While cryptocurrencies such as Bitcoin are gaining popularity many don’t know anything about how to trade Bitcoin in Forex. Dealing in a decentralized currency that enables fee-free worldwide transactions is advantageous in BTC forex trading.
Traders willing to take on that risk should conduct their transactions through a locally registered forex brokerage. There are many things to understand if you want to make profitable trades and in this blog, we will deal with it in detail.
What is Foreign Exchange Trading?
Foreign exchange can be thought of as a network of brokers exchanging currencies at an agreed price. It is a process in which individuals, businesses, and major banks exchange money from one another – if you have ever travelled overseas, you have probably been involved in Forex trading.
While some foreign currency is made for practical reasons, most currency exchanges are for profit. Due to the daily exchange rate, the exchange rate on some currencies may fluctuate. This flexibility is what makes trading forex with Bitcoin so attractive for traders. It increases the chances of having huge rewards while at the same time raising the risk.
In general, a trader can engage in the Bitcoin Forex trading in one of two ways:
- Trade Bitcoin in conjunction with other currencies.
- Use Bitcoin to finance a trading account.
BTC Forex trading as part of a currency pair, such as BTC/USD, is analogous to trading traditional forex currency pairings.
However, owing to Bitcoin’s inherent characteristics and the fact that it has been existing for such a short period of time, Bitcoin distinguishes itself from traditional currencies in key areas.
For starters, Bitcoins are produced through mining and have an unalterable limited supply. This obviates the potential of an unexpected rise in supply, which would devalue Bitcoin. On the contrary, fiat currencies are prone to supply uncertainty due to central bank intervention.
Additionally, Bitcoin’s total supply is restricted to 21 million units, and its value is determined by the crypto market’s fundamentals, not by any single government, economy, or central bank. Currency, on the other hand, is heavily reliant on central banks. As a result, changes in monetary policy can lead to significant inflation changes.
Nonetheless, Bitcoin has a limited number of derivatives and other paper contracts. Numerous brokers are developing new contracts to enable investors to purchase Bitcoin on margin; nevertheless, such contracts are quite limited. By contrast, currency traders may leverage their contracts through the quantity of over-the-counter (OTC) contracts.
Risks Associated with Bitcoin Forex Trading
Diverse Exchange Rates: Bitcoin is traded on a variety of exchanges, and exchange rates fluctuate. Traders interested in trading Forex with Bitcoin must verify they comprehend the Bitcoin exchange rates being used by the Forex broker.
US Dollar Rate Risk: Almost all brokers sell Bitcoins immediately upon receiving customer deposits and store the funds in US dollars. Even if the trader does not immediately enter the forex transaction following the deposit, they are still exposed to the risk of Bitcoin-to-US-dollar rate between deposit and withdrawal.
Volatility: Bitcoin prices have historically been quite volatile. Without regulation, unregulated brokers can use volatility to their benefit and to the detriment of traders. For instance, suppose the intraday Bitcoin price varies between $5,000 and $5,300 United States dollars per Bitcoin. For a deposit of two Bitcoins, the unregulated broker may credit the trader $10,000 (2 Bitcoins * $5,000 = $10,000) at the lowest rates available. However, when the trader is ready to withdraw funds, the broker may utilize the most advantageous exchange rate. Instead of the two Bitcoins originally placed, the trader receives 1.88679 Bitcoins ($10,000 / $5,300 = 1.88679 Bitcoins). Unregulated brokers may be trading Bitcoins and dollars at a rate of, say, $5,150 and pocketing the difference at the client’s cost.
Bitcoin Security Risks: Deposited Bitcoins are at risk of being stolen, even in a merchant’s digital wallet. To mitigate this danger, seek a broker that is insured against theft.
Leverage is problematic for inexperienced traders who may not appreciate the exposure. This risk is not specific to cryptocurrency forex trading; it is also present in normal foreign exchange trading.
Assembling Asset Classes: Cryptocurrency is a separate asset class with its own value mechanism. Trading Forex with Bitcoin creates a new mediator currency, which can have an unexpected impact on profits and losses. Any funds that are not denominated in the trader’s base currency are at risk.
How to Trade Bitcoin on Forex?
People can add, withdraw, and trade with a Bitcoin-based account to trade Forex with Bitcoin. However, the operation of these traders may have legal consequences for the American people, as contractual contracts (CFDs) are not allowed in the United States, and the Financial Conduct Authority (FCA), the financial regulator of the United Kingdom, has issued warnings to investors about these platforms.
Some forex traders say they can put Bitcoin trading on their platforms, yet given that they are not BTC-based and trade other currencies, it is not clear that they are doing more than allowing traders to buy and sell Bitcoin on Bitcoin-based exchanges.
Most foreign buyers use regular Bitcoin exchanges. It’s not as if they have a spot desk for Bitcoin or any other currency. That is not how it works. Bitcoin trading is not comparable to currency spot trading.
Until the Forex with Bitcoin trading platform becomes stronger, investors are better off dealing with Bitcoin-based transactions that trade with their home currency. These organizations have a superior awareness of the trading market, security needs, and will almost certainly incur lower trading expenses on each purchase.
If you ponder, ‘can you trade Bitcoin on Forex?’, then Coinbase can be a good option. It is a digital wallet that enables users to store, spend, purchase, and receive Bitcoin. The widely used platform enables consumers to purchase goods and services from a variety of merchants, including Expedia Inc. (EXPE) and Overstock.com Inc. (OSTK).
To purchase Bitcoin, customers must first create a Bitcoin wallet and then conduct a money transfer into the wallet whenever they wish to purchase a Bitcoin. Coinbase does not keep any currencies in its accounts, which means that any “exchange” of Bitcoin/dollars requires additional security measures. Purchasing Bitcoin may take three to five business days, indicating that it does not operate in the same way as a typical currency exchange.
However, you can buy at the agreed price, which means that each transaction will be closed before the Bitcoins are sent to each account. The cost of each transfer from dollars to Bitcoin or vice versa is 4%.
Forex with Bitcoin: Conclusion
Bitcoin’s rising popularity as an alternative investment has attracted the attention of Forex brokers trying to diversify their product offerings. Some refer to Bitcoin as a common currency, especially since its trading is not based on the macroeconomics of the nation, but rather on the platform and the major response to global economic development.
While trading Forex with Bitcoin is akin to trading stocks, using a BTC Forex broker is not essential and maybe more expensive if the Forex broker charges higher fees than standard Bitcoin platforms like Coinbase. Investors should weigh the risks involved with trading Forex with Bitcoin and the different currencies and determine whether they are appropriate for their portfolios.