Benefits and Risks of Trading Forex With Bitcoin
The currency market is the world’s biggest and most liquid market. It is a genuinely global currency market, available 24 hours a day, seven days a week, and from anywhere in the world.
As if forex wasn’t already active enough, cryptocurrencies such as bitcoin have brought an intriguing new dimension to currency trading. Many forexbrokers have started to accept bitcoins for currency trading in recent years, with some also taking a range of other digital currencies.
Should you go in and start trading your hard-mined bitcoins on the currency markets? First, determine the risks and advantages.
- The FX market specializes in exchanging the world’s currencies.
- Bitcoin and other cryptocurrencies are now accepted by several FX brokers.
- Bitcoin transactions benefit from the currency’s anonymity and decentralized value mechanism.
- They bring a new degree of danger to FX trading, which is amplified by cryptocurrency volatility.
Before deciding whether to trade forex using bitcoin, it’s a good idea to understand how a traditional forex deal works.
A forex transaction is simply the exchange of one currency for another at the current exchange rate. Unlike tourists who exchange their native currency for local spending money, forex traders strive to profit from the constant swings in the actual value of one currency vs another.
Trading a ‘Pair’
Assume you are an American trader who believes the British pound will lose value in relation to the US dollar. Trading on the British pound/US dollar currency pair (GBP/USD) is what this is termed.
You make a $100 deposit with aforexbroker. Assuming a $1 = £0.5 exchange rate, you will get £50 for your $100. If the GBP/USD exchange rate falls below 0.45, you will close the bet at 50/0.45 = $111.11. That is, you earn 11.11% on your original $100 investment.
The majority of currency trading is done decentralized via over-the-counter marketplaces. However, just because the FX market is decentralized and bitcoin is a decentralized digital currency does not imply that the two are similar.
The Impact of Decentralization
The major contrast is that, although FX markets are decentralized, currencies are backed by central banks in the nations that produce them. It is the responsibility of those banks to stabilize and maintain the value of their currencies.
Bitcoin and the majority of other cryptocurrencies lack this support.
Consider the following example of aforextrade using Bitcoin. To begin, you must create a trading account with a broker that takes bitcoins. AvaTrade, eToro, and LiteForex are examples. You next send two bitcoins from your digital wallet to the digital wallet of the FX broker.
Only utilize a locally licensed forexbrokerage if you wish to deal with bitcoin. And, unless you know what you’re doing, avoid utilizing leverage.
Assuming the current bitcoin-to-US-dollar exchange rate is $7,500, your investment of two bitcoins is worth $15,000. Assume you wish to open a position in British pounds. You will earn £7,500 if the exchange rate is £0.5 = $1. After a while, the GBP/USD rate falls to 0.45, and you close your trade to get $1,666.65 in your trading account. You’ve earned a nice 11.11% profit and are ready to pay out.
The Bitcoin Effect
Assume, however, that the bitcoin-to-US-dollar rate has changed throughout this time period to 1bitcoin= $8,500. You get ($16,666.65/$8,500) = 1.961 bitcoins when you withdraw money in bitcoins.
The worth of a bitcoin throughout the course of a year ending in July 2020.
Despite the fact that your bet on British pounds yielded an 11.11% profit (from $15,000 to $16,666.65), the change in the bitcoin-to-US-dollar rate results in a loss of 0.039 bitcoin, or around -2. (Initial investment of two bitcoins—1.961 bitcoins=.039 bitcoin)
If the bitcoin-to-US-dollar exchange rate was altered to 1 bitcoin= $7,000, you would benefit from both theforextrade and thebitcoinexchange. You would have gotten 2.381 bitcoins ($16,666.65/$7,000), a 19.1% profit.
This hypothetical case highlights a major reason to take cautious when trading FX using digital currency. Even bitcoin, the most popular and commonly used cryptocurrency, is very volatile in comparison to most conventional currencies.
The value of a bitcoin fluctuated from $5,532 to $11,982 in the fiscal year ending July 24, 2020.
Because of this unpredictability, the risks connected with trading forex using bitcoin are significantly increased.
Aside from the influence of exchange rate swings on profit and loss, there are additional advantages and disadvantages to consider before trading FX using bitcoin.
Benefits of TradingForexWithBitcoin
- Decentralized valuations: One significant benefit of trading FX using bitcoin is that it is not beholden to a central bank. Digital currencies are not subject to central geopolitical control or macroeconomic difficulties such as country-specific inflation or interest rates.
- Leverage: Many forex brokers provide leverage for bitcoin trading. Experienced traders may take advantage of this. However, such huge margins should be addressed with extreme care since they multiply the possibility of loss.
- Low Deposit Amount: Some bitcoinforextrading companies allow traders to start with as little as $25. A few forex brokerages have even given bonuses such as a deposit match. Traders should make certain that the broker is reputable and properly regulated.
- Low Trading Rates: In order to attract new customers, most forex firms that handle bitcoin keep brokerage costs relatively low.
- To conduct a bitcoin transaction, you do not need to give your bank account or credit card information. This is a significant cost and financial security benefit.
- There are no global borders with Bitcoin transactions. A trader in South Africa may trade forex with a broker in the United Kingdom. Regulatory issues may persist, but there are no geographical restrictions if both traders and brokers are prepared to interact.
Risks of TradingForexwithBitcoin
- Different Exchange Prices: Bitcoin is traded on a number of exchanges, and the exchange rates vary. Traders must ensure that they understand which bitcoin exchange rates will be used by the forex broker.
- U.S. Dollar Rate Risk: Upon receiving bitcoin deposits from customers, practically all brokers immediately sell the bitcoins and keep the funds in US dollars. Even if a trader does not immediately establish aforextrade position after depositing, they are still exposed to the bitcoin-to-US-dollar rate risk from deposit until withdrawal.
- Volatility is a risk: Bitcoin prices have historically been volatile. Volatility may be employed to the benefit of unregulated brokers and to the detriment of traders in the absence of rules. Assume the intraday bitcoin rate varies between $5,000 and $5,300 USD per bitcoin. For a deposit of two bitcoins, the unregulated broker may credit the trader with $10,000 (2 bitcoins * $5,000 = $10,000). However, if the trader is ready to withdraw funds, the broker may utilize the lowest available exchange rate. The trader obtains 1.88679 bitcoins instead of the initial two bitcoins invested ($10,000/$5,300 = 1.88679 bitcoins). The unregulated broker may be trading bitcoins and dollars for, say, $5,150 and pocketing the difference at the client’s cost.
- Bitcoin Security Risks: Deposited bitcoins are vulnerable to theft by hackers, even from a broker’s digital wallet. To mitigate this risk, search for a broker that is insured against theft.
- Leverage Risk: Using leverage might be problematic for rookie traders who may not grasp the exposure. This danger is not limited to bitcoin forex trading; it also exists in standard FX transactions.
- Asset Class Mixing: Cryptocurrency is a distinct asset class with its own value mechanism. Trading forex with bitcoins simply creates a new intermediary currency that might have an unanticipated influence on profit and loss. Any money not locked up in a trader’s base currency poses a danger.
The Bottom Line
Although cryptocurrencies such as bitcoin are gaining popularity, there are still several hazards involved with them. Dealing in a decentralized currency that allows for worldwide transactions with no costs is advantageous. However, the tradeoff is effectively adding a third currency to what was formerly a trading pair.
Traders who are willing to accept that risk should only utilize a locally registered forexbrokerage.
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