Trading Forex With Bitcoin: How Does It Work?

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Trading Forex With Bitcoin: How Does It Work?

Bitcoin (BTC) has recently grown into a speculative investment for investors seeking alpha from alternative assets as well as a viable hedge against global uncertainty and fiat currency weakening. Bitcoin is a digital floating exchange that, like foreign exchange, is linked to the US dollar (forex).Unlike gold, however, there is no underlying physical item on which to base the price.

Key Takeaways

  • Bitcoin is still the most valued and discussed cryptocurrency, as well as the one that is most actively traded on exchanges.
  • This digital asset was launched in 2009, and its price has fluctuated drastically over the years, making it appealing to day traders who have begun using forex trading tactics on it.
  • There are now multiple trading platforms and online exchanges that allow you to trade bitcoin and other cryptocurrencies—but before you jump in, consider trading expenses, platform security, and reputation/trust.

Is Bitcoin a Currency?

Following the high-profile hack on Japanese exchange Mt. Gox and the increasing acceptance of bitcoin in payment processing at major U.S. shops, the argument over whether bitcoin should be deemed legal cash has heated up.

Unlike the US dollar, Chinese yuan, or euro, bitcoin is not generally recognized as a currency by all worldwide market participants, including regulators and government authorities.

It is worth noting that El Salvador became the first nation in the world to accept bitcoin as legal money (in June 2021).

“Regulators don’t see bitcoin as a currency,” said Steven Lord, founder of Modern Money Group and editor of “FINAlternatives.” “They see it as a valuable ‘asset.'” We’ve read a legislation that states it may be a depreciable asset, but this is not the case in the forex currency trading marketplaces.”

The rise of bitcoin trading has given rise to a multibillion-dollar sector that enables people to purchase and sell the cryptocurrency on a variety of exchanges. Several brokers indicate that bitcoin trading is permitted as part of their FX trading services. However, investors need be aware of a few basic facts regarding how bitcoin and forex trading function.

This essay examines the similarities and differences, as well as why conventional bitcoin exchanges are a superior alternative to FX platforms that provide cryptocurrency trading.

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Bitcoin Trading vs. Forex

There are several distinctions between FX and bitcoin trading. The prices of both paper and digital currencies are determined by global supply and demand parameters in both cases. The price of bitcoin grows as demand rises. When demand declines, so does the price.

Bitcoin, on the other hand, is not susceptible to the supply uncertainty caused by international central banks. Bitcoins are mined at a known pace, but unanticipated changes in monetary policy, such as the Swiss National Bank’s decision to decouple its currency from the euro in 2015, may cause major price movements. Bitcoin value is related to the foundations of the cryptocurrency ecosystem, while FX problems are linked to an individual nation’s and its currency’s economic choices and circumstances.

“Trading bitcoin on an exchange is similar to trading anything else. On the exchanges, you may swap dollars for euros and dollars for bitcoins. It’s extremely similar, but the difference is that it’s exchanged on a real currency,” Lord said. “There’s a bit of a disconnect when we speak about it.” It does not exist. Many consider it a currency, but it lacks the dynamism of trade currencies.”

Another problem is how people exchange money. In addition to one-to-one trading, currency traders may increase their leverage by using derivatives and other paper contracts intended to increase returns. Some brokers are slowly underwriting contracts that will increase leverage in the bitcoin sector in the present climate, but such contracts are still in their infancy. Bitcoin trading is more akin to owning stock on the New York Stock Exchange.

“There is relatively little derivative activity surrounding bitcoin, as opposed to the currency market, which has numerous over-the-counter (OTC) contracts,” Lord said. “It’s coming along. Some are enabling investors to buy bitcoin on margin, while others are developing new contracts. However, for the time being, trade is mostly based on speculation about the price of bitcoin rising.” More financial engineering is to be anticipated.

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The issue of liquidity is maybe the most significant distinction between Bitcoin and Forex. Global currency trade is a $6 trillion sector, yet bitcoin is worth billions. Because bitcoin resides in a smaller market, it is more likely to face a more volatile trading environment and substantial price movements due to minor macroeconomic events.

The spot currency market is uncontrolled. Options and futures based on currency trading are regulated by the Commodity Futures Trading Commission (CFTC), the National Futures Association (NFA), and numerous other futures exchanges. The CFTC, on the other hand, has yet to release a formal judgement on how it classifies bitcoin other than as an asset.

The Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), the Consumer Financial Protection Bureau (CFPB), and other government authorities, on the other hand, have issued multiple investor cautions about the hazards of bitcoin investment.

“Trading” Bitcoin on Forex

Individuals may deposit, withdraw, and trade on a bitcoin-based account, according to many FX firms. However, because contracts for difference (CFDs) are not permitted in the United States, the functionality of these brokers may have legal implications for Americans, and the Financial Conduct Authority (FCA), the United Kingdom’s financial regulator, has issued investor warnings about these types of platforms.

Other forex brokers have said that they can include bitcoin trading into their platforms, however given that they are not BTC-based and trade other currencies, it is unclear what they are doing beyond enabling consumers to buy and sell bitcoin via current bitcoin exchanges.

“Most overseas brokers use a more typical bitcoin exchange,” Lord said. “They don’t have a spot desk dealer for bitcoin on currencies.” That is not how it works. Bitcoin trading is not the same as spot currency trading.”

Until FX platforms’ bitcoin offers become more strong, investors are better off engaging with bitcoin-based exchanges that trade in their own currencies. These companies have a greater awareness of the trading market, security standards, and will most likely incur lower trading charges with each buy. Following the demise of Mt. Gox, several exchanges claim to have upgraded their models with enhanced security features. Coinbase, a San Francisco-based Bitcoin exchange, has grown to over 100 countries, for example.

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Coinbase is still one of the most popular ways to buy in bitcoin. Coinbase is a wallet that enables users to store, spend, purchase, and accept bitcoin. The well-known platform accepts payments for products and services from a variety of merchants, including Expedia Inc. (EXPE) and Overstock.com Inc. (OSTK).

To buy bitcoin, users must first open a bitcoin account and then start a money transfer into the account each time they wish to buy bitcoin. Because Coinbase does not keep currency in its accounts, every “exchange” between dollars and bitcoin necessitates extra security measures. Purchasing bitcoin may take three to five working days, implying that it does not function like a typical currency exchange.

You may, however, acquire at an agreed-upon price, which means that each transaction is locked in before bitcoins are sent to the individual account. A fee of 4% is imposed for each transfer from dollars to bitcoin or vice versa.

The Bottom Line

The rising popularity of bitcoin as an alternative investment has piqued the interest of forex brokers eager to diversify their products. Some consider bitcoin to be a conventional currency, particularly since bitcoin trading is dependent on the underlying platform and larger response to swings in global economics rather than a nation’s macroeconomics.

Trading bitcoin is analogous to trading stocks, however using a forex broker is optional and may be more expensive if they demand greater costs than established bitcoin platforms like Coinbase. Investors should weigh the risks connected with bitcoin and other alternative currencies before deciding if this kind of speculation is appropriate for their portfolios.

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