The largest and most liquid market in the world is the FX market. The foreign exchange market is open around the clock, every day of the week.
Currency trading now has an intriguing new dimension thanks to cryptocurrencies like bitcoin, as if FX wasn’t already dynamic enough. Many forex brokers have started to take bitcoins in recent years, and some also accept a variety of other digital currencies.
Should you immediately start trading in the currency markets with your hard-mined bitcoins? First, learn about the advantages and risks.
A Common Forex Transaction
It’s beneficial to comprehend how a typical forex deal operates before deciding whether to trade forex using bitcoin.
Simple currency exchange at the going rate is what constitutes a forex deal. Forex traders attempt to profit from the ongoing changes in the real value of one currency compared to another, unlike tourists who exchange their home currency for local spending money.
Changing a “Pair”
Consider that you are an American trader who is placing a wager that the British pound would decline in value in relation to the dollar. Trading on the British pound/U.S. dollar exchange rate (GBP/USD) is what this is known as.
You provide a forex broker a $100 deposit. If $1 is equivalent to £0.5, you will get £50 for your $100. You close the position at 50/0.45, or $111.11, if the GBP/USD rate drops to 0.45. In other words, you turn a profit of 11.11% on your initial $100 investment.
The majority of currency trading takes place on decentralized over-the-counter platforms.
Bitcoin forex brokers is regarded as a decentralized digital currency, but that does not imply that the FX market is also decentralized or that it is equal to bitcoin.
How Decentralization Affects Things
The main distinction is that, despite the decentralized nature of currency exchanges, the currencies themselves are supported by central banks in the nations where they are issued. It is the responsibility of those banks to maintain and stabilize the value of their own currencies.
The majority of cryptocurrencies, including Bitcoin, lack that support.
A Bitcoin-based Forex transaction
Now consider an illustration of a bitcoin-based currency transaction. You must first create an smartfx trading account with a bitcoin-accepting broker. These consist of LiteForex, AvaTrade, and eToro. Then, you send 2 bitcoins over to the digital wallet of the forex broker.
Considering that 1 bitcoin currently costs $7,500 in U.S. dollars, your deposit of 2 bitcoins is worth $15,000. Let’s now say that you desire to trade British pounds. You will get £7,500 if the exchange rate is $0.5 for every £1. Once the GBP/USD exchange rate reaches 0.45, you close out your position and receive $1,666.65 in your trading account. You are prepared to withdraw your profit, which is a tidy 11.11%.
The Impact of Bitcoin
Imagine, though, that throughout this time, the exchange rate between bitcoin and dollars changed to 1 bitcoin = $8,500. The amount you receive when you withdraw money in bitcoins is ($16,666.65/$8,500) = 1.961 bitcoins.
Despite the fact that your wager on British pounds resulted in a profit of 11.11% (from $15,000 to $16,666.65), the change in the price of bitcoin relative to the US dollar causes you to lose 0.039 bitcoin, or around 2%. (An initial 2 bitcoin deposit less 1.961 bitcoins equals.039 bitcoin.)
You would, however, make money from both the forex trade and the bitcoin exchange if the bitcoin to U.S. dollar exchange rate was modified to 1 bitcoin = $7,000 instead. You would have made a profit of 19.1% and received ($16,666.65/$7,000) = 2.381 bitcoins.
More unpredictableness
The main justification for exercising caution while employing digital currency for forex trading is demonstrated by the hypothetical case. Even bitcoin, the most frequently used and well-known cryptocurrency, is extremely volatile when compared to the majority of traditional currencies.
The price of a bitcoin in the year ending July 24, 2020 ranged from $5,532 to $11,982.
Due to this unpredictability, there are now significantly higher risks involved in trading forex with bitcoin.
Before engaging in forex trading with bitcoin, one should weigh the advantages and hazards in addition to how exchange rate swings affect profit and loss.
The Advantages of Using Bitcoin to Trade Forex
Decentralized Valuations: One significant advantage of trading forex with bitcoin is that it is not tied to a central bank. Digital currencies are not influenced by central geopolitics or macroeconomic issues such as country-specific inflation or interest rates.
High Impact: Leverage is available from many forex brokers for bitcoin trades. Experienced traders can take advantage of this. However, such high margins should be approached with extreme caution because they magnify the possibility of loss.
Low Deposit Amount: Some bitcoin forex trading firms allow traders to start with as little as $25. A few forex trading firms have even offered promotions such as deposit matching. Traders Union should make certain that the broker is legitimate and properly regulated.
Low Trading Costs: In order to attract new clients, most forex brokers that accept cryptocurrency keep brokerage costs very low.
Security: Making a bitcoin transaction requires no disclosure of your bank account or credit card information. In terms of price and financial security, this is a significant benefit.
No International Boundaries: Global boundaries do not apply to bitcoin transactions. A broker situated in the United Kingdom can facilitate forex trading for a trader based in South Africa. Although regulatory obstacles can still be a problem, there are no geographical restrictions if traders and brokers are prepared to engage in business.
