Forex is the world’s largest and most liquid market. Global currency markets are open 24 hours a day, 7 days a week. In addition to forex, cryptocurrencies like bitcoin have added an intriguing new dimension to currency trading. Several forex brokers now accept bitcoins for currency trading, along with a variety of other digital currencies. Is it a good idea to invest in forex with bitcoin? Take a look at the risks and benefits first.
Forex trading simply involves exchanging one currency for another at its current rate. Foreign exchange traders make money by taking advantage of the fluctuations in the real value of one currency against another, unlike tourists who exchange their home currencies for local spending money.
The ‘Pair’ trade of Forex with Bitcoin
Imagine you are an American trader who believes the British pound will lose value against the U.S. dollar. Trading on this currency pair is called British pound/US dollars (GBP/USD).
Suppose you deposit $100 with a forex broker. If you assume $1 = £0.5, you will receive £50 for $100. If the GBP/USD rate changes to 0.45, you close the position at 50/0.45 = $111.11. You have made an 11.11% profit over your initial $100 investment.
The majority of forex trading occurs on decentralized over-the-counter markets. Forex is a decentralized market, and bitcoin is a decentralized digital currency, but they are not the same.
Decentralization and its Impact
Although a currency exchange can be decentralized, the currency itself is backed by a central bank in the country that issues it. A bank’s job is to stabilize and maintain the value of its currency.
There is no such support for Bitcoin or most other cryptocurrencies.
Cryptocurrency Forex Trading Benefits
- Bitcoin is not tied to a central bank, which is a major advantage when trading forex with Bitcoin. Geopolitical influence does not affect digital currencies, nor does macroeconomic factors such as inflation or interest rates vary by country.
- Bitcoin trades can be leveraged heavily with many forex brokers. An experienced trader can make use of this to their advantage. These high margins, however, should also be approached with great caution as they greatly increase the chance of loss.
- Bitcoin forex trading firms allow traders to start with as little as $25. Many forex trading firms offer promotions such as matching deposits. A legitimate and properly regulated broker should be checked by traders.
- To attract new clients, most forex brokers accepting cryptocurrency keep brokerage costs very low.
- Bitcoin transactions are secure because you do not have to reveal your bank account or credit card information. In terms of financial security and cost, this is a big advantage.
- There are no global boundaries to Bitcoin transactions. South African traders can trade forex through brokers based in the United Kingdom. In spite of regulatory challenges, brokers and traders can transact around the world if they are willing to do so.
The Risks of Trading Forex with Bitcoin
- Bitcoin is traded on multiple exchanges and exchange rates vary. It is important for traders to understand what bitcoin exchange rates will be used by their forex broker.
- Almost all brokers instantly sell bitcoins upon receiving deposits from clients and hold the funds in U.S. dollars. Bitcoin-to-US dollar rate risk remains even if a trader does not take a forex position immediately after depositing.
- A high level of volatility is a risk associated with bitcoin prices historically. Volatility can be used by unregulated brokers to their advantage and traders’ disadvantage in the absence of regulations. Suppose the intraday bitcoin rate fluctuates from $5,000 to $5,300 U.S. dollars. Unregulated brokers may credit a trader $10,000 based on a deposit of 2 bitcoins (2 bitcoins * $5,000 = $10,000). Brokers may use the lowest exchange rate when a trader is ready to withdraw. Rather than receiving 2 bitcoins as originally deposited, the trader receives only 1.88679 bitcoins ($10,000 x $5,300 = 1.88679 bitcoins). It is possible that an unregulated broker is exchanging bitcoins and dollars at, say, $5,150, pocketing the difference while the client pays for it.
- A Bitcoin wallet’s digital wallet can be hacked to steal Bitcoin deposited there. Consider a broker who is insured against theft to reduce your risk.
- For new traders who are unfamiliar with the risk of leverage, using leverage can be risky. There are risks associated with traditional forex transactions as well as cryptocurrency forex trading.
- Investing in cryptocurrency is different from investing in other asset classes because cryptocurrency has its valuation mechanism. By trading forex with bitcoins, you introduce a new intermediate currency that can affect profit and loss unexpectedly. Traders take risks with money that isn’t locked down in their base currency.
Despite the growing popularity of cryptocurrencies like Bitcoin, there are still many risks associated with them. Decentralized currencies offer global transactions with no fees, which is an advantage in forex trading. However, the tradeoff is that what was a trading pair is now a trading pair with a third currency.
A local forex broker is the best choice for traders who want to take that risk.