Forex and Cryptocurrencies

The currency market (Forex) is the largest market in the world and has the highest liquidity. It is not a limited market, since it operates 24 hours a day, 7 days a week, all over the world. Cryptocurrencies, especially Bitcoin, bring a new dimension and dynamics to the currency markets.

Standard Forex

First, here is an example of how standard currency trading works. Imagine that you are an American merchant betting on the pair sterling / US dollar ( GBP / USD ). You deposit $ 100 with your broker. Assuming the rate of $ 1 = £ 0.5, you would then receive £ 50 for your $ 100. If the GBP / USD rate changes to 0.45, and vd closes the position to 50 / 0.45 = $ 111.11. That is, you make a profit of 11.11% on your initial deposit of $ 100.

Forex with Bitcoin

Now, let's move on to an example of a currency trading using bitcoin. First, a forex trading account is opened with a broker who accepts bitcoins (such as AvaTrade, eToro, Libertex or Liteforex). Next, deposit 1 bitcoin from your digital portfolio to the digital portfolio of the currency broker. Assuming that the current bitcoin at the dollar rate is 1 bitcoin = $ 4000, your deposit of one bitcoin is equal to $ 4,000. Now, assume you want to take a position in sterling. If the exchange rate is £ 0.5 = $ 1, you will receive £ 8,000. After some time, the GBP / USD exchange rate goes to 0.45, and you close your position to get $ 4,444.44 in your account. You have a benefit of 11.11% that you can withdraw at any time. However, let's suppose that at this moment bitcoin at the rate of the US dollar. changed to 1 bitcoin = $ 3,800. When you withdraw your money in bitcoins, you receive ($ 4,444.44 / $ 3,800) = 1,169 bitcoins.

Even though the Bitcoin price has fallen ($ 4,000 to $ 3,800), the profit obtained in the GBP / USD part of the transaction has compensated for this loss, allowing us to obtain a profit margin of 0.169 BTC. This would be taking into account a hypothetical fall of the BTC / USD pair, but in the case that this pair had increased suppose to $ 4,200, we would receive ($ 4,444.44 / $ 4,200) = 1,058 bitcoins. Therefore, our profit in BTC would be lower, but it would be constant in USD, since the difference in values ​​($ 4,000 vs $ 4,200) in the BTC / USD pair would make this benefit identical.

Beyond fluctuations in the exchange rate that affect profit and loss, there are other benefits and risks to consider before trading bitcoin in Forex markets.

Advantages of trading Forex with Bitcoin

• Decentralized valuations : An important advantage of trading currencies with bitcoin is that there is no central bank to randomly change bitcoin valuations. Due to its decentralized nature, bitcoin rates are free of geopolitical influence, as well as macroeconomic issues such as inflation or the specific interest rates of each country.
• High leverage : Most forex brokers offer a high level of leverage that can reach up to 1: 1000 for bitcoin operations. Experienced traders can use this to their advantage. However, these high margins must also be approached with great caution as they also increase the potential for loss. Unless you are an experienced investor, we do not recommend that you use leverage.
• No transaction costs : All bitcoin transactions are digitally registered on public networks without any involvement of banks or clearing agencies. Therefore, there are usually no transaction costs involved in bitcoin, even for global transfers. Brokers pass these benefits to customers by not imposing any deposit or withdrawal fees for bitcoin transactions. This improves business profits.
• Low deposit amount : One can start with as little as $ 25 with some bitcoin currency trading firms. As promotional offers, some forex trading firms even offer new members a small amount as an initial deposit to encourage them to use their services. One thing to always keep in mind is to check that all brokers are properly regulated.
• Low cost of trade : Most forex brokers that accept cryptocurrency are keeping brokerage costs too low to attract new bitcoin-trading customers.
• Security : With bitcoin transactions, you do not need to reveal your bank account or your credit card information to deposit or withdraw money. Especially when it comes to foreign brokers, this is a great advantage in terms of cost and financial security.
• Without global borders : Bitcoin transactions have eliminated global limits. Using Bitcoin, an African-based trader can trade forex through a broker based in the United Kingdom. Regulatory challenges may remain a concern, but if both traders and brokers are willing to make transactions, all geographic boundaries are eliminated.

Risks of Forex Trading with Bitcoin

• The value of Bitcoin in the different exchange houses (Exchanges) is not uniform, and the exchange rates vary. You must make sure you know the bitcoin exchange rates that the currency broker will use.
• While receiving bitcoin deposits from customers, almost all brokers sell bitcoins instantly and keep the deposit in US dollars. Even if a trader does not take a currency trading position immediately after the deposit, he or she is still exposed to the USD / BTC exchange risk when withdrawing their deposit.
• Historically, bitcoin prices have shown high volatility. In the absence of regulations, volatility can be used by unregulated brokers to their advantage and to the disadvantage of the trader. For example, suppose the intraday bitcoin rate fluctuates from $ 4,000 to $ 4,300 per bitcoin. For an incoming deposit of 2 bitcoins, the unregulated broker may apply the lowest rates of $ 4,000. However, once you want to make a refund, the broker can use the highest exchange rate and instead of the original bitcoins deposited, only receives 0.93 bitcoins ($ 4,000 / $ 4300 = 0.9302 bitcoins). In fact, the unregulated broker may be exchanging bitcoins and dollars at 4,150 at the expense of his client and thus obtaining an additional benefit.
• The deposited bitcoins are prone to theft by piracy, even from the digital wallet of the broker. To reduce this risk, look for brokers who have theft insurance protection.
• High leverage is risky for novice traders who can not understand the exposure.
• Cryptocurrencies are a different kind of asset and have their own valuation mechanism. Currency trading with bitcoins essentially introduces a new intermediate currency that can impact profits and losses in unexpected ways. Any money that is not locked in a trader's base currency is a risk.

Verdict

Cryptocurrencies, including Bitcoin, are a new Forex trading tool, thanks to their volatility and usage advantages, they are making these one of the new investment instruments.

With an increasingly mature market and a growing popularity, we find a new investment tool to consider.