First, let’s understand what Bitcoin is. It is a cryptocurrency or a digital currency, which was introduced in the year 2009, and here all the transactions that take place are verified by network codes through a process called cryptography. It is open-source, everyone can take part in it, and all the transactions are recorded in a public distributed ledger called Blockchain. In layman’s terms, it is digital money available in the form of tokens, which enables peer-to-peer transactions on the internet. It is highly secure and transparent. It is perhaps one of the most valuable and extensively traded cryptocurrency, along with Ethereum (ETH) and Litecoin (LTC).
First Things First: What is FOREX Trading?
In technical and trading parlance, it is referred to as an exchange of one particular currency with another at its present rate; say for example USD with GBP or EUR. A forex trader with the help of a broker tries to make money and profit margins through the ever dynamic nature of foreign exchanges or international currencies/fiat money that fluctuate by every minute and hour. The currency rates are influenced by geo-political situations, market sentiments, trading volume and in the event of any man-made catastrophe or pandemic type situation. Therefore, it is by taking advantage of the fluctuations to his/her own favor, a trader earns profit.
Bitcoin and Forex Trading
Firstly, you need to open a dedicated forex trading account with a ‘locally regulated’ brokerage firm who accepts Ethereum and Bitcoin. There are several online exchanges and trading platforms that accept different cryptocurrencies, Bitcoin being one of them. But, you need to check out the reputation of the platform, transaction fees, trading costs, transparency and security, before delving into it. Apart from Bitcoin, Ethereum Pay is also used extensively for forex trading, when you buy fiat currencies, provided the said platform or broker accepts it.
Benefits of Using Bitcoin in Forex Trading
- Low Trading Cost – A majority of forex brokers globally are of the opinion that using cryptocurrencies like Bitcoin is helping minimize brokerage costs, thereby eventually attracting new clients.
- Minimum Deposit Amount – A forex broker who wants to trade online, can start with as little as $25 USD, by partnering with some trading houses that readily accept Bitcoin. In fact, a few forex trading firms offer mouthwatering and lucrative promotions like a ‘matching’ deposit amount. But, before starting to trade with Bitcoin, a trader must ensure that the broker is legitimate and government regulated.
- Security & Transparency – As a trader in FOREX, you are not required to reveal your bank account or credit/debit details, in order to make a Bitcoin (BTC) transaction. This is a great feature in terms of cost, business transparency and financial security.
- High Leverage – A lot of forex brokers around the world offer leverage for trading in Bitcoin. Professional and experienced traders can use this to their advantage. On the contrary, such lucrative margins should be dealt with extra caution, as they significantly magnify the chance of losses.
- Decentralized Valuations – One big benefit of trading forex with Bitcoin is that this cryptocurrency or digital asset is not linked to a central bank. The rates of all digital currencies are free from geo-political sentiments and macro-economic situations inflation, recession and interest rates.
- No Global Limits – There are NO global boundaries associated with Bitcoin transactions. A trader in New Zealand can trade forex via a forex broker based in Brazil or UAE. Though regulatory challenges are a bit of concern, the effect is vastly negated when both the trader and broker is willing to transact, as there are no geographic limitations.
Risks Associated with Forex & Bitcoin
- Varied Exchange Rates – As this cryptocurrency trades on multiple exchanges, the exchange rate usually varies. Therefore, a trader must preempt, speculate or understand, as to which particular Bitcoin exchange rate the broker would be using.
- US Dollar Rate Risk – When clients pay in Bitcoins, almost all forex brokers immediately convert them into US Dollars, by selling the Bitcoins. It has been noticed that a trader who fails to take any position immediately after receiving Bitcoin deposits, is eventually exposed to USD-to-Bitcoin ‘rate risk’ from the time of deposit till withdrawal.
How the Trading Process Works
Well, trading with BTC is like trading with any other cryptocurrency via a secured USDT payment gateway on an exchange. As a broker or trader, you can trade Euros for Dollars through FOREX and similarly USD, AUD or CAD for Bitcoins on the exchanges. As Bitcoins are mined, they’ve a capped or controlled supply. This means, there cannot be a sudden increase in its supply, which would diminish the value of a Bitcoin. Generally speaking, a forex trader or merchant can use BTC to function in a forex market in two distinct ways:
> Trading with Bitcoin as a part of a currency pairing.
> Make deposits in the form of Bitcoin to finance a trading account.
As per popular brokers and brokerage firms, individuals can deposit and withdraw money on a Bitcoin-based account. It must be noted that Bitcoin trading is not exactly similar to spot currency trading. Today, a majority of investors are relying upon Bitcoin-based exchanges, until the traditional forex platforms become more dynamic in their Bitcoin transaction/trade offerings. There are numerous forex brokers like AvaTrade, LiteForex & eToro that offer BTC trading. But, it is always advised to trade Bitcoin using a traditional crypto currency exchange.
In order to trade in Bitcoin (BTC), users and forex traders must create a BTC account, and go about transferring money into the said account every time they’re looking forward to buying a Bitcoin. Here, you can use Coinbase, which is a digital wallet or cryptocurrency trading platform that allows you to buy, sell, store and accept Bitcoin. As Coinbase does NOT hold currencies, which means every exchange between USD/EUR/GBP and BTC requires traders to go through extra security protocols and steps. A Bitcoin purchase may require 3-5 working days, which implies that it does not work in the same method as a traditional currency exchange does. As a forex trader, you need to pay a fee for each and every Dollar transfer to Bitcoin and vice-versa, which is charged at a base rate of 4%. This is how the overall process works.
With the growing popularity of Bitcoin as an alternative method of investment and transaction, it has caught the attention of forex brokers, who are looking forward to expanding their service deliverables and offerings. Some refer to Bitcoin as a traditional currency, especially when trading is not dependent on the macroeconomics of a nation, instead on the dynamics in global financial situation and economy as a whole.