Once regarded as an activity exclusive to large financial institutions such as banks or hedge funds, forex trading started gaining immense popularity amongst individual traders with the advent of the internet. Although some people are still reluctant about forex trading, citing the market’s complexity and unpredictability as the main reasons to stay away from it, there are many others who are more than willing to take the leap.
It can’t be denied that forex, as the largest and most liquid market in the world, offers plenty of advantages for all traders. And if the idea of entering a high liquidity market that provides countless opportunities for financial gain wasn’t tempting enough, we also have cryptocurrencies to make things even more interesting. The forex landscape became more diverse once brokers started accepting bitcoin for forex transactions.
This gave rise to one important question: should people start trading bitcoin in the forex market or should they stick to trading fiat currencies? Let’s take a look at some of the aspects you should keep in mind if you want to go down this route.
What is forex trading?
Before we go deeper into the topic, we should start with the basics and explain what forex trading is all about. Forex trading, also known as FX trading, refers to the exchange of one currency against another. So basically, the forex market allows traders to buy and sell currencies from all over the world at their current rates.
The forex market is the largest market in the world, open 24 hours a day, five and a half days a week, so people can trade anytime from anywhere. The currencies are always traded in pairs (for example, USD/EUR) and market participants can speculate on the changes in currency value in order to make a profit.
What makes forex trading ever so tempting is mostly the low entry costs, meaning small traders can enter the market without having to invest a fortune. Also, the high amount of leverage attracts traders to the game, with the possibility of high returns even when you have a small trading capital.
What is bitcoin?
If you’re even slightly familiar with the concept of cryptocurrencies, you probably have a rough idea of what bitcoin is. Launched in 2009 by a group of programmers using the name Satoshi Nakamoto, bitcoin is a digital currency that eliminates the need for formal institutions in order to perform financial transactions.
Bitcoin is different from fiat currency, not only by being completely virtual, but also because it’s powered by a decentralized ledger system, known as blockchain, where each transaction is recorded. The blockchain technology is considered to be one of the safest transactional systems available, providing a great solution for storing and exchanging digital currencies.
How things work
So how does trading forex with bitcoin work? It can be as easy as looking for forex brokers accepting bitcoin, opening an account and then you can start trading. However, there are some aspects you must understand before you jump into it.
It can’t be denied that bitcoin has had a turbulent history, but the public’s interest in investing in bitcoin keeps on rising. This also drew the attention of forex brokers who decided to add bitcoin exchanges to the services they offer. It’s therefore important to know the basic differences between forex trading and bitcoin trading.
While the values of both fiat currencies and digital currencies depend on supply and demand, bitcoins are associated with a lower risk of uncertainty. Bitcoin is not influenced by the economic environment of different countries. It relies solely on the principles that rule the cryptocurrency landscape.
Generally speaking, trading bitcoins is quite similar to trading fiat currencies on forex. You can exchange bitcoins for euros or dollars on a forex platform, just as you would trade any other currency pair. Yet the difference lies in the fact that bitcoins aren’t currencies in the traditional sense of the word. This means there’s not as much dynamism when trading bitcoin on forex.
Bitcoin trading offers less opportunities to boost leverage, as there are little derivatives around cryptocurrencies that could help with that. Although brokers are working to change things by creating new contracts, the process is still in its early stages, so it may take a while to diversify opportunities in this sector.
- Decentralization – One obvious benefit of trading forex with bitcoin comes from the decentralized blockchain network cryptocurrencies rely on. That exempts bitcoin from geopolitical influences that could affect its value.
- Accessibility – traders who want to start exchanging bitcoins for other currencies on forex platforms can begin with small amounts, so there’s no need for big investments. One thing to keep in mind though is you need to choose your broker wisely and do a bit of research to make sure he’s regulated, in order to avoid issues down the road.
- Low fees – usually, brokers who accept bitcoin for forex transactions have very low fees. This is one way to promote their services and attract new customers.
- Safety – bitcoin transactions are as safe as transactions can get, as you don’t have to give out information about your bank account or credit cards to start trading.
- Convenience – you can trade bitcoins anytime from anywhere, so if you’re based in one part of the world and your broker is in the opposite part, you’ll still be able to trade successfully.
- Multiple exchange rates – there are different exchange rates when it comes to bitcoin trading, so it’s absolutely necessary to be aware of the rates used by forex brokers before initiating a transaction.
- Volatility – bitcoins are known for their volatility ever since they were created. This instability gives unregulated brokers the opportunity to use different rates to make a profit, causing the client to lose money in the process.
- Leverage risks – inexperienced traders should take caution when using leverage to boost their profits. Using leverage comes with significant risks that first-time traders might not be aware of.