Benefits and Risks of Trading Bitcoin Forex

The foreign exchange market is the largest and most liquid in the world. This is a truly global forex market that is open 24 hours a day, seven days a week, everywhere. As if the currency market wasn't dynamic enough,  foreign exchange market cryptocurrencies like Bitcoin have added a fascinating new dimension to currency trading. In recent years, many forex brokers have started accepting bitcoins for currency trading, with some accepting a variety of other digital currencies as well. Should you go ahead and start using your hard bitcoin in the currency markets? First, learn about the risks and benefits.



A Standard Forex Trade

Before considering currency trading with Bitcoin, it is helpful to understand how a traditional currency trade works. A forex trade is simply an exchange of one currency for another at the current exchange rate. Unlike tourists who exchange their national currency for local pocket money, currency traders try to make money from the constant fluctuations in the real value of one currency for another forex trading platforms in India. Imagine you are a US trader and you bet that the British pound will lose value against the US dollar. This is called sterling / US pound trading. Dollar currency pair (GBP / USD). Deposit $ 100 with a forex broker. Assuming the fee is $ 1 = £ 0.5, you will get £ 50 for your $ 100. If the GBP / USD rate changes to 0.45, close the position at 50 / 0.45 = $ 111.11. That is, you will make a profit of 11.11% on your initial deposit of $ 100. Most currency transactions are conducted in a decentralized manner through the over-the-counter markets. However, just because the forex market is decentralized and Bitcoin is considered a decentralized digital currency does not mean that the two are equivalent.

The Effects of Decentralization

The main difference is that although currency trading can be decentralized, the currencies themselves are backed by the central banks of the countries that issue them. The job of these banks is to stabilize and keep the value of their currencies stable. Bitcoin and most other cryptocurrencies do not have this support.



Currency Trading With Bitcoin

Now consider an example of Bitcoin currency trading. First of all, you open a Forex trading account with a broker that accepts bitcoins. These include AvaTrade, 1 eToro, and Lite Forex best brokers in India for forex. 2 Then you transfer 2 Bitcoins from your digital wallet to the forex broker's digital wallet. Suppose the current rate of bitcoin against the US dollar is 1 bitcoin = 7,500 USD, your deposit of 2 bitcoins is worth 15,000 USD. Now suppose you want to take a position in pounds sterling. If the exchange rate is £ 0.5 = $ 1, you get £ 7,500. After a while, the GBP / USD rate will drop to 0.45 and you will match your position to get $ 1,666.65 in your trading account. You've made a decent 11.11% profit and are ready to pay.

The Bitcoin Effect

However, suppose that the Bitcoin-US dollar rate increased to 1 Bitcoin = $ 8,500 during this period. When you withdraw your bitcoin money, you will get ($ 16,666.65 / $ 8,500) = 1,961 bitcoins.

$ 5,332 $ 11,982

The Value Range of a Bitcoin During the Year to July 2020.

Even though your bet in sterling gave you a profit of 11.11% (from $ 15,000 to $ 16,666.65), the fluctuation in the exchange rate of Bitcoin against the US dollar means that you lose 0.039 Bitcoin or around -2% late. (First deposit of 2 bitcoins - 1,961 bitcoins = 0.039 bitcoins). However, if the bitcoin to US dollar exchange rate were to increase to 1 bitcoin = $ 7,000, you would make a profit on both currency trading and bitcoin trading. You would have received ($ 16,666.65 / $ 7,000) = 2,381 bitcoins, a gain of 19.1%.

Greater Unpredictability

This hypothetical example illustrates the great reason to be careful when using digital currencies to trade forex. Even the most popular and widely used cryptocurrency, Bitcoin, is very volatile compared to most traditional currencies. In the year ending July 24, 2020, the value of one bitcoin was between $ 5,532 and $ 11,982. This unpredictability means that the risks associated with trading Bitcoin currency are much higher. In addition to exchange rate fluctuations that affect profits and losses, there are other benefits and risks to consider before trading Bitcoin forex.

Benefits of Currency Trading With Bitcoin

Decentralized Reviews - A big advantage of Bitcoin currency trading is that Bitcoin is not tied to a central bank. Digital currencies are free from core geopolitical influences and macroeconomic issues like inflation or country-specific interest rates. High leverage - Many forex brokers offer leverage for Bitcoin transactions. Experienced traders can use it to their advantage. However, these high margins must also be approached with great caution, as they increase the potential for losses.

Low Deposit Amount: A trader can start with as little as $ 25 with some bitcoin currency trading companies. Some forex trading companies have even offered promotions like a suitable deposit amount. Traders should verify that the broker is legitimate and properly regulated.

Low Trading Costs - Most forex brokers that accept cryptocurrencies keep their brokerage costs very low to attract new clients.

Security - You don't need to reveal your bank account or credit card details to complete a Bitcoin transaction. This is a great advantage in terms of costs and financial security.

No Global Borders - Bitcoin transactions have no global borders. A South African based trader can trade Forex through a UK based broker. Regulatory challenges can remain a problem, but when traders and brokers are ready to trade, there are no geographic boundaries.

Risks of Currency Trading With Bitcoin

Different exchange rates: Bitcoin is traded on various exchanges and the exchange rates vary. Traders should make sure they understand the bitcoin exchange rates that the forex broker will use. US Dollar Exchange Rate Risk: When receiving bitcoin deposits from clients, almost all brokers sell bitcoins instantly and keep the amount in US dollars. Even if a trader does not take a forex trading position immediately after making a deposit, he is still exposed to Bitcoin-to-US. Dollar rate risk from deposit to payment.

Volatility Risk - In the past, Bitcoin prices were very volatile. In the absence of regulation, unregulated brokers can use volatility to their benefit and to the detriment of a trader. For example, suppose the intraday price of bitcoin fluctuates from $ 5,000 to $ 5,300 per bitcoin. For an incoming deposit of 2 bitcoins, the unregulated broker can apply the lower rates to credit the merchant with $ 10,000 (2 bitcoins * $ 5,000 = $ 10,000). However, once the trader is ready to opt out, the broker can use the lowest possible exchange rate. Instead of the 2 bitcoins initially deposited, the merchant only receives 1.88679 bitcoins ($ 10,000 / $ 5,300 = 1.88679 bitcoins). The unregulated broker can trade bitcoins and dollars for, say, $ 5,150 and pocket the difference at the customer's expense.

Bitcoin Security Risks: deposited bitcoins are susceptible to being stolen by hacking, even from a broker's digital wallet. To reduce this risk, find a broker who has theft insurance. Leverage Risk - Using leverage is risky for new traders who may not understand risk. Not only is this risk unique to crypto currency trading, it also comes into play in traditional forex transactions.

Asset Class Mix - Cryptocurrency is a completely different asset class and has its own pricing mechanism. Bitcoin currency trading essentially introduces a new intermediate currency that can affect profits and losses in unexpected ways. Any money that is not locked in a trader's base currency is a risk.

The Bottom Line

Although cryptocurrencies like Bitcoin are becoming increasingly popular, there are still many risks associated with them. In currency trading, about foreign exchange market you. it is beneficial to trade in a decentralized currency that offers global transactions free of charge. But the trade-off is basically adding a third currency to what was a trading pair. Traders who wish to take this risk should only use a locally regulated forex broker.

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