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The forex market is the world’s largest market running 24 hours a day and 7 days a week all over the world. However, forex is not dynamic enough prompting the uses of Bitcoin in currency trading. In this article, we shall cover the risks and benefits of trading forex with bitcoins.
In a standard Forex Trade, users deposit the amount they wish to trade with their forex broker. Let’s consider an American trader betting on a pound sterling/USD currency pair (GBP/USD). He would deposit for instance $100.
Assuming the exchange rate is $1 =£0.78, he would receive £78 for the $100 deposit. If the GBP/USD rate changes to 0.7, he receives 78/0.7 =$111.42. Meaning the trader made 10.25% profit over the initial $100 deposit.
On the other end, forex trading using Bitcoin involves opening an account with a broker who accepts bitcoin (like Ava Trade, Etoro or Liteforex). The trader can then deposit bitcoin into the broker’s wallet. Assuming a bitcoin is valued at $4000, a customer who deposits 0.5 bitcoin gets $2,000. If the trader takes a position in British Pounds.
Assuming the exchange rate is £0.78 = $1, the trader gets 1560. When the GBP/USD rate changes to 0.7 the trader gets $2,228.57. This price is further subject to the changing prices of Bitcoin. Supposing bitcoin rise to $4,600, the trader gets 0.484 BTC.
Exchange rate fluctuation of bitcoin significantly affects profits and losses, however, there are other benefits and risks associated with trading forex with BTC.
Benefits of Trading Forex with Bitcoin
1. No Central Control
One of the most important advantages of trading forex with bitcoin is that there is no central bank to randomly change bitcoin valuations. Decentralization makes the bitcoin market independent of geopolitical influences. Macroeconomic issues like country-specific inflation or interest rates too do not affect bitcoin.
Bitcoin attracts high leverages ranging up to 1:1000. This can be utilized by experienced traders to gain high profits. However such high margins increase the potential of making losses.
2. Zero Transaction Fees
All Bitcoin transactions are automatically recorded on a public blockchain. This process does not involve any banks or clearing agencies. This makes bitcoin transactions extremely cheap to execute worldwide. This allows brokers to charge a zero withdrawal or deposit fees on bitcoin transactions thus improving profits.
A user trading with Bitcoin can deposit amounts as small as $25 with some bitcoin forex trading platforms. However, it is vital to cross-check the legitimacy of the broker before sending in your money.
Bitcoin trading brokers keep brokerage cost very low in order to attract new bitcoin trading clients. This can be of much benefit to the trader. Furthermore, Bitcoin transactions are secure than most banks transactions. This positively affects the costs and security of funds.
3. No Geographical restrictions
Bitcoin transactions can be executed from any part of the world irrespective of regulatory boundaries. This only requires the consent of the trader and the broker ignoring all the bureaucratic policymakers.
Risks of Trading Forex with Bitcoin
On the other hand, the risks associated with trading Bitcoin includes,
1. Varying Exchange Rates
Bitcoin trade on multiple exchanges with varying exchange rates. Traders ought to understand which baseline rate the forex broker uses. Furthermore, Bitcoin deposits keep fluctuating in according to the changing value of Bitcoin in USD. Any Bitcoin transaction from deposits to withdrawal is still exposed to the risk of bitcoin to USD rate.
2. Dangerous Price Fluctuations
The High volatility of Bitcoin prices can be used by brokers to their advantages most especially in the absence of regulations. Brokers would cash the difference of any positive price changes after depositing your bitcoin into their accounts.
3. High Chances of Loss due to rampant Hacks
Being a digital asset, Bitcoin deposits are prone to theft by hacking, even from the broker’s wallet. To reduce this risk, it is vital to trade with brokers who have insurance protection against theft or safe custodian of their funds.
4. High Risks Associated with Leverage Trading
The high leverage bitcoin forex trading offers is too risky for newcomers who may not understand the exposure. It is vital for traders to note that cryptocurrency is a different asset class with its own valuation mechanism.
5. Unavoidable new Intermediate currency
Trading in cryptocurrency introduces a new intermediate currency which can affect profits and losses in unprecedented ways. Any funds not locked down in a traders base currency is at risk.
Never the less, you can’t quit trading just because of the many risks associated with it. We all know everything in life carry a lot of risks. To trade cryptocurrency with confidence and make long-term profits from it, knowledge is a must-have. Check out our analysis of some of the critical cryptocurrency trading tools you can’t do away with. We urge you to find as much information as required before trying real money trading.
To give your views on this topic share your ideas in the comment section below and help out a brother out there trying to sharpen his trading skills. It is obvious that when you follow the right sets of steps in trading cryptocurrency, you will be able to make some money out of it.
However, poor portfolio (money) management and lack of effective strategies would only lead to frustration and disastrous experience. Do not forget to follow this conversation Twitter.