The Foreign Exchange or Forex is the biggest and most dynamic currency trading market in the world. The introduction of crypto currencies like Bitcoin has further added a new dimension to this liquid market.
Forex traders make a profit by exploiting the volatility in exchange rates. The more the variation with other currencies, the higher is the profit. With some traders now allowing digital currency for exchange trading, the forex market is looking to change for good.
Let us first understand how standard forex works. Imagine you are an Indian trader betting on the U.S. Dollar/Indian Rupee currency pair (USD/INR). You deposit INR100 with your forex trader. Assuming the rate of INR1 = $0.5, you will receive $50 for your INR100. If the USD/INR rate shifts to 0.45, you will receive INR111.11 (50/0.45), making a profit of 11.11% over your original INR100 deposit.
How Does Forex Work With Bitcoin?
Let us assume you deposit 2 Bitcoins to the digital wallet of a forex broker. Assume that the Bitcoin to U.S. dollar rate is 1 Bitcoin = $500, so your 2 Bitcoins equal to $1,000. Now, if you want a position in INR, given the exchange rate is $0.5 = INR1, you will receive $500. If the rate USD/INR changes to 0.45 after some time, you will get $1,111.11 in your account, making a profit of 11.11%. However, assume that the Bitcoin to U.S. dollar rate now changes to 1 Bitcoin = $560, you will receive 1.984 Bitcoins ($1,111.11/$560) when you withdraw in Bitcoins.
Thus, despite earning a profit on INR, the variation in the Bitcoin to USD rate sets you back by.016 Bitcoin (2 Bitcoins - 1.984 Bitcoins). Conversely, if the Bitcoin to USD rate altered to 1 Bitcoin = $475, you would receive 2.339 Bitcoins ($1,111.11/$475), a profit of 16.95%. In other words, you would make a profit from the forex exchange as well as the Bitcoin trade.
With an understanding of how forex works with digital currency, let us move on to learning how Bitcoin trading will impact Forex’s activities:
Supply
While foreign currency is regulated by specific central banks, an exponential algorithm controls the creation of the. This automated method decreases volatility and gives you an idea about how many Bitcoins will be created in all.
Inflation
Bitcoin is unaffected by monetary inflation as Bitcoin’s algorithm limits mining once it reaches the upper limit of 21 million Bitcoins. On the other hand, foreign currencies are government regulated and hence, are not immune to monetary inflation. However, price-level inflation impacts both Bitcoin and Forex. Multiple factors including interest rates, nation’s public debt, political stability, and economic health cause steep derivatives that result in foreign currency inflation.
Demand
A centralized currency is uniformly in demand but, Bitcoin’s demand is determined by factors like public approval, emerging marketplace, and the public’s trust in Bitcoin value. The increase in public approval together with emerging markets has expanded the popularity of Bitcoin. In spite of criticism by media, Bitcoin’s demand continues to rise progressively.
Volatility
The volatility in Forex market is around 0.5% to 1% while volatility is around 5% to 15% for Bitcoin. For this reason, Bitcoin appeals to high-risk traders.
Trading Platform
Forex and Bitcoin can be traded over different exchange platforms. The main difference is the alternative currencies such as Litecoin and Dogecoin that are offered for trading. Forex platforms do not incorporate these crypto currencies but replace them with lesser known currencies.
Bitcoin is yet to reach its potential as it has given rise to a risky trading market. Other than the market fluctuations, there are several advantages and disadvantages of trading Bitcoin in forex.
Advantages Of Bit coin Trading
Decentralized valuation
Since there is no central authority that can unpredictably change Bitcoin valuation, the Bitcoin is not influenced by free from geopolitical and country-specific macroeconomic issue.
Low trading cost
In order to attract new Bitcoin traders, forex brokers offer very low brokerage costs.
Global reach
Bitcoin transactions have abolished global borders. A trader living in USA can trade forex with Bitcoin through a broker living in the UK.
Each Bitcoin transaction is electronically entered on public networks. Since banks or clearing agencies are not involved, Bitcoin trading is free from transaction costs.
Leverage
For Bitcoin trading, forex offers high leverage up to 1:1000. If approached sensibly, traders can benefit from the huge margins.
Small deposit amount
New traders can start Bitcoin trading with just $25. Some forex trading firms offer a corresponding deposit amount to new members.
Security
Bitcoin transactions don’t require you to disclose your credit card or bank account details to withdraw or deposit money. This is a huge benefit with
regard to financial security.
Disadvantages Of Bitcoin Trading
- The exchange rates for Bitcoins vary on different exchanges. Traders should understand which exchange rates will the forex broker use.
- High leverage puts new traders to risks as they cannot comprehend the exposure.
- Bitcoin exhibits high volatility. Since there is no central authority, unregulated brokers use high volatility to their advantage and put traders to disadvantage.
- Deposited Bitcoins can be stolen from broker’s digital wallet by hackers. To avoid this, traders should seek brokers who are insured against theft.
- The majority of brokers sell Bitcoins as soon as they receive the Bitcoin deposits from customers. A trader is exposed to the rate risk of Bitcoin to U.S. dollar from deposit to withdrawal.
Conclusion
Cryptocurrencies like Bitcoin are becoming popular but there are several related risks. Dealing in decentralized currency offers several advantages and risks. If traders are willing to take these risks, Bitcoin trading can be a lucrative market.
Popular cryptocurrencies like Bitcoin and new currencies like GDC coins are set to change the forex landscape forever. Given its global accessibility and low transaction costs, trading cryptocurrencies in forex can impact you in unanticipated ways.
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