Forex market or simply foreign exchange market is a global decentralized market for trading currencies. It runs 24hrs for seven days. It involves all aspects of buying and selling of currencies. As if it is not dynamic cryptocurrencies such as bitcoin are incorporating fascinating new dimension to trading forex. Numerous forex brokers are now accepting the use of bitcoins when trading forex. This article focuses on comparing the standard forex trading with bitcoin forex trading.
In a standard forex trading, a trader can for instance be an American trader batting on the UK pound/ U.S Dollar currency pair. If he or she deposits $100 with his/her forex broker. Taking the rate of $1= £0.5 you will earn £50 for your $100. In the GPB/USD rate change to 0.45, you close the position to 50/0.45=$111.11. He/she makes a profit of 11.11% over the initial $100 deposit.
Whereas in a forex trade utilizing Bitcoin, a trader opens an account with a broker who accepts bitcoins for instance eToro, AvaTrade or Liteforex. Then by depositing two bitcoins from your digital account to the forex broker’s digital account. If the current bitcoin to U.S dollar rate is one bitcoin =$500, your deposit of 2 bitcoins is equivalent to $1000. Now taking an assumption that you requires to take a position in British pounds. If the exchange rate is £ 0.5 to $1, you will earn £500. After a while, GBP/USD rate changes to 0.45, then you square off to earn $1,111.11 in your trading account. This translates to a tidy profit of 11.11% and you ready to cash out. Suppose by the time you want to cash out, the bitcoin to U.S dollar rate has changed to 1bitcoin =$560. When you withdraw your cash I bitcoins you will earn $1,111.11/$560 = 1.984 bitcoins meaning you have incurred a loss of 0.16 bitcoins
The following are some of the advantages of trading forex with Bitcoin:
1. High Leverage. Many forex trader offer a high leverage of up to 1:1000 for bitcoins trades. Experience traders can exploit this to their advantage. However, such high margins should be exploited with great caution because they can magnify the loss potential.
2. Decentralized valuations. On major benefit of trading forex utilizing bitcoins is that there exists no central bank to randomly determine the value of each bitcoin. Because of its decentralized nature, these bit coins are free from geopolitical influence and macroeconomics problems like country specific interest rates or inflation.
3. There is no Transaction Costs. All bitcoin transactions are recorded digitally on public networks without any involvement of clearing agencies or banks. Thus there are no transactions costs incurred even when it comes to global transfers.
Besides its advantages forex trading with bitcoins can pause some risk including:
1. Bitcoins on multiple exchanges rates fluctuate. Any trader must ensure he or she must understand which bitcoin exchange rates the forex broker will be utilizing. Sometimes many brokers sell bitcoins that they receive from their clients and hold them in US Dollars.
Although cryptocurrencies, for instance bitcoins are gaining popularity, there are numerous risks associated with it but in forex trading, using decentralized currencies that offer global transactions with no fee is a benefit.