You probably know that the biggest liquid market is the Forex market. It is open 24×7 and is a global market. Forex is also a dynamic market and cryptos like the Bitcoin have now added another dimension to it. Recently, Forex traders have started trading foreign exchange with Bitcoins.
Whether Bitcoin should be viewed as a legal asset or not had been questioned when the infamous hacking of Mt. Gox exchange happened. Till now, the Bitcoin has not been recognized as a currency like the US dollar or the Japanese Yen. So, in that sense, the crypto market is distinct from the Forex market.
Bitcoin trading however has grown exponentially and people are buying and selling coins through many cryptoexchanges. Some brokers are including Bitcoin trading in Forex trading services. But, as an investor, it is necessary to know how trading Forex with Bitcoins actually works. A trader may use BTC in the Forex market in these ways:
- He can trade BTC as part of any currency pair
- Deposit BTC to finance a trade account
If you trade BTC as part of any currency pair such as BTC/USD, it is like trading any conventional Forex currency pair. But because of its unique features and since it is relatively new, Bitcoin is seen to be distinct from fiat currencies. It is created through a process called mining and Bitcoins have a finite supply. So, there cannot be a sudden surge in Bitcoin supply devaluing the coins in circulation. But fiat currencies can be subject to supply changes. Unlike fiat currencies, Bitcoin’s total supply is 21 million and its value is not related to a bank, government, or economy. Finally, there is another key difference between the Forex and Bitcoin in terms of liquidity. Bitcoin has a market cap of $650 billion but Forex has a $6 trillion market cap. So, Forex market has much more liquidity than Bitcoins which are subject to volatility.
Trading differences exist between Forex and Bitcoin trading. In case of both, prices will depend on demand metrics and worldwide supply. If demand for Bitcoins goes up, prices will increase. But it is not subject to uncertainty in supply which is triggered by banks. They are mined and their values are linked to the crypto ecosystem basics, but Forex matters are related to economic situations and decisions of individual countries.
Trading BTC is similar to trading any other asset on an exchange. So, you may trade USD for Euros and USD for BTC on an exchange. While Bitcoin advocates argue that it is an actual currency, it is believed that Bitcoins is not as dynamic compared to trading currencies. Besides the one-on-one trading, traders can improve their leverage via derivatives/contracts for getting high returns. Some brokers have begun underwriting contracts to boost Bitcoin’s leverage but these are new. Unlike the currency market with many OTC contracts, derivatives are limited for Bitcoins. As of now, trading is primarily on speculation about Bitcoin prices.
Many brokers argue that people can withdraw, trade, and deposit on Bitcoin-based accounts. But functionality of such brokers can have legal implications. CFDs are still not permitted in the US and the Financial Conduct Authority in the UK has warned investors about such platforms. Most Forex traders use a traditional Bitcoin exchange. Until and unless Forex platforms become stronger in Bitcoin offerings, investors have to keep working with Bitcoin-based exchanges which trade fiat currencies. These exchanges have upgraded their security systems after the Mt. Gox incident.