When discussing the most popular assets of the 2020s, cryptocurrencies like Bitcoin are unavoidable. Although originating from the Great Recession, Bitcoin rose to prominence a few years later, achieving staggering growth and making many of its early investors wealthy.
With popularity came the broader adaptation, and many Bitcoin holders are now using it as a funding source for loans and their trading accounts.
This article will look into fine details of using Bitcoin as a funding method for forex trading — explain how it works and what to keep in mind when opting for such an approach.
How Does Trading Forex With Bitcoin Work?
Trading forex using Bitcoin starts with a deposit to the broker’s wallet. In this case, Bitcoin is treated like a commodity with a specific denomination.
For example, imagine if a forex broker allowed you to trade by depositing crude oil. You’d send trucks filled with barrels to the broker’s warehouse for storage. In return, the forex broker would credit your account with an equivalent worth in denominated currency (U.S. dollar).
It works the same with Bitcoin, except you don’t have to pay for sending hundreds of barrels of oil nor does the forex broker have to cover the storage fees. Instead, you pay a small fee for sending Bitcoin, and the broker credits your account. Digital assets hold this advantage over physical assets, similarly to digital products over physical products.
Technically, traders can use that Bitcoin for two trading purposes. One works like any foreign exchange currency pair where the trader sells or buys Bitcoin against fiat currencies or other cryptocurrencies.
The latter involves exchanging Bitcoin for a currency and then taking a position on the forex market. For example, you could exchange Bitcoin for the U.S. dollar and then buy euros with it to get long EUR/USD.
Is Bitcoin a Currency?
Bitcoin is widely categorized as a virtual currency that differs from traditional currencies. It is a decentralized form of payment that is outside any group’s control, in contrast to currencies that fall under the full control of central banks that increase or decrease their supply.
Although currencies are among the more volatile assets, Bitcoin’s volatility is significantly higher — imposing larger short-term risks to its users. Still, some forex brokers accept deposits in Bitcoin, and most of them offer it as a tradeable asset — usually denominated in U.S. dollars and treated as volatile commodities like crude oil or gold.
Things to Consider With Trading Forex With Bitcoin
Although it is similar to regular trading, trading forex with Bitcoin has a few key differences to keep in mind.
Location
Bitcoin’s adaptation significantly varies across the globe. While some countries like El Salvador use it as legal tender, others outright ban it. Using Bitcoin to trade forex largely depends on the trader’s location.
In the U.S., Bitcoin’s regulation varies as IRS treats it as property, while the Commodity Futures Trading Commission (CFTC) classifies it as a commodity. States like Hawaii are more restrictive, while others like Texas or Colorado are more crypto-friendly.
Exchange Rates
Bitcoin trades in denominated currencies like commodities, while currencies trade in ratios. Thus, when a trader wants to take a position, a broker will use the funds in denominated currency to facilitate the trade. For example, buying EUR/USD would involve selling the U.S. dollar and buying the euro.
Traders who want to track their account’s value must simultaneously pay attention to its exchange rate since it can significantly oscillate. Novice traders should avoid taking long-term positional fx trades through Bitcoin-funded accounts.
Volatility
Bitcoin, like most other cryptocurrencies, is volatile. By some estimations, its volatility is 10 times higher than the most popular currency pair EUR/USD.
When trading forex in Bitcoin, traders take on extra volatility risk as its value can significantly increase or decrease during the trade. Although this factor can result in magnified winnings as well, it is a double-edged sword and has to be part of the risk management plan.
Benefits of Trading Forex Using Bitcoin
Trading one of the largest markets using the largest cryptocurrency has these benefits.
- Low deposit requirements: Many forex brokers offer low minimum Bitcoin deposits. Sometimes it can be as low as $25, allowing traders to test this trading approach with low risk.
- Higher security: Funding a trading account through Bitcoin requires no credit card or any other payment service.
- Decentralization: Bitcoin is a global decentralized cryptocurrency. It is not tied to any central bank and therefore has less risk from negative macroeconomic or geopolitical developments.
- Lower costs: Bitcoin forex trading is somewhat new, and many brokers keep the fees relatively low.
Risks of Trading Forex Using Bitcoin
Cryptocurrency forex trading also comes with some risks.
- High volatility: Cryptocurrencies are extremely volatile, and this fact can cause traders to experience outsized wins and losses, contributing to amplified emotional responses.
- Varying exchange rates: Bitcoin trades on multiple exchanges, and prices may vary. Before depositing, traders must check which exchange rate the broker is using.
- High leverage: Bitcoin brokers often offer high leverage. For experienced traders, it can be beneficial, but it is a tempting offer for novice traders who might easily blow their accounts chasing outsized returns.
- Asset class mixing: Funding the account in one asset class and then using it to trade another one can be confusing. It requires tracking both asset class prices, and it might create mistakes because of wrong calculations.
Situational Approach for Outsized Returns
If there is anything that traders love above everything else, it is volatility. Moving price is what makes money in any market. Although forex is volatile, cryptocurrency’s volatility blows it out of the water. Combining those two types of assets is a large risk to take for any but veteran traders.
Still, there are instances where Bitcoin forex trading becomes compelling. For example, traders anticipating Bitcoin’s medium-term decline could fund their trading accounts and speculate on the proceedings while waiting for the storm to pass.
Forex traders trading platforms play a crucial role in the forex market, where investment returns and interest rates are at stake. Make sure to work with a forex broker that supports forex bitcoin.
Frequently Asked Questions
Can you trade Bitcoin on forex?
All brokers denominate Bitcoin in a base currency, usually the U.S. dollar. Depositing Bitcoin with the broker grants the trader an amount of that currency in return, which serves as a currency trading deposit.
Can I trade Bitcoin on MT4?
Most brokers offer Bitcoin as a tradeable asset on MetaTrader 4. Traders should be aware that spreads usually differ from broker to broker and steer clear of those who keep them artificially high.
Is forex part of cryptocurrency?
No. Forex and cryptocurrency are drastically different assets. While anyone can issue a cryptocurrency, only central banks can issue currencies. Only recognized sovereign countries can have their currencies globally accepted.