Foreign Exchange, also known as Forex, is the largest and most dynamic currency trading marketplace in the world. This market has been given a new dimension by the introduction of crypto currencies such as Bitcoin.
Forex traders can make a lot of money by taking advantage of volatility in exchange rates. Profit margins are higher if there is more variation between currencies. The forex market is changing with some traders now accepting digital currency for trading.
How Standard Forex Works.
First, let’s understand what standard forex is. Imagine that you are an Indian trader who bets on the currency pair USD/INR. Your forex trader will accept INR100 as a deposit. If the INR1 rate is $0.5, then you’ll receive $50 for INR100. You will get INR111.11 (50/0.45) if the USD/INR rates shift to 0.45. This is a 11.11% increase in your original INR100 deposit.
Forex and Bitcoin: How does it work?
Let’s say you deposit 2 Bitcoins into the digital wallet of a forex brokerage. Let’s say that 1 Bitcoin is equal to $500. This would make your 2 Bitcoins equal $1,000. If you wish to hold a position in INR and the exchange rate is $0.5 = INR1, then you will get $500. You will receive $1,111.11 in your account if the USD/INR rate changes to 0.45. This would give you a 11.11% profit. If the Bitcoin to U.S. Dollar rate changes to 1 Bitcoin = $560 you will get 1.984 Bitcoins ($1,111.11/$560).
Even though you earn a profit on INR however, the fluctuation in the Bitcoin rate to USD rate will set you back by.016 bitcoin (2 Bitcoins – 1.8984 Bitcoins). If the Bitcoin to USD rate were to change to 1 Bitcoin = $475 you would get 2.339 Bitcoins, or 16.95% profit. This means that you would also make profit from the Bitcoin trade and the forex exchange.
Now that we have a better understanding of forex and digital currency, let’s move on to learn how Bitcoin trading will affect Forex’s activities.
Supply
An exponential algorithm manages the creation of foreign currency, whereas certain central banks regulate it. This automatized method reduces volatility and gives an estimate of how many Bitcoins will ever be created.
Inflation
Bitcoin is not affected by monetary inflation because Bitcoin’s algorithm restricts mining after it reaches 21 million Bitcoins. Foreign currencies, on the other hand are government-regulated and are therefore not immune from monetary inflation. Both Forex and Bitcoin are affected by price-level inflation. Foreign currency inflation is caused by many factors, including interest rates, national debt, political stability and economic health.
Demand
Although a centralized currency is always in demand, Bitcoin’s popularity is determined by factors such as public approval, emerging markets, and public trust in Bitcoin’s value. Bitcoin’s popularity has increased due to the growing acceptance of Bitcoin by the public and emerging markets. Despite criticisms from the media, Bitcoin’s popularity continues to grow.
Volatility
In Forex markets, volatility can be as low as 0.5% to 1%. Bitcoin volatility can range from 5% to 15%. Bitcoin is therefore attractive to high-risk traders.
Trading Platform
Different exchange platforms allow you to trade Bitcoin and Forex. There are alternative currencies like Dogecoin and Litecoin available for trading. This is the main difference. These crypto currencies are not included in forex platforms, but they can be replaced by lesser-known currencies.
Bitcoin has yet to realize its full potential, as it has created a risky trading marketplace. Trading Bitcoin in forex has many advantages and disadvantages, besides market fluctuations.
The Advantages of Bit coin trading
Decentralized Valuation: Because there is no central authority who can change the Bitcoin’s valuation unpredictably, the Bitcoin cannot be influenced by geopolitical or country-specific macroeconomic issues.
Forex brokers offer low trading costs to attract new Bitcoin traders.
Global reach: Bitcoin transactions are now available worldwide. An American trader can trade with Bitcoin via a UK broker.
No transaction costs: Every Bitcoin transaction is electronically entered onto public networks. Bitcoin trading does not incur transaction fees because banks and clearing agencies are not involved.
Forex leverage: Forex offers high leverage of up to 1 000 for Bitcoin trading. The huge margins can be a boon for traders if they are managed well.
A small deposit amount is required Bitcoin traders can begin trading with as little as $25 Some forex trading companies offer a matching deposit amount for new members.
Security: Bitcoin transactions do not require you to reveal your bank account or credit card details in order to withdraw or deposit money. This is a significant benefit in terms of financial security.
The Disadvantages of Bitcoin Trading
- Different exchanges have different exchange rates for Bitcoins. Forex brokers will use different exchange rates so traders need to understand them.
- High leverage exposes new traders to high risks because they don’t understand the exposure.
- Bitcoin is volatile. Unregulated brokers can use high volatility to their advantage, putting traders at disadvantage.
- Hackers can steal bitcoins that have been deposited with a broker’s digital wallet. This can be prevented by brokers that are insured against theft.
- Most brokers will sell this coin immediately they receive customer deposits. The rate risk of Bitcoin to U.S. Dollar for a trader can be incurred from the time he deposits to the time he withdraws.
Conclusion
Although cryptocurrencies such as Bitcoin are growing in popularity, there are also many risks. There are many benefits and risks to dealing in decentralized currencies. Digital currency trading is a profitable market if traders are prepared to take on these risks.