Foreign exchange has been and still is the biggest and most liquid global market in existence. Its operations continue on 24 hours a day for 7 days a week. The current main participant in this market is currency, real currency that draws its validity out of banks and governments.
But in recent years, we have seen the participation of a new type of currency, specifically cryptocurrencies which have radically and exponentially grown since they were first introduced and have made the forex market that much more lucrative and profitable.
In fact, there are leading brokers all over the world that have included cryptocurrencies as part of their trading assets. It would not be fair to try and explain them all in a single article. What we will talk about here is the cryptocurrency known as bitcoin and the potential risks involved with trading it in the forex market.
Forex Trading and Bitcoin
The first thing to note about bitcoin for all its influence on the forex market is that it is not in fact what we call real money. It does not draw its validity from any government or bank. It is entirely a virtual currency stored in a digital wallet. The future is now, it seems.
It is fair to assume then that trading it in the Forex market is going to be different than how you would trade your average dollar, and you would be right. Let us now take a look at what a regular transaction with bitcoin looks like.
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First things first, you will need to own an account with a forex broker that includes bitcoin trading as part of its services. With that taken care of, let us assume you deposited 2 bitcoins and quote the value at $500 apiece. So in dollar speak, your deposit is worth 1000. What’s more you also take up a position in British currency for which the rate of exchange is $2 for each pound. So your bitcoin deposit is worth 500 in English pounds.
As for the rate for GBP/USD, we shall call it 0.45 and you quote your position at $1,111.11. So your profit will be 11.11%. However, rates tend to change all the time so let us now say the value of 1 bitcoin has gone up from $500 to $560. If you make a bitcoin withdrawal at this point, your return will be the quoted value of your position divided by current rate assigned to bitcoin. That is 1,111/560. You now get 1.984 bitcoins.
As much as you stand to make good profits from trading bitcoin, it is always advisable to be cautious and be keenly aware of the risks involved. We have listed them down here for your benefit.
Risks of Bitcoin Trading In Forex
- Bitcoin is traded over several exchanges and those rates differ all the time. As a trader, you must be acutely aware of the bitcoin exchange rates being used by your forex broker before proceeding to trade.
- It is common for practice for the majority of brokers to immediately sell off the bitcoins and retain the same value in US currency in the midst of receiving bitcoin deposits from client traders. And that goes even if you do not actually take up a position on the forex market, so you will be left vulnerable to the risk of an unfavorable rate on the US dollar influencing your deposit or withdrawal.
- Traditionally speaking, the prices for bitcoin are extremely volatile. An unregulated broker can capitalize on this at a trader’s expense.
- Being a virtual currency, never underestimate the threat of being hacked. No, the network is not entirely immune to a cyber-attack. Any deposited bitcoins are potential targets for theft by hackers. The best solution to this is find a broker that provides insurance in the event of thievery.
- New traders must understand how high leverage can cost them dearly.
- A cryptocurrency has its own way of assigning value to itself as a separate category under assets. Trading bitcoins in the forex market is basically bringing in a new intermediary form of currency that is relatively unpredictable in the way it affects profits and losses.
Hopefully now you have greater insight into bitcoin works in the forex market and the potential risks there are to trading it.