What Is Bitcoin Forex Trading?
Cryptocurrency forex trading uses cryptocurrency to trade currency pairs, attempting to exploit exchange rate differences and cryptocurrency price fluctuations. There are several caveats that you should consider before deciding to use cryptocurrency to trade forex pairs, but once you understand how crypto and forex relate to each other, it's not as complicated—but no less risky.
Key Takeaways
- Cryptocurrency forex trading is using cryptocurrency to take positions in a forex pair trade.
- There are several trading platforms and online exchanges that let you trade cryptocurrency and fiat pairs—but beware of trading costs, platform security, reputation, and trust issues.
- Bitcoin forex trading combines the risks inherent in both types of trading.
- Unless you accept and can tolerate the risks involved, it might be best to use regulated cryptocurrency exchanges and trade in your country's currency.
Understanding Bitcoin Forex Trading
Cryptocurrency is subject to the same market influences that many other investing instruments are. For example, investor and market sentiments influence cryptocurrency prices, as do regulatory agency releases and news. Supply and demand also play a part in prices.
Cryptocurrency is very responsive to these factors. In some cases, prices can fluctuate thousands of dollars within a trading period. Many investors and traders avoid products with similar volatility, but others enjoy it because it creates profitable opportunities if timed correctly.
Forex trading uses currency pairs to attempt to generate returns from small price fluctuations. So, because cryptocurrency is convertible to fiat currency, you can use it to take advantage of volatile cryptocurrency prices and fiat pair differences.
How It Works
A hypothetical (and simple) cryptocurrency forex trade might look like this:
- Select a currency pair, such as USD/GBP
- Purchase the cryptocurrency you want to use in dollars
- When you're ready, exchange the cryptocurrency for pounds
- Wait for a favorable USD/GBP rate and cryptocurrency price
- Convert the pounds back to cryptocurrency and calculate your gain (or loss)
Crypto and Forex Differences
One of the most significant differences between crypto and forex is the matter of liquidity. Global currency trading is a $7.5 trillion market, compared to a cryptocurrency market valued at about 1.6 trillion. Additionally, because it exists in a much smaller market, it experiences more volatility, with significant price swings over small macroeconomic events.
Cryptocurrency is not subject to the influence or manipulation of central banks, one of the key ideas behind its development. Central banks regulate the supply of cash circulating in economies to implement monetary policy, increasing or decreasing it as needed. Affecting the money supply is a critical tool in central bank policies, helping them promote economic stability.
Many cryptocurrencies have fixed amounts circulating or are introduced at more predictable rates, often touted as an inflation prevention measure. Some even use a technique called "burning"—removing specific amounts from circulation to influence how much is available. The entities pulling or pushing tokens in or out of circulation are crypto developers and communities.
While obviously highly intelligent, many of these individuals generally have no experience or education in advanced economics or monetary policy. They are essentially attempting to duplicate the efforts of more knowledgeable and experienced central bank personnel. Some burn tokens in an effort to increase prices by reducing supply, while others limit the rate of introduction or don't set any limits on circulating tokens. This creates even more uncertainty in the cryptocurrency market than in forex markets—at least regarding the currency pairs of more stable and developed countries.
Concerns for Bitcoin Forex Trading
Several forex brokers state that you can deposit, withdraw, and trade using a cryptocurrency-based account. However, there may be legal implications for residents in some countries. For example, contracts for differences (CFDs), a trading instrument most forex brokers that allow cryptocurrency use, are not allowed in America.
That said, it is difficult to determine whether forex brokers are reputable and trustworthy, given that most are based in countries with less strict regulations. So, until reputable and regulated forex platforms emerge, it might be better to use a regulated cryptocurrency exchange that trades in your national currencies.
These firms have a better understanding of the trading market and security requirements and likely will have fewer trading costs associated with each purchase. Additionally, you'll have a few more protections using a regulated exchange as you attempt to use two different speculative markets to try and generate returns.
Can I Trade Crypto on Forex?
There are forex brokers that allow you to trade forex pairs using cryptocurrency, but most that allow it are in less regulated jurisdictions and use contracts for differences to facilitate trades. It might be better to use regulated cryptocurrency exchanges to purchase cryptocurrency and legal forex exchanges in your country to trade pairs.
Can I Fund My Forex Account With Crypto?
If your broker allows it, you can use crypto to fund your account.
Is Forex More Risky Than Crypto?
Both markets carry significant risk—forex because of exchange rate fluctuations and the use of leverage and cryptocurrency because of substantial price volatility. When you combine the two, there is even more risk of loss.
The Bottom Line
Cryptocurrency can be used to trade currency pairs and does not need to be done through a forex broker. However, if you reside in a country where the brokers that offer the service are unavailable, you'll have to use the services of regulated cryptocurrency exchanges and forex exchanges to conduct your trades.
If you're considering using cryptocurrency to trade forex, make sure you consider the risks associated with these markets and decide whether both speculative forms are suitable for your portfolio and risk tolerance.
The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read ourwarranty and liability disclaimerfor more info. As of the date this article was written, the author does not own cryptocurrency.
