In recent years, bitcoin has become a speculative transaction for individuals that are looking for an alfa from alternative assets and a possible hedging against the uncertainty of worldwide currencies. Bitcoin (BTC) is a digital floating currency that is linked with USA dollar like a foreign currency (forex). Unlike gold, there’s no physical asset to base the price on.
Debate on whether bitcoin should be considered as a legal tender has been sped up thanks to MT. Gox from Japanese stock market and also because big USA retailers use it widely for processing payments. Unlike USA dollars, Chinese yuan or euro, bitcoin is not considered as a global currency.
Steve Lord, editor of ‘FinAlternatives’ and ‘Modern Money Letter’ said: ‘Regulators don’t look at at bitcoin as a curreny.’ ‘They look at it like an ‘asset’ of value.’
The growth of trading bitcoin has created a multi-billion industry that allows individuals to buy and sell cryptocurrencies. Many brokers are saying they allow to trade bitcoin as a part of their forex trading services. Investors though should know some things about how trading bitcoing and forex actually works.
Trading bitcoin vs forex
There are some differences trading forex and bitcoin. For both, the prices of banknotes and digital currencies are based on the global offer and demand. If demand for bitcoin increases, it’s price also increases. The uncertainty created by international Central Banks is not applied to bitcoin though. Bitcoin is mined with a predictable speed, but unexpected sways on monetary policies may cause significant currency rate price movements. The value of bitcoin is related to key elements of crypto currencies ecosystem, whereas forex is related to a certain country and it’s currencies economic decisions and conditions.
‘Trading bitcoin is similar to trading anything else on the stock market. You can exchange dollars to euros through forex and dollars to bitcoins. It is very similar but it depends on the idea that it is traded in real currency,’ said Lord. ‘It’s not a real thing. Lots of people say it’s a currency but it is not as dynamic as trading currencies.’
Another problem is how individuals trade currencies. In addition to one-to-one trading potential, traders may increase their leverages through derivates and other paper contracts, that are designed to increase profit. In current situations some brokers conclude contracts that increase leverage in bitcoin sector, but this kind of contracts are still in their beginning stages. Trading bitcoing is more similar to equity in the New York stock market. Similar to the Exxon Mobil Corporation (XOM) stocks, bitcoin depends on price movements and market changes.
‘There’s very little of derived work unlike the currency market where there’s a lot of outside the stock market contracts,’ said Lord. ‘It will get there. Some of them allow investors to buy bitcoin marginal or they conduct new contracts. But for now trading is mostly a speculation of the price increasing of bitcoin.’
Maybe the biggest difference between forex and bitcoin is liquidity. The worldwide market of currencies is a 5 trillion dollar sized market, compared to the bitcoin market which value is just in billions. On a smaller market like bitcoin it is more likely to see a more volatile market and the significant changes in prices due to macroeconomic events. The market of currencies is unregulated. Regulators like CFTC, NFA and others monitor options and futures. CFTC has still not given a formal statement about how they will define bitcoin other than an asset.
Trading bitcoin in forex
Several forex brokers like Bit4X and 1Broker say that individuals can store, withdraw and trade on a bitcoin based account. The platform can bring legal consequences since the differences in contracts is not allowed in the United States and the FCA (financial regulator in the UK) has given out warnings to investors about Bit4X platform.
Other forex brokers have said that they can add bitcoin trading possibility to their platform but taking into consideration that they are not BTC based.
In a recent report Goldman Sachs explained that the Chinese yuan is the most popular currency that bitcoin transactions are based on. According to investment bank 80% on bitcoin is traded with the Chinese yuan. On Bitciunity.org site it says that almosy 78% of all bitcoin trading is done in Chinese stock markets OKCoin, BTC China or Huobi.
Until forex platforms start offering more possibilities to trade bitcoin, it’s better for investors to work with bitcoin-based platforms where their own countries currency is traded. These companies have a better understanding of the trading market, safety requirements and possibly have lower costs. After the crash of Mt. Gox these exchanges say that they have bettered their models with better safety mechanisms.
Coinbase is still one of the most popular methods of investing in bitcoin. By definition Coinbase is a wallet that lets users store, spend, buy and receive bitcoin.
In order to buy bitcoin, users have to make an account and start a money transfer on the account every time they want to buy bitcoin. Coinbase doesn’t keep keep currencies on those accounts, which means every ‘exchange’ between the dollar and bitcoin requires extra safety measures. It takes up to three to five work days to buy bitcoin which means it does not work like traditional currency exchange. It is possible to buy with a previously agreed price. For every transaction between bitcoin and dollar you need to pay 1% and in addition 0.15 dollars of bank fee.
The growing popularity of bitcoin as a alternative investing possibility has gotten the attention of brokers who want to expand their services. Some define bitcoin as a traditional currency, especially since trading bitcoin doesn’t base on a countries macro economics. Bitcoin and forex trading can be similar but you don’t have to do it through a forex broker. It may be more expensive, especially if you’re using a platform that takes bigger fees like Coinbase. Investors should weigh the risks with bitcoin and alternative currencies and decide, whether that kind of speculation fits their portfolio.