The forex market, with a daily volume of about US$6.6 trillion, is the largest financial market globally. Investors and traders in this market enjoy the highest liquidity, thanks to its massive valuation -over US$2.409 quadrillion. Anyone can trade currencies on this market 24/7 from virtually any location in the world.
Aside from the traditional forex trading, market participants have had to contend with the rise in cryptocurrencies such as bitcoin (BTC) and Ether (ETH). Unlike their traditional counterparts, cryptocurrencies are decentralized currencies not issued or controlled by any central bank. Therefore, when forex brokers began accepting cryptocurrencies in forex trading, a new fascinating dimension came up.
If you are wondering whether your UK Forex Broker or any other broker will allow you to trade forex using cryptocurrency, the most probable answer is yes! However, before we go further into that direction, it is important to first understand a few things about the dynamics of forex and crypto.
Traditional Forex Trading
Before throwing cryptocurrencies into the mix, it helps to quickly look at how to execute a standard forex trade. At the very basic, forex trading refers to the exchange of one currency e.g., the US dollar for another such as the British pound. The rate of exchange usually varies with one currency being stronger than the other. For instance, at the time of this writing the GBP/USD was priced at 1.3571. This means one British pound is equivalent to 1.3571 US dollars.
There are many reasons why people exchange currencies. Some could be tourists looking for foreign currency to spend in their destinations, others could be buying properties in foreign countries or sending money to their loved ones back home. However, when you talk of forex trading, the kind that is executed by forex brokers and others, the underlying motive is to make a profit from the fluctuations in currency values. Currencies fluctuate in real value relative to one another and depending on the direction of this fluctuation you may make or lose money in your trade.
Assuming you are trading the EUR/USD currency pair. Currently, the pair is priced at 1.1320. If you buy at this rate and spend US$100, you’ll get €88.3392. If the EUR/USD rate moves to 1.1350 and you sell or close your position, you’ll get US$100.2650. Your profit for the trade will be 0.27%.
Structurally, the forex market is decentralized in that market participants trade borderless with each other through a system of technological devices. Cryptocurrency is also based on a decentralized digital currency system but conceptually different from how forex markets work. In forex markets, the currencies are still issued and controlled by central banks while cryptocurrencies aren’t. Here’s a little bit more about crypto and forex trading.
Trading Forex Using Cryptocurrencies
To trade forex using crypto, you must first identify a broker who accepts crypto as a means of payment for currency trades. When you get a UK forex broker that accepts crypto, open a forex trading account with them. The presumption here is that you already have crypto in your digital wallet and are ready to transfer.
With your forex trading account set up, transfer your crypto from your digital wallet to the digital wallet of your broker. Assuming you are paying in bitcoin and the current Bitcoin USD (BTC-USD) rate is 40,006.29. If you transfer 0.5 BTC, you’ll have US$20,003.145 in your forex trading wallet.
If you are targeting the AUD/USD currency pair currently trading at 0.7165, with US$20,003.145, you’ll get AU20,003.145. Assume that during trading, the AUD/USD rate moves to 0.8500 and you close your position. You’ll get US$23,730.18. In terms of percentage profit, you’ll have made 18.63% profit.
Conversion to Bitcoin
If the BTC-USD rate hasn’t changed, you’ll get 0.59 BTC. However, if the rate has changed to, say to 45,000, you’ll get 0.53 BTC. Incase of a drop in the rate to 35,000, you’ll get 0.68 BTC.
Therefore, despite the profit on your AUD/USD position, movement of the BTC-USD rate can have a significant impact on your returns. It can either erode your profit or boost it.
Advantages of Trading Forex with Crypto
There are several advantages you will realize when trading forex using crypto. Here are the top benefits.
- Decentralization: Cryptocurrencies are free from geopolitical influences because they are not controlled by governments. This gives them autonomy from country-specific risks.
- Leverage: Forex traders using crypto have the benefit of unlocking leverage to help amplify their profits. However, it is advisable that beginner traders exercise caution as they explore the use of leverage to avoid making huge losses.
- Deposit Amount: Depending on the forex broker you choose to trade with, you can get offers such as matching deposit amounts which make it simpler for you to trade.
- Brokerage costs: In a bid to attract new clients, some of the brokers offering forex trading with cryptocurrency charge lower brokerage costs.
- Security and privacy: When paying for your forex trades using crypto, one thing you are guaranteed of is privacy and security. In traditional forex trading, transactions are subject to regulatory scrutiny and vulnerable to political nuances.
Demerits of Crypto Forex Trading
As you consider trading forex using crypto, here are some pitfalls you should be on the lookout for.
- Crypto exchange rates: Cryptocurrencies are traded on several exchanges, and this means multiple exchange rates. Before engaging your forex broker, understand the exchange rate platform they are using.
- Exchange Rate Risk: When depositing and withdrawing funds, forex brokers convert the crypto into fiat almost immediately. This exposes you, the trader, to crypto-fiat exchange rate risks.
- Volatility: Cryptocurrencies are inherently volatile. Their prices go up and down frequently with some of the dips being so significant. To mitigate this, ensure you trade with a forex broker who is regulated as they are likely not to take advantage of the fluctuations.
Trading forex using crypto is very much possible and many forex brokers are increasingly offering this feature to their clients. However, as a trader, you must understand the dynamics involved and the inherent risks in your trades. For instance, when trading forex using cryptocurrency, you must factor in the volatility and exchange rate risks of crypto and how that can affect your position. While reaping the benefits of decentralization and high leverage, ensure you trade with brokers who are regulated in the local market.