Cryptocurrencies add an interesting element to forex trading. Now that Bitcoins aren’t a new concept, more brokers and traders are starting to use them on the forex market; however, the use of cryptocurrencies can add an additional element to trading that can be very complex for beginners. First, you should know how Bitcoins can be used in forex trading. Then, we can examine how they affect the market itself.
How Forex Works With Bitcoins
Of course, everyone reading this article probably already knows how forex trading works, but for the sake of this explanation, here is a recap. In forex, you are wagering on one currency in relation to another currency. If you bet $500 on the pound vs. the dollar, and the exchange rate is 0.5 pounds per dollar, you will receive 250 pounds on the forex market. If the rate dips to 0.45 pounds per dollar, you receive a profit. Simple enough? With bitcoins, it gets a little more complex. Say one bitcoin is equivalent to $500. You exchange that bitcoin for $500 and wager it on the GBP/USD rate that was discussed above. The same thing happens, and you receive a profit. Now, you must trade your profit back in for the equivalent in bitcoins in order to cash out, because your original trade was made in bitcoins. Simple, right? Not exactly. By the time you decide to cash out, the bitcoin exchange rate may have changed, adding another element to your trade. Before, one bitcoin equaled $500, but now, one bitcoin might be worth $560. Therefore, when you cash out the profit you made in USD, it may not end up being a profit once exchanged back into bitcoins. In Layman’s terms, it just adds another step in the exchange process, which could end up being beneficial or detrimental if you do not pay attention to each element.
How Cryptocurrencies Affect Forex Trading
Bitcoins could end up stirring up all kinds of controversy on the market. Currently, there are no transaction costs for the use of cryptocurrencies because they are a digital currency. On the other hand, there are more exchange rates that need to be monitored, which could create a problem if you are a broker. As a broker, you are at risk of theft due to hacking, since bitcoins are digital currencies. They might be more enticing for traders though, because they present a much lower cost of trading than other currencies. Ultimately, there are pros and cons with cryptocurrency trading, as there are with almost any form of trading. The most important thing is to be aware of all the elements involved.