Forex

There is an impending financial crisis, and it’s bound to open up opportunities in the world of Bitcoin. The uncertainties of the past few months might make trading forex with Bitcoin an enticing option given how this coming economic turmoil figures to make traditional world markets plummet. However, before you actually start trading forex with Bitcoin, bear in mind that, as with any investment, there are pros and cons to pairing up a real-world currency with a digital currency.

What is Forex?

Unlike your typical cryptocurrency, forex is a decentralized global market. Here, the world’s different currencies are traded in pairs, such as the Euro against the U.S. dollar (EUR/USD). Trades involve predicting whether the base currency, in this case, the EUR, will appreciate or depreciate in value against the quote currency, here the USD. A positive forecast would see traders buying the EUR/USD pair, while a negative one would see it being sold. If you guess correctly, you stand to make a profit. Trading currencies against Bitcoin is similar. However, the exchange rate is steeper. Currently, you can get 0.86 EUR for every 1 USD. In comparison, you can get 1 Bitcoin for 63,278.50 USD.

The Pros

Now, let's take look at the advantages of trading forex with Bitcoin. One obvious pro is that Bitcoin and its 2.7 trillion USD market cap is insulated from chaos. In other words, Bitcoin’s valuation is not necessarily impacted by geopolitical and economic factors, which means that its price does not move in sync with other assets, like stocks and commodities. In these uncertain times, Bitcoin might be more stable than traditional assets.

Additionally, as trading forex with Bitcoin isn't as commonplace yet, several brokers that do have the Bitcoin option are offering it with high leverage (the ability to use debt as an investment) at low costs (low deposits and low trading costs). These enticements make trading with Bitcoin appealing, and could easily magnify profits.

The Cons

Despite being insulated from chaos, Bitcoin is not immune from volatility. In fact, its hallmark is being volatile. Its value this year alone has seen its fair share of peaks and dips. For example, Bitcoin reached an all-time high 64,863 USD last April but tumbled by almost 10% to 46,700 USD when El Salvador adopted it as an official legal tender. It then went on to reach a new all-time high 66,974 USD just last October 20. This volatility makes it hard to predict Bitcoin's movement compared to a fiat currency, therefore making it risky to trade forex with.

Though its recent performance makes Bitcoin trading appear promising, the fact that its price volatility can magnify losses even more than profits can be a con. Certainly, it makes Bitcoin trading riskier, especially for new traders with a limited understanding of how leverage works. Another disadvantage here is that Bitcoin is a unique asset class with its own valuation mechanism. This dynamic can then affect profit and loss in unforeseen ways, thereby increasing risks.

How to get started

Equipment-wise, all you need is a device with an Internet connection. The hard part is finding a certified broker to make your trades simpler, cheaper, and more convenient. This guide to forex-based trading platforms from FXCM explains that such platforms have to have beginner-friendly data analytics tools like charting applications and preloaded indicators that can help you assess the market like a pro. Some platforms can even automatically develop strategies and place trades for you, providing a hands-off trading experience. However, these platforms have to be regulated by institutions like the Financial Industry Regulatory Authority.

Conversely, you can use Bitcoin-based exchanges like Coinbase to directly trade in USD. These platforms utilize blockchain technology to make all trading records transparent, accessible, and extremely difficult to tamper with. The blockchain is so secure that Analytics Insight contributor Apoorva Komarraju even called it the future of financial technology. In fact, the blockchain is being used for everything from online banking and investments to instant money transfers.

All things considered, trading forex with Bitcoin is just like traditional trading: You can make a profit, yes, but you can just as easily occur losses if you underestimate the market. So, it's best to proceed with caution. Do your research and trade conservatively to gain experience and the ability to make bigger and more profitable trades.