A few years ago, maybe 3 or 4 years ago, the words bitcoin, cryptocurrency and blockchain were only used by very few people worldwide. Back then even word processors would not recognize the words and instead suggest alternative spellings. At the moment, this isn’t a problem anymore, and the usage of the words has been increasing rapidly.
Bitcoin is only the one from a number of virtual currencies that function through a code known as the blockchain. The Blockchain is the code that dictates how these virtual currencies are created, and they are handled in a way that prevents duplication while maintaining anonymity. Virtual currencies like the bitcoin are built on this blockchain code and they act almost like the actual currency.
Uses of bitcoin
Bitcoin is now the most popular digital currency in the world, and due to its popularity has gained various uses. A person with bitcoin can exchange them into legal tender currency, or directly use it to buy products. Some companies now allow the use of bitcoin for purchases including Dell, HP, etc.
Since it already acts as a currency, it can also be traded as one, just like we do regular currencies on the Forex market. Also similar to regular currencies, bitcoin is also subject to value fluctuations depending on supply and demand, and this makes it ripe for trade by speculators. Normally, people buy bitcoins for use, but speculators trade bitcoin just for profit, and this is our focus.
How do you trade bitcoin?
There are 2 main ways to trade bitcoin if you are a speculator – from a bitcoin exchange or from an online broker. The former option is similar to buying stocks at a stock exchange, only instead of getting a certificate that shows you own the shares, you have bitcoin sent to your ‘wallet’.
The latter option is to buy bitcoins from an online broker that can be a dedicated bitcoin broker or a Forex broker. A dedicated bitcoin broker has the same qualities as a physical exchange, but trading bitcoins with a Forex broker presents some differences. If you’re interested in trading bitcoins, you need to know which option is better for you, and this is by looking at the advantages and disadvantages.
Why trade bitcoin through a Forex broker?
There are reasons to trade bitcoin either from an exchange or a Forex broker. Some good reasons to trade bitcoins with Forex brokers are:
Forex brokers that offer bitcoins will provide similar leverage to bitcoins as they do Forex pairs, which is a definite plus. Consider the fact that a single bitcoin is trading at around $1,200 per. That is a lot, almost as much as an ounce of gold! At an exchange, you would have to buy a single bitcoin at that price, plus any other included charges.
Now imagine a bitcoin FX Broker that offers only a 100:1 leverage. In this case, you would only need to have $12 to buy a whole bitcoin, which means you can buy plenty more bitcoins. Leverage also has the advantage of bringing in a lot more profit. For example, if bitcoin prices rose to just $1,300, which would be a $100 difference, the whole profit would go to you, even though you only put down $12. Of course, leverage has its downside, but it provides an opportunity for massive gains.
An exchange makes money by charging for their services, usually through a commission. Continuing with the above example, you would have gained $100 after buying one bitcoin at $1,200 at an exchange, but you would have pay, say, 5% commission, leaving you with a $95 profit.
Bitcoin transactions still remain very cheap because the charges are very low, but recent government intervention is changing this. In China, the People’s Bank of China recently dictated that bitcoin exchanges impose a charge on all transactions. Furthermore, every exchange is free to set their own charges as they see fit, and the choice is out of the traders’ hands.
On the other hand, bitcoin Forex brokers will only impose the same spread they use for Forex trading. Some of these brokers have spreads as low as 0.1 pips, which is a very small charge considering the upside. By reducing the amount of charges incurred by their clients, you get to keep more of your profits compared to buying bitcoin from an exchange.
If a single bitcoin goes for $1,200, how comfortable would you be putting a huge investment in the hands of an exchange. I could quote Mt. Gox, the largest bitcoin exchange of its time that went bust, losing its investors millions of dollars’ worth of bitcoin, but I don’t even need to. There are just too many cases of fraud involving bitcoin exchanges and scams which have led to people losing a lot of their money.
This is not to say that every bitcoin Forex broker is honest, certainly not. There are a number of fraudulent Forex brokers that claim to offer bitcoin trading services and abscond with investors’ money. However, there are also a number of honest and reliable bitcoin Forex brokers reviews that anyone can access to find out just how trustworthy a particular broker is. Because these companies operate an online business, you can find reviews by users all over the world who will tell you whether the broker can be trusted, rather than rely on the word of mouth spread by a local bitcoin exchange.
Many ways to trade
At a bitcoin exchange, you can only buy bitcoins and sell them when you want to convert them to cash. With a Forex broker, it is possible to also short sell the bitcoins and make a profit whether its value goes up or down. For speculators not interested in owning the actual bitcoins, this is a definite plus.
On the subject of freedom, you are free to choose whichever broker on the list of bitcoin Forex brokers to trade with. There are plenty of these out there, and you’re not restricted by location on which one to partner with. It is a definite advantage compared to being stuck to a particular broker perhaps because of location.
Are there some downsides to online bitcoin trading?
Nothing is perfect, and even in the online bitcoin trading industry, there are some downsides.
Lack of choice
In order to offer bitcoin trading services, bitcoin FX brokers rely on the quotes sent to them by an exchange. It is up to the broker to select the bitcoin exchange from which to draw their quotes, and you as the trader don’t have a choice in the matter. In fact, you may not even know which particular exchange they are using.
The problem arises because the value of bitcoin can be different from one exchange to another, and this means you can find yourself dealing with an exchange with less favourable quotes. If you were dealing directly with an exchange, you have the choice to pick whichever exchange you find better, but with FX brokers bitcoin, you don’t have a choice but to accept what they give you.
Security of funds
Before we saw how bitcoin exchanges can abscond with traders’ money, or go bust inadvertently losing their client’s money, but there’s certainly a lot more security in dealing with a physical bitcoin exchange than an online bitcoin Forex brokers. This is because bitcoin exchanges are supposed to be regulated by the region’s financial regulator.
For example, in the US, bitcoin exchanges are regulated by the CFTC, and any complaints are overseen by these regulators. On the other hand, it is easier for online brokers to disappear than physical ones, which makes investigating and prosecuting cases of fraud much more difficult. In this sense, there is more security of funds in physical exchanges than in online brokerages.
When you buy bitcoins from an exchange, your bitcoins are sent to your wallet and you own the bitcoins yourself. This means you can use those bitcoins for other transactions and you are not subject to any other charges. When you are trading with Forex brokers bitcoin, those bitcoins are not really yours, and you don’t have any control over them. That means you can’t use them for anything else, and they are not really yours.
Furthermore, most of these Forex brokers that allow bitcoin trading will apply additional charges for bitcoin trades held overnight. Because the broker is only connecting you to an exchange, the trade essentially closes at midnight and is re-entered afresh the next day. By doing this, your bitcoin trades will incur a form of overnight swap rate which increases the cost of trading.
Now that you know both sides of the coin, it is up to you to decide whether you prefer trading bitcoin through a Forex broker, or directly at an exchange.
How to make use of the bitcoins in your wallet
By now, you are able to decide how you want to purchase bitcoin, and there’s also plenty more you can do with your bitcoin if you have it, such as trade the Forex market. In addition to conventional payment services like PayPal, Skrill and Neteller, there are Forex brokers that accept bitcoins as a way to make deposits.
These Forex brokers deposit bitcoin from your wallet and into your account, converting it into whatever currency your trading account supports. Thereafter, you can use your deposit as capital to participate in the Forex market as usual. People who are interested with anonymity will appreciate this option because bitcoins keep your identity secret.