Guide to Forex Trading With Bitcoins
Unlike other currencies on the Forex market, Bitcoins are not an actual world currency, being produced by a central bank and issued in the form of coins and banknotes. Instead, it is a virtual currency, in fact, it is the world’s first Cryptocurrency, and has no physical form, being held electronically instead. While Forex traders have enjoyed participating in the traditional markets for years, the arrival of this new and exciting cryptocurrency has led to a deeper dimension in trading with a range of new possibilities and interest around this new type of trading is being to rise. Created as recently as 2008, with the open source software being released in 2009, Bitcoin has rapidly risen in profile and is now being offered as a trading instrument by many online Forex brokers.
What are Bitcoins?
Unlike all other currencies, Bitcoins are digital and are therefore held and created electronically with no one organisation or bank being in control of it. Bitcoins were created by a man using a nickname “Satoshi Nakamoto” (in May 2016 Craig Wright revealed himself as the creator of Bitcoins), a software developer, with the idea of creating a currency that would be completely independent of central authorities but which could be electronically transferring instantly with only a low transaction fee applied. Bitcoins cannot be devalued as only 21 million are permitted to ever be produced, however anyone with the right know-how can create Bitcoin as they are mined using a distributed network of computing power. Transactions are also processed by this network. Each Bitcoin is divided into parts of 1 hundredth millionth of a Bitcoin and these are called “Satoshis”. Although traditional currencies have this basis on precious metals like silver and gold, Bitcoin is different, having its basis in mathematics. Bitcoins are produced using a freely available open source mathematical formula.
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What are the Benefits and Risks of Trading Bitcoins?
Bitcoin trading is becoming more popular due to its many benefits. These include:
- Decentralised Currency
There is no central bank changing the valuation of Bitcoin and therefore the rate of Bitcoins is completely free from any macroeconomic or geopolitical issues or influences.
The majority of Forex brokers offering Bitcoin as an instrument offer a high leverage of up to 1:1000 which allows experienced traders to gain greater profits.
- Free Transactions
As Bitcoin transactions are recorded digitally on a public network with no bank or clearing agency involvement there is usually no transaction fee involved on Bitcoin trades, even when transferring sums globally.
- Low Deposit Amounts and Trading Costs
It is possible to start trading Bitcoin with an amount as small as $25 with certain brokers and trading costs are kept low to appeal to new clients.
- High Security
There is no need to reveal any personal or bank details when trading in Bitcoin which allows investors to remain anonymous while maintaining security of their funds.
- No Global Restrictions
When a trader chooses to trade in Bitcoin they can use any broker based anywhere in the world which is not the case with regular currencies.
There are, however, increased risks associated with Forex trading in Bitcoin:
Historically, there has always been high volatility in Bitcoin prices and as there is no regulation, brokers can use this to their own advantage to the expense of clients. As prices can swing wildly by up to a dollar or more per day, there is also an increased chance of extreme losses for inexperienced traders.
- Theft and Software Problems
Bitcoins are increasingly becoming the target of cyber criminals and any Bitcoin account is at risk of being hacked. Also there have been cases where entire Bitcoin accounts have been lost due to computer hardware or software failures.
While the high leverage available on Bitcoin trading is appealing to an experienced investor, it can be very risky for a newbie who may underestimate the potential losses.
What Affects the Price of Bitcoin?
As with any currency, there are several factors which impact the value of Bitcoins. These include:
- Supply and Demand – as there is a limit of 21 million Bitcoins set over a century and around half of that amount has been mined so far, there are cycles of great interest among the public in this currency, so when demand stays high, Bitcoin prices are dramatically increased.
- Banking blockades – when one of the traditional banks decides to block a specific organisation or business, they are still able to receive and send payments in Bitcoins thus increasing its value.
- Traditional currency issues – if one of the traditional currencies is facing a crisis like a banking crash Bitcoins come to the fore since it is uncontrolled by any single organisation or central bank.
- Market manipulation
- Regulation and Government bans of Bitcoins – if a country decides to ban the use of this cryptocurrency, its value decreases.