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The type of trading where cryptocurrency is used to exchange pairs to utilize cryptocurrency price fluctuations and exchange rate differences is called cryptocurrency forex trading. Once you understand how crypto and forex are related to each other, the trading is not that complicated, but not less risky. There are several warnings you should consider before starting to use cryptocurrency for forex trading. You should be aware of platform security, reputation, trading costs, and trust issues before trading in the several platforms and online exchanges available that let you trade cryptocurrency and fiat pairs.
Understanding Bitcoin Forex trading
To generate returns from small price fluctuations, currency pairs are used in forex trading. But as cryptocurrency is convertible to fiat currency, you can easily take advantage of fiat pair differences and volatile cryptocurrency prices. Cryptocurrency is subject to the same market influences that many other investing instruments are. For example, investor and market sentiments influence cryptocurrency prices, as do regulatory agency releases and news. Supply and demand also play a part in prices. Cryptocurrency is very responsive to these factors. In some cases, prices can fluctuate thousands of dollars within a trading period. Many investors and traders avoid products with similar volatility, but others enjoy it because it creates profitable opportunities if timed correctly.
How it works:
A hypothetical (and simple) cryptocurrency forex trade might look like this:
- Select a currency pair, such as USD/GBP
- Purchase the cryptocurrency you want to use in dollars
- When you’re ready, exchange the cryptocurrency for pounds
- Wait for a favorable USD/GBP rate and cryptocurrency price
- Convert the pounds back to cryptocurrency and calculate your gain (or loss)
Crypto and Forex Differences
One of the most significant differences between crypto and forex is the matter of liquidity. Global currency trading is a $7.5 trillion market, compared to a cryptocurrency market valued at about 1.6 trillion. Additionally, because it exists in a much smaller market, it experiences more volatility, with significant price swings over small macroeconomic events.
Cryptocurrency is not subject to the influence or manipulation of central banks, one of the key ideas behind its development. Central banks regulate the supply of cash circulating in economies to implement monetary policy, increasing or decreasing it as needed. Affecting the money supply is a critical tool in central bank policies, helping them promote economic stability.
Many cryptocurrencies have fixed amounts circulating or are introduced at more predictable rates, often touted as an inflation prevention measure. Some even use a technique called “burning”—removing specific amounts from circulation to influence how much is available. The entities pulling or pushing tokens in or out of circulation are crypto developers and communities.
While obviously highly intelligent, many of these individuals generally have no experience or education in advanced economics or monetary policy. They are essentially attempting to duplicate the efforts of more knowledgeable and experienced central bank personnel. Some burn tokens in an effort to increase prices by reducing supply, while others limit the rate of introduction or don’t set any limits on circulating tokens. This creates even more uncertainty in the cryptocurrency market than in forex markets—at least regarding the currency pairs of more stable and developed countries.
Concerns for Bitcoin Forex Trading
Several forex brokers state that you can deposit, withdraw, and trade using a cryptocurrency-based account. However, there may be legal implications for residents in some countries. For example, contracts for differences (CFDs), a trading instrument most forex brokers that allow cryptocurrency use, are not allowed in America. That said, it is difficult to determine whether forex brokers are reputable and trustworthy, given that most are based in countries with less strict regulations. So, until reputable and regulated forex platforms emerge, it might be better to use a regulated cryptocurrency exchange that trades in your national currencies.
Can You Trade Crypto on Forex?
There are forex brokers that allow you to trade forex pairs using cryptocurrency, but most that allow it are in less regulated jurisdictions and use contracts for differences to facilitate trades. It might be better to use regulated cryptocurrency exchanges to purchase cryptocurrency and legal forex exchanges in your country to trade pairs.
The Bottom Line
Cryptocurrency can be used to trade currency pairs and does not need to be done through a forex broker. However, if you reside in a country where the brokers that offer the service are unavailable, you’ll have to use the services of regulated cryptocurrency exchanges and forex exchanges to conduct your trades.
If you’re considering using cryptocurrency to trade forex, make sure you consider the risks associated with these markets and decide whether both speculative forms are suitable for your portfolio and risk tolerance.