Bitcoin Trading vs Forex: How Does It Work- Part 1

Taking into account, there has been in recent years, the evolution of Bitcoin into a speculative investment for those individuals seeking alpha from alternative assets as well as a possible hedge against global uncertainties with weakness in fiat currencies. In this case, Bitcoin comes as a digital floating exchange pegged to the US dollar like in foreign exchange. There is still no underlying physical asset on which one can base the price. 

Is Bitcoin a Currency?

It was that in the wake of a very high profile attack of Japanese exchange Mt. Gox, along with the widespread adoption of it in payment processing at major US retailers, the debate is on whether Bitcoin should be considered a legal tender. Bitcoin is not recognized universally as a currency, unlike the US dollar, the Chinese Yuan, or the Euro, by every participant of global markets which includes regulators as also government officials.

According to Steve Lord, editor of FinAlternatives, and The Modern Money Letter, regulators don’t view Bitcoin as a currency. He further states that they are viewing it as an asset of value as the regulation has said it can be a depreciable asset, very different from forex currency trading markets.

Creating a multi-billion industry, the growth of Bitcoin trading allows individuals to buy or sell the cryptocurrency across a large number of exchanges. Permitting Bitcoin trading as a part of their forex trading services are several brokers. It is important that in this case the investors are entitled to know a few simple realities about using Bitcoin trading and forex trading which work. 

Exploring the similarities and differences in this article explaining why traditional Bitcoin exchanges are a better alternative to those forex platforms while adding the option of trading the cryptocurrency.

Bitcoin Trading Versus Forex

Coming with very few differences is between forex trading and Bitcoin trading where the prices of both paper and digital currency are based on global supply and demand metrics. It follows the path that when demand for Bitcoin rises, the prices too increase whereas when demand falls, it also fails.

Bitcoin, on the other hand, is not subject to supply uncertainty which is created by international central banks as the Bitcoin is mined at a predictable rate while unexpected shifts in monetary policy like those of the Swiss National Bank’s decision as it unpegs the currency from euro creating significant swings in currency prices. Whereas the Bitcoin value is linked to the fundamentals of the cryptocurrency ecosystem, as forex matters are tied to economic decisions and conditions of an individual nation and the currency.

According to Steve Lord, trading Bitcoin is similar to trading anything else on an exchange where trading dollars for euros through forex and dollars for Bitcoin on the exchanges are similar. It depends a lot on the idea that it’s traded on the actual currency. With a little bit of disconnect there when talking about it, it’s not a real thing as many who say it is a currency whereas not as dynamic as trading currencies. 

Depending on Bitcoin trading is the issue caused by the way individuals trade currencies in addition to one-to-one trading potential currency traders boosting their leverage even though derivatives and other paper contracts are designed to boost returns. In the current environment, some brokers are slowly underwriting those contracts that tend to boost the leverage in the Bitcoin sector whereas such contracts are still in their infancy. Similar to the ownership of an equity on the New York stock exchange is the Bitcoin trading. 

As Lord said, with a very little derivative work around Bitcoin as in contrast to the currency market with many over the counter contracts getting there. Currently, some are allowing those investors to purchase Bitcoin on margin or creating new contracts while right now trading is the main speculation on the rise of the price of Bitcoin. Additionally, financial engineering is expected.

In this context, the greatest difference between Bitcoin and Forex is the matter of liquidity as the global currency trading is a $5trillion market when compared to the Bitcoin market valued in billions. In the context where the smaller market has the Bitcoin existing to come more likely to experience a more volatile trading atmosphere while also seeing significant price swings conducting over small macroeconomic events.

While the currency spot market is highly unregulated, the regulators like the Commodity Futures Trading Commission (CFTC), the NFA, and several other futures exchanges are sure to oversee options and futures based on currency trading. Whereas the CFTC is however yet to issue a formal ruling on how it defines Bitcoin aside from it being an asset.

The Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), the Consumer Financial Protection Bureau (CFPB), among other agencies have surely sent the number of investor warnings on the risks associated with Bitcoin investment.

To Be Continued…

More on this discussion about forex and Bitcoin in the next post. Stay tuned and get more ideas on the demand for Bitcoin from the next post.