Bitcoin has emerged as one of the hottest investments around. Now, as Bitcoin trading continues to evolve, it is also being linked up with another hot investment market, Forex, which involves the trading of currencies. While Bitcoin itself aims to be a currency, there are some important differences between Bitcoin trading and traditional Forex trading.
Forex trading refers to the trading of currencies. In a globalized world, companies and organizations must be able to quickly exchange currencies in order to facilitate global operations and purchases. A large company like General Electric can have operations in literally dozens of countries. This means that General Electric must be able to quickly access various currencies in order to pay local staff and make purchases, among other things.
The Forex market is the largest and most liquid investment market in the world. Most of the traders are large institutions, corporations, and governments who conduct trading to facilitate their various operations. Some investors, however, also trade in Forex with the goal of making money off of fluctuating exchange rates.
Currencies are traded in pairs. This means that one currency is exchanged for another. So USD/Euro and Euro/USD refers to two separate trading pairs. The first currency refers to the “base currency”, which means that USD is the currency being bought, and Euro is the currency being sold. In the USD/Euro pair, you are using Euros to purchase dollars. If you use Euros to purchase dollars, you are essentially betting that the dollar with rise in relation to the Euro, and the Euro will likewise fall.
Forex is considered to be a more stable market to invest in. Currency exchange rates generally move very slowly and only change at moderate paces over time. While traumatic world events, such as the collapse of a national economy, or a major financial crisis, can cause exchange rates to rapidly move up and down, most of the time currencies remain quite stable in comparison to other investment vehicles such as stocks.
Investors, however, make money off of fluctuations in markets. Generally, the more volatile prices for an investment are, the more opportunities there are to make and lose money. This is why Bitcoin Forex trading is becoming more and more popular. At the moment, the amount of speculation and number of concerns (i.e. security, government intervention) surrounding the currency mean that Bitcoin prices are highly volatile. This makes Bitcoin an investment vehicle more similar to stocks, commodities, and other highly speculative investments – giving it the ability to gain larger profit (and loss).
Most Forex trading is conducted through dedicated Bitcoin exchanges, such as MtGox, which allow you to “buy” Bitcoins. Forex trading differs from a traditional Bitcoin exchange in that it is non-executable and you buy Bitcoins in pairs. This means that you can’t simply withdraw your Bitcoins and use them to make purchases. Instead, you invest in a dedicated financial instrument, in this case a currency pair.
Lately, Forex brokers are beginning to get involved in Bitcoin and are setting up Bitcoin trading pairs similar to those found on traditional Forex platforms. Like other trading pairs, a Forex pair will allow you to buy and sell Bitcoins in relation to other currencies. This means that you could potentially profit off of the rise in the value of Bitcoin and the drop in the value of the US dollar, or vice versa.
Popular Bitcoin/Forex trading companies that supply CFD services include Plus500 and Avatrade. Oanda, one of the world’s largest Forex brokers, has added Bitcoin to its conversion tool but has so far declined to make Bitcoin a tradable currency. Still, the mere fact that Oanda is engaging with Bitcoin is good news and adds credibility to the currency. When trading CFDs your capital may be at risk. This method of trading is suitable for experienced traders.
Even though only a handful of companies allow Bitcoin in their Forex trading, you can still engage in Forex trading and currency pairs through the Forex brokers listed above. By trading Bitcoin through Forex brokers and through currency pairs, you should be able to maximize your earnings if your market analysis is right.