Just a few years back, you would only hear words such as bitcoin, cryptocurrencies, and blockchain in very small and niche circles in society. Back then even word processors would not recognize them, instead suggesting alternative spellings. Nowadays, you hear them about them at nearly every corner, and you certainly can’t go about the financial world without a mention of at least one of them, with the usage of the words increasing exponentially.
As you may be aware, bitcoin is only one many cryptocurrencies, which have a code known as the blockchain at the core of their existence. The blockchain is the code that dictates how these virtual currencies are created, how they are handled in a way that prevents duplication while maintaining anonymity. Virtual currencies like bitcoin are built on this blockchain, slowly but surely marching toward becoming on par with official currency.
Bitcoin is now the most popular digital currency in the world, and its popularity and widespread use have enabled it to adopt a number of usages. A person with Bitcoin can exchange it into legal tender currency, or directly use it to buy products, the latter slowly becoming a common occurrence, with some of the international companies, such as Dell and HP, now allowing the use of bitcoin for direct purchases.
Since it already acts as a currency, naturally, it can also be traded as one, just like we do regular currencies on the Forex market. Also similar to regular currencies, bitcoin is subject to value fluctuations that depend on supply and demand, which makes it ripe for trade by speculators. Normally, people buy bitcoins for use, but speculators trade bitcoin for a profit, which will be our focus here.
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 that you own the shares, you have bitcoin sent to your digital wallet.
The latter option is to buy bitcoins from an online broker, which can be a dedicated crypto broker or a Forex broker. A dedicated crypto broker has the same qualities as a physical exchange, but trading bitcoin with a Forex broker entails some differences from a traditional exchange. If you’re interested in trading bitcoins, you need to know which option is better suited for you, and this is by looking at the advantages and disadvantages.
There are several pros and cons of trading bitcoin through either an exchange or a Forex broker. Some of the advantages of trading bitcoin with Forex brokers include:
Forex brokers that offer bitcoin will provide similar leverage to bitcoin as they do with Forex pairs, which is a definite plus. Consider the fact that a single bitcoin is trading at around $9,500. That is a lot, almost as much as almost six ounces of gold! At an exchange, you would have to buy bitcoin at that specific price, in addition to some sub-charges included.
Now imagine a bitcoin FX Broker that offers only a 100:1 leverage. In this case, you would only need to have $95 to buy a whole bitcoin, which means you can buy plenty more bitcoins for a fraction of a price. Leverage also has the advantage of bringing in a lot more profit. For example, if bitcoin prices rose to just $9,600, which would be a $100 difference, the whole profit would go to you, even though you only put down $95. Of course, leverage has its downsides, but it provides an opportunity for massive gains for those willing to take the risk.
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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 $9,500 at an exchange, but you would have pay, say, 5% commission, leaving you with a $95 profit.
Bitcoin transactions still remain very cheap as the charges are still very low, but recent government intervention is changing this. In China, the People’s Bank of China 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 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 spread of as low as 0.1 pips, which is a very small charge when considering the upsides. By reducing the amount of charges incurred by their clients, you get to keep more of your profits when compared to buying bitcoin from an exchange.
If a single bitcoin goes for $9,500, how comfortable would you be putting a huge investment in the hands of an exchange? We could quote Mt. Gox, the largest bitcoin exchange of its time, that went bust and lost millions of dollars’ worth of bitcoin that their investors have invested in, but the very fact speaks for itself. There are just too many cases of fraud involved with bitcoin exchanges and scams which have led to people losing a lot of their investments.
This is not to say that every bitcoin Forex broker is honest and fully trustworthy, 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 among those that we have reviewed, which can be accessed by anyone to find out just how trustworthy a particular broker is. Since these companies operate an online business, you can easily find reviews by users from all over the world, which will tell you all you need to know about the trustworthiness of the broker, rather than having to rely on the word of mouth spread by a local bitcoin exchange.
At a bitcoin exchange, you can only buy bitcoins and sell them when you want to convert them directly to cash. With a Forex broker, it is possible to also short sell bitcoin and make a profit, whether its value goes up or down, depending on your forecasts. For speculators that are not interested in owning an actual bitcoin, this is definitely a beneficial arrangement.
On the subject of freedom, you are completely free to choose whichever broker from the list of bitcoin Forex brokers you want to trade with. There are plenty of these to choose from, and you are in no way restricted by your location when choosing the one to sign up with. It is a definite advantage compared to being stuck with a particular broker simply due to geographical limitations.
Nothing is perfect, and even in the online bitcoin trading industry, there are some downsides that we shall look into now.
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 when the value of bitcoin is different from one exchange to another, and this means that you may find yourself dealing with an exchange with less favorable 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.
We have seen before how bitcoin exchanges can abscond with traders’ money, or go bust and subsequently lose their client’s investments, but there’s certainly a lot more security in dealing with a physical bitcoin exchange than 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 much easier for online brokers to disappear, than for physical ones, which makes investigating and prosecuting cases of fraud a lot more difficult. In this sense, there is more security of funds with physical exchanges than with online brokerages.
When you buy bitcoins from an exchange, they are sent to your digital wallet and you own the bitcoins yourself. This means that you can use them for any other transaction and you are not subject to any other charges. When you are trading with bitcoin Forex brokers, those bitcoins are not really yours, and you don’t have any control over them, which means you can’t use them for anything else, limiting your options on how to use them.
Furthermore, most 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 so, 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 weigh pros and cons and decide whether you prefer trading bitcoin through a Forex broker, or directly at an exchange.
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 such as PayPal, Skrill, and Neteller, there are Forex brokers that accept bitcoins as a way to make deposits directly.
These Forex brokers deposit bitcoin from your wallet directly 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 in anonymity will appreciate this option, as bitcoins keep your identity secret.