How to trade Bitcoin on the Forex market
HOW TO TRADE BITCOIN ON THE FOREX MARKET
Bitcoin is typically traded cryptocurrency-to-cryptocurrency. The term trading pairs describes a trade between say Bitcoin (BTC) and Ethereum (ETH). This would be ETH/BTC where ETH is the base currency and BTC is the quote currency.
You can also trade cash for cryptocurrency and vis a versa. Traders can access BTC/USD and other cryptocurrency pairs via a brokerage house using MetaTrader 4 (MT4) and MetaTrader 5 (MT5).
Bitcoin is not a traditional currency but it is frequently traded on the forex market through CFD forex brokers. With conventional currency pairs, the price fluctuations are usually measured in small fractions. With Bitcoin, the value can rise and fall dramatically during the course of the day.
Before trading Bitcoin for fiat currency, it’s important that you know that trading in these financial instruments is exceptionally risky. It’s recommended that you begin to trade Bitcoin for other cryptocurrencies and/or conventional currency pairs using a free demo account where there is no risk of losing your investment.
What is Bitcoin?
Bitcoin is the largest cryptocurrency in the world with a market capitalisation of approximately USD 117.81 billion. It now commands at least 67 percent of the total cryptocurrency market and is either bought and sold on a long position to make a profit or traded on its speculative value as a CFD.
The revolutionary decentralised digital currency hit the market in 2009 and its popularity skyrocketed almost overnight. In the last ten years, its store of value has been turbulent to say the least and its digital asset price has fluctuated wildly. This may be off-putting for your average investor but extremely exciting for those that trade on volatility.
Bitcoin is unlike any fiat currency on the forex market. It is created, distributed, traded and stored using a decentralised ledger system known as blockchain. Bitcoin can be traded as a leverage instrument on platforms such as MT4 via online exchanges such as Luno and ice3x.
Bitcoin trading versus Bitcoin investing
There are two ways to make a profit from Bitcoin; investing in Bitcoin and trading in Bitcoin. To invest in Bitcoin in South Africa, you’ll go through one of the two main exchanges. To trade in Bitcoin, you’ll access the financial instrument via a broker’s service that offers MetaTrader 5 or MetaTrader 5.
Investing in Bitcoin involves buying Bitcoin for the long term. The Bitcoin community call this “HODL”, which is a play on the word HOLD. When you invest in Bitcoin for a long period of time, you ride out the ups and downs of the volatile digital instrument and hopefully come out at the end with a profit.
Bitcoin trading are different. Traders buy and sell Bitcoin in the short term and trade on the extreme volatility of the digital coins. You can make a profit if you correctly anticipate the movement of the Bitcoin price. Likewise, you can lose your investment if you guess wrong.
Can you trade Bitcoin on the forex market
Bitcoin is not directly traded on the forex market like the major currency pairs (EUR/USD, EUR/GBP). However, a growing number of forex brokers offer Bitcoin CFDs in their range of tradeable assets. To trade Bitcoin on the forex trading platforms, you need to find a broker that offers cryptocurrency trading.
Cryptocurrency trading is similar to forex trading. Investors can trade cryptocurrency-for-cryptocurrency or cryptocurrency-for fiat-currency, such as the US Dollar, British Pound and Euro.
Basically, different fiat currencies from all over the world are traded on the forex market and cryptocurrencies like Bitcoin offer investors an alternative investment asset.
To trade Bitcoin on the forex market, you can trade with a buy-and-hold strategy or open and close daily or weekly positions. You can also potentially profit with Bitcoin contract of differences (CFDs) and the more risky binary options.
Most crypto traders favour trading Bitcoin derivatives because the asset is highly volatile. This makes Bitcoin ideal for online CFD retail trading.
Can you trade Bitcoin on MetaTrader 4?
MetaTrader 4 is one of the most popular trading platform in the world and is offered by over 95% of forex brokers. MT4 has an array of tools that make it convenient to trade, analyse and monitor the Bitcoin trading environment.
This includes advanced charting tools, wide range of timeframes, different order types, fundamental and technical analysis and risk management tools. MetaTrader 4 allows traders to place 6 different types of orders: Buy Stop, Buy Limit, Sell Stop, Sell Limit, Buy-Stop Limit and Sell-Stop Limit.
To trade Bitcoin on the MetaTrader 4 trading platform, you need to go through a broker’s server. Otherwise you can buy and sell Bitcoin through the two leading exchanges in South Africa; Luno and ice3x.
Trade Bitcoin CFDs in four easy steps on MetaTrader 4:
- Open a trading account through a broker’s server
- Deposit funds into the account
- Select the currency pair you want to trade
- Place your trade order to buy (go long) or sell (go short) Bitcoin
Is Bitcoin a currency?
Bitcoin is known as a cryptocurrency. It’s a digital or virtual currency that is secured by cryptography which makes it virtually impossible to counterfeit or double-spend. Bitcoin is the best example of a cryptocurrency that is created through a decentralised network based on blockchain technology.
Can it be called a currency? Well, the debate continues to rage as to whether Bitcoin should be considered a legal tender. Yes, Bitcoin is a currency in a digital form but it is not legally recognised as a currency within a political jurisdiction. This is because the very nature of a decentralised digital coin means it is not bound to a country.
Legal tender is money that is recognised as a legal entity within a given political jurisdiction, for instance South Africa. In other words, anything that is permitted by law as a means to meet your financial obligations and settle public or private debt. The national currency of a country is an example of a legal tender.
Traditional fiat currencies are recognised universally as a currency by every participant of the global markets, including regulators and government officials. This includes the world’s top 5 most-traded currency pairs: EUR/USD, USD/JPY, GBP/USD, AUD/USD and USD/CAD.
Central authority regulators view Bitcoin as an asset of value, rather than a currency. An asset of value is an economic resource that is owned or controlled for the purpose of making a profit or for future financial benefit. Examples of financial assets on the forex market are stocks, bonds, foreign currencies and commodities.
An asset is either a depreciating asset which has a limited effective life and its value is expected to decline over time; or it’s an appreciating asset with a value that increases over time. An asset can also be tangible or intangible and this is determined by whether it can be owned and converted into a monetary value.
Bitcoin is classified as an underlying assets, putting it on a par with shares, indices, commodities, fiat currencies, bonds, options and exchange traded products (ETPs). When you trade an underlying asset or a derivative instrument, you don’t take ownership of the asset.
Instead, you speculate on the price movement of the underlying asset and if you correctly predict which way the price will move, you make a profit. If you predict that the asset will decrease in value and it subsequently increases, you will make a loss.
Bitcoin is very much a speculative investment and is often used as a hedge against unknown and uncertain global movements in fiat currencies. Bitcoin is traded on what is known as a digital floating exchange and is almost always pegged to the US Dollar on the forex market.
Bitcoin trading versus forex trading
The main similarity between Bitcoin trading and forex trading is both markets carry risks and it’s important for you to have a solid trading strategy and to pre-set your risk management tools before you open a position on forex or Bitcoin.
You can open a position on the forex market and Bitcoin market with a financial derivative like CFDs which are a leverage product. The forex market has greater liquidity while Bitcoin CFDs are illiquid.
Forex trading involves multiple currencies that include the majors such as EUR/USD, EUR/GBP and USD/JPY as well exotic currency pairs like ZAR/USD. Bitcoin is a single digital currency that represents just one digital coin in a cryptocurrency market that is fast becoming oversaturated.
The main differences between the forex market and Bitcoin trading market relate largely to liquidity, volatility, risk and regulations.
The forex market is more liquid than Bitcoin. It’s more accessible because it can be traded directly through a broker and the forex market has a far higher number of participants.
Bitcoin is regarded as illiquid, meaning it is not easily converted into cash. There are fewer participants and Bitcoin trading requires you to trade through a broker and have a wallet address and exchange account.
Liquidity in the forex market depends on the currency pair that is being traded. The major currency pairs enjoy extremely high trading volumes while the exotics are thinly traded.
For example, the US Dollar enjoys some US$2.2 trillion worth of trades on a daily basis and the average daily volume of EUR/USD is about 575 billion USD. The net volume of global trading on Rand (ZAR) is reported to be in the region of USD 72 billion daily.
In contrast, the daily US Dollar value of Bitcoin transactions is around $320 million. This is largely because Bitcoin is not a universally-adopted form of currency and it still has a long way to go as a suitable alternative to fiat money to buy and sell goods and services.
Bitcoin is a highly volatile financial instrument. Volatility refers to how vulnerable or sensitive an asset’s price is to change. An underlying asset like Bitcoin experiences extreme highs and lows in a short space of time, largely due to market sentiment. This makes it highly volatile.
Bitcoin is a single currency that tends to move more significantly than forex pairs, sometimes up to hundreds or thousands of dollars in a single trading session. In contrast, forex pairs tend to move in narrow bands rather than in large price shifts. Forex pairs can move a lot but usually always within a narrow band.
The volatility of Bitcoin is attributed to the fact that a small number of individuals hold a large portion of Bitcoins. As a result, when one large Bitcoin holder sells his or her shares, it can flatten the market.
Traders who trade in volatility with CFDs can take advantage of the small and large movements in the Bitcoin price. Bitcoin CFDs allow traders to buy (take a long position) and sell (take a short position) a number of contacts.
Traditional currency pairs and Bitcoin both carry risks but they are somewhat different for the forex market and the Bitcoin market. The main difference is experienced traders can generally read the forex market more easily and anticipate price movements more accurately than they can the volatile and mysterious Bitcoin market.
The forex market is affected by factors such as the interest rate differential between the two currencies in a pair. In general, the higher a country’s interest rate, the stronger their currency will be on the international market. High interest rates incentivise foreign investment and drives up the demand for the currency.
Bitcoin is affected by the fact that it’s a newcomer to the market and its technology is still in its infancy. This means price movements are largely based on market sentiment towards the cryptocurrency itself, rather than political and socio-economic factors. This makes it harder to conduct fundamental and technical analysis on the Bitcoin market which is really what gives forex traders the edge.
Conventional currency pairs and Bitcoin are traded over-the-counter (OTC) and are largely unregulated. Apart from ensuring you trade via a reputable brokerage house that’s registered with a financial advisory board, you have little recourse when things go wrong.
Bitcoin and the forex market are decentralised, meaning they do not have a single central authority that is tasked with regulating market transactions. To some extent the forex market is safer than Bitcoin because the vast majority of daily forex trades go through brokerage houses or banks and these establishments are heavily regulated.
Bitcoin was created to bypass any central authority to create a wholly decentralised currency. No central bank or inter-governmental body regulates Bitcoin transactions, only the participants on the blockchain network verify and confirm transactions.
Blockchain technology ensures each transaction is irreversible, meaning it can never be undone. Once committed, a Bitcoin trader cannot take back or correct a trade. While this is a key strength of Bitcoin to prevent double-spending, it’s also a weakness because it’s impossible to detect and mitigate fraud.
What cryptocurrencies are traded on the market?
Bitcoin dominates the cryptocurrency market but the crypto world is inundated with what are known as Altcoins which are deviates created from soft and hard forks. In fact, there are currently more than 1 600 cryptocurrencies listed on major and specialist exchanges.
The Big 7 cryptocurrencies at the moment are:
- Ripple XRP
The two most popular cryptocurrencies are Bitcoin and Ethereum (Ether). Bitcoin represents approximately 35-40 percent of the crypto market and Ethereum represents between 15-20 percent. Combined, Bitcoin and Ethereum represent close to 60 percent of the market.
Ripple XRP came on the scene in 2012 and now sits firmly in the Top 3 cryptocurrencies. In fact, Ripple XRP briefly topped Ethereum’s market capitalisation in 2018 to become the second-most popular cryptocurrency in the world.
Bitcoin has maintained is top position on the crypto leaderboard since was launched in 2009. It’s price movement has the strongest impact on the rest of the Altcoins on the market, including Bitcoin Cash which came out as a hard fork from its big brother.
Ethereum (Ether) is the second-most popular cryptocurrency, although it’s completely different to Bitcoin. Ethereum was actually created for Smart Contracts while Bitcoin was created as a digital alternative to fiat currency. Ether is actually the name of the cryptocurrency while Ethereum is the name of the blockchain platform.
Ripple XRP was created as another ‘utility coin’, meaning it had greater purpose as a payment digital coin than an investment asset. The same goes for Litecoin and the newest hardfork, Bitcoin Cash.
Litecoin and Bitcoin Cash are newcomers that are shaking up the status quo. Both were created as potential fiat alternatives and plugged the gap where Bitcoin’s transactions were too slow and too expensive.
Litecoin and Bitcoin Cash have positioned themselves as digital coins for everyday purchases of goods and services. This makes Litecoin and Bitcoin Cash a far more practical and cost-effective cryptocurrency for merchants. However, Bitcoin remains the leading investment cryptocurrency in the world.
NEO competes with Ethereum as a cryptocurrency for Smart Contracts, using the same Dapps platform. It was released in 2014 and was designed as a more superior and sophisticated platform than Ethereum.
IOTA was created to work with Internet of Things (IoT). It’s designed to facilitate fee-less micro-transactions involving connected devices. IoTs also helps to maintain data integrity. IOTA has shot to the top of the list of most popular cryptocurrencies and it’s gaining traction against the big crypto players.
What is Bitcoin CFD trading?
Bitcoin CFD trading is basically a contract between a trader and a CFD broker. You don’t buy the actual Bitcoin as a form of currency, instead you enter into a contract to “bet” on price movements of the cryptocurrency.
Bitcoin CFDs allow traders to speculate on a change in the price of the digital coin. If you expect the price of Bitcoin to go up, you will open a long position (buy). If you expect the price of Bitcoin will fall, you open a short position (sell).
The Bitcoin market is extremely volatile and Bitcoin CFDs are high risk. They’re not suitable for beginners, although you can try your luck with no financial risk using a free demo account.
What is a CFD?
Contract of differences (CFDs) are a popular trading product on the forex market. CFD trading is where you trade a derivative product of an underlying asset. Underlying assets can include shares, indices, commodities, currencies, bonds, options or Exchange-traded products (ETPs).
CFD trading allows traders to make profits on changes in the price of the underlying assets but without them actually owning the asset. Traders makes a judgement call on the direction the price will move and if they get it right, they make money. If they get it wrong, they lose money.
The point of difference with CFDs is you can make money from rising prices of an asset as well as falling prices. CFDs are not traded on stock exchanges and are mostly illiquid, meaning they’re not easy to convert into cash.
A CFD position can be long (buy) or short (sell). When you take long CFD position, you expect the value of the underlying asset to increase. When you take a short CFD position, you expect the price of the underlying asset to fall.
Advantages of Bitcoin CFDs
Bitcoin CFDs are simple to trade if you already have an account with a CFD broker. The majority of CFD brokers offer Bitcoin as a tradeable asset and you can access Bitcoin CFDs from your MetaTrader 4 trading platform.
Bitcoin CFDs allow a trader to buy the cryptocurrency on margin. In other words, borrow money to participate in a bigger trade. With Bitcoin CFDs, a trader can open a large position with only a small deposit.
CFDs are a leveraged product. This means a trader only needs to deposit a small percentage of the full value of the trade in order to open a position. Another term for it is ‘trading on margin’. Trading Bitcoin on leverage means you can get far more exposure on a trade than you would with your own funds.
For example, if you want to buy Bitcoin to the value of US$5 000 but you only have US$1 000 to spend, you can ‘trade on margin’ and borrow the US$4 000 shortfall. If the value of your Bitcoin increases, you will liquidate it and refund the broker the amount you borrowed and pocket the difference.
With Bitcoin CFDs, you don’t actually own Bitcoins. You are merely speculating on the price of the financial asset. Because you don’t own the Bitcoins, you don’t need to worry about them (the snippet of code) being stolen or lost.
The important thing about Bitcoin CFDs is you can preset your stop losses and profit limits. In other words, you can determine the maximum amount you are prepared to lose on an open position or you can set a price at which to take profits. This reduces the risk of trading in Bitcoin CFDs and means you don’t have to constantly monitor the forex market to close off a position before you get burnt.
Disadvantages of Bitcoin CFDs
Bitcoin CFDs are a leverage product and the funny thing about leverage is it be your best friend or your worst enemy. Leverage can magnify your losses as spectacularly as it can your profits. You have a lot to gain from Bitcoin CFDs but you also have a lot to lose.
And at the end of it all, you don’t own any Bitcoins. You’ve only speculated on price fluctuations and hopefully come out better off then you went into the trade.
Just like ordinary CFDs, it’s important that you use the tools available on MetaTrader 4 to manage your risks. This includes pre-setting your Stop Order or Stop Limit.
A Stop Order is an instruction to trade when the price of a market hits a specific level that is less favourable than the current price. If you were buying a market, this would be below the current market price, and if you were selling a market this would be above the current market price.
You can use stop orders to close positions and open them. You do this by using either a Stop-Loss Order or a Stop-Entry Order.
A Stop-Loss Order is the common term used to close an order. It’s an instruction to close your position when the market value becomes less favourable than the current price. A Stop-Entry Order allows you to open a position when the market reaches a price that is less favourable than the current price.
On the other hand, a Stop Limit is an instruction to trade if the market price reaches a specified level more favourable than the current price. If you are looking to buy a market, this will be lower than the current market price, whereas if you are looking to sell it would be higher.
What are Bitcoin binary options?
Bitcoin binary options are only suitable for experienced traders who trade on volatility. It’s highly speculative and you are at risk of losing a lot of money trading on Bitcoin binary options.
Bitcoin binary options involves predicting the rise and fall of the price of Bitcoin within a specific period of time. If you get it right, you earn the option’s payoff. If you get it wrong, you lose your investment.
Each Bitcoin binary option has a specific expiration date. On that day and at that time, the Bitcoin binary option is checked to see if it’s ‘In the money’ (you are correct) or ‘Out of the money’ (you were incorrect).
Each Bitcoin binary option has a specific payoff that you either win or lose. There is nothing in between.
Example of a Bitcoin binary option
An example of a Bitcoin binary option is a trader looks at the BTC price at 10h00 and it is $495.205. The trader anticipates that by 17h20 on 17 March, the price will be higher than $495.205 and buys a ‘Call’ option. On that day at 16h00, if the BTC price is higher than $495.205, the trader earns anything from a 70 to 80% payout on the original investment. If it’s lower, the trader loses his or her investment.
Traders buy a ‘Put’ option if they anticipate that the BTC price will go down. If the price at the expiration date and time is lower than the original price, the trader earns the option’s payout.
The benefit of Bitcoin binary options if you don’t have to have a thorough understanding of Bitcoins and their exact value. It’s only an educated guess that the price will go higher or lower than the base price.
Bitcoin binary options are the closest thing forex traders can get to gambling and many countries have strict regulations regarding who is allowed to offer Bitcoin binary options. Bitcoin binary options can become highly addictive just like gambling and they are not recommended for beginner traders.
Forex Trading Africa Disclaimer
Trading in Bitcoin in South Africa is associated with risks and can lead to merchants and traders losing money. The cryptocurrency market is highly volatile and you can expect prices to fluctuate dramatically.
The information in this article should only be used to educate yourself on how Bitcoin works and the benefits of trading Bitcoin in South Africa. Pay due caution to the risks involved in trading Bitcoin and take the necessary precautions to avoid losing money on Bitcoin transactions.