Broker to Trading

Bitcoin is a network which processes payments online. It uses a cryptocurrency called Bitcoin (BTC). Bitcoin can be exchanged into fiat currencies and is thus valued in terms of other currencies (as well as other cryptocurrencies). Fiat currencies are currencies like USD, GBP and so on. Bitcoin is not like these currencies as it has no centralised authority issuing it or determining factors such as interest rate targets used for fiat currencies, though major economies tend to let their currency exchange rates roam free, within certain constraints. This movement of exchange rates helps create a trading market based on currency exchange.

In the Forex market, traders trade Forex pairs, which are one fiat currency valued in terms of the other pair. The changes in exchange rates help create changes in value of these pairs, which trace out patterns in the chart. The cryptocurrency Bitcoin is also traded on cryptocurrency exchanges and speculation and other factors help create movement and patterns on the chart. In both cases the need to exchange help create a trading market, where a range of factors creates changes in value, traced out on a chart. These factors can form the basis for analysis, as traders attempt to gauge direction in movement.

A difference between Bitcoin trading and Forex trading is that when trading Forex, the retail trader does not normally own any currency. Forex tends to be traded as CFDs, which are contracts based on the value of currency pairs in the Forex market. Bitcoin however is traded as an asset on cryptocurrency exchanges and retail traders can trade it here or simply keep it in a wallet. But Bitcoin can also be traded at CFD brokers as a CFD. When trading a CFD, the trader does not own any Bitcoin and does not therefore need a wallet to store it. CFDs in general let a trader trade a market, rather than buying it to own.

A significant difference between the Forex market and Bitcoin is that Bitcoin is traded 24/7 on exchanges. Forex however is open continuously for trading from Friday to Sunday. So to actively trade a market at weekends, the trader may look to Bitcoin. While some CFD brokers do not support weekend trading of Bitcoin CFDs, others do.

The Forex market contains a wide range of Forex pairs, which may be studied and analysed and can evidence different characteristics, which can depend on market conditions, such as volatility. Some Forex pairs are more liquid than others, generally major Forex pairs (such as EUR/USD, GBP/USD, AUD/USD). More liquid pairs may have tighter spreads at brokers. To find the tightest spreads, the trader may look to an ECN broker, but these normally also have a commission charge added to the spread.

Viewed in terms of an asset, Bitcoin is one market, although it has a key role in the cryptocurrency market. Bitcoin is extremely volatile, thus it can show sharp and wide changes in value. Forex pairs tend to move in more circumspect ways, but nonetheless Forex pairs move in complex ways as they trace out movement on the chart. However as Bitcoin can be exchanged for other cryptocurrencies and fiat currencies, there is effectively a range of Bitcoin markets to trade, for example Bitcoin/USD, Bitcoin/EUR and so on.

So Bitcoin can be traded as a pair as well and CFD brokers express Bitcoin in these terms, as the trader is not owning the Bitcoin asset. CFD brokers may only offer Bitcoin/USD but others may extend the range available. Each side of a Forex pair of fiat currencies also has a real existence as an asset, simply by having GBP or USD, for example, which has an exchange value when it is converted into another fiat currency.

Because Bitcoin has a value relative to currencies or other cryptos the difference between it and Forex in trading terms is subtle in some sense. One way of expressing it in terms of a trading market, is that Forex tends to be traded on leverage. This is because a relatively large value of a Forex pair needs to be traded to produce a standard lot size.

When trading the trader is generally interested in the difference in value between a point in time A and a point in time B. This can be positive or negative. When trading CFDs, the trader is only trading on this value difference. The trader can go long if they think the value difference will be positive and short if they think it will be negative. Bitcoin does not need to be traded on leverage or as a CFD, and the fact it can be fractioned down to a tiny amount known as 1 Satoshi (0.00000001 Bitcoin) and that it is digital means that the trader can generally buy to hold small amounts of real Bitcoin as well as larger amounts. There is an analogue in Forex trading, which is micro or even smaller lot sizes or low order sizes.

In some sense like a Forex pair, the Bitcoin unit has a relatively large unit value when valued relative to currencies or other cryptos. This has a consequence in trading CFDs in Bitcoin. As with Forex, the trader is generally only concerned with the value difference and does not own any Bitcoin. But Bitcoin may not be offered in tiny factional sizes at a CFD broker. So the trader may wish to use leverage. Because increasing leverage increases risk and because Bitcoin is extremely volatile, then leverage has tended to be limited. This has also happened to Forex leverage, but still even when limited Forex leverage is still relatively high.

In essence the role of leverage may be more significant overall in Forex trading than Bitcoin trading. Bitcoin is new (emerging around 2008) and volatile while currencies have been around for a while and have central Banks which operate to control extremes of volatility. However Bitcoin is more than a digital currency, it is a decentralised payment processing technology the true scope and future potential of which is perhaps not known.

Both Bitcoin and currencies are used to make payments. However its role as a payment method is arguably more central to Bitcoin (as its aims of being a currency play out). The way Bitcoin works as a payment method and how Bitcoin exists as an asset are intertwined.

While the currencies Forex pairs are based upon have a real existence as well as a digital existence, which is itself referenced to the real existence, Bitcoin has no real existence, if real is defined as the physical world of objects. Bitcoin exists as quantities in encrypted wallets across the world. Wallets can be online or offline, however offline wallets or paper storage also store encrypted digital information (so in a real sense Bitcoin exists as digital bits, hence its name).

As a payment method, Bitcoin is transferred from wallet to wallet in accordance with a completed transaction. But how is this Bitcoin moved. There is no central processing system. This is where the blockchain comes into play. The blockchain in effect 'moves' Bitcoin from wallet to wallet, but in actuality it updates a record which is maintained as a distributed ledger and secured by cryptogrphy (hencer the name 'crypto').

The blockchain is a system based around the Internet which operates as an automated system. The Bitcoin Network itself plays a key role in verifying information to ensure the integrity of the network. But processing itself is done by third party miners, who compete to create a new block of processed transaction data for the blockchain. The transaction data is a record of a payment from wallet to wallet, with some other information as well. Cryptography comes into play as it is used to securely attach a new block to the previous block. As each succeeding block in the chain is added, the newly minted block becomes more and more secure.

However the blockchain itself does not play a role in Bitcoin trading, except in terms of sending Bitcoin from Wallet A to Wallet B (assuming a trade happens with real Bitcoin and not CFDs). Bitcoin trading happens on cryptocurrency exchanges, unlike Forex, which is not traded on exchanges, although its value is based on currency exchanges particularly by banks which are a core part of the decentralised Forex market. However there are a number of cryptocurrency exchanges. Bitcoin CFDs tend to base their value on the value of Bitcoin across exchanges, for example using a Volume Weighted Average. But the value of Bitcoin is a consequence of trading activity on exchanges.

This said both Forex and Bitcoin are decentralised, but in different ways. The Forex market is decentralised, but there are centralised controls on currencies composing traded Forex pairs and key groups of players have a large role in determining Forex value, based on volume traded. The Bitcoin market is relatively centralised, in that it happens mostly on a core group of exchanges. However the asset Bitcoin is not centrally controlled controlled, it functions in a decentralised system (the blockchain), but with value determined on exchanges. This can be seen as the difference between Bitcoin as a payment system vs Forex as a currency.

So in terms of which is comparatively better it really depends on wide range of factors, as there are similarities, but also differences. If the trader trades Bitcoin as a CFD pair, they may notice similarities, but may also see how volatile Bitcoin is. Volatility in the Forex market tends to come and go, for example increasing potentially when data is released which affects the value of the pair. However this is also true of Bitcoin as news, for example about forks and general economic news, can affect its value, as well as factors related to the currency it is being valued in.

So both the Forex and Bitcoin market can be analysed using fundamental analysis to gauge the potential affect of news data. They can also be analysed using technical analysis, to gauge direction in the market. Both of these analytical approaches can be wrong, in that the expected outcome does not happen. So to some extent Bitcoin can be like another pair to be analysed and traded, except it is open 24/7 and has its own characteristics, based on what it does and can do.

If the trader wishes to try both Forex and Bitcoin CFD trading and compare them, they may try out demos at the brokers below, each of which supports Bitcoin CFD trading and Forex trading.