The central principle on which forex runs is the exchange of currencies. Traders use strategies to buy and sell one currency with another to make profits. Simple enough? Now, what about bitcoins?
Bitcoin is becoming a very popular cryptocurrency among the traders. It also works on the similar concept as forex in which a currency is exchanged with bitcoins. However, there are two differences:
- When trading through bitcoins, one has to convert the bitcoins to the currency in which they want to buy or sell other currency. This means, unlike the series of transactions in the forex (deposit, buy, sell and withdraw), there are two more steps of converting the currency to and from bitcoin while depositing and withdrawing.
- Secondly, many experienced forex investors, who play only in normal currency, get to know the reasons for volatility in the market. This is not the same when trading in bitcoins as the price driving factors are anomalous.
Let’s check out in detail how these two types of currency trading strategies differ from each other:
Forex and Bitcoin, both have their trading platforms. The most popular platform for forex is FXCM and that for bitcoin is Coinbase. These days many forex brokers are offering to trade in bitcoins also. So if you have Bitcoins and don’t want to open a new account, then your existing forex account works equally well. However, you cannot trade cryptocurrency with a cryptocurrency in a forex account, but you can do this in a separate bitcoin trading account.
The most common currencies traded with a bitcoin account are US Dollars (USD), and European Currency (EUR) and the popular cryptocurrencies traded with this account are Dogecoin and Litecoin. Forex platform offers only trading in common currency and bitcoins.
The price of a Bitcoin is highly volatile, and that is why high risk taking traders prefer trading in this currency. The volatility factor of bitcoins is from 5% to 15% with an average of 10%. On the flip side, the volatility factor of forex is maximum 1% in extreme cases.
As the normal currency in forex is centralized and is handled by the government, the demand is also uniform. On the other hand, there is no uniformity in the demand of Bitcoins as there are numerous factors that control it such as public confidence on cryptocurrency, emerging marketplace, and public adoption.
The demand for bitcoins is directly proportional to the acceptance of this currency by the public. The main culprit for reducing the value of bitcoin is media, but at the same time, NASDAQ and New York Stock Exchange are accepting this currency which is also making the general population accept this. Till now the mining and demand for Bitcoin is at its peak and the price is making a new high on a daily basis. As the value is highly volatile, the day is not far when the price bubble could burst.
The normal currency is regulated by the central banks of all the countries. On the other hand, the regulation of the bitcoin supply is done by an exponential algorithm. The major role of this algorithm is to keep the inflation in control by controlling the production of cryptocurrency. This is a new method to control the inflation. It is predictable to a bit, but not fully.
The value of bitcoin is affected by the price level inflation, but not the inflation caused by the money flow. It has already been decided that total generation of bitcoins will be 21 million and once all these 21 million Bitcoins will be generated, there will be no more bitcoin generation. So no inflation or deflation can cause the value of bitcoin to move up and down. However, this is not the same when it comes to normal currency as the government can increase the money flow any time which can affect the inflation.
Many factors influence the value of a common currency such as interest rates, nation’s public debt, economic health and political stability. There is nothing that affects the price of bitcoins. Its volatility is purely dependent on the speculation theories.