How to trade cryptocurrency on Forex: everything you need to know
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How to trade cryptocurrency on Forex: everything you need to know
Nothing says “the future is here” like virtual money. In the last decade the cryptocurrency has grown from barely existent to significantly affecting the entire global economy. Crypto transactions have entered all areas of life from shopping to banking and, in the recent years - trading. Many currency traders around the world swear by cryptocurrency to be the best asset for online trading and it is fair to note that they might be right. In order to successfully learn how to trade cryptocurrency it is wise to start from getting a general idea of what exactly is crypto money and what to expect from dealing with it. Here we have gathered most of the information you might possibly need on cryptocurrency in general and crypto Forex trading in particular. Below you we will cover the following:
What is cryptocurrency and how did it originate
Where and how to get cryptocurrency
Types of cryptocurrency
How to trade cryptocurrency on Forex
Steps to successful cryptocurrency trading including how to trade Bitcoin in MT4
What Forex brokers trade Bitcoin and other crypto coins
Depositing and withdrawing in cryptocurrency
The full story behind cryptocurrency and its origins
Let’s start at the very beginning. “Crypto” in cryptocurrency comes from the Greek “kruptos” which means hidden. In other words cryptocurrency is secret or hidden money. Now, how exactly does this work. Any cryptocurrency is a digitized financial asset created with the use of highly advanced cryptography (a practice of securing communication channels from third parties). Just a few years back cryptocurrency was mostly in the shadows and therefore associated by many with a not so rightful activities. However, nowadays it grew into broadly accepted token for various services and products, even to the point where some companies only accept cryptocurrency as payment.
The brief history of what is now considered cryptocurrency started in the 1980’s when the first electronic money ever was introduced by an american cryptographer David Chaum. The electronic cash continued its development through the 90’s and early 00’ becoming more advanced and effective. Until in 2009 the first decentralized currency was created by a developer known as Satoshi Nakamoto. This was the now famous Bitcoin a cryptocurrency that we have all watched grow from 30 cents a unit to a sky-high $19k. Since the release of Bitcoin over 6000 alternative cryptocurrencies came into existence, and while none of them has reached the same heights as the Bitcoin, many earned their rightful place in the world of finance.
We are choosing not to get very technical and dive into the complexity of design work behind cryptocurrencies since this is not the focus today. However, just for the sake of having a full picture it is important to understand how can virtual money possibly be accepted as payment for real things. The actual money also known as flat currency are centralized, meaning they are backed up by the things of actual value like gold, land and various economic agreements amongst governments. Now the cryptocurrency is decentralized which means it is not being regulated by any bank or government and its validity is proven through other channels. The main way of validating cryptocurrency is blockchain technology which is a secure way of building and linking data blocks designed to create value of the specific digital currency. This type of technology is secure from its very foundation making cryptocurrency immune to third party intrusions and theft. As you now have a general understanding of the matter, we can move forward to discussing how to trade cryptocurrency on Forex. But first let’s discuss where to get the crypto money in the first place.
Where and how to get cryptocurrency
Before we even begin to learn how to trade Bitcoin on Forex, we need to know where to get the crypto money for trading. The blockchain technology we have discussed earlier is a way of both securing the existing coins and creating new ones. The process of creation is commonly referred to as mining. And although it sounds as easy as digging dirt to find precious metals, this process is definitely not for everyone. Mining cryptocurrency is basically a process of adding a block to the blockchain, which consists of solving a complex mathematical equation before anyone else does. The math is always done by highly sophisticated computers, since it is not only tricky but also needs to be resolved in a timely manner. Nowadays the cryptocurrency mining, especially for Bitcoin, is extremely competitive and costly. At some parts of the world the cost of mining a single Bitcoin is higher than its current value, and therefore not really worth the trouble. From this we can easily draw the conclusion that making or earning the crypto money through actually creating it is a time and energy consuming process which is usually attempted by large companies and individuals with a lot of disposable income, so basically not your average Forex trader. Then what is the solution for those who want to trade cryptocurrency and do not have time, money or resources to mine it? Easy: buy it.
Purchasing cryptocurrency is far less complicated than mining it, but it still requires a certain amount of undivided attention. On the example of Bitcoin let’s walk through the steps of purchasing cryptocurrency
Open a digital wallet. The physical cash goes into the wallet and its virtual representation goes to the bank account. But as we have already established, crypto coins do not have a body to transfer into and therefore they require a very special kind of wallet. There is a number of wallets to choose from and the selection may differ on what type of device you are using to manage the wallet and what you will be using it for. One of the safest ways to choose a Bitcoin wallet is through the dot-org Bitcoin website which provides you with the detailed list of available wallets.
Depending on where you are you will need to provide a different set of documents that confirm your identity. For example, in the States you will be providing a copy of your driver’s license and your SSN.
Choose the bank card you will buy the Bitcoin with. Wallets can be connected to your bank account directly or to a specific debit or credit card.
Ensure your Internet connection is secure. Whenever you access your wallet, make sure that you are using a highly secured network such as in your home or office. Public network connection is an open gate for hackers to trace the ongoing transaction and redirect it.
After every step above is set up, you can proceed to purchase Bitcoins from one of the marketplaces called exchanges. Through an exchange you will be connected to an online market where you can buy cryptocurrency with money from your bank account or card.
An additional way to get Bitcoin is to trade with any other currency and then choose to withdraw in crypto money. We will discuss what brokers trade Bitcoin and how you can deposit and withdraw cryptocurrency later on.
Before we go on, one more important thing to understand about cryptocurrency wallets is that they do not exactly work as an online banking account. The online banking is just a visual representation of the transactions you can perform in a physical branch. But as we know cryptocurrency does not have a body, therefore there is no way to actually store it somewhere. However, the code which represents cryptocurrency can be accessed and this is what you are doing through the wallet which is built with two cryptographic keys: the public key and the private key. The public key is both the location of the deposits and withdrawals of cryptocurrency and a verification of its owner’s digital identity. While the private key is a personal never-to-be-shared with anyone password to purchase, sell and trade the cryptocurrency within the wallet. Now, let’s take a closer look on the cryptocurrencies with strongest presence at the current market.
Cryptocurrencies with the strongest presence
As we have already discussed, there is a tremendous number of cryptocurrencies available at the financial market today. However, this does not mean that they all have a strong place in the overall picture. While some currencies are widely traded and used for purchases almost as much as Bitcoin, the others are reserved to very specific niches and communities and will most likely remain that way. It is also important to mention that in most cases with the independently standing cryptocurrencies the technology behind them can vey a little and this sometimes affects the way they are purchased, sold and traded. Let’s go over 5 most popular cryptocurrencies besides Bitcoin, that deserve their rightful position in the financial world.
Ethereum or ETH. Ether is the cryptocurrency generated by the ethereum technology and it is a modified version of programming behind Bitcoin. ETH has rolled out in 2015 and now is mostly popular amongst cryptocurrency miners and financial investors who are looking to purchase other crypto money using ether. ETH has taken a solid spot above the $100 mark in its value and is currently priced around $180 per unit.
Litecoin or LTC. Bitcoin was introduced back in 2011 and is often referred to as Bitcoin’s change. Unlike most cryptocurrencies, LTC uses the faster block building technology which results in enhanced speed of transactions involving the currency. Litecoin is not a very popular tarding choice, however it is accepted by a decent amount of market places across the net. LTC’s current value marks just slightly below the $60.
Monero or XMR. The technology behind Monero is something called ring signing where the code behind each unit consists of a series of digital signatures from various participants including at least one non robotic participant. The encryption happens due to all signatures appearing evenly validated therefore the original signer can not be identified. XMR is more associated with the dark side of the Internet than other crypto currencies and is not often traded as a result. But it is worth mentioning since the advancement of technology behind its generation gives the coin an opportunity for a promising future in the world of finance. The current price value of one Monero unit is $65.
Dash or DASH. This one is perhaps the most rebranded alternative coin that went through a number of name changes since its launch in 2014. Starting as Xcoin Dash was a fork of the original Bitcoin protocol and became known for participations in pump and dump speculations, where a group of traders spreads fake news to artificially stimulate the interest towards the currency. Within the same year the currency got renamed to Darkcoin and quickly got a reputation for the dark net currency. In 2015 the coin has rebranded into Dash which stands for digital cash and has been known to clear out from most major dark net markets which made it a more attractive choice for currency traders and general users. The price of one DASH unit as of now is $70.
Zcash or ZEC. Being one of the fresher cryptocurrencies, ZEC claims to be a major technological step up from Bitcoin. Their signature feature is an advanced level of security associated with the transaction. A Zcash holder has an option to leave the trading process transparent, or shield it entirely through the developer’s zero knowledge protocol in which the validation of a unit is the coded statement of its existence. ZEC is also the cheapest from the major cryptocurrencies with its value marking around $35 as of today.
Cryptocurrency and Forex
From what we have learned so far it is entirely safe to conclude that practically any cryptocurrency can be traded on Forex. Crypto money by its nature tend to have extremely high volatility which is a crucial factor for many categories of traders. However, as we also know volatility is not enough and what need to accompany it to attract trader’s attention is high volume. Based on this criteria the crypto coins with the highest popularity at the foreign exchange market right now are Bitcoin, Ether and Litecoin. But for the purpose of keeping this article to the point we will focus our attention on how can you trade Bitcoin on Forex.
There are two major ways for a Forex trader to involve cryptocurrency in their trades. The first one is to purchase Bitcoin and either store it in your digital wallet until the value increases dramatically or use scalping strategies to trade Bitcoin pairs with flat money and accumulate small victories. Another option is considered more safe and favorable amongst professional cryptocurrency traders and it involves depositing the Bitcoin to your trading account and immediately converting it to a preferred currency to later trade using the selected flat money pair. There is also always an option to withdraw from your trading account in Bitcoin which we will discuss closer to conclusion.
Now disregarding of which way are you choosing to trade crypto, there are some set in stone guidelines that are designed to direct you through the setup process. Note that the suggestions and recommendations you find here can easily be applied to both cryptotrading and regular currency trading. Here is what you need to do in order to ensure your success in trading cryptocurrency on Forex:
Select a trustworthy broker to work with. Any trader’s success is closely related to efficiency and productivity of their broker. Choosing a broker company with a longer history is a general rule of thumb as well as paying attention to what the company in question does to enhance the overall knowledge and expertness of their clients. This includes professional customer care and a constantly updating informational source. Well established brokers usually have professional traders as part of their staff so it can be a nice place to seek advice as well.
Learn your trading platform. A trading terminal also known as the trading platform is your gateway to everything you will ever need regarding currency trading. That is why taking your time in choosing the right software and then getting to know it properly is extremely important. Perhaps the best way of speeding up the familiarization process is by getting yourself a copy of the trading platform manual and go through each function one by one. As you get the basics sorted out make sure to pay extra attention to how to trade Bitcoin in MT4 or any other platform you are using. Due to the nature of cryptocurrency and specific settings established by your broker the process may slightly differ compared to trading physical money.
Decide on what type of trader you are. This step is important for all kinds of traders including those who stick to only trading crypto. Earning your income through Forex can be achieved by various approaches and one of the ways to guarantee a pleasant outcome is to establish your currency trading style before you get into it. You can get an idea of which path to take by answering some of the questions like: how much money do I have available to invest in trading, what is my time availability and how often can I trade, what is the risk rate I am willing to take and at what pace I am expecting to gain profit. This is simply an outline but you probably get the gist. Deciding on these aspects beforehand will significantly limit the strategy selection and learning process.
Select the right strategy. Forex trading strategy also known as a trading plan is a system of action broken down into a step by step instruction of how to trade. The strategy rules usually include which time frames to use during analysis, what kind of trading indicators to watch, how big should be each trade, how often should new tardes be open an so on. Depending on the factors we discussed above such as trader's resources and availability there is an option to choose from ddozen of trading systems and strategies. Again, cryptocurrency is slightly different from governmentally regulated money and the trading strategy you choose for trading crypto has to match that. For example, we already know that crypto coins are highly volatile and therefore you need to limit your search to strategies that take this under control by a set of actions.
Practice patience and calmness. The great example of why patience is important is the short by eventful history of Bitcoin. In 2013 the caoin managed to grow from $13 per unit to $770. Surely many Bitcoin holders were thrilled to sell the majority of their crypto holding and get nearly 60 times its starting value. But then in 2017 the Bitcoin took that historical leap from $900 to $13,000 with its highest peak at nearly $20,000 in December, 2017. Now let’s compare gettig 700 bucks versus almost 20 k. Pretty drastic, isn’t it? This is why it is crucial for both regular currency traders and crypto traders to never lose their head. Although, Bitcoin was a one time event, we also know that market tends to be repetitive. That is why the best practice is to always check your trading plans with the analysis results and always trade with just a portion of your account balance.
What Forex brokers trade Bitcoin
We have already briefly mentioned that brokers might differ on the way they let traders manipulate cryptocurrency. Some brokers, although they are a definite minority, choose to avoid dealing with crypto altogether. Then some will allow you to withdraw and deposit funds in cryptocurrency buy trade with traditional currency pairs. And the other kind of brokers who allow you to trade currency pairs including crypto, with the most popular being BTC/USD.
With this type of brokers you will have a choice of opening a trading account type specific to your needs. Make sure to read up on each account and also learn about the typical spread and swaps associated with each cryptocurrency. As you begin to trade consider all of the suggestions above and find out if you have an option to practice trading cryptocurrency using a demo account.
Demo account for Forex trading is an irreplaceable tool for both new traders and market professionals. The ones who are just starting their trading journey have an option to take it slow and practise every skill and technique they came across during the learning stage. This is doubly important as it allows traders to experiment with various trading styles and build their confidence as well as save precious time of getting to know the trading platform setup before starting to actually trade. The golden rule of trading in demo is avoid rushing and try out every idea that crosses your mind. Since in demo everything is a simulation based on real market conditions traders are able to observe the outcome of their decision making without barring any losses and risking personal funds.
Depositing and withdrawing funds in cryptocurrency
As promised above, let’s wrap up by briefly discussing the specification of depositing and withdrawing from your trading account in crypto. Every respected broker will be upfront with their transaction policy and all you need to do is to carefully read through it first. Because cryptocurrency is not associated with banks the crypto transfers usually take less time, however it is important to note that most brokers will not process any transactions outside of market’s open hours which usually translates to traditional Saturday and Sunday weekend. This is where you need to be fully aware of processing times and transactional policies to plan ahead and get the money in and out of your account in a convenient and hustle free way.
Two more things to keep in mind during financial manipulations with your trading account are safety and fees. Good brokers guarantee the transactional safety with the encryption technology like Secure Socket layer. This means that your transactions will be safe from fraud and theft in the moment of transfer. Further one your assets will be stored in a number of top security banking systems.
As for the fees, you should not be charged for withdrawing or depositing money. The only exception is if you decide to use a credit card for the financial operation in which case the broker will charge you a certain percentage to cover the transactional fees dictated by the card’s service providing company.
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