The forex market is the largest and most liquid market in the world. It's a truly global currency market that is open 24 hours a day, seven days a week.

As if forex were not dynamic enough, cryptocurrencies like bitcoin have added a fascinating new dimension to currency trading. Many forex brokers accept bitcoin, with some accepting a variety of other digital currencies. 

Should you jump in and begin using your hard-mined bitcoins in the forex markets? Find out the risks and nuances first.

A Standard Forex Trade

Before you consider whether to trade forex using bitcoin (BTC), it's helpful to learn more about conventional forex trades. A forex trade is simply exchanging one currency for another at its current rate. Traveling to another country and exchanging your currency for local spending money is the same thing, but forex traders are trying to make money off the continual fluctuations in the real value of one currency against another.

Trading a "Pair"

Trading a pair is the term for trading a pair of currencies. For instance, you would be trading a pair if you traded on the British pound/U.S. dollar currency pair (GBP/USD). Here's how a scenario might work.

You deposit $100 with a forex broker. Assuming the rate of $1 = £0.5, you will receive £50 for your $100. If the GBP/USD rate were to change to 0.45, you could close the position at 50/0.45 = $111.11. So, you've made an 11% profit just by exchanging dollars for pounds.

A Forex Trade Using Bitcoin

Now consider an example of a forex trade using bitcoin. First, you open a forex trading account with a broker who provides crypto/fiat pair trading. These include Coinbase, eToro, and Gemini. You then transfer your BTC from your digital wallet to the forex broker’s.

Assuming the current BTC to U.S. dollar rate is 1 BTC = $7,500, you deposit 2 BTC, worth $15,000. Now, imagine that you want to take a position in British pounds. If the exchange rate is £0.5 = $1, you will receive £7,500. After some time, the GBP/USD rate changes to 0.45, and you square off your position and receive $16,666.67 in your trading account. You have made a tidy 11.11% profit from your 2 BTC, and you are ready to cash out.

Recognizing Profits and Losses

One key difference between trading only currency pairs and using cryptocurrency to trade forex is realizing profits and losses. Bitcoin is traded as an asset, so its market and realized values can differ depending on the circumstances.

Market Value After Reconverting to Bitcoin

So, using the previous example with the end result of $16,666.67, suppose that the bitcoin to U.S. dollar rate changed to 1 BTC = $8,500. When you withdraw and convert your funds to bitcoin, you receive ($16,666.67/$8,500) = 1.96078 bitcoins.

Despite the fact that your bet on British pounds earned you an 11.11% profit (from $15,000 to $16,666.67), the fluctuation in the bitcoin to U.S. dollar rate means that you sustain a loss of 0.039 BTC (initial deposit of 2 BTC — 1.96078 BTC = .039 BTC). However, it's important to note that you haven't lost any fiat value yet.

Next, imagine the bitcoin to U.S. dollar exchange rate instead changed to 1 BTC = $7,000. You would have received ($16,666.67/$7,000) = 2.381 bitcoins. As misleading as this seems, you haven't gained monetarily from the exchange.

This is because when you make the conversion to BTC, you have lost or gained bitcoin compared to your previous transactions, but your profit (in dollars) remains the same, $1,666.67:

• 2 BTC x $7,500 = $15,000
• Profit from GBP to USD = $1,666.67
• Total = $16,666.67

If BTC climbs to $8,500 and you exchange your money for bitcoin:

• 1 BTC = $8,500
• $16,667.67 ÷ $8,500 = 1.96078 BTC
• 1.96078 BTC x $8,500 = $16,666.67

If BTC dropped to $7,000 and you exchange your money for bitcoin:

• 1 BTC = $7,000
• 2.381 BTC x $7,000 = $16,666.67

So, no value is lost. However, the situation changes if you hold your bitcoin.

Market Value Change While Holding

Only when you exchange your BTC for dollars again can you actually calculate your profit or loss.

Using the above scenario, you repurchase bitcoin after making the initial profit of $1,666.67 at a market price of $7,500. You would have 2.222 BTC. You decide to hold it and sell it later, and the market price increases:

• $16,666.67 ÷ $7,500 = 2.222
• Market value increase to $8,000
• 2.222 BTC x $8,000 = $17,777.78

Now you have a profit because you've realized (converted BTC to money) a gain of $1,111.11.

Increased Unpredictability

This hypothetical example illustrates the big reason to exercise caution when using digital currencies for forex trading. Even the most popular and widely used cryptocurrency, bitcoin, is highly volatile compared to most traditional currencies. For instance, bitcoin spot prices ranged from $35,166.20 on Nov. 14, 2023, to $37,879.93 on Nov. 15, 2023. One day later, it was down to $36,197.39. The quick and wide price variations can mean quick losses but also quick profits.

This unpredictability makes the risks associated with trading forex using bitcoin much greater because the bitcoin-to-fiat currency exchange rate changes so quickly.

Beyond the exchange rate fluctuations impacting profit and loss, there are other benefits and risks to consider before trading forex with bitcoin.

Benefits of Trading Forex With Bitcoin

• Decentralized Valuations: A major advantage of trading forex with bitcoin is that bitcoin is not tied to a central bank. Digital currencies are free from central geopolitical influence and from macroeconomic issues like country-specific inflation or interest rates.
• High Leverage: Many forex brokers offer leverage for bitcoin trades. Experienced traders can use this to their benefit. However, such high margins should also be approached with great caution as they magnify the potential for losses.
• Low Deposit Amount: A trader can start with as little as $25 with some bitcoin forex trading firms. A few forex trading firms have even offered promotions like a matching deposit amount.
• Low Trading Costs: Many forex brokers that accept cryptocurrency offer low costs to attract new clients.
• Security: You don’t need to reveal your bank account or credit card details to make a bitcoin transaction on decentralized exchanges. This is a big advantage in terms of cost and financial security.
• No Global Boundaries: Bitcoin transactions have no global boundaries—a trader based in South Africa can trade forex through a broker based in the United Kingdom. Regulatory challenges may remain a concern, but if both traders and brokers are willing to transact, there are no geographical boundaries.

Risks of Trading Forex with Bitcoin

• Different Exchange Rates: Bitcoin trades on multiple exchanges and exchange rates vary. Traders must ensure they understand which bitcoin exchange rates the forex broker will be using.
• U.S. Dollar Rate Risk: While receiving bitcoin deposits from clients, almost all brokers instantly sell the bitcoins and hold the amount in U.S. dollars. Even if a trader does not take a forex trade position immediately after the deposit, they are still exposed to the bitcoin-to-U.S. dollar rate risk from deposit to withdrawal.
• Danger of Volatility: Historically, bitcoin prices have exhibited high volatility. In the absence of regulations, volatility can be used by unregulated brokers to their advantage.
• Security Risks Inherent to Bitcoin: Deposited bitcoins are prone to theft by hacking, even from a broker’s digital wallet. To reduce this risk, look for a broker who has insurance protection against theft.
• Risk of Leverage: Using leverage is risky for new traders who may not understand the exposure. This risk is not unique to cryptocurrency forex trading.
• Asset Class Mixing: Cryptocurrency is a different asset class altogether and has its own valuation mechanism. Trading forex with bitcoins essentially introduces a new intermediate currency that can impact profit and loss in unexpected ways. Any money that is not locked down in a trader’s base currency is at risk.

The Bottom Line

Although cryptocurrencies like bitcoin are gaining popularity, there are still many associated risks. In forex trading, dealing in a decentralized currency that offers global transactions with little or no fees is an advantage. But the tradeoff is essentially adding a third currency to what was a trading pair.

So, if you're considering taking on the risks of trading forex with cryptocurrencies, you should use only a locally regulated forex brokerage.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own cryptocurrency.