Bitcoin has gone from worst to best currency – has the forex industry embraced digital currency yet?

Bitcoin was deemed to be by Bloomberg the Worst Currency of 2014. According to Bloomberg in 2014 “[t]he digital currency peaked at a value of $1,130 just over a year ago. Its plunge of more than 56 percent in 2014 makes it the world’s worst performing currency this year, according to Bloomberg, which tracks 175 foreign-exchange values”. One year later it is hailed as the Best Performing Currency of 2015.

The mere fact that Bitcoin has a place in the assessment of the performance of currencies is an important feat in itself. Somehow the very fact that bitcoin is part of competition vindicates its existence.

I think 2 years of being part of a global currency competition should be sufficient for the forex industry to take it more seriously as an innovative asset class to add to their portfolio for customers.

Super volatility

Let’s however remember one thing, as Barry Silbert said on CNBC “Investors with sizable portfolios can and do carve out a portion for higher-risk investments. “Putting 1 percent into high risk is not a bad idea,” Silbert said, but he added, “People should invest in bitcoin only what they can afford to lose.” A currency that goes from worst performing currency to best in two years is not exactly a stable reserve currency.

Explaining the volatility in the bitcoin market Investopedia states: “Global currency trading is a $5 trillion market, compared to a bitcoin market valued in the billions. The smaller market in which bitcoin exists is more likely to experience a more volatile trading atmosphere and may see significant price swings over small macroeconomic events.

Forex industry adoption

Who in the forex industry has embraced the best currency of 2015? It seems that Plus500 were one of the first to take on the bitcoin challenge and advertise their bitcoin CFD product (pictured below) and a few others who have decided to add a bitcoin CFD to their portfolio.

 

 

But providing CFDs in bitcoin doesn’t mean that the forex broker is handling the digital currency. Quite the contrary. Deposits and withdrawals remain in USD.

Who in the Forex space is accepting bitcoin deposits? And why bother?

First, it is important to note that digital currency has no chargeback risk. It is a currency as well as a payment system packaged into one. Second, processing deposits/withdrawals in bitcoin reduces your card or bank processing costs as a broker. Third, regarding AML risk, there are tools today that address the origination of the digital currency.

That said, from all the regulated brokers, FX open or Instaforex appears to be one of the only online forex companies taking digital currency deposits. Then you have (obviously) the digital currency trading exchanges such as Bitstamp, Bitfinex, Kraken or brokerage services from Magnr.

Events/factors affecting bitcoin’s price?

Here are a few factors that might affect bitcoin’s price (not exhaustive):

  • Reduction in the supply of bitcoins issued through mining
  • Monetary policy in China, devaluation of Yuan (as a strong portion of mining takes place there)
  • Progress of the core development team in addressing the development of the bitcoin protocol
  • Adoption by merchants/users of the digital currency
  • Regulatory stances (such as the EU Court of Justice removing any VAT from bitcoin transactions through the EU)
  • Technical failures with the protocol or significant businesses within bitcoin industry failing
  • Connection between bitcoin and other digital currencies. Often altcoins are priced in bitcoin.

Lack of Bitcoin Education

Traders need to understand how to trade bitcoin and or other digital currency and what are the fundamentals behind digital currency pricing (such as some of the factors listed above). Essentially, the trader needs to be educated on the asset itself. This is what is lacking for bitcoin related products. Forex brokers need to invest in educating their customers about bitcoin and what the factors that may affect its price.

USP of Forex Brokers

The advantage that forex brokers have is reputation, regulation and strong brands already. It should not be difficult for them to pivot towards the digital currency industry. In particular, the regulatory climate is far more stable than 18 months ago in relation to digital currency, so there is greater certainty with respect to regulatory impact.