In this article, we will explore the framework for how Bitcoin trading components compare to foreign currencies on a trading platform and how they impact Bitcoin’s and Forex’s behavior.

Supply

The amount of foreign currency in circulation is regulated by the specific central banks. Meanwhile, an exponential algorithm that systematically decreases inflation as the stock of bitcoin increases controls the production of the cryptocurrency illustrated by blue in the Bitcoin Inflation vs. Time graph. This design was meant to rapidly create Bitcoins at first and exponentially decrease production after “enough” Bitcoins are generated. While this computerized method is new and hard to comprehend for some, it is important to notethat it decreases unpredictability as you already know how many Bitcoins will be produced in the short-term and long-term future.

Inflation

Many Bitcoin enthusiasts believe that Bitcoin is immune to inflation; this may be true for monetary inflation, but not for price-level inflation.
As emphasized in the Supply graph above, Bitcoin’s algorithm has a maximum limit of 21 million Bitcoins that can be mined, shown as a horizontal asymptote.  Due to the fact that once all 21 million Bitcoins are distributed, and no more can be found, Bitcoin will be immune to monetary inflation or debasement.  This is not the case with foreign currencies that are government regulated since they can produce fiat currency at anytime resulting in monetary inflation.
While (the reason for fiat) debasement has a more apparent answer, Bitcoin’s and Forex’s price-level inflation simply does not.  Multiple factors that affect Forex include the involving nation’s public debt, interest rates, political stability, and economic health.  These factors cause steep derivatives; impacting foreign currency inflation.  Bitcoin is even more complicated with only speculation theories on what causes price-level inflation.

Demand

One of the advantages of having a centralized currency is uniform demand.  Since the government controls the currency, its application within the economy is indisputable.  Bitcoin does not have this convenience; Bitcoin’s demand is determined through numerous factors including public adoption, marketplace emergence, and the public’s confidence in Bitcoin holding value.

As public adoption expands so will the demand for Bitcoins; coupled with emerging marketplaces that accept Bitcoins, the prevalence of Bitcoin will widen.   Bitcoin’s public opinion has been negatively impacted by news stories, such as Mt. Gox declaring bankruptcy and Bitcoin’s heavy use within the deep web.  However, the involvement of the New York Stock Exchange and NASDAQ in the blockchain has boosted the general population’s opinion of Bitcoin’s ability to retain value. Even with the negative elements, such as the media’s criticism, Bitcoin’s demand has and continues to rise steadily.

Volatility

Forex’s volatility is around 1% for the extreme foreign currency couples and 0.5% for less.  On the contrary, Bitcoin has a volatility around 5% to 15% with a 10% volatility average.  For this sole reason, Bitcoin attracts high-risk traders.

 Trading Platform

Both Forex and Bitcoin offers multiple trading platforms; Kraken, BTC-E, Bitstamp, Bitfinex, Coinbase, and others offer Bitcoin trading/exchange platforms  Forex has copious amounts of platforms with the most popular being FXCM.  The main difference between the two is the alternative currencies offered to trade with.  Bitcoin’s popular platform, Kraken, regularly trades with USD (United States Dollar) and EUR (European currency), along with alternative cryptocurrencies such as Litecoin and Dogecoin.  These crypto currencies are not integrated within Forex platforms but replaced with less well-known currencies.

Bitcoin and Foreign currency have many similarities, but their divergent behavior says otherwise.  Measuring one order of magnitude higher than that of Forex, Bitcoin’s volatility is an intense contrast from the variance of foreign currency.  Despite the fact that a Forex trader could have some success trading Bitcoins using Forex fundamentals, Bitcoin has created a riskier trading market that has yet to reach its potential.

What are your thoughts on Bitcoin’s trading potential?

Image Sources Bitcointalk, Kraken, Coinbase

Steven deCsesznak

Steven deCsesznak is a student at California Polytechnic State University majoring in Mechanical Engineering coupled with a minor in finance and an emphasis in Game Theory. He is a bitcoin enthusiast and uses his technical knowledge in Engineering to give an alternative perspective on Bitcoin.