Apart from currencies pairs, exchanges allow trading of cryptocurrencies as well. Cryptocurrencies can be bought and sold in the exchange market through Forex brokers. Trading cryptocurrencies can be closely related to Forex trading but not stock trading. This is because cryptos are traded as pairs and not individually. In this series, we will be analyzing the trading costs involved while trading cryptocurrencies that are paired with fiat currencies (Ex: USD).
BTC/USD is a cryptocurrency pair where BTC stands for Bitcoin, and USD stands for US Dollar. This pair is traded through Forex brokers as CFDs, or through cryptocurrency exchanges where cryptos are bought and sold exclusively.
The price of BTC/USD in the exchange market represents the value of the US Dollar equivalent to one 1 Bitcoin. It is quoted as 1 BTC per X USD. For example, if the current market price of BTCUSD is 7356.50, then it can be said that one Bitcoin is equal to the US $7356.50.
Spread is the difference between the bid and the ask price in the exchange market. It is determined by the brokers and exchanges, and it hence varies from time to time. Typically, the spreads for trading cryptocurrencies are very high. In recent years, the spread of coins having two decimal places is between 1500-6000 pips. The approx. spread on ECN and STP accounts are given below.
- Spread on ECN: 3000 pips (30 USD)
- Spread on STP: 3050 pips (30.5 USD)
The fee is simply the commission paid for the position a trader takes. It is charged only for ECN and Pro accounts and not for STP accounts. For our analysis, we shall keep the fee at 45 pips.
Slippage is the difference between the price at which a client executed trade and the price which was actually given by the broker. This difference occurs either because of high market volatility or speed of trade execution.
Trading Range in BTC/USD
The trading range is the representation of the pip movement in the pair for different timeframes. The values are calculated using the average true range indicator. And the procedure to assess it is given below as well.
Procedure to assess Pip Ranges
- Add the ATR indicator to your chart
- Set the period to 1
- Add a 200-period SMA to this indicator
- Shrink the chart so you can assess a large time period
- Select your desired timeframe
- Measure the floor level and set this value as the min
- Measure the level of the 200-period SMA and set this as the average
- Measure the peak levels and set this as Max.
BTC/USD Cost as a Percent of the Trading Range
Cost is a factor that varies with the change in the volatility of the market. By finding the ratio between the total cost and volatility, the variation in the costs is measured.
ECN Model Account
Spread = 3000 | Slippage = 25 |Trading fee = 45
Total cost = Slippage + Spread + Trading Fee = 25 + 3000 + 45 = 3070
STP Model Account
Spread = 3050 | Slippage = 25 | Trading fee = 0
Total cost = Slippage + Spread + Trading Fee = 25 + 3050 + 0 = 3075
The Ideal way to trade the BTC/USD
It is a general impression that trading cryptos are very risky because of its high volatility. But it is not completely true. To clear the misconception, consider the following example.
The pip value of BTC/USD per lot is 0.01 USD. That is, for every pip up or down, you will gain or lose 0.01 USD. The average pip movement in the 1H timeframe is 9100 pips. So, if you trade one lot of BTC/USD, you will win or lose about $0.01 x 9100 = $91 in a time frame of one hour. Hence, though the pip movement seems to be high, the profit/loss remains within decent boundaries.
Considering the cost variation in the above tables, it can be inferred that the costs are more for low volatile markets and less for a highly volatile market. But, the cost for average volatility acts as a median. Hence, trading when the volatility is around the average values is recommended. Furthermore, costs can be lowered by trading via limit orders instead of market orders. In doing so, the slippage on the trade will be nullified and will not be included in the total cost. In the above example, the total cost would reduce by 25 pips.
That’s about the trading costs involved while trading the BTC/USD pair. We will be discussing more Crypto/Fiat pairs in the upcoming articles. In case of any queries, let us know in the comments below. Cheers!