eToro
By eToro
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BTC/GBP: Two Major Players in the Financial Arena. Here’s How to Trade Them

The BTC GBP trade pair matches Bitcoin with the UK currency GBP. Bitcoin is still the leading cryptocurrency with almost 50% of market share despite the emergence of many more contenders in the years since its launch. However, 9 years on from its launch, Bitcoin is still hugely volatile. This means that trading of this pair is very much focused on the price movement of the base cryptocurrency which, on an average day, dwarfs that of the fiat GBP side of the trade. For traders interested in trading the BTCGBP chart, it is important to understand the fundamentals of Bitcoin, how those of the GBP compare and the resulting dynamic between the two.

What is Bitcoin?

Bitcoin (BTC) is a decentralised cryptocurrency that runs on blockchain technology and aims to address perceived flaws in the traditional fiat currency system. Unlike fiat currencies, the total volume of Bitcoin that can ever be in circulation was capped at its launch – 21 million units. These are gradually released into circulation at a controlled rate based on predefined criteria until the final total has been exhausted. This means that the purchasing power erosion that fiat currencies suffer from when central banks increase their supply through money printing, which leads to inflation, should, in theory, never affect Bitcoin. The intention is that this makes Bitcoin an effective store of wealth as well as a medium of exchange.

The blockchain technology that Bitcoin runs on is an innovative mechanism to decentralise the system and means the rules-based system runs itself without the need for third-party management or a central authority. Blockchain is a peer-to-peer digital ledger system whose record is held on and updated by a huge network of computers, or ‘nodes’. When a Bitcoin transaction is made, a cryptographic process is completed by ‘miners’, whose job is to verify the transaction’s validity (ie. the entity making a transfer of Bitcoin is the owner of the currency being transferred). These miners, computers that form part of the p2p network, are incentivised by small Bitcoin payments. Because a majority of nodes need to agree on a transaction’s validity, and then all hold copies of the updated ledger, it is impossible to falsify transactions. This means that banks or other financial services companies, which Bitcoin’s creator argued have too much economic power, as a result, are not required. It also means transfers should be cheaper and faster than those via traditional fiat systems.

What is GBP?

The GBP, or pound sterling is one of the world’s ‘major’ fiat currencies and the 4th most traded in the world after the USD (U.S. dollar), EUR (euro) and JPY (Japanese yen). The UK’s currency and issued by the Bank of England, the GBP has historically been both one of international trade’s strongest and most stable currencies. It owes its relative strength to the historically stable political climate of the UK and its economy, to which the financial services industry contributes significantly. The past couple of years has, however, seen increased GBP volatility as a result of the uncertainty that the Brexit process has created since a 2016 referendum voted in favour of the UK leaving the EU.

BTC and GBP – Main Differences

Bitcoin is a cryptocurrency and the GBP, the trading code for pound sterling, is, of course, a fiat currency. The GBP’s value ebbs and flows in relation to other fiat currencies based on macroeconomic factors such as the strength of the economy, interest rates and other central bank-dictated monetary policy tools and sentiment around future developments. For example, uncertainty around Brexit led to a significant drop in the value of the pound against major peers such as the dollar and euro and all things being equal an increase in interest rates would be expected to strengthen the GBP. Volatility, while varying, is relatively low and against other fiat currencies averages around 0.6% a day.

As a cryptocurrency not tied to any particular country or region, the economic and geopolitical factors that fiat currency price fluctuations are influenced by, have little to no bearing on Bitcoin. Price is still a product of demand, but that demand is influenced by other factors. Because Bitcoin and cryptocurrencies are still relatively new, niche and in the process of gaining the trust of the wider general public, demand revolves around market sentiment and future adoption rates. For example, mainstream financial exchanges launching Bitcoin futures in late 2017 was one of the major drivers of the bull run/bubble that took Bitcoin’s price up to around $20,000 from $1000 earlier that year. Conversely, Bitcoin’s price tends to suffer when negative news around security, such as exchanges being hacked and cryptocurrencies stolen, or fears of a regulatory clampdown, dampen sentiment.

Bitcoin is volatile and averages daily movement of over 4%, though this has been much higher in the past and on any given day double-figure swings are far from uncommon.

How to Trade BTC/GBP

The pair will most appeal to traders with sterling denominated accounts, as on cryptocurrency exchanges the USD is the default fiat currency that exchange values are calculated against.

The fact that Bitcoin volatility is so much higher than that of the GBP, on a daily and longer-term basis, means that trading this pair successfully will necessitate a focus on Bitcoin’s price movement. There is little value in taking GBP volatility into account.

Staying up-to-date on the news around Bitcoin, such as potential hard forks, the attitude of mainstream finance to the cryptocurrency and regulation will be key when it comes to either intraday or longer-term trend trading of the Bitcoin GBP pair. If holding long-term, traders will have to train themselves to not react to short-term volatility. It is common for Bitcoin to drop or rise 10% or more over the course of a day, or much more over a week or two, only for losses to then reverse just as quickly.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 65% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

This content is for information and educational purposes only and should not be considered investment advice or an investment recommendation. Past performance is not an indication of future results.

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