Cryptocurrencies are a relatively new entry in the financial world. Its role as a digital asset is to stand as a decentralized medium for peer-to-peer financial transactions. It has built global traction for its independence from central banks and governments. In recent years, it’s become a solid alternative source of funds and trading option for many—a massive change from its earlier reputation of being an infamous means to dealing with nefarious activities.
Foreign exchange (forex) or currency trading is similar to cryptocurrencies in the sense that it’s likewise a decentralized market as there is no single location for traders to transact currencies. Exchanges can be done easily through various ways, online or over-the-counter, proving both are convenient and technologically advanced modes of trading.
There are, however, some key differences between crypto and forex that make each more suitable for trading in specific scenarios. In this post, we’ll look into the crypto and forex landscapes, how they work, and how they’re different, to help you decide which is better for your trading style.
The Forex Landscape
The forex market has been around for decades. A product of the barter system, which later utilized gold coins, its exchange eventually involved the use of paper—the process now more commonly known as the gold standard. Many countries adopted the gold standard for its equal value to gold as a lighter, more convenient alternative.
However, the world wars didn’t give this form of trading much of a chance. By the end of World War II, the Bretton Woods Accord gave global economies an avenue to restore themselves with an adjustable pegged foreign exchange market.
The modern-day forex market is easily denoted as the ideal trading market for several advantages. Its high liquidity allows a trader the ultimate flexibility in managing risks. You can buy and sell currencies within a moment’s notice thanks to sleepless trading schedules five and a half days a week.
Banks are the major players you’ll usually find in the forex market. Because there is no cap for trading volumes, banks normally have high quantities of trading for clients alone—add to that, physical desk trading and trading between banks. The most tradable currencies at present are the US Dollar (USD), European Euro (EUR), Japanese Yen (JPY), and British Pound (GBP).
It then makes sense that the most traded currency pairs are EUR/USD, USD/JPY, GBP/USD. The high volume of these transactions implies high liquidity and subsequently tight spreads. This means there is little impact on market price no matter how large a trade.
To be able to fully maximize the potential of forex trading, it’s best to get familiar with some of its pillars:
- Technical analysis – Determine the price movement and make informed decisions with charts. With technical analysis, you must look at historical data to see the likeliness of the market value going up or down to avoid falling.
- Fundamental analysis – More than checking trends, fundamental analysis dives deeper into the context of supply and demand with geopolitics.
- Risk management – Know your limits in risking more than you can truly trade. Risk management keeps your precautions in check to hold losses to a minimum.
Next, let’s talk about forex’s newer counterpart…
The Crypto Landscape
Compared to forex, cryptocurrency has only been around a much shorter period of time. That of course doesn’t make it any less formidable in the trading field. Since Bitcoin’s creation in 2009, crypto has seen a sporadic rise and fall in its worth. From Bitcoin’s first valuation caused by trade, rival currencies emerged, Bitcoin’s price plummeted, scams became rampant, and Bitcoin once again saw its redemption—all in the span of ten years.
To date, there have been over 36 million crypto wallets created. It’s been on a steady growth rate since 2016 and it’s safe to say that it’s become quite a popular trade with exchanges doubling in the last year alone.
On top of multi-coin wallets for digital assets, several countries have already enabled the use of crypto as a means to pay for products and services. This has not only paved way for fiat-to-crypto and vice versa trades to rake in the biggest trading volumes, it also proves crypto’s capacity to be liquid—given you’re in the right place.
Aside from Bitcoin being a clear cryptocurrency to keep an eye on, there are other good options to look out for on the field. This includes Litecoin (LTC), which has faster block generation for speedy transactions. Dash (DASH) prizes itself in near untraceable transactions, while Ripple (XRP) banks on low-cost, efficient transactions. At the end of the day, the currency you choose is about how you prefer to conduct your transactions.
Comparing Crypto and Forex Trading
Cryptocurrency and forex trading essentially serve the same function, which is to exchange funds. However, they involve two very different kinds of currencies: digital assets and fiat money. The former is independent from banks and governments while the latter is held by centralized government. Their platforms are different, but no less accessible in this day and age.
Some other notable similarities between the two trading systems are the influence of supply and demand on their prices, and its convenient transaction processes—both doable online through various platforms.
A Look at Forex
Forex has been around for decades, and its history with the creation of national currencies makes it a considerably safe option for traders. As the largest marketplace in the world, it has high liquidity, which enables you to trade in large volumes without directly affecting the market by a longshot. This means that for as long as forex liquidity is high, volatility will be low, making it a less risky trading option.
You also don’t need to worry much about currency popularity as major, minor, and exotic pairs are always going to be available for trade.
A Look at Crypto
The cryptocurrency trading system is one that’s much newer and highly volatile, but is easy to enter and exit. All you need is account verification and direct access to the market or your own crypto broker. Fees involved in transacting with cryptocurrencies are significantly lower than what you would have with forex. There are also much bigger returns to be gained with cryptocurrency trading—the real challenge, however, is the patience involved for this to happen.
Once you’ve accumulated a sizeable amount of digital assets, you’ll be able to use it directly to purchase goods and services with merchants who accept it as a mode of payment. Depending on your location, there may or may not be a bigger chance for you to use your digital assets for transactions. Alternatively, you can choose to convert it into fiat money to fully utilize your earnings.
From a distance, crypto and forex trading seems similar in concept. To trade, you have to master markets by understanding the complexities of the factors which affect what it is you’re trading, but that’s about as far as it gets. Cryptocurrencies and foreign currency trading have glaring differences that are primarily affected by their environment. One is detached from governance and the other, highly affected by current affairs.
What it all boils down to, really, is what your risk appetite is. Do you prefer to go slow and steady, or hard and fast?