Since the late 2010s, cryptocurrency has experienced exponential growth, with many traditional Forex brokers offering trading in significant liquid cryptos like Ethereum, Bitcoin, or Tether. Due to this, trading in crypto has become considerably easier. You can trade crypto or traditional Forex currency pairs – or both – once you’ve opened up an account with reputable brokers.
Forex and crypto may seem like overlapping assets, but in reality, they don’t share the same rules. While there are some similarities between the two, Forex and crypto work differently. In this article, we will take a look at the two types of assets to help you gain more insight into their characteristics, as well as their pros and cons.
What is Forex?
Forex refers to the foreign exchange markets, and it means investing in foreign currencies. More precisely, it’s about investing in the exchange rates between currencies and making a profit as they gain or lose value one against the other.
Put differently, by investing in Forex, you invest in the global economies’ movement as you try to foresee which economies are likely to gain strength and which are likely to lose it and how their currencies will reveal that. It also means predicting how factors like debt levels or import and export rations will change the demand for different currencies. This investment area is very complex, which is why it’s not recommended for beginners.
What is Crypto?
Crypto is a digital asset, meaning you can’t hold it as you do with physical dollars. Instead, tokens can only be stored in digital accounts. When buying and selling crypto in the real market, all your transactions happen via an encrypted, decentralized system, which helps ensure anonymity. The crypto market experienced a trading volume of around $4.1billion in 2020 – two-thirds as large as the foreign exchange market.
Bitcoin was the first digital currency created in 2009 and is currently the most famous. If you want to trade crypto, you can do that via major crypto exchanges or major Forex brokers. In the former case, you’ll want to check the BTC price before investing, as there are always fluctuations. Trading on a crypto exchange is effective for long-term investments, while trading with Forex brokers is a better route for short-term trading.
Forex vs Crypto – Similarities and Differences
Both forex and crypto trading involves trading currencies. But unlike the crypto market, which is still relatively new, the forex market is well-established. Both types of trading are easily accessible to traders as long as they have an Internet connection and a computer.
In both cases, it takes little time to conduct trades. Forex and crypto trading combine the usage of multiple digital platforms and have high volatility. Investors don’t buy these assets for fundamental value, like one would do with stocks, for instance. They do it for the trade value. Here are some key comparisons between Forex and crypto trading.
Regulation
Forex is a regulated market, while crypto is something that belongs to the wild west. The former has existed ever since trading markets became common, and those who trade currencies are under the eyes of the government.
However, government officials haven’t yet decided anything about crypto regulation, and this has both pros and cons for investors. On the one hand, the lack of regulations makes it easier for them to enter the crypto space. But on the other hand, it brings long-term uncertainty in the crypto world.
Diversity
The forex and crypto markets are similar in terms of diversity, as they both involve a significant number of assets you can trade. Forex investors can trade any pair of currencies that exists, while crypto investors also have numerous crypto projects.
However, this only happens in theory. In practice, Forex trading happens among eight currency pairs, while in the crypto market, only a handful of cryptocurrencies are used. Both Forex and crypto are large asset classes, but cryptocurrency provides a more extensive market than Forex.
Volatility
Forex is an extremely volatile market, and no investor who wants to get into the market should underestimate this fact. Predicting how currencies may change is impossible, and more often than not, you have to be willing to make significant investments to make a profit. This means that the Forex market is risky in terms of investment.
Cryptocurrency is also volatile – perhaps even more than Forex. Bitcoin alone has experienced significant swings, which is also true for other assets in the market. Success stories of people who made fortunes off crypto are common in the media. But what’s also common is to make a lot of money and lose it shortly after. Unfortunately, this is often the case for many investors, and it’s essential to be aware of this volatility before entering the market.
Liquidity
Unlike crypto, the forex market is more liquid. As mentioned previously, Bitcoin defines the crypto market, and there are a limited number of BTCs in circulation. While the crypto market holds $2 trillion in its total value, it’s smaller than it looks, meaning that you can barely invest in any other token than popular ones like Bitcoin.
Forex, however, currently holds around $6.6 trillion in value, meaning that it is held across several investors and a wider range of assets. For this reason, investors can easily find someone to trade with.
Which asset is better?
Forex and crypto both carry their risks and rewards. While forex trading is more regulated and protected, crypto trading brings better opportunities for returns. The two markets have different behavior, size, and structure, so before deciding which one to choose, it’s paramount to research and study both markets to understand how they work. The volatility of crypto and the liquidity of Forex means that the two markets require different trading strategies.
Ultimately, the decision of whether to trade crypto or Forex only belongs to you and depends on your goals, risk tolerance, and resources. Thus, you need to consider the characteristics of the two markets and get very clear about what you want to get out of your trading experience. Whether you choose to trade Forex or crypto – or both – what matters most is to be aware of what these markets involve and decide if you’re financially ready for this type of investment. Volatility isn’t always a bad thing and can also mean gains, but you need to invest wisely.