Bitcoin and other digital cryptocurrencies, or “cryptos” as they are popularly known as having been part of our financial news ever since they rolled out. There are people who have invested in cryptos at a fledgling stage and have made a fortune. There are others who use them as part of their everyday transactions, which further proves why cryptocurrencies are here to stay. When compared with Forex trading, there are definitely some key similarities between how these two markets work.
How does forex and cryptocurrency trading work?
While many cryptocurrencies and the FX market, in general, are mainly focused on trading currencies, there are differences between the two. Forex, which is the global market for changing fiat currencies, works by using one currency to buy another. This is based on several different measures, with the ultimate aim of making a profit on the investment. Traders will look at factors such as the health of a particular currency and its volatility in comparison with others. The bigger the variation, the bigger the win or loss (in case you guess wrong). In the cryptocurrency market, things are similar, as you are essentially buying one cryptocurrency against another, just like in the forex market. However, the main difference here is volatility in value as well as the supply of cryptos and fiat currencies.
Points of difference between the two
While forex and crypto-trading may appear similar on the surface, there are quite a number of differences that traders need to be aware of before they switch from FX to cryptocurrencies and vice versa. These differences are explained in brief below.
| Points of Difference | Forex Trading | Cryptocurrency trading |
| Supply | The normal fiat currencies that are traded in the FX market usually come from the central banks of nations issuing that currency. Thus, it comes as no surprise that the forex market is the world’s biggest financial market, playing a massive role in the world’s economy. The supply of fiat currencies, thus, depends on the central bank or any other institution that issues them. Governments and institutions can choose to increase the supply of their respective currencies due to a number of factors, which, in turn, affect the value of the particular currency. They can even choose to inflate or deflate the value of their currencies. | In crypto-trading, central banks do not have the power nor influence to inflate or deflate the value of cryptocurrencies. Cryptos tend to have a predetermined maximum supply. For instance, when Bitcoin was first introduced, there was a written rule in the code that ensured that the maximum amount of Bitcoin to be produced is 21 million. Thus, cryptos act like just another finite resource. |
| Inflation | Forex has a multitude of factors that can result in steep derivatives, which, in turn, impact foreign currency inflation. The factors that cause this can range from political stability or instability to the level of a nation’s public debt at any point in time, among others. | On the other hand, cryptos are immune to monetary inflation but are still affected by price level inflation. These are usually caused by speculative theories. Thus sheer speculation is something that should be avoided in this market at all costs. |
| Market Regulation | When it comes to market regulation, FX traders often enjoy a lot of securities in all aspects. One can open an account with a couple of dozen dollars. The businesses they deal with are track-able and legitimate. Even if one of these entities disappears overnight, investors are still protected by various means. | With cryptocurrencies, one of the advantages, as well as disadvantages of the concept, is that they cannot be regulated. While this provides many advantages, especially when it comes to non-traceability and value exchange, it’s not as safe of a market compared to cryptos. There have been a lot of instances of scams and fraud in this landscape, in addition to thousands of projects that did not come to fruition because of one reason or another. As such, investors wanting to deal with cryptos should exercise due diligence in analyzing the project’s background and future prospects before investing. |
| Volatility | Forex pairs exhibit lesser volatility compared to the crypto market, as they tend to move in narrow bands instead of experiencing major shifts. However, fx pairs can still move a lot within those narrow bands because of the high volume of daily trades. | Volatility in the crypto-market is due to a small number of entities holding a large proportion. Therefore, if a trader holds a lot of Bitcoin, for example, to sell them, it can flatten the market. They are known as whales in the cryptocurrency market. |
What to be aware of in forex trading if you are already a crypto-trader
If you are already a crypto-trader, then you might be aware of the nuances of the market. The first thing that is quite apparent if you wish to cross over from cryptocurrencies into forex, with the government regulations and directives in place. As such, Governments from all around the world recognize almost all fiat currencies from countries but do not recognize cryptocurrencies.
It’s also a lot easier to open an account in forex trading, as there are various avenues to do so. Comparatively, the avenues of accessing Bitcoin and other cryptocurrencies may be limited. Many countries have outright banned the use of cryptos, making it harder for users to trade, hold, and invest on a regular basis.
Lastly, one should never expect the enormous gains prevalent in the cryptocurrency market from the forex market. While there is an opportunity to profit from volatility, it can never match the same amount as available in cryptos. This also means that the potential for losses is also less in the forex market.
Factors worth considering when trading
The following are some of the factors that affect trading in both cryptocurrencies and forex trading.
| Factors | Cryptocurrencies | Forex |
| Market timing | Open 24/7 | Open 24/5 |
| Stability | The market is still relatively new, which makes it susceptible to volatility. | The market has been around for ages and thus provides more stable trading conditions. |
| Time Horizon | It’s a long-term option for potential profit, even though it does not guarantee definite payouts. | It is mainly for short-term profit. |
Final Thoughts
Both cryptos and forex have been the sources of success for many traders worldwide. The ultimate decision to choose between the two rests on the individual’s trading preferences, trading habits, and the amount of time he/she can invest. The forex market is a tried and tested market, while the crypto-market is still in its fledgling stage.
