Since the emergence of cryptocurrency, crypto trading has attracted comparisons with foreign exchange trading. A significant number of prospective traders have no idea of the difference between the two and which market to venture into. The duo is accredited as two of the most profitable markets despite their risky nature. Thus, they have attracted a considerable following, attention, and curiosity.
Crypto and forex trading are similar in different areas. However, they also carry their own risks, characteristics, benefits, opportunities, and weaknesses. Understanding the similarities and differences between crypto and forex trading can help traders improve their understanding of how the two markets work. However, before looking at the difference and similarities between the two, what are they?
What is Crypto and Forex Trading?
Cryptocurrency trading is the peer-to-peer buying and selling of digital financial assets. Examples of these cryptocurrencies include Ethereum, USDT, Bitcoin, Ripple, etc. The trader requires a digital wallet, a verified account, and an exchange to trade in crypto. The crypto market is decentralized, offering peer-to-peer (P2P) transactions.
Forex trading is the buying and selling of foreign currencies or exchanges. The forex market is also a decentralized and over-the-counter market. Trading in forex only requires a trader to have an account, and they are set to go.
Similarities in Crypto and Forex
1. Supply and Demand/ Market Structure
The market forces, supply, and demand drive the market price in both cases. When the number of sellers supersedes that of the buyers, the price goes down. In case there are more buyers, the price skyrockets. Briefly, low supply leads to high demand and vice versa.
Moreover, the markets are also affected by external factors like news and trends. Thus, the negativity or positivity of the news determines whether the price in the crypto and forex markets goes up or down. This implies that traders negotiate on prices without third-party interferences.
2. Accessibility to Assets
Assets in both crypto and forex trading exist in different markets. Thus, users have to have several accounts and systems to access the assets. For instance, a trader will require a crypto trading app to conduct trading and a wallet to store the digital asset. Moreover, they can change it to fiat currency by withdrawing the funds into a prepaid debit card. Depositing and withdrawing money from forex has a similar trend where the trader makes ACH transfers from their respective banks, online checks, credit cards, or wire transfers.
3. Trading Account
A trader is required to have an account to get started on both crypto and forex trading. Furthermore, the trader needs a strong internet connection and a smartphone or PC by their side. Since both markets rely on charts and fundamental and technical analysis, users can quickly profit from both.
Differences in Crypto and Forex Trading
1. Liquidity
The liquidity of forex markets is higher than that of crypto trading. This makes buying and selling a forex pair easier without spillage, enabling users to enter and exit at their desired positions. Forex trading is estimated to have exceeded the $6.6 trillion mark in 2019, while the crypto industry is only at $2 Trillion. Thus, it explains the level of liquidity. However, of course, the major currencies also have more liquidity.
2. Choice of Instruments and Trading Pairs
While forex only utilizes pairs of major currencies, cryptocurrencies have a variety of assets to pick from. For instance, crypto traders enjoy approximately 11,000 different cryptos. However, only a fraction of these is actively traded. Moreover, the vast number of crypto makes it impossible to track all of them. Thus, while crypto traders have a finite number of crypto to track, forex traders operate on limited watchlists. Therefore, crypto offers more trading options than forex trading.
When trading one fiat currency for another, the platform displays the relative value of each currency. Thus, traders buy the base currency and sell the quote currency while forex trading. Pairing USD against another currency is called currency pairs, while other fiats against each other are called cross pairs. The same concept applies to crypto trading. However, most currencies cannot be traded directly against each other or converted to fiat. Thus, the knowledge of the trading pairs is fundamental to every trader. Moreover, it allows investors to diversify their portfolios, arbitrage between trading pairs, and make comparisons of the relative worth of digital assets.
3. Volatility
Cryptocurrencies are known for their extreme volatility. The cryptos can make a massive shift in prices in a short time, making it challenging to control risks. However, such changes in the forex market are subtle and allow traders to control risks.
4. Security
Cryptocurrencies have been around for barely over a decade, and their security is not yet at par with forex trading. Blockchain networks have faced hacking and fraudulent risks before, which is typical for booming markets. The forex market is already highly established, making security issues minimal. However, forex traders should remain vigilant since scammers and hackers might change their approach just as the system has improved.
5. Potential Reward
With a vast risk comes huge profits. Since cryptocurrencies are more volatile, they have the highest potential reward over a short period. However, the potential reward in crypto is dependent on factors like strategies, choice of the coin, et al. Forex trading also offers a substantial potential reward given that the trader increases their trading potential by leveraging. Thus, choosing the right amount of leverage can increase profits while avoiding risks.
6. Nature of the Markets and Operation Hours
The crypto market operates on a 24/7 basis, while forex operates five days a week. Hence, crypto traders are in constant touch with the market. Moreover, the value of crypto is purely speculative, dependent on the shared belief between the participants. On the other hand, the value of fiat currency is measurable, and governments back the fiat currency. More so, currencies qualify as legal tenders, have institutions that control their supply, and can be used as a standard instrument of exchange.
7. Market Participants
The crypto market is saturated with smaller players with countable institutional and authoritative presence, rising interest in state-owned crypto. On the other hand, the players in the forex market include governments, institutions, corporations, bank and credit suppliers, and individual players.
8. Market Size
The 24-hour trade volume in forex trading exceeds that of cryptocurrency by far. Thus, despite the wide acceptance and recent success in the crypto industry, forex trading daily activities and trade volume still beats crypto trading.
Bottom-line
Cryptocurrency and forex trading are not for the faintest of hearts. Hence, traders should consider capital availability, financial goals, and trading strategies while choosing between crypto and forex. Moreover, the most informed decision is for the trader to create small accounts for both and do a market test to discern the market that works for them.