Similarities and Differences between Crypto and Forex Trading
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Today, we will be discussing something that might intrigue many of you future investors and traders. Though some might argue that comparing cryptocurrency trading with forex trading might be like comparing apples and oranges but you will see for yourself that that’s entirely the case.
There are many differences, yes, but there are also plenty of similarities between the two types of trading and we are here to discuss them.
Crypto trading, just like forex, involves trading currencies. However, the forex market is larger and well-established while the crypto market is relatively a new player to the scene.
Forex involves middlemen, brokers and various other institutions that usually collect fees at almost every step of the trading process. However, in crypto trading, there’s no middleman and that’s probably the biggest draws to it.
Another major difference we have to mention between the two is the liquidity available in forex and the lack of it in crypto, once you drift away from the major cryptocurrency coins. Security and other issues will also have to be talked about if you truly want to understand the differences between forex and crypto trading.
If you are wondering which type of trading to start with, this article might help you. We will take a quick look at both cryptocurrency trading and forex trading before comparing them on several fronts. Let’s get started.
Cryptocurrency Trading Landscape
As previously mentioned, cryptocurrencies are a relatively new entry in the financial world. Compared to forex, it’s a much shorter period of time but that doesn’t really make it any less formidable in the trading field. Since the creation of Bitcoin back in 2009, crypto has been on the spot, though experiencing a sporadic rise and fall in its worth. In the span of ten years, however, despite rival currencies emerging and tons of scams, Bitcoin still remains a powerhouse in the crypto world.
The role of cryptocurrencies as a digital asset is to stand as a decentralized medium for peer-to-peer transactions. Due to its nature and independence from central banks and governments, in recent years it has become an alternative source of funds and trading for many people. That’s a huge jump from the early days of cryptocurrency when it was mainly used in the black market.
Up to date, there have been over 40 million crypto wallets created and over 1,600 cryptocurrencies in existence. With a steady growth rate since 2016, it’s safe to say that the crypto market has become quite popular with traders in recent years.
In addition to the multi-coin wallets for digital assets, there are companies that have already enabled the use of crypto as a means to pay for services and products. This opens new opportunities to talk about crypto’s future liquidity and fiat-to-crypto (and vice versa) trades to enlarge in trading volumes.
Bitcoin is definitely a cryptocurrency to keep an eye on. However, there are other good options to look out for if you want to invest or trade with cryptocurrencies. For example, check out LTC (Litecoin) for speedy transactions or Dash which guarantees near untraceable transactions. There are, of course, plenty more to check out.
Ultimately, the currency you choose will depend on how you prefer to conduct your transactions so make sure you do your research beforehand.
Let’s talk a little bit about the differences between investing in and trading cryptocurrencies.
When people decide to invest in a cryptocurrency, usually that means that they are buying, let’s say, Bitcoin for the long term. They believe that the price will go up, regardless of other factors that may prevent that along the way. Those people believe in the technology and the idea behind the currency and want to invest in it with the hope of a future return of investment.
Crypto traders, on the other hand, buy/sell Bitcoin (we are using Bitcoin, just as an example), in order to make a profit. Traders view cryptocurrencies as an instrument for making profits, unlike investors. Sometimes they may not even study the ideology or technology behind the product they are trading. Also, cryptocurrencies are very volatile. You can only make a profit if you manage to correctly anticipate what’s going to happen in the market.
Because the cryptocurrency landscape is relatively new, there are not a lot of factors that can cause price changes. The fact that they have been designed as decentralised assets, free from any government/bank control, things like rate changes, political factors, data releases, etc. don’t quite affect them as much as fiat currencies and the forex trading market, consequently.
There are several factors that might affect cryptocurrency prices. Those include:
- Security flaws, resulting in attacks on cryptocurrency exchanges;
- Countries announcing that they are banning cryptocurrencies;
- Disagreements over upgrades. For example, when a cryptocurrency undergoes a hard fork (this can happen when a Blockchain diverges in two separate directions);
One last thing you need to know about cryptocurrencies is that each cryptocurrency on the market has a different degree of volatility.
You have to remember that cryptocurrency markets are some of the world’s most volatile markets and big price swings are not something uncommon.
Cryptocurrency trading could be good for you but only if you have a good understanding of the market, accompanied by a solid trading strategy and risk management techniques.
Forex Trading Landscape
Let’s talk about the forex market real quick. The foreign exchange market (FX or forex) is the largest financial market in the world and it involves buying and selling of currencies. Traders are drawn to the market because of its beneficial characteristics, including a wide variety of currencies available to trade, low transaction costs, 23 hour a day trading during the week, the size of the market and its volatility.
The foreign exchange market allows private individuals, as well as large institutions, governments, retail traders and more to exchange one currency for another. This takes place over the counter (OTC) through the interbank market, instead of on a centralized exchange.
There are a lot of factors actually that can move the FX market. Those might include country-specific factors, such as GDP, unemployment, inflaton, election of a new president and more. That’s why traders use an economic calendar to stay up to date with such information and other important economic events that might affect the market.
People wonder how to make money trading forex. Though it’s a straightforward process it requires a lot of understanding, preparation and experience. Don’t even think about becoming a trader and making money if you don’t possess the knowledge of trading. You won't go far without it.
How do things work in the forex market? Well, the concept is simple - if you think the value of a currency is going to go up (appreciate), you buy the currency. This is known as going “long”. Whereas if you think the currency is going to go down (depreciate), you sell the currency which is known as going “short”. There are plenty of different forex pairs for traders giving them the chance to spot profitable trades and earn money.
Crypto vs. Forex trading
Let’s talk about the similarities between forex trading and crypto trading. Check out our infographic and discover which type of trading will appeal more to you.
Which one to choose?
Whether you choose to trade forex or crypto, you have to know that each type of trading carries their own risk and rewards and positive and negative sides.
Generally speaking, forex trading is more protected, regulated and stable, however, crypto trading can promise you larger returns than forex.
The two markets are quite similar in the sense that they are electronic trading forms of currency. As mentioned, all you need is an access to the Internet and a computing device to start trading.
The liquidity of the forex market and the volatility of the crypto market means that traders would have to use different trading strategies for the two markets.
Ultimately, the size, behaviour and structure of each market place is different. There are many similarities, however, equating them is, as we said, like comparing apples and oranges.
Opportunity, however, knows no boundaries. Many forex traders have turned to the cryptocurrency markets due to its recent growth in popularity. At the end of the day, the decision of whether to trade forex or cryptocurrency depends on your personal goals, resources and risk tolerance.
We do hope that our article on the differences between forex and crypto trading gave you some insightful information on both markets and helped you make a decision or form an opinion for future discussions.
We also suggest you spend some time to do analysis and research on both markets before choosing which one to trade.
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