Forex vs Cryptocurrency Trading: Similarities and Differences – Analytics Insight
We will compare both Forex trading and cryptocurrency trading in the article below
Forex trading is not the same as Cryptocurrency. It is all about buying and selling currency for profit. While on the other hand, cryptocurrency is digital cash for the digital age. Its similar to regular money but its digital only. Forex trading involves the exchange of regular currency with another regular currency. For example, the exchange of Dollars and Euros is forex trading. But when it comes to actually trading both financial instruments, they are very similar.
You can take a long position in both forex trading and cryptocurrency trading if you predict the asset price will increase. You can also take a short position in both forex trading and cryptocurrency trading if you predict the asset price will decrease.
For example, the total value of the forex market is estimated to be over US$2.409 quadrillion, while the combined market cap of the crypto market was US$1.14 trillion as of May 17, 2023. However, there are also marked differences between these two asset classes, and while there may be considerable overlap, they can each help diversify your trading portfolio in 2023 and beyond.
Well compare both of these asset classes in the article below while asking how you can leverage these to your financial advantage.
Forex markets involve the buying, selling, and exchanging of international currencies, which are traded in pairs and as speculative assets.
This means that you can use one currency to hedge against another, as you look to speculate on and profit from specific price movements without assuming ownership of the underlying financial instrument.
In more general terms, youll invest in the exchange rates between different currencies and forex pairs, while potentially leveraging the markets innate volatility to secure short and medium-term profits.
Due to this volatility and the relative complexity of the forex market, its not necessarily an ideal space for beginners. After all, theres no single marketplace place or regulatory framework in which to operate, while the majority of individual currency pairs are subject to free-floating exchange rates that are subject to macroeconomic factors, geopolitical tumult, and fundamental drivers such as supply and demand.
While fiat currencies are tangible assets that theoretically have an unending supply (as they are supplied by central banks), cryptocurrencies are completely digital assets that have a finite supply.
This means that crypto tokens have no tangible value or corporeal form, and therefore cannot serve as a secure store of wealth. At the same time, the finite supply impacts directly on each token, according to factors like scarcity and a generally high level of demand.
Crypto assets are built on blockchain technology, which creates decentralized and distributed ledgers that create an immutable store of transaction data. This creates heightened transparency and minimizes the risk of market manipulation, while theres no central authority or third party to control assets or enact transaction fees.
While crypto is now in its third generation (and the latest crypto assets like Cardano are considered technological entities that directly tackle the scalability issues associated with first-generation alternatives like Bitcoin), this asset class remains gripped by even greater volatility.
This level of volatility is more pronounced than what youll encounter as a forex trader, due largely to the lack of tangible value that underpins crypto and the assets vulnerability to speculation.
As we can see, there are some similarities between these two asset classes, but in many ways, forex and cryptocurrency are opposed. But how exactly do these speculative asset classes compare in the eyes of investors? Here are some considerations to keep in mind:
In this respect, forex and crypto are largely the same, as both are home to huge markets and have an almost inordinate amount of assets that can be traded. Sure, there are slightly more crypto assets (around 20k at the time of writing), but investors are spoiled for choice regardless of which market they target.
However, it should be noted that both marketplaces are considerably narrower in practice, with the seven major currency pairs accounting for 68% of the markets total daily trading volumes. At the same time, Bitcoin accounts for approximately 70% of the entire crypto market too, creating concentrated market segments for investors to focus on.
Liquidity refers to the ease with which an asset can be bought and sold, and in this respect, forex is considerably more liquid than cryptocurrency. This is particularly true in the case of major currency pairs such as the EUR/USD, which accounts for approximately 24% of total daily forex volumes and benefits from almost constant, uninterrupted demand.
Conversely, BTC is the only crypto asset that can be broadly described as liquid, but even then, there are only a fixed number of Bitcoin tokens in circulation. Demand also fluctuates wildly in line with market sentiment, meaning that liquidity can also diminish considerably at different times (making the asset difficult to shift).
As weve already touched on, fx is a highly volatile market, and one that a particular investor shouldnt underestimate. However, major currency pairs are considerably less volatile than exotic and even minor pairings, meaning that while prices can still fluctuate considerably in relatively short periods, assets like the EUR/USD typically trade in narrow and predictable ranges.
The same cannot be said for cryptocurrency, however, with Bitcoin having experienced recurring bull runs and crashes throughout its history. Having peaked in terms of market cap and value last November, for example, it has since shed nearly 70% of its value through a turbulent 2022. Less well-known assets are similarly volatile, meaning that real-time crypto holdings can rise and fall markedly and with minimal warning.
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Forex vs Cryptocurrency Trading: Similarities and Differences - Analytics Insight