Finance

Forex vs Crypto Trading

Some years ago crypto trading was an aberration for traders and over the past years, it has almost become a norm, which shows how crypto has gained popularity and trust among traders. The ever-rising interest has pushed the total market valuation of cryptos to above $3 trillion. And many traders face the dilemma of whether they should focus on crypto markets instead of forex or try to have the best of both worlds. 

The practical application of blockchain technology and its cryptocurrencies in finance, banking, and other sectors has got the traders interested, and they don’t want to miss out on promising gains.

This is a huge difference from forex (FX) markets, where the exchange rates between currencies move almost predictably most of the time. The leverage that’s applied to forex is what traders find appealing

This article tries to decipher the similarities and differences between these two assets to help you in making an informed choice

Similarities

Trading in both forex and crypto has the same basics, you need a trading account and an electronic device with a good internet connection. Fundamentals of crypto trading are easy to get if you have experience with trading forex and the same applies vice versa as well. As crypto has been here for a long time now, Charts are available on crypto platforms and execution is fast to facilitate trading.

Supply-demand interest drives the price fluctuations in crypto similar to forex trading. Positive demand moves prices up and negative sentiment drives it down. Thus, you’ll find indicators and chart patterns familiar when trading crypto.

Differences

While on the surface crypto trading looks very similar to forex trading but as you skim the surface, there are many differences that will be discussed below.

Instruments

In forex trading, traders either concentrate on mainstream currency pairs like EUR/USD, USD/JPY, GBP/USD, AUD/USD, NZD/USD, etc. Or some traders work with less predictable pairs, which mostly include a major currency and the currency of developing countries, which can potentially facilitate greater movement.

But in the world of crypto, there are more than 10,000 different currencies right now, and the number is dynamically changing. Established ones like Bitcoin or Ethereum are actively traded, but as you dive in deeper there are cryptos only known to hard-core enthusiasts.

Forex markets can sometimes experience periods of calm trading for days or even weeks, but in the crypto world, there is never a dull moment.

Because of the sheer number, It is very difficult to track all cryptocurrencies, so like stocks, traders will have to choose the currencies they find interesting and promising. Thus, experienced traders mostly work with a concise watchlist.

Liquidity

The forex trading volume was more than $6.6 trillion in 2019. This only goes on to prove that forex is a highly liquid market. Irrespective of the size of your position, you can purchase or sell the instrument you choose without fretting over slippage. This can prove to be a great plus point as you would be able to usually get a price that is either equal or very close to the price on screen. 

This does not apply to a majority of cryptocurrencies. Compared to forex, the crypto market share seems even lesser at nearly $2 trillion, out of which almost 45% is covered by Bitcoin. For cryptocurrencies other than Bitcoin, trading is not as active and thus, traders will find it hard to get the price they want. 

Difference in coins

Since there are so many cryptocurrencies in the market, the price difference among them is massive. Thus, if you’re willing to try your luck with a not-so-popular cryptocurrency probably because you think of it as an underdog, make sure your trading call is backed by a thorough understanding of the fundamentals. 

Also because there is no proper way to keep a track of all the different opportunities in the crypto market, it is in the best interest of traders to only track those coins which they have a sound understanding of. This would bring their watchlist at par with those of forex traders. 

Volatility

Cryptocurrencies are notorious for their volatility while the forex market is relatively stable. Even the seemingly small cryptocurrencies could swing greatly within a short period but this is not common in forex markets unless you’re trading an exotic pair. Hence, while risk management is easier in forex, you can earn more in the crypto markets. 

Profits

Crypto markets are popular because they host a number of opportunities where one can earn a lot of profit. There is much greater risk in trading but there is also great potential for profit and hence, traders should exercise caution when making risky moves with cryptocurrencies. If enough capital is not pumped into the project, or the crypto just fails to perform well, the token’s value could come down to zero. 

While leverage is always an option in forex, one must remember that leverage boosts both your profit as well as your loss potential. 

Market hours

The cryptocurrency market keeps running round the clock, 24 hours a day, all seven days of the week. On the other hand the forex market also operates for 24 hours per day but is closed on weekends. This can have a massive impact on one’s lifestyle as forex traders can afford to enjoy their weekends and not worry about monitoring the rates but crypto traders always have to be on the edge. 

Even though both markets operate for 24 hours, there is a set pattern of trades in the forex market as it is dominated by large institutions. However, in the crypto space big institutions are yet to make a mark and hence individual investors make up for the driving force that runs the market. 

Security

Crypto markets are at a nascent stage and hence all around the globe, rules and regulations around this are still in the making. Crypto traders always have to take into consideration counterparty as well as hacking risks since scamsters are always lurking around in markets that show solid growth. 

Contrary to this, the forex market is well regulated and the interests of traders are well protected. Yet, it is important for forex traders to be sure of their trading agent/company’s track record to ensure that the local regulations are being followed. Since the forex industry is arguably one of the oldest financial trading markets, the risk of scams is close to none. 

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