At its core, any comparison between the forex market and the cryptocurrencies market boils down to old and new ways of thinking about money. It may seem difficult to correlate currencies backed by countries with those by coding. But, people are creating real buying power in their day-to-day lives learning both types.
If you’ve ever had forex vs. crypto thoughts rolling around in your head, read on for some context that could help inform your decision.
Similarities Between Crypto Trading and Forex Trading
Before we move into the differences between crypto and forex, let’s see why these markets may not be so different after all.
Forex and Crypto Play Together
The most important similarity between crypto and forex is that they now hold value relative to each other. You may not believe in Bitcoin or Ripple as a legitimate currency, but forex exchanges do. The Chicago Board Options Exchange (CBOE) also believes in crypto enough to offer options contracts on them.
Although the CBOE only offered crypto futures contracts from December 2017 until March 2019, the Chicago Mercantile Exchange (CME) currently offers bitcoin futures. You can also trade contracts-for-differences (CFDs) of reputable cryptocurrencies on platforms like eToro just like CFDs of forex currency pairs.
If you’ve read anything about crypto, you’ve heard about the concept of “decentralization.” All that means is there is no central regulation on the market. Here’s a little secret: The forex market is also decentralized. No, FOREX.com is not a central regulatory body for forex, just a well-named exchange! (Click here for a FOREX.com Review to learn more about it.)
On its own, decentralization does not mean that a market is less stable. It does mean you need to watch your back when investing, but that should go without saying.
Similar Market Physics
The same basic money physics that regulates movement in forex also regulates crypto. The notion of basic supply and demand is in effect: If there are more buyers than sellers for a cryptocoin, the price of that coin generally goes up. More sellers than buyers means a crypto bear market, just like in forex.
Efficient market absorption of news means that both forex and crypto respond instantly to market shocks. For example, if a BTC whale converts $30 million BTC into Japanese yen, it affects the crypto market just as talk of war in the White House would change the value of certain U.S.-based forex currency pairs.
Differences Between Crypto Trading and Forex Trading
The forex market is the No. 1 market in the world for trading volume by a large margin. The Bank for International Settlements reported an average of $6.6 trillion daily trading value in the 2019 forex market, a 29.4% increase since its last report in April 2016. As of May 2020, the cumulative market cap for the crypto market totaled around $256 billion.
The larger size of the forex market also gives it different levels of volatility and liquidity (concepts that will be discussed below). Forex beginners can start out trading currency pairs from stable countries with more protection from large losses before moving on to more speculative trades.
Volatility and Liquidity
Crypto is a smaller market than forex, so smaller amounts of money can move crypto more substantially than forex. If another $256 billion entered the crypto market, we could ideally expect the prices of all crypto to double. That same $256 billion represents a change of about 4% in the forex market. As a result, the crypto market is much more volatile than the forex market.
A higher volatility means more risk for investors — a greater chance of an exponential upside as well as huge, financially crippling losses. Higher volatility also means less liquidity (ease of trading), because more people are naturally attracted to a smooth marketplace. Low volatility and high liquidity means the forex market can better absorb economic shocks. This benefits the average person — both investor and noninvestor — with relatively stable currencies even in bad economic times.
Cryptocurrency first took off primarily because of its ability to foster anonymous transactions. Government intervention has limited the ability of top coins like Bitcoin and Ethereum to hide identities, but smaller coins like Monero, Zcash and Verge retain this characteristic.
Forex transactions, on the other hand, are regulated by a tight web of forex brokers and financial professionals known as the interbank market. Since 2014, the interbank market has incorporated a “know your customer” (KYC) standard that requires traders to provide personal information to access an exchange. Perhaps spurred on by crypto’s anonymous structure, companies like EagleFX that subvert or ignore KYC rules are popping up for forex traders.
Pros and Cons of Crypto Trading
Before making a decision to invest in this quickly changing environment, consider some of the following pros and cons.
High growth potential
Low barriers to entry
Increasing acceptance into mainstream society
|No government insurance for accounts
Less secure marketplace
Probability of total currency default
Lower levels of liquidity
Errors in underlying technology can drastically affect markets
Pros and Cons of Forex Trading
Although on the surface forex is safer than crypto, you still need to know what you’re getting into.
Measure of centralized protection against fraud and theft
Less potential for massive losses
KYC standards protect traders and brokers from fraud
|Less potential for huge, short-term gains
Gains easily tracked and taxed
Higher barriers to entry
High fees and middleman costs depending on your chosen broker
Unexpected political events can shock the market and cause major losses
Best Brokers for Forex Trading
The broker you use for trading forex can make a huge difference in your success. Here are some of the best forex platforms to consider.
Best Brokers for Crypto Trading
You can divert quite a bit of risk trading crypto with the right broker. Take a look at some of the more reputable and popular choices.
Which Market is Right for You?
The forex and crypto markets share characteristics but they couldn’t have a more different risk-reward dynamic. If you want a smooth, liquid market that rewards patience, forex may be your game. If you’re looking for pure growth, then you may want to look into cryptocurrencies. Consider talking to a financial advisor about forex versus crypto, and never speculate in any market with money that you are not willing to lose.