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Technology 9 min read

Crypto and Forex online trading: similarities and differences




September 27, 2022

In recent years, cryptocurrency has become mainstream, and many traders wonder whether they should focus on crypto markets instead of Forex or try to combine both. Technology and innovation have fueled a “digital gold rush,” pushing the total market valuation of cryptos to over $3 trillion (Maximum amount reached). It should be no surprise that online traders are apprehensive about missing out on significant gains.

In contrast, there is little movement in exchange rates between currencies in Forex (FX) markets. The possibility to use the leverage and maximize gains in Forex trading created its appeal for traders.

This article will debate the differences and similarities between Forex and crypto trading.

Crypto and Forex Trading Overview

FX trading, also known as foreign exchange or Forex, is the market in which one currency is converted into another. With an average daily trading volume of $6.6 trillion and over 150 government-backed national currencies, it is one of the most active markets in the world. The Forex market involves buying and selling currencies against each other at an agreed price. In fact, 88% of all currency trading is buying and selling the USD, usually for Euros, GBP, Yen, and a few other currencies. You have been exposed to Forex if you have purchased any goods from an international online retailer in a currency other than your native one. There are online currency providers where you can buy exotic currencies, but it’s usually up to a specific limit and thus would not be conducive to currency trading.

Crypto refers to digital currencies where the transactions are verified and recorded on a decentralized system rather than through a central authority. That is nonphysical money that can be used like a traditional tender. Cryptocurrencies keep their transactions on blockchains giving complete control and transparency to their holders, lowering risk, and removing an intermediary that takes additional transaction fees.

The similarities between crypto markets and forex markets

The first similarity we need to outline is a technical one. Forex and Crypto are traded online, so everyone who wants to join those markets will require a trading account and an internet connection.

The transition to Forex trading will be easy for those familiar with Crypto trading. The same is true for Forex traders looking to try decentralized crypto trading. The supply-demand balance determines both markets – prices rise when traders buy more than they sell, and prices drop when more traders sell than buy. Both cryptocurrencies and Forex are volatile, highly speculative financial assets. Traders of both markets purchase products not for fundamental value, like holding a stock for the value of owning a part of a company’s underlying equity. Instead, they do so for the trade value. The value of possessing a foreign currency or cryptocurrency comes almost solely from reselling that asset to another trader.

Crypto and Forex Differences

Differences between both markets will tell you which you choose to invest in as a starting point. You might invest in both, but the average novice trader usually chooses one. When you get some experience, you might switch to other markets you did not fully comprehend when you started investing.

The cryptocurrency market is smaller than Forex. If $480 billion were to flow into the cryptocurrency market tomorrow, we could expect the majority of assets in the market to double. The exact amount would affect a 7% change in the Forex market. Consequently, the crypto market is much more volatile than Forex. Higher volatility also represents less liquidity because more traders are naturally attracted to a more stable marketplace. As a result of low volatility and high liquidity, the Forex market can absorb shocks more effectively than the crypto market. That benefits traders with moderately stable currencies even in tough economic times. On the other hand, skilled investors can do exceptionally well in the crypto market if they research and use the right tools and techniques.

The Cryptocurrency markets are still relatively fresh, and many regulations are in the development phase worldwide. That means crypto investors can potentially face more risks, such as fraud and hacks.

In contrast, Forex trading is highly developed and heavily regulated. Forex trading is less risky, and scams are less prevalent. Nevertheless, Forex traders should carefully vet their broker and ensure it is regulated in the country where it is registered.

Cryptocurrency has gained rapid popularity mainly because it fosters anonymous transactions. Government intervention has altered the ability of top coins like Bitcoin and Ethereum to hide identities, but smaller tokens retained this feature.

On the other hand, the interbank market regulates Forex transactions through a secure web of Forex brokers and financial professionals. To gain access to an exchange, traders must provide personal information as part of a “know your customer” (KYC) standard introduced in 2014. Perhaps spurred on by Crypto’s anonymous structure, companies like EagleFX that subvert or ignore KYC rules are popping up for Forex traders. That is the fundamental difference between the two markets. With time and increasing crypto market regulation, this difference may disappear.


Which Market is Right for You?

Although Forex and crypto markets share similar characteristics, their risk-reward dynamics could not be more different. You may be more attracted to Forex if you prefer a liquid market that rewards patience, or consider cryptocurrencies if you’re looking for a riskier investment.

It might be a good idea to set up an account with minimal assets in both markets and experiment for some time to understand it better.

Before investing your money, you should consult a financial professional and never speculate with money you cannot afford to lose.

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