It was not until recently that people could easily exchange currencies. Indeed, correlating currencies by countries through codes would only be dreamed of back then. Today, people buy and sell currencies and coins in their daily lives in the forex market and cryptocurrency market. Consequently, they constantly engage in debates and research on comparing these two markets. We prepared a detailed guide for you: forex vs crypto markets.
When you compare these two trading markets, you should read their differences and their similarities. Once you fully comprehend their structure, differences, and similarities, you can compare the pros and cons of trading both. That will help you to put things in perspective.
Forex vs Crypto vs. Similarities:
The similarities among these two markets are summarized under the three primary qualities they share. First of all, both markets share similar market physics. They both are highly decentralized. Finally, you can play them together. What do these qualities tell us for forex vs crypto, then?
Both markets function similarly. They both rely on the notion of supply and demand. There are buyers and sellers, and the movement of buyers and sellers determines the prices. If a coin is more purchased than sold out, it means the demand is high for this coin, and as expected, the price increases. It is the same for the forex market, where currency pairs are sold and bought against each other.
Both markets absorb the news and respond to the market shocks accordingly. Suppose a BTC whale converts a significant amount like $50 million BTC into Japanese yen. In that case, the entire crypto market will be under the influence.
Decentralization refers to the lack of central regulation in a given market. Both the crypto market and forex market are decentralized. In other words, the movement of money changes by natural forces of the market, which is the supply and demand equilibrium explained above. There are no third parties involved in these markets.
Usually, lack of regulation or decentralization leaves a negative impact on readers. However, there is no reason to worry. Decentralization is not an enemy. It does not mean that the market is less stable. It just means that you should trade without reporting or stating your agenda of investment.
Forex and Crypto Play Together
Last but not least, Crypto and forex do hold value relative to each other. To put it in latent terms, you as an investor may have doubts concerning cryptomarkets in terms of their legitimacy. Still, in the forex market, they are legitimate currencies. As a matter of fact, many forex brokers also provide cryptocurrency trading for investors.
Like the Chicago Board Options Exchange (CBOE) platforms, option contracts are offered on cryptocurrencies. Thus, you can trade contracts-for-differences (CFDs) of selected well-known cryptocurrencies on some platforms like eToro. That is the same as trading CFDs of forex currency pairs.
Crypto vs. Forex Differences:
These markets differ according to their market size, anonymity, and volatility, and liquidity. Here is how:
The forex market cohabits the most significant margins of trading volumes in the world. In 2021, the forex market experienced an average of $7.3 trillion daily trading value, according to the Bank for International Settlements report. Whereas for the crypto market, the accretive market cap was around $256 billion in May 2020.
Such size difference determines the volatility and liquidity variances that we discussed below. Many Forex market beginners start by trading currency pairs from stable countries. By doing so, they increase their familiarity while they are under protection from huge losses. Once beginners gain confidence and knowledge of the market, they move onto more speculative trades.
Volatility and Liquidity
Crypto is smaller than the forex market when it comes to its volume. That means the substantial movement of small amounts of money in Crypto rather than forex. If the cryptomarket receives an additional $256 billion, it will double the prices of the digital coins in theory.
On the other hand, such an amount in the forex market would not create such an impact as $256 billion is only a 4% change in foreign exchange. That implies higher volatility in the crypto market than in the forex market.
Increasing volatility is accelerating risk for investors. In the context of trading, risk brings about either a greater probability of an exponential profit or severely damaging losses.
Volatility is also negatively correlated to liquidity. If a market has tremendous volatility, we will observe less liquidity and vice versa. For example, the forex market is always remembered as one of the most liquid markets.
In general, people tend to choose smooth markets. Low volatility and consequently higher liquidity in the forex market makes it appealing to investors. From an investor’s perspective, it seems reasonable as the forex market absorbs shocks way better than the crypto market due to its lower volatility and higher liquidity. Both investors and noninvestors are benefitted even in bad economic times with stable currency pairs.
The rise of cryptocurrencies is expressed with their veil providing anonymity to the transactions. Recent interventions of governments have limited the leading coins like Bitcoin and Ethereum to hiding identities. Meanwhile, smaller coins like Monero, Verge, or Zcash could remain with anonymity features.
On the flipside, forex transactions are tightly regulated by forex brokers and financial professionals. Likewise, starting from 2014, the interbank market has inserted the standard of “know your customer” (KYC). By doing so, traders are supposed to provide personal information to access an exchange. Yet, there are some companies of forex brokerage ignoring or turning about the rules of KYC to catch up with the anonymity demand shifting to the crypto market.
Pros and Cons of Two Markets:
In the light of these differences and similarities, investors should evaluate the positive and negative features of the markets and decide which qualities are more favorable and reasonable.
Cryptomarket provides anonymity, high growth potential, low entry barriers, and low fees. It is becoming a mainstream trading market. In contrast, it is less secure with lower levels of liquidity. There is no government insurance for accounts. The probability of currency is the total default. As it relies on technology, the errors of the technology affect the market drastically.
The forex market is way more stable with higher liquidity. Consequently, fewer massive losses emerge. Even though it is decentralized, it has centralization measures when it comes to protection against fraud and theft.
Unlike the crypto market, it poses higher barriers to entry and usually high fees. Usually, there are extra costs due to broker services. Easy gains are tracked and taxed. Thus, the potential gains are typically short-term and limited.
Overall we have explained the pros and cons of the two competitor markets as forex vs crypto. Now you can start your financial journey considering the unique and similar features each market offers.