Within the past few years, cryptocurrencies have held a tight grip on the general public’s curiosity. In 2021, the cryptocurrency Bitcoin finally breached a market cap of 1 trillion USD (9.24 billion CHF) thanks to positive public sentiment. Support from big-name companies, such as Tesla, Apple, and Uber helped to place cryptocurrencies on the path of mainstream adoption.
The popularity of cryptocurrencies has left investors everywhere wondering how digital assets stand against traditional investment techniques. In particular, the foreign exchange (forex) market, which facilitates trade between international currencies, sees many comparisons with the cryptocurrency trade. One represents the traditional financial system that relies on banks and governments, while the other represents the potential future of the financial system, in which trust is decentralised. Below, we’ll discuss the main differences between trading crypto and forex.
Accessibility
If we’re talking about platform availability, cryptocurrencies and forex are equally accessible. The wide availability of forex and cryptocurrency trading platforms makes trading accessible to beginner traders.
Many forex platforms will also allow you to trade both forex and cryptocurrencies. A forex account at FXCM allows users to trade cryptocurrencies, commodities, shares, and indices, on top of fiat currencies. However, their cryptocurrency offerings are limited to specific clients. Mixed cryptocurrency/forex platforms make trading easier for investors that want to dabble in both asset types.
Liquidity
Business Insider’s overview of liquidity defines liquidity as the ease at which an asset can be converted into cash. When it comes to investments like crypto and forex, liquidity usually refers to how fast you can sell an asset. Investors value liquidity because it ensures financial health. No matter how valuable your asset is, if you have a difficult time selling it, it won’t be able to cover immediate needs, such as debts.
Forex is one of the most liquid markets in the world. Because the market operates 24/5, and international currencies have high utility outside of trading, investors tend to have an easy time selling their assets when they want to cash out. The crypto trade, on the other hand, tends to move a bit more slowly. Since cryptocurrencies are a newer invention, there are not as many active traders in the crypto market as there are in forex.
Volatility
CNBC’s report on Bitcoin volatility explains that the lack of a central bank, which is a defining feature for most cryptocurrencies, means that no single authority can control a cryptocurrency’s supply to stabilise prices. Cryptocurrencies tend to derive their value from demand, which means that prices can swing dramatically upward or downward depending on public perception.
Though fiat currencies also derive their value from supply and demand, they tend to be controlled by centralised banks, who can adjust supply according to demand to keep prices stable. Though this reduces the risk of loss, it also reduces the profit potential of forex trades.
Risk
When it comes to trading cryptocurrencies, the market’s extreme volatility is the biggest contributor to trading losses. On the other hand, trading losses in forex are mostly attributed to leverage. Because volatility is low in the forex market, platforms tend to offer leverage options to increase trading profitability. Leverage platforms allow traders to stake borrowed capital to amplify potential returns. However, if they come out on the losing end of the trade, they will also have to pay back what they borrowed, increasing their losses. Though leverage options are also available in cryptocurrencies, offerings tend to be smaller, thus creating less risk.
Cryptocurrencies and forex are both good investment options for online traders. As long as they play it safe with leverage options, high liquidity and low volatility make forex the ideal option for traders that want to mitigate risk. However, investors seeking higher returns can benefit from the greater profit potential of crypto.