When it comes to trading financial assets, forex and crypto are right up there on the list of investor choices. This is because of the profit potential they offer. The good news is, both markets have some degree of interoperability, which means if you’re conversant with one, the learning curve for the other will not be as steep. That being said, let’s dive into the features that set these two markets apart.
Nature of the assets
Both fiat and cryptocurrencies adhere to the laws of demand and supply when it comes to their price determination. The difference is that for fiat currencies, governments, through the central banks, exercise a degree of control over the supply of a country’s currency. This means they have a pronounced effect on the price of said currencies.
Crypto, on the other hand, is completely decentralized. This means that no single entity can influence its price. The prices of these coins are purely speculative, which means the two parties in the transaction must be in consensus on the coin’s value.
In the forex market, the largest participants are governments, commercial banks, and other institutional investors. Governments and banks provide liquidity to this market and as such, hold the biggest share of the market. Individual investors are plenty, but they do not have much control over the price movements in the market.
Crypto, in contrast, is mostly dominated by individual investors. For instance, most Bitcoin whales are individual investors who got in on the ground floor of the BTC wave. Governments and other institutions are only now trying to catch up, but their market share is significantly lower than that held by these individual whales.
Size of the market
The forex market has been around for much longer than the crypto market. As such, it has seen significant growth in volume over the years. As of 2019, the BIS estimated the daily turnover of the forex market to be at $6.6 trillion. With its global reach and various trading desks all over the world, it is not difficult to imagine how this much money changes hands every day on this market.
The crypto marketplace is relatively new. Bitcoin, the first cryptocurrency, was introduced in 2009. Since then, hundreds, if not thousands, of other cryptocurrencies have subsequently been introduced into this market. In recent years, it has seen increased popularity as more and more people adopt the use of crypto assets. Be that as it may, as of September 2021, this market had only reached a daily turnover volume of under $200 billion.
The FX market is open 24 hours a day, but it remains closed on weekends. The crypto marketplace, in contrast, is a never-ending flurry of activity. It remains open 24/7, which means traders have to always be on the alert as significant price moves can happen even during the weekend.
Number of tradable instruments
In the forex market, the instruments traders dabble in are called forex pairs. To that end, there are major pairs, which are currencies belonging to the world’s leading economies. Most of these pairs will include the USD. Those that don’t are called currency crosses. If you pair a major currency with one belonging to a developing country, you yield what is called an exotic pair.
When it comes to crypto, there are thousands of coins you can trade. Bitcoin, Ethereum, Solana, and Binance Coin are among the most traded coins on the crypto market. You can pair cryptocurrencies with other crypto coins, but not all cryptos can buy a coin like Bitcoin. Thus, since the coins are too many for one trader to master, you should concentrate on the coins that are most relevant to your trading needs.
Due to the speculative nature of both markets, they tend to be highly volatile. However, the forex market is a lot less volatile since there exists governmental control to limit the price fluctuations of their currencies. Further, most participants are institutions, which means trading follows a particular, almost predictable pattern. Due to this, the FX market enjoys a level of stability.
Cryptocurrencies, on the other hand, are very volatile. Due to a large number of individual investors, and a lack of a central authority, prices of these coins tend to fluctuate greatly over short periods of time. Analysts try to predict these prices by using a fear and greed index, as this provides insight into the market sentiment.
Potential for profit
With high volatility comes an increased profit potential. This means that crypto trading offers more opportunities to make outsized profits than the forex market. On the flip side, this also means that the crypto trade is significantly riskier than FX. In fact, several coins have seen their value drop to zero after enjoying a good run, while others simply refused to pick up.
Forex trading offers minimal profits, especially if your trading capital is not large. However, brokers often offer leverage, which may increase your profit potential. However, the more you stand to make, the more you’re at risk of losing. Therefore, one should be careful when using leverage and deciding how much of it to take on.
In both of these markets, one thing is constant – risk. Therefore, if you are looking to change markets because you’ve made significant losses in one, think again. The truth is, trading either of these markets is not for the faint of heart. Analytical strategies used for forex may work with the crypto price charts, of course, with a few adjustments.
The crypto market is still developing, and with it, we may see governments exercising more control over it. Crypto enthusiasts believe cryptocurrencies may replace fiat currencies as legal tender, but that is still up for debate. For now, with good risk mitigation strategies, it would be wise to diversify your portfolio and enjoy the best of both markets.