Trading Forex and trading cryptocurrencies have many differences, but there are also plenty of similarities. If you’re a novice trader, you may want to learn the key differences and similarities before choosing between the two.
If you’re planning to start currency trading, you’re probably on the fence about whether you should choose trading cryptocurrencies or foreign currencies. Well, we’ll start by telling you that the Forex market and the cryptocurrency market are two separate things.
Crypto and Forex trading are often considered similar as, well, both involve trading currencies. Yet, both are more complex than that and have their own specific characteristics.
Now, when you are a beginner, it can be challenging to know about the differences. And, it can be even harder to know which one to choose if you’re not sure what sets each of them apart. So, here’s everything you should know about the two:
The Forex market vs the Crypto market
First things first, let’s discuss the markets. It’s impossible to understand why trading crypto or Forex is different if you don’t know a thing about the markets.
Forex market explained
The Forex market is the largest and most liquid market in the world. It is a well-established and decentralized market where all currencies from around the world are traded. However, over 85% of all global transactions on the market happen on just seven popular pairs: GBP-USD, EUR-USD, USD-JPY, AUD-USD, NZD-USD, USD-CHF, USD-CAD.
Now, the thing with being a global market is the fact that Forex can be influenced by plenty of factors from political announcements to inflation numbers, job reports, and even natural disasters. Yet, even so, about $5.3 trillion is traded in the market every day on average.
So, the Forex market is massive!
The currencies in the Forex market are backed by a centralized government.
Crypto Market Explained
The crypto market is a relatively new entry in the financial world. More precisely, the crypto market started back in 2009 with the creation of Bitcoin, the first cryptocurrency. But, despite being incredibly young, the crypto market has quickly become a formidable trading field, now having over 2.000 cryptocurrencies.
The market quickly transformed into a vast ecosystem of trading different digital assets. Today, it has an average daily volume of nearly $100 billion, most of which goes through exchanges.
Compared to the Forex market, the crypto market is independent of central banks and governments.
Key Similarities and differences between trading Forex vs trading crypto
Now that you know more about the two markets let’s dig deeper into the key similarities and differences of actually trading foreign currencies and trading cryptocurrencies.
Similarities between the two
While some traders may argue that comparing the two is like comparing apples and oranges, there are actually many parallels between them.
For example, the most significant similarity between the two is that they both take place in a digital environment, in the sense that they both rely on modern-day communications technology to operate.
What’s more, another similarity is that they both deal in currencies as opposed to other commodities such as gold, oil, or natural gas. Although not everyone agrees to grant digital assets the title of “currency”, Bitcoin and other cryptocurrencies operate and are perceived by many as currencies.
Besides that, both markets also include a large variety of players from individuals to massive financial institutions, and all these players are either conducting regular businesses or trying to earn a profit using the markets’ volatility.
Another significant similarity is the fact that both have high volatility, which can be both a negative and a positive feature. Volatility in both markets means that they can be subject to a huge variation in price in a short period of time. However, compared to foreign currencies, cryptocurrencies tend to wildly fluctuate.
Differences between the two
Despite having many similarities, the two markets remain very different.
One of the critical differences between crypto and forex trading is the fact that Forex trading requires a broker to facilitate it. Traders can. However, get an account that gives direct access to the market, yet this is a highly regulated move.
So, going through a broker is a much more straightforward move for investors and traders, even if it means that they need to give the broker a cut of their winnings. Plus, best offshore forex brokers also provide the opportunity to trade on international markets if the trading conditions are too tight in the country traders live in.
In contrast, cryptocurrencies are mostly brought on exchanges, which act much like a broker or a middleman and will take a cut. Yet, unlike brokers, the exchange acts as the only authority over buying and selling cryptocurrencies. What’s more, the exchange usually has a fixed rate or rate structure that will always be the same for any trade.
Besides that, foreign currencies are not the same as crypto ones because they can easily be influenced by global events. Political crises, economic events, or even natural disasters can affect a country’s currency, bringing plenty of changes to the market.
In contrast, when it comes to what’s determining the value of cryptocurrencies, it’s all about supply and demand. More precisely, if a particular cryptocurrency has a high token supply but little demand from traders, then, obviously, its value will drop. On the flip side, low supply and high demand cause the cryptocurrency’s price to increase.
Choosing between trading Forex and trading cryptocurrencies
“Which one is right for me?” That’s a question that every novice trader should ask themselves between randomly choosing one. However, there is no one-size-fits-all answer to this question because whether you’d like to trade cryptocurrencies or foreign currencies is a very personal choice.
Suppose you like the risk and strive for higher gains (which potentially come with higher loses) than maybe you’re more of a trader that should go on the crypto market. In contrast, if you prefer a more regulated and strict market, which also involves lower risks, perhaps you should become a Forex trader.