Many newcomers to trading, in general, believe that trading and investing in cryptocurrencies is similar to buying stocks or betting against forex currencies. While there are some similarities to take into account, the truth of the matter is, they could not be more different. Both markets support arbitrage, various trading strategies and long-term investment plans. On the other hand, each market has different dynamics and ‘’rhythms’’ that shape its evolution in a particular way. But enough with that – here are a few things traders should know about trading currencies vs. trading forex.
A Few Elements Regarding Scale
Before deciding to trade cryptocurrencies and forex pairs, potential traders should understand the contrast in size of these two markets – for the sake of coherency, we will be using Bitcoin as a point of reference from now on. According to the basic principles of economics, the bigger a market is, the greater the liquidity, the depth and stability. This principle applies both to forex and bitcoin.
But in terms of size, forex is by far the largest market in the world, as millions of people around the world engage in it, both directly (by trading and betting against currencies) and indirectly (by purchasing products out of their native countries, exchanging money, and so on). The forex market’s development is further supported by advancing internet technologies. Further evidence of the forex market’s growth is the turnover, which effectively quintupled from 1998 to 2016, from $1 trillion to a whopping $5 trillion in under 20 years.
On the opposite side of the spectrum, bitcoins are traded on a much smaller scale and represent only a small slice of the overall cryptocurrency market. The size of the blockchain technology market, overall, is projected to reach over $2 billion by 2021. Admittedly, 2 billion dollars is nothing to sneeze at, but forex has more growth momentum simply because it has been around for longer than bitcoin.
However, even in the finance world, size does not always matter, as bitcoin is very desirable for ambitious investors. As of October 2018, Bitcoin’s value sits at a comfortable $6000 in value – a far cry from December of 2017 when the Bitcoin craze began, but still a valuable investment opportunity.
Advantages and Disadvantages of Trading Bitcoin
Now that we have briefly covered the realities of both markets, it is time to talk about their advantages and disadvantages. Let us start with Bitcoin. Even though in terms of liquidity and depth, Bitcoin falls short in some respects, trading this cryptocurrency (and any other virtual coin, for that matter) comes with several advantages:
- Bitcoin is not as affected by geopolitical issues or domestic economic performance as the forex market, so it is quite insulated from this perspective. However, it does get affected by public opinion and market speculation
- Volatility. Although volatility is a double-edged sword, this factor generates tremendous trading opportunities for participants who use the appropriate tools and have an instinct for market dynamics.
- Easy entry and exit levels. All you need to enter the bitcoin market is capital, as well as an online cryptocurrency broker or direct access to the market.
- Low transaction costs. Similar to forex, transaction costs are limited. If one uses the services of a broker, they may asses some fees upon the purchase or sale of bitcoin. However, if one accesses the market directly, they could benefit from some reduction in fees.
So, as you can see, the bitcoin market comes with many opportunities for business savvy traders. However, there are some drawbacks to consider:
- This is still a major problem in the blockchain industry, as the increased media attention has brought with it waves of hackers who are trying to make a quick and easy profit.
- System errors. Any glitch in the blockchain or computer can prove to be very costly for the trader.
- Drastic limits in terms of leverage opportunities. Bitcoin is traded in many different fashions, each method having its own degree of leverage. However, there is no industry standard that regulates margin trading, as each broker or exchange comes with its own suite of leverage portfolios.
Advantages and Disadvantages of Forex
Even though it seems like forex has the upper hand when it comes to trading, in reality, it is not without its flaws. But until we get to the cons, let us talk a bit about the advantages:
- Forex comes with a wide array of options in terms of currency pairs, one more exotic than the other. This means that traders have tons of opportunities to experiment and find their own niche.
- Tons of cheap and reliable tools for traders, including the Forex and CFD trading calculator.
- Due to the nature of the market and its specificities, the forex market is extremely liquid. So, whether a trader wants to push forward a popular pairing or a niche one, there is always a market for it.
- As opposed to other markets, forex offers great leverage options, with some brokers going as far as 50:1, 100:1 or even 200:1. However, it is worth noting that generous leverages come with high risks, so traders should be cautious in this respect.
- Aside from atypical circumstances, like when George Soros effectively broke the Bank of England and became one of the richest men in history, the forex market is relatively stable. Due to the large volumes traded on a regular basis, high degrees of fluctuation are quite rare.
As for the disadvantages of the forex market:
- Lack of volatility. This might sound contradictory, but as we have stated in the previous entry, volatility is a double-edged sword. A lack of volatility means that taking advantage from market discrepancies is quite challenging. In most cases, this leaves traders with no other option than searching for trends, an activity which deserves an article of its own.
- By costs, we are referring to the spread. The higher and riskier the trade, the bigger the spread will be (which is the commission that the broker takes for every trade).
While forex and crypto trading have some similarities, the mechanics behind are quite different. Cryptocurrencies are more predisposed to bouts of volatility, while instances of drastic market shifts in forex are very rare. Ultimately, whether one is better than the other can’t be assessed objectively, so it all comes down to each individual trader to decide which market suits their skills and personalities best. Hopefully, this article will help you make a decision.