Cryptocurrency trading has been active over the past decade and has many similarities to forex trading. Most of the cryptocurrency trading that occurs throughout the globe combines a cryptocurrency, such as bitcoin or ether, versus a fiat currency like the U.S. dollar, Euro, or Japanese yen. Cryptocurrencies are more volatile than fiat currencies, and therefore, when a broker or exchange facilitates liquidity, the commissions are generally significant. Additionally, cryptocurrencies are generated from a decentralized mechanism instead of a country, and therefore, they have no interest rate attached to them. Cryptocurrency first experienced popularity because of its ability to foster anonymous transactions. Government intervention has limited top coins like Bitcoin and Ethereum to hide identities.
Forex Money versus Crypto Money
Forex, which is fiat currencies, and digital cryptocurrencies, are different mechanisms of thinking about cash. Forex currencies are backed by countries, while digital coins are decentralized and are created by programs. For example, the U.S. dollar is supported by the full faith of the U.S. government. Cryptocurrencies, like bitcoin, are decentralized. All that means is there is no central regulation on the market. The forex markets have some similarities as it pertains to the decentralized nature of the currency. While the governments around the globe have some influence in the forex markets’ movements, the market itself is the driving force behind the actions of forex currencies.
Similarities
Supply and demand, a market concept, is the driving force behind changes in the value of both forex and cryptocurrencies. If there are more buyers than sellers for a digital coin, that coin’s price generally goes up. More sellers than buyers mean that both a forex pair or a crypto pair will decline. Both markets efficiently absorb new information and move to different levels once they become available to the public.
The cryptocurrency markets and the forex markets work in tandem. To trade the cryptocurrency markets, most traders initially need to convert a fiat currency, like the U.S. dollar, the Euro, or the Japanese yen, into a cryptocurrency.
Differences
The forex trading market is the largest and most liquid market. As of 2019, there was $6.6 trillion daily trading value. As of May 2020, the cumulative market cap for the crypto market totaled around $256 billion. The difference in size creates a difference in liquidity and volatility. There is also some anonymity in the crypto markets. Cryptocurrency first took off primarily because of its ability to foster anonymous transactions.
Volatility and Liquidity
The cryptocurrency market is smaller than the forex market, and therefore, you can move few volumes of currency in the crypto market without moving the market. For example, if you tried to transfer $256 billion in the crypto market, you might expect all crypto prices to double. That same $256 billion represents only 4% of the forex market. This scenario means that the liquidity in the cryptocurrency markets is lighter and will create more volatility when large transactions are placed. Higher levels of volatility represent more risk. There is a greater chance at a loss from rising and falling cryptocurrency prices relative to the forex markets. This lack of liquidity also means that the slippage from trading the cryptocurrency market is more significant than the slippage in the forex market. When you attempt to transact, a large trade in the cryptocurrency market is likely to move the market, compared to a significant transaction in the forex market. Low volatility and high liquidity mean the forex market can better absorb economic shocks: higher liquidity and lower volatility help the average trader.
Anonymity
Cryptocurrency first experienced popularity because of its ability to foster anonymous transactions. Government intervention has limited top coins like Bitcoin and Ethereum to hide identities. Additionally, brokers and exchanges are more likely to report transactions than they did initially. Forex transactions are regulated by a tight web of forex brokers and financial professionals. Since 2014, the interbank market has incorporated a know your customer standard that requires traders to provide personal information to access an exchange.
The Bottom Line
The upshot is that cryptocurrencies and forex have many similarities and several differences. To initially trade the cryptocurrency market, you will need to convert a fiat currency into a cryptocurrency. The forex market is the most liquid globally and therefore provides low volatility and high liquidity. The cryptocurrency market is a fraction of the forex market’s size and has much higher levels of volatility. The anonymity that used to be associated with cryptocurrency has been someone eliminated by brokers, and exchanges employ the know your customer rule. While there are many similarities and differences, the benefit of trading forex for beginning traders is that the liquidity is more significant, allowing you to enter and exit the market more accessible. The volatility in the forex market is also smaller generating less movement in your positions.
