In this article we describe forex market and cryptocurrency market, explain the similarities and differences between them and finally answer the important question, which one is suitable for you?
The Forex market is the biggest trading market globally, with a daily trading volume of about $5 trillion. The market comprises financial institutions, banks, businesses and retail investors, all of which exchange national currencies either as a matter of doing business or as a means to make a profit.
Forex market emerged out of the creation of the gold standard in the 19th century and the subsequent establishment of the USD as the world reserve currency in the 20th century. It wasn’t until the 1970s, though, that a surge in institutional and retail investing started to create the type of system we know today. Eventually, the advent of internet trading in the ’90s has made Forex more accessible and more automated than ever, which is what has let the market grow to its current size.
As opposed to stocks, which are often traded on exchanges, most of the Forex market is OTC. Therefore, traders negotiate without any governing authority over them that guarantees the trades. Terms and conditions are agreed upon, and trades are made between the parties directly or through a broker, a middleman who facilitates transactions on behalf of clients. The market operates 24 hours a day, Monday through Friday, though there are four main “sessions” each day that overlap based on the business hours of different regions.
Forex is known as a volatile and fast market, which is exactly what has attracted traders over the last several years. It is just this volatility that provides chances for a lot of money to be made. Generally, this volatility is derived from political and economic news, as the strength of a region’s economy, as well as its international relationships, weigh heavily on the value of its currency against others. For this reason, Forex traders pay a lot of attention not only to charts but to issues such as economic calendars, gross domestic product reports and updates on any conflicts unfolding on a global stage.
Cryptocurrency trading started in 2009 with Bitcoin (BTC), though it would be a few years before the first exchanges would open. However, once they did open, and with the surge of many different altcoins, a vast ecosystem of trading different digital assets quickly grew. Today, the market has a daily volume of about $100 billion, with most of that happening through exchanges. These exchanges are open 24/7/365, however, trading regulations on many of these platforms can vary extremely due to different parts of the world having different rules and attitudes concerning cryptocurrency.
These markets are known to be so risky and open to manipulation. However, much like Forex, the volatility is considered by some as advantageous. While definitely susceptible to industry news and scams, in general, crypto markets are less affected by global events or traditional financial markets. Traders are less likely to be scanning headlines and more likely to be paying attention to charts and technical analysis.
They are both based on currencies as opposed to other tangible commodities. While not everyone actually grants digital assets the title of “currency,” it is this basic type of instrument that Bitcoin (BTC) and others seek to emulate. Moreover, both markets are made up of a variety of players ranging from individuals to big financial institutions, all of whom are either conducting regular business or attempting to earn a profit on volatility.
Additionally, computers and internet technology play a role in the creation of both markets. While Forex emerged well before the IT age, it is no secret that it has exploded as a result, and today, the internet is the major way that these trades are executed. Cryptocurrency just takes this one step more, as it only exists in the digital realm, and in fact, couldn’t in any meaningful way be traded without internet.
A major difference is the nature of exchanges versus OTC trading. OTC trading provides global liquidity, but trades often must be facilitated by a broker, as mentioned before. It is possible to get an account that gives direct access to the market, but it is highly regulated. Going through a broker, however, is simpler for many investors and traders, but the broker is going to take a cut. How much will depend on many variables, such as the actual institutions involved, the trading pair you select and current market conditions.
Cryptocurrency is usually bought on exchanges. An exchange, much like a broker, acts as a middleman and will take a cut. Unlike brokers, though, the exchange acts as the singular authority over trading and usually has a fixed rate (or rate structure) that will always apply to trades. There is no negotiating; there is just the terms. Therefore, this can simplify the process for users in some ways, but it does mean that activities will be under the watchful eye of a central authority.
Global currencies are also not the same as cryptos, a fact that proponents on both sides are often quick to point out. Traditional currencies (fiat) can be pegged to an asset, other currencies or nothing at all, but they are regulated by governments and central banks. It is obvious that the systems in the world that define their interactions are old and well established. The value of a global currency will always be dependent on things: what commodities they produce and how their nations are doing against other global nations.
Cryptocurrencies, however, have very little of this. None of them have been existed for a long time, and none of them are tied to a particular nation or bank. While they can be pegged to other assets, most of them are not, and they rely on a combination of their own utility and speculative faith to derive value. The intrinsic usefulness of a digital asset can vary extremely, and the market is fairly competitive, often with multiple projects vying to fulfill the same niche. Meanwhile, virtually none of them are well regulated, and the future of how legislation will play out is not clear. Some may speculate that fiat money can potentially collapse; however, they are much more tried and true investment vehicles on average than the majority of cryptocurrencies available.
Which one is suitable for you?
This is a question that all traders have to ask themselves, but a lot of it comes down to which type of trading environment suits the best to you. Forex trading can provide more built-in stability, as well as an industry with deeper roots, more infrastructure and clear regulation. However, the room for upside in this market may not be as extreme as cryptocurrency can provide. If you’re interested in finding a broker to get involved, check out FX-List for a comprehensive collection globally. Also note that many FX brokers are now offering cryptocurrency options, though the terms on these trades will obviously vary case-by-case.
Cryptocurrency trading is more of a “wild west” market, and the risks are higher, but there is potential for huge returns that would be unlikely to be found by investing in traditional currencies. If this sounds better, then getting involved with one of the larger and more reputable exchanges is probably your best first step. Companies like Coinbase, Binance and Gemini all offer straightforward access for beginners, as well as more advanced tools for if and when you want to take your trading to the next level. You can our complete guide for beginners here.
Whichever way you go, or if you wish to dabble in both, the key is education. Staying educated will help you make the best decisions and hopefully stay ahead of rough times in the market.