In the last few years, crypto trading has gained traction, thereby becoming a major mainstream of both financial and technological worlds, with a digital gold rush in the 21st Century innovation. Today, the trajectory of digital currency investment has pushed forth a total market valuation of over $1.6 trillion for all cryptocurrencies.
On the heels of the steady rise in blockchain technology, thousands of cryptos have been in the spotlight, which in turn attracts traders and investors, who are skeptical of their significant gains.
This remarkable feat makes a huge difference from forex (FX) markets, there is a near-rigidity for the exchange rates between different fiat currencies. But the applied leverage on forex makes it more appealing for traders to delve into.
In this article, we will put the contrast and comparison of crypto and forex trading side-by-side to assess which is to consider before having your first trade.
The Landscape Of Crypto And Forex Trading
There are some similarities and differences between crypto and forex trading. Crypto trading can be described as the buying and selling it digital assets, which include cryptocurrencies, tokens, and NFTs. On the other hand, forex trading involves the exchange of one fiat currency for the other, having the hope for a currency value rise, which can amass profit to the trader.
The mechanics behind the valuations of cryptos and fiat currencies are similar, like in terms of supply and demand. But the distinguishing feature underpins the particular forces behind the supply and demand of cryptocurrency and forex.
For instance, cryptocurrencies on a blockchain system involve a decentralized and distributed ledger to keep transaction records. As a result, huge investment is thrown into this digital infrastructure, as the demand for cryptos increases with time.
In forex trading, this is more of pitting one country’s economy against the other, with the hope of having the value of the currency you bought increase over time. Forex trading has been around the financial space for many decades.
The force underlying the supply and demand in forex trading is considerably large, such that the global economy can suffer a huge blow in the event of significant imbalances.
1. Market Capitalization
Similar to the potential of cryptos to fund different blockchain projects, forex is also important as the fuel for the world’s economies. One of the major benefits brought forth by Satoshi Nakamoto during the development of Bitcoin was the creation of a transparent ledger of ownership for the coin. Due to this, the size of the crypto market can be easily determined.
At the time of writing this article, the total market capitalization for cryptocurrencies is about $1.6 trillion. It took 12 years to achieve the first $1 trillion combined valuations, although its value in the crypto market is on a steady increase.
In forex trading, there is difficulty in determining its real market value. In 2017, economists estimated the total value of the global economy to be about $80 trillion.
Every three years, the world’s trading volume is always estimated in foreign exchange by the Bank for International Settlements (BIS). The most recent report was released in September 2019, when BIS discovered that about $6.6 trillion was traded on forex every day. This is an increase from the $5.1 trillion three years earlier.
Cryptocurrency is characterized by its decentralized nature, hence making it difficult to deduce a precise figure for its trading volumes, but it is estimated between $100 billion to $500 billion per day.
Due to its long years of existence in the financial space, forex trading is well-grounded. Cryptocurrencies like Bitcoin might have been available for about 13 years, buying Bitcoin is been made easy over the last few years.
2. Market Participants
Bitcoin started its trade in its early days with retail clients, miners, and a few centralized exchanges. But the narrative has changed today with a plethora of exchanges offering thousands of cryptocurrencies.
Also, the early days of cryptocurrency were constrained by the ability to hold crypto instead of another party. There was a breakthrough in this, following the announcement of MicroStrategy (MSTR) on the purchase of Bitcoin in 2020. This further quickened many companies to incorporate cryptos into their treasury plans.
In forex trading, banks are always exchanging currencies. Banks are known to deal with each other in “yards,” which is the equivalent of one billion units of currency. As the digital revolution has emerged across all walks of life, forex traders have explored technological means of enabling the buying and selling of currencies while nudging exposures to larger banks.
Crypto trading is more volatile than forex trading. Accordingly, a higher margin is required overall, which translates to the more volatile the product becomes. So, higher leveraged amounts are available in forex trading than in crypto trading.
The deeper level of liquidity in forex trading is a function of small price fluctuations. This is one of the reasons why the forex market trades about $6.6 trillion daily and the crypto market trades between $100 billion to $200 billion per day. Crypto trading had its high at $516 billion in May 2021.
Moreover, this liquidity factor places the crypto market at 12 to 60 times greater than the crypto market.
Money loss is one major thing that the forex market is known of. It can be inferred that depending on the quarter, between 25% to 35% of forex traders produce at least $1 more in their respective accounts through the course of the quarter. What this means is that about 65% to 75% of forex traders don’t and as such, lose money.
Leverage is considered the key factor to the traders’ loss.
Leverage can be defined as a financial tool that can either magnify losses or profits. However, the invention of high-speed computers and also the decentralized nature of forex and crypto have given way to arbitrage opportunities existing between two different traders or exchanges.
6. Market Operations
Crypto and forex trading can be initiated around the clock to serve traders and investors across the globe. Therefore, the two exchanges have offices spread around the world to serve local clients.
7. Market Structure
The interbank market determines the forex pricing, but major brokers flatten the spread in a bid ti generate their preferred pricing.
Meanwhile, the crypto market was created on the amount of liquidity that participants offer at respective locations. As a result, the crypto exchange you use to trade large amounts might not have large crypto to transact at the time of your purchase.
Is Forex Safer Than Cryptocurrency From A Regulatory Perspective?
Forex trading can in a way be safer than cryptocurrency. This is hinged on the decentralized nature of crypto and its high volatility, hence, it is vulnerable to wild market swings.
Also, the crypto market has less liquidity with lower trading volumes, thereby posing difficulty to go into and out of large trades. So, forex traders are generally provided with more leverage, ranking them to make larger trades.
Volatility is a characteristic for both crypto and forex trading, and they are not for the faint-hearted. Painstakingly consider the distinguishing qualities and risks of each market before deciding on our readiness, as well as which is the best option for you. This depends solely on your risk appetite.