As a beginner in forex and cryptocurrency trading, you need to know the main differences, benefits, disadvantages, nitty-gritties, technicalities, loopholes and risks associated with these two. Only then you can become a successful trader, and earn bigger profit margins, be it in foreign exchange or crypto trade. This is for new investors, as well as existing merchants who want to hop boats and shift to cryptocurrency from forex, or vice-versa. Forex is basically the exchange of fiat/conventional currencies, whereas crypto is all about trading in digital currencies and virtual assets. In this article, we’re going to compare both these asset classes, and convey the idea of how you can best leverage it for your monetary gains.
- Trading Fundamentals
With forex, it is all about a country’s economic data, GDP, inflation, balance of trade, etc. that impacts the exchange rate of currencies like the USD, GBP, EUR, CAD, AUD, JPY, etc. Moreover, the role played by political sentiments, national issues, internal turmoil, man-made or natural catastrophe and economic crisis also impacts the exchange rate of fiat or traditional currencies, which we refer to as forex.
Whereas the fundamentals of crypto assets and cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), Dogecoin, Ripple, Cardano, Solana, etc. are based on the ‘usage value’; meaning, the actual number of people who are currently accepted crypto payments. The more the buyers, the higher the price, and when selling goes high, the price drops. This phenomenon applies for both.
- Diversity & Market Size
In this vital aspect, both crypto and forex are more or less the same. Both have access to a huge market base, with an excessive amount of assets that are traded in the virtual domain. Investors are literally spoiled with options, irrespective of the market or asset class they choose to trade in. However, it must be kept in mind that both these market domains are significantly narrow in practice, with seven popular fiat currency pairs accounting for nearly 67% of daily trading volume, whereas Bitcoin (BTC) alone accounts for 70% of the total crypto trading market. This leads to specific and directed market segments for investors to focus on.
- Liquidity
Liquidity is one important differentiation factor between crypto and forex. If you go by present data and statistics, the foreign exchange (forex) market has a greater level of liquidity than cryptocurrency. This is quite evident, with major currency pairs like USD/EUR & USD/GBP, which accounts for nearly 25% of daily forex trading volumes, and there’s always a constant and steady demand for it in the market.
On the contrary, Bitcoin is the only crypto asset that can be broadly classified as ‘liquid’, but still there’s a fixed number of digital coins or tokens in circulation. Here, the liquidity can also reduce considerably, due to the fluctuation in currency demand, which is directly related to market sentiment, supply and usage.
- Volatility
FYI, forex is a highly volatile market, and an investor should not underestimate this fact. Well, there are some popular currency trading pairs, which are considered significantly less volatile than some exotic pairs; meaning if the prices or exchange rates fluctuates considerably, traditional trading pairs like USD/EUR & GBP/USD, typically trade in sharp and predictable ranges.
Whereas in case of cryptocurrencies, it has been observed that Bitcoin (BTC) experienced bull runs and also had its share of falls in the past. Having peaked before the COVID era, and experiencing massive turbulence post 2022, BTC has shed nearly 70% of its actual value. On the other hand, less familiar assets like Cardano, Solana, Ripple, etc. are considered highly volatile, with real-time crypto prices rising and falling, without any warning.
- Risks
To be very candid, both forex and crypto have high risks associated with them. The risks in cryptocurrency trading come from extremely volatile ‘intraday’ price movements, which is portrayed by a high ‘correction’ rate in a fraction of moment. If a crypto asset is not performing up to the desired standards in a fundamental way, the price can even fall by almost 100%.
Though forex is considered comparatively stable than crypto, it also has risks, and investors can encounter losses. It is not because of the drop in prices of fiat currencies, but due to the leverage factor. The bigger the leverage ratio, the greater the losses. So, it is not difficult to understand why there’s a greater risk, even if the overall price movements and indices are stable.
- Profit Margins
In forex and crypto markets, it is the price movements of assets that impact the overall profit margins. In the world of crypto trading, an investor can make profit to the tune of 1000%, which is a reality. Whereas in forex trading, the profits are considerably smaller in margins. On the contrary, traders in crypto can earn more through buying and selling of crypto assets, rather than mining, lending or staking.
In foreign exchange trading, profit margins are usually generated through the difference in buying and selling prices of currencies. There’s always a scope for generating better profits, as forex offers better leverage than crypto. Well, higher the leverage ratio, bigger the risks.
- Asset Variety
In the exclusive domain of forex trading, investors mainly focus on popular and high-yielding currency pairs. There are 7-21 major currency pairs through which a trader can earn bigger margins, by exchanging forex, barring the minor and exotic pairings.
On the other hand, there’s a humongous variety of crypt assets and cryptocurrencies, when compared to forex. As per latest credible reports, there are approximately 23k crypto assets in the marketplace. The most popular ones are Bitcoin, Ethereum, Dogecoin, Litecoin, Solana, Cardano, Tether USDT (Stablecoin) and Matic. These are the most heavily traded cryptocurrencies. Therefore, crypto presents a bigger and better choice to investors, whereas the forex market provides limited fiat currency pairs.
Final Words
To sum it up, even though both these asset classes come with its own set of advantages and drawbacks, it is wiser to carry out a thorough research before investing in any one or both. A majority of ‘old school’ investors prefer forex trading, whereas the new generation of traders go for crypto trading due to the bigger margins associated with it, unmindful of the greater risks. Of late, a lot of forex traders are trying their luck with cryptocurrency, after assessing the differences between the two and by studying the pros & cons. This makes you aware, and help become an intelligent investor.