Over the past few years, cryptocurrencies have become mainstream, and many traders wonder whether they should focus on crypto markets instead of forex or try to have the best of both worlds. This article explains the similarities and differences between these two asset classes so that you can make an informed decision.
Similarities Between Crypto Markets and Forex Markets
To start trading, you’ll need a trading account and a modern electronic device with a stable internet connection. You can easily learn the basics of crypto trading if you have experience with trading forex and vice versa. Charts are widely available and execution is fast, so that you can concentrate on your trading.
Like forex markets, crypto markets are driven by the supply-demand balance. The price moves higher when there are more buyers than sellers and drops when sellers overwhelm buyers. Thus, you’ll be able to use familiar indicators and chart patterns when trading crypto.
Differences Between Crypto Markets and Forex Markets
While crypto trading looks very similar to forex trading on the screen, there are many differences that will be discussed below.
Number Of Available Instruments
Inforex, traders typically concentrate on main currency pairs (EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, NZD/USD). Some traders prefer to work with exotic currency pairs, which include a major currency and a currency of a developing economy like South Africa or Mexico.
Currently, there are more than 11,000 different cryptocurrencies, and the number keeps growing. Some of them are actively traded, like Bitcoin or Ethereum, but many cryptos are only known to hard-core crypto enthusiasts.
There are many instruments to choose from in crypto markets, whereas forex markets can occasionally experience periods of calm trading for days or even weeks.
It is impossible to track all cryptocurrencies, so traders will have to choose a finite number of coins to track. Thus, traders will still be working with a limited watchlist.
Forex is an extremely liquid market, and forex trading volume exceeded $6.6 trillion in 2019. Regardless of your position size, you will be able to easily buy or sell your chosen instrument without material slippage. This is a big advantage as you will always be able to get out of the trade at a price that is equal or very close to the price that you see on the screen.
This is not true for most cryptocurrencies. The total crypto market cap is less than $2 trillion, and more than 45% of this market cap is taken by Bitcoin. For most cryptocurrencies, trading is not nearly as active as in Bitcoin, so traders may have some trouble getting out of the trade at a desired price.
Huge Difference Between Coins
Due to the enormous number of available cryptocurrencies, there is a huge difference between various coins. Anyone who is willing to trade lesser-known cryptocurrencies will have to dive deep into their fundamentals.
As noted above, there is no way to track all opportunities in crypto markets, so traders will have to focus on coins that they understand well. This makes the size of their trading watchlist similar to the size of a typical watchlist for forex traders.
Cryptocurrencies are very volatile while forex markets are more stable. The world’s leading cryptocurrency, Bitcoin, started this year at $29,000 and moved up towards the $65,000 level before pulling back to $30,000 and rebounding towards $45,000. Smaller cryptocurrencies can make huge moves within short time frames.
Such moves are rare in forex markets and mostly occur in exotic pairs. In this light, it is easier to control risk on forex, but the profit potential is bigger in crypto markets.
Crypto markets gained popularity as they offer opportunities to make outsized profits. In trading, risk increases together with profit potential, so traders should be prepared to take bigger risks when trading cryptocurrencies. In fact, the value of many coins may ultimately drift to zero if the projects do not work well or capital flows into more established coins, which is the norm for more advanced stages of developing markets.
It should be noted that traders can always increase their potential in forex trading by using leverage. Leverage is a double-edged sword, so risks also increase, but traders can manage risks by choosing the appropriate amount of leverage for their trades.
Crypto market is open 24/7 while the forex market is open 24/5. This is a huge difference from a lifestyle point of view. Forex traders can switch off their screens and enjoy their weekends. Crypto traders should always be in touch with markets as cryptocurrencies often make big moves on weekends.
While both markets are open 24 hours, forex market activity follows a regular pattern as forex trading is driven by big institutions. The situation is different in crypto markets as bigger institutions have only recently started to increase their activity, and many coins are driven by individual traders or small crypto investing firms.
Crypto markets are still in their early development stages, and appropriate regulations are currently developed in various countries. Crypto traders have to deal with counterparty risks (scams occur, which is natural for booming markets) and hacking risks. Just recently, hackers have stolen $600 million in Poly Network (oddly, they have returned about half of the stolen assets at the time of writing this article).
In contrast, the forex market is heavily regulated, so forex traders face fewer risks. Forex traders should still check the history of their broker and the appropriate regulations in the country where the broker is registered. As the forex trading industry is well-developed, scams have been mostly eliminated.
Choosing between Crypto Trading and Forex Trading
Traders should check their financial goals, available capital, trading style, and lifestyle demands when choosing between crypto and forex markets.
The best way to make an informed choice is to try both crypto trading and forex trading with small accounts. After a few months, you’ll see which market suits your needs.
Don’t forget, you aren’t required to choose between crypto trading and forex trading, which means you can take advantage of the opportunities available on both markets.
Forex Trading involves significant risk to your invested capital. Please read and ensure you fully understand our Risk Disclosure.
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