The financial world has expanded quite a bit in the past two decades with the addition of crypto trading. This article looks to compare this asset class to buying and selling a currency pair as part of forex trading.
Both of these are tradable assets, and one huge difference between the two is the lack of regulation within the crypto market which allows projects that may not be genuine to be a part of the market.
A lot of Forex and CFD brokers have started to offer trading services in major liquid crypto pairs like Bitcoin, Ethereum, Tether, and Ripple. These exchanges make it easier to trade cryptocurrencies right after you open an account with major brokers like eToro.
Forex Trading vs Crypto Trading
What is Forex Trading?
Forex is short for Foreign Exchange and constitutes a global market of exchange that includes national currencies. The forex trading market has the highest trading volume and liquidity amongst the other legacy markets.
There are daily transactions of approximately $6.6 trillion, and the market contains more than 150 major currencies.
When the currency of a country is quoted against the US Dollar as the base currency, they are referred to as “currency pairs”.
The pairings that do not involve the US Dollar are called “currency crosses” and usually include the currencies that have the highest trading volumes, like the European Euro, the Japanese Yen, and the British Pound.
In the forex market, these pairs are traded as Contracts For Differences (CFDs) which means that you will not have legal ownership of any of the currencies you are trading.
There is only an agreement between you and the trading platform to make a profit or loss by a defined amount according to the movement of the broker’s price feed.
Even in the case that you take a “spot” trade as a forex trader on the platform, there is always legal documentation in place which ensures that you will never have to take delivery of the actual currency being traded.
The forex markets are very sensitive to events around the world which means that your trades can be affected adversely if you choose to trade the release of economic data, the times when central banks release or update their monetary policies, or other macroeconomic and political events.
What is Crypto Trading?
Cryptocurrencies are digital currencies that can be created by anyone with the knowledge or intent to make one. In the past private individuals, collectives, companies, and some banks have created cryptocurrencies for differing uses.
Currently, only a handful of countries recognize them as legal tender, so the use of these cryptocurrencies is not as widespread as currencies provided and recognized by nation-states, and they can’t be readily exchanged for goods and services.
There are already a lot of businesses that accept payment in the form of cryptocurrency, and they will later be considered industry leaders when there is more acceptance of this form of payment.
One of the USPs of the cryptocurrency revolution is the underlying technology, namely the blockchain technology that underpins the whole operation and keeps an unchangeable record of the transactions that occur daily using a distributed and decentralized ledger.
If you are in the crypto markets to buy and sell currencies, you will make use of the blockchain without realizing it.
The system is decentralized and encrypted so that your anonymity is maintained and the only thing linking back to you is your wallet address.
The blockchain also regulates the other rules of the coin, like the supply and the integrity of the ecosystem, making sure that no hackers can take control of the operation.
On average, the crypto market in 2020 had an average daily trading volume of $4.1 billion, and it peaked in the bull market of May 2021 at $516 billion, which makes it one-twelfth of the current trading volume of the forex markets.
The first digital currency was started in 2009 and named Bitcoin by its mysterious creator named, Satoshi Nakamoto. Today, Bitcoin is the largest and most famous cryptocurrency.
Which one is better, Forex or Cryptocurrency?
This question does not need or indeed have a definite answer as it depends on what your area of expertise is, and how much time you can give to the market. Overall the forex market is comparatively well established, and thus there are lesser chances of getting cheated.
With the crypto market, if you venture outside of the top 500 cryptos, there are chances you might lose all your money if the project is not managed well or makes mistakes at their end.
A prime example of this is the debacle of the Luna project, where investors lost millions of dollars and now have no recourse to get it back.
The entry price for forex trading is low as platforms are ready to offer good opportunities for new entrants, whereas, for crypto, even the ones that offer the service allow you to trade Bitcoin and Ethereum majorly.
The forex market is open all through the week but closed on the weekends, whereas the crypto trading market remains open 24*7.
In terms of leverage and volatility, the forex markets have comparatively low volatility, and thus most trades are taken with high leverage. The crypto market is highly volatile, so trades are then taken with low leverage.
At this time, it is an understood fact that trading is not for everyone, and most traders do not make money regardless of the markets they trade. It is a good idea to understand the risks involved and learn to analyze price charts before getting a trading account.
Which is Bigger & More Liquid- Forex or Crypto?
The forex market is still the frontrunner when it comes to which of the market size is bigger and more liquid, but the crypto market has been catching up in the past few years.
The forex market remains large as the market participants are big international entities that use the market to exchange foreign major currency pairs in real-time and to process international settlements. These include companies, banks, investors, funds, and individuals.
The crypto markets are still in their infancy compared to the behemoth that is the forex market.
In theory, though, both forex and crypto markets have a large number of potential assets to trade, as the forex market includes all the world’s currency pairs and crosses. The crypto market also gives you the option of thousands of crypto to trade.
In practice, though, almost all of the forex trading activity takes place between eight main fiat currency pairs, and nearly all of the crypto trading activity is confined to a handful of digital coins, with Bitcoin alone making up close to 70% of the trading volume.
In terms of liquidity, the forex market takes the cake again from the crypto trading market.
Forex has a total market capitalization of close to $6.6 trillion and is held in a wide range of assets when compared to cryptocurrency, where $1-$1.4 trillion out of the $2 trillion of overall value is held in Bitcoin, and the other products do not have a lot of investment in them.
To trade or invest in cryptocurrencies, you can choose to get legal ownership by purchasing them from decentralized and centralized exchanges for a minimal fee and transferring them to a self-custody wallet for safekeeping.
Another way that is used by trading platforms is the use of Contracts For Differences (CFDs), where the ownership of the crypto assets is virtual, and your bet is on the price fluctuations. You will make money if the asset’s price goes in your trade’s favour, or lose money in case it does not.
With CFDs, you do not have to worry about the security and storage of your assets as you only have virtual ownership over them.
Which is More Profitable- Forex or Crypto?
If you are a novice trader about to start trading, there are high chances that the answer is neither is going to be profitable for you as you are yet to practice your technical analysis skills.
Depending on what financial quarter it is, 65-75% of the forex traders lose money, and a lot of this is down to the misuse of leverage.
Leverage as a tool will magnify your losses and gains and so when it is used and the market moves unfavourably, a margin call can be triggered quickly. This can wipe out a trading account very quickly.
With high-speed computing, high-frequency trading, and decentralization becoming more commonplace, arbitrage opportunities are easier to take advantage of between two different dealers or exchanges in both the forex and the higher-risk crypto market.
In arbitrage, you will buy one fiat currency at an exchange and then sell it at another and earn the difference between the two prices.
KYC Requirements- Forex or Crypto?
Crypto and Forex trading both have different requirements for KYC, and it is also dependent on the country you are in.
For forex trading, verification documents are required to confirm your identity and financial status.
KYC documents that work would be a passport, a national ID card to confirm your real name, date of birth, place of birth, and a recent utility bill to confirm details like the home address and phone number.
Most brokerages use this service called B2Core, where all these relevant documents can be quickly submitted for the verification process, and the forex account can be registered and passed on to the trader quickly.
Because it is required to be done according to the relevant regulators, every brokerage needs to offer these verification services, and it is in their favour if this process is as bump-free as possible.
While the cryptocurrency market matures, regulators across the world are pressuring firms that offer cryptocurrency trading as a service to comply with the same rules as a central bank.
There is an ongoing debate about the balance between privacy and security, proper KYC measures help to prevent the illegal use of cryptocurrency markets.
As a notoriously anti-KYC community, the asset class of crypto creates a secure environment for crypto traders that are looking to trade crypto anonymously and without submitting any KYC documents.
Crypto firms that do not require KYC will not be able to pass on your personal information to any central authority in case they come calling and regulators for digital assets do not find this acceptable.
One place where KYC is not a requirement is the world of Decentralized Exchanges which suggests that people who trade with smart contracts are not needed to disclose their identities.
The regulations do not apply to the creators of the DEX as they are not financial intermediaries and the users trade directly with one another by leveraging the power of the DEX.
Which is More Volatile- Crypto or Forex?
Both crypto and forex trading are volatile, but the crypto trading participants tend to experience this more than trading traditional currencies. Crypto trading is highly likely to be affected by small market movements and can lead to a lot of fluctuations in one trading session.
Forex trading pairs have a high amount of daily trading volume courtesy of forex brokers, and institutional investors can make a huge investments to take advantage of the market’s movements.
Forex trading is helped by the fact that there are frequent movements within narrow bands and the high volatility rate attracts traders looking to take advantage of it.
Both markets provide ample trading opportunities for their traders, and the fiat currencies are one for people looking to start trading.
With a higher market cap compared to the crypto market, both the supply and demand sides have a lot of liquidity that leads to reasonable prices when it comes to spreads.
Between both markets, the major difference is that crypto is pretty volatile and more expensive to trade courtesy of the exchange rates and fees. The potential profits although make up for this as you can make larger profits in crypto rather than in forex markets.
Bitcoin and Ethereum respect the resistance and support levels that come from technical analysis much better than the major forex pairs but the smaller cryptocurrencies can be very volatile and do not respect the basic rules of technical analysis.