As cryptocurrency trading grows in popularity, investors are starting to wonder which is the better route to take – crypto trading or FOREX trading. They are also asking themselves if they could master both fields at the same time to get the best of each.
In this short article, we will examine this question from a range of angles. We will guide you, the investor/trader, by highlighting the key differences and similarities between these two widely popular investment instruments.
By the end of the article, we envisage that you will be better placed to decide which instrument to favor as you construct your portfolio. We have also included a frequently asked question section that covers some of the commonly asked questions about these two asset classes.
Similarities between Crypto Markets And FOREX Markets
The world’s trading markets are very well developed. As a new investor, getting into trading is relatively easy as all you need is a smartphone or a laptop, and a stable Internet connection. You will be vetted by the online broker of your choice, and you will need to supply key identification information.
From that point, you can trade both crypto and FOREX with few restrictions. Both markets are driven by the dynamics of supply and demand. This means the price climbs when there are more buyers than sellers, and then falls when everyone is selling. You will learn quickly that FOREX is the more established trading asset while crypto is still relatively new.
If you have not traded crypto yet, its volatility may surprise you. Crypto trading is only a decade old, and its extreme sensitivity to market sentiment is part of its development as a financial instrument. FOREX, in its own way, is also moved by market sentiment, but on a much more macro level. Where cryptos might swing by a few percentage points on the back of a breaking crypto scandal, individual FOREX currencies are prone to minor movements or slippages relating to global political and economic news. It will pay you to become better at understanding the way the global economy works.
To start, let's get some of the most important similarities between crypto and FOREX out of the way:
Both instruments respond to market forces of supply and demand.
Both instruments respond to market sentiment.
Both assets are high touch, meaning they will need active monitoring, unlike, say, long-term bonds that you buy and leave alone for extended periods.
It is easy to trade and handle transactions on both instruments with a good broker.
Crypto Trading vs. FOREX Trading
Crypto trading, just like FOREX, is about trading currencies. FOREX trading is older and more established and relates to trading currencies that are legal tender, known as “fiat” currencies. By contrast, Crypto is about trading digital currencies like Bitcoin and Ethereum.
FOREX is the most liquid market in the world. The FOREX market is made up of major global currencies being traded against each other, known as major pairs, or the currencies of small and developing nations being traded against each other, known as exotic pairs. The rules of the FOREX trade have long been established and it is a relatively stable trading instrument.
Crypto, by comparison, is a newcomer on the scene. Due to the wild swings that often come with crypto, traders can make lots of money quickly, but they can also lose it quickly.
The FOREX trading market is characterized by intermediaries, brokers and other players that supply complementary services like liquidity, insurance and clearing. These “middlemen” attract fees every step of the way, diluting your profits. Crypto, on the other hand, is still largely free of many of these intermediaries. Let’s understand the two landscapes a little better.
Cryptocurrency Trading Landscape
Cryptocurrencies are defined as a new payment form underpinned by blockchain technology. This digital asset allows decentralized peer-to-peer transactions between parties all over the world. Cryptocurrencies are welcomed by many who see them as a necessary challenge to the old order of international financial transactions.
Crypto is not controlled by central banks or governments, giving individuals access to a market in which they have autonomy. Crypto also offers itself up to the unbanked, as you do not need all the identifying information that is required with traditional currencies. The digital asset is growing fast, with as many as 4,500 types of crypto in existence at the time of writing. More are added regularly. The price of Bitcoin, the largest single crypto, has surged more than 40,000% since its introduction in 2009. Most cryptos use highly secure blockchain technology and cryptography that are near impenetrable methods of transferring and storing funds.
There is great excitement among investors for the future of crypto as they believe it is inevitable that it takes up a mainstream role in the global financial system. Unfortunately, or fortunately for speculators, cryptocurrencies are highly volatile. This is because they face almost daily attacks on their legitimacy and place in the financial world.
Cryptos do not have a central controlling authority, and research and development of its tools is driven by early investors and early adopters. Crypto is still in a precarious position, meaning that until there is a groundswell of support and acknowledgement at governmental levels, it will remain as the upstart technology form that is prone to volatility.
Differences between Crypto Markets and FOREX Markets
There are key differences to keep in mind when you assess the two markets:
Number of Instruments
The FOREX market includes major currencies like the USD, the EUR, the GBP, the JPY, and the AUD. Pairing a major currency with an exotic currency that is subject to more volatility could yield bigger profits, but also bigger losses.
A good online FOREX broker will normally have over 50 FOREX pairs available to trade, which takes care of the main combinations. There is enough variety here for FOREX traders to be satisfied.
With cryptos, the thousands of crypto types already in existence are constantly being expanded as it is relatively simple to set up a new crypto with blockchain technology. In the same way that FOREX traders often stick to a small group of major currencies, many crypto traders stick to established cryptos like Bitcoin, Ethereum, Ripple, Tether and Binance Coin. It should be clear that on a practical level, it is impossible to seriously trade any more than a few dozen assets at any one time.
FOREX is the largest financial market in the world, with recent estimates putting the daily trading volume of FOREX at $5 trillion. No matter your position size, you can always buy or sell your chosen instrument without any real slippage. This is part of the benefit of taking part in a large and established market like FOREX. It is mature enough to be well capitalized and regulated, and liquidity is never a problem.
Crypto is not nearly as liquid. By comparison, its annual trading volume is only $3 million, not even close to the daily volume of FOREX; and almost half of all crypto volume is made up of Bitcoin. This disparity in market size points to the immaturity of crypto, which naturally affects the liquidity of the ecosystem.
Difference between Coins
There are already a great many crypto coins available, and the number is always on the increase. FOREX has a limited number of currencies that are well proven. No material change to this number is expected, unless a raft of new countries and currencies comes into existence, which is highly unlikely.
The large (and growing) number of crypto types means that traders always must be on their toes to keep up with the sheer range of choice. There is a downside to this variety as traders can spread themselves too thin. It is difficult to argue that having the choice of thousands of cryptos, many of them materially insignificant, is a gamechanger for traders.
Emergence of Non-Fungible Tokens (NFT)
NFT is an emerging group of cryptos that offers some exciting opportunities. If something is non-fungible, it is unique and cannot be duplicated. Fiat money in the form of bills is an example of a fungible item. You can exchange one Euro for another and be no worse or better off.
Examples of NFT are rare sports memorabilia. They are unique and cannot be traded for another identical item because an identical item does not exist. NFT cryptocurrencies are like other cryptocurrencies in that they are also decentralized and secure. However, the main difference is that they are non-fungible and non-divisible, such as entrepreneurs launching art, property and sports-based NFTs for traders to speculate on. FOREX trading cannot offer the same investment possibilities.
As we have stressed, crypto-based investments are much more volatile than FOREX investments. The volatility of cryptos can see traders making runaway profits or losses. Traders with high levels of risk tolerance (and a lot of money) can go big on cryptos. There is a thrill associated with the possibility of making huge profits that is genuinely attractive to many traders.
Crypto markets have gained popularity because they can offer enormous profits. Many investors are not in it for the health or future of the crypto market per se. They are following a big pay day, and this can be made with cryptos.
FOREX trading also offers the opportunity for outsize profits, but in a different way. Traders can use leverage to magnify their winnings, though in some markets like Europe, leverage is tightly controlled by regulators as it can lead to devastating losses. In less regulated markets, traders can trade FOREX with high leverage and do very well.
The crypto market is open 24/7, which means you can trade without taking a break. The FOREX market is open 24/5 because these are big institutions with conventional working hours involved. While the crypto market never sleeps, many online brokers don’t offer crypto trading 24/7. They find it makes more sense to align their crypto services to the operating hours of the other assets they deliver, so they default to 24/5.
Crypto markets are admittedly less secure than traditional FOREX markets. This is true to the extent that FOREX is regulated and monitored at governmental levels. Notwithstanding, crypto market stakeholders also understand that their market cannot be forever associated with high levels of risk and little control. For this reason, crypto exchanges take their security seriously, even though doubts from commentators persist.
Cryptography and the blockchain system are inherently secure. Any fraudulent activity currently taking place comes from criminals taking advantage of loopholes in a developing system. However, it is getting more secure. Binance is the world’s largest crypto exchange. It is listed on the NASDAQ and is, therefore, subject to all controls associated with stock exchanges. More players in the crypto ecosystem are putting themselves up for scrutiny.
Choosing between Crypto Trading and FOREX Trading
It really depends on where you are in your trading journey and what level of risk you are willing to take. Each trader has a different set of requirements. For example, you could be affected by any of these factors:
Your financial goals.
How much money you have to spend.
Your trading style.
How much time you can devote to trading.
A good trader knows they must keep a regular watch of their portfolio where there is constant change. Investing in either crypto or FOREX is not a passive exercise. Whichever instrument you choose to trade, you should know that each has its own positive and negative elements.
Crypto can come with amazing rewards, but also heavy losses as it is a newer and much more volatile asset. Yes, there is similarity between the two, as they are both electronic forms of trading currency, but the scale, structure, number of stakeholders and behavior of each is different.
It is always best to perform a thorough analysis between the two, but if you cannot choose outright, you don’t have to, as you can get the best of both worlds. Indeed, many online brokers have seamless interfaces that allow you to switch between crypto and FOREX trading without skipping a beat.
There are key differences between the two financial instruments and you should perform thorough research before making a final decision. This article has presented the key similarities and differences, and you will do well to find more information beyond the foundational elements we have discussed. From there, it is all about what type of investor you are, as well as your personal circumstances and goals.
Are cryptocurrencies regulated?
No. Cryptos are not regulated, but legislative policy positions are currently forming in many markets, especially in the US. Meanwhile, some countries, like China, have banned cryptos entirely, making regulation moot.
Which asset makes more profit - crypto or FOREX?
Due to its high volatility, crypto can offer large profits, but this is not to say you cannot make large profits with FOREX as you can trade on leverage.
Do I need to own crypto to trade it?
No. Since you are not actually buying the cryptocurrency outright when you trade spot cryptos, you do not own the underlying asset, nor do you need to.
What is the minimum trade size for cryptocurrencies?
The minimum trade size is normally one unit of the cryptocurrency. Cryptos are also divisible into smaller units, but most brokers defer to one unit for trading purposes.
Can you trade cryptocurrencies traded on leverage?
Yes. Many brokers allow you to trade this already potentially profitable asset on leverage. Remember that with increased leverage comes increased risk.
Can I short cryptos?
Yes. Shorting or selling is a simple process when buying with spot cryptos. Shorting is more difficult to maintain as a strategy when you purchase cryptos outright, which is also an option.
When are cryptocurrencies available to trade?
Crypto markets are open 24/7, although some brokers limit trading to 24/5 as it aligns with their operations for other asset classes.
What are the risks of cryptocurrency trading?
Cryptos are highly volatile. Traders face significant losses during crashes. Cryptos are also exposed to cyber threats and disputes over mining contracts and permissions.
Adrian Ashley is a seasoned business and finance writer. With a corporate career spanning over 20 years, he has developed deep experience in such diverse areas as investing, business, finance, technology and macroeconomics.