Forex vs Crypto Trading: Similarities and Differences
How to choose between the forex market and the crypto market?
Forex and crypto trading bring to the table divergent opportunities and risks. While forex represents a well-established market that is more regulated and less volatile than the cryptocurrency market, the crypto market is more characterised by its dynamic nature and the opportunity to obtain higher profits.
However, what is the right choice for you depends on your traits such as financial goals and risk management. Before making any decisions, educate yourself as much as possible, do your research on both markets, and think about the level of your risk tolerance.
In this article, we are going to help you decide by explaining both the crypto trading space and the forex market as well as their similarities and key differences.
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What is forex trading?
Forex trading, short for foreign exchange trading, refers to the trading activities of divergent fiat currencies on the foreign exchange market.
In its simplest terms, it can be said that forex trading is quite similar to the fiat currency exchange you do when travelling abroad – a forex trader buys one currency and sells another one, with the exchange rate constantly changing due to the laws of supply and demand on the market.
The foreign exchange market operates 24 hours a day during weekdays. All foreign trading on this global exchange market is done over the counter (OTC) which means that there is no physical exchange, and that a network of financial institutions monitor the market.
OTC trading occurs in the crypto trading space as well. If you want to find out more, why not read this article: 'What are crypto OTC desks?'.
Foreign exchange trading is well-known for its liquidity; in other words, there is a broad amount of trading going on forex markets. Liquidity presents a desired trait for any market since it enables traders to smoothly enter and exit their positions without affecting the market price in a significant manner.
Forex trading is also associated with the occurrence of leverage that is used to enhance profits; keep in mind that trading with leverage is also linked to the possibility of big financial losses.
A lot of forex trades happen between institutional investors that don’t plan to physically possess the foreign exchange currencies, but to speculate about or hedge against future exchange rate fluctuations.
For example, a forex trader decides to sell euros and buy U.S. dollars if, based on prior analysis, thinks that the bought currency will rise in value. On the other hand, a forex trader could use the forex market as a hedge against the weakening of the euro as well.
How are foreign currencies traded?
The trading is done through currency pairs. Each pair presents the current exchange rate for two trading currencies. Let’s explain this on the EUR/USD pair.
Euro (EUR) is the currency on the left and refers to the base currency while the U.S. dollar (USD) is the currency on the right and presents the quote currency. The exchange rate between these different currencies presents how much of the quote currency is needed to buy 1 unit of the base currency or how much USD is needed to buy 1 EUR.
Therefore, the base currency is always featured as a 1 unit while the quote currency differs based on the current market dynamics. For example, the exchange rate in the EUR/USD trading pair is 1.2 which means that 1 EUR can buy 1.2 USD and the other way around. If the exchange rate decreases that means that the base currency is losing its value.
All trading currencies are represented with a three-letter code which mirrors the stock’s ticker symbol. There are more than 170 currencies worldwide so it is helpful if you know the symbols of major currency pairs.
For example, the most popular forex currencies are the U.S dollar (USD), euro (EUR), the Japanese yen (JPY), the Australian dollar (AUD), the British pound (GBP), the Swiss franc (CHF) and the Canadian dollar.
What is crypto trading?
Cryptocurrency trading refers to the buying and selling of digital currencies such as Bitcoin and Ethereum on the crypto market based on blockchain technology.
In contrast to traditional currencies, the crypto space is decentralised as it excludes any intermediary between the buyer and seller as well as not being backed by any central authority. The value of crypto assets is solely determined by the interplay of supply and demand on the cryptocurrency market.
Crypto trading is associated with potentially high returns due to the volatility of the crypto market and speculative activities. Crypto markets are always open and provide a lot of opportunities for traders in the digital realm.
However, the sphere of crypto trading is linked to several risks so traders must be cautious and implement proper risk management techniques.
How does crypto trading work?
To trade crypto assets, people use cryptocurrency exchanges, either centralised or decentralised. A crypto exchange works similarly to a stock exchange where traders and investors can buy and sell digital currencies.
These digital marketplaces provide a wide range of investing and trading tools. In addition to simple buying and selling, users can engage in, for example, margin trading, lending, and borrowing as well as options and futures trading activities.
For the services they provide, crypto exchanges charge fees for the users’ transactions which are typically based on the type of trade that is being carried out or on the volume of the transaction in question. The crypto market developed rapidly, and now we have many crypto exchanges operating globally and providing various crypto products and services.
However, crypto exchanges, either centralised or decentralised, are still a novel concept so let’s explain them a bit more. These exchanges are based on providing a match for buyers and sellers. For example, when you set up your account and go through all required verifications, you can see that you can trade a wide range of cryptocurrencies.
Like forex trading, crypto trading pairs are the bread and butter of crypto trading activities. Forex and crypto trading are based on a duo of currencies that can be swapped for one another.
Crypto coins are usually paired with major cryptocurrencies such as Bitcoin (BTC) or stablecoins like Tether (USDT) that are pegged to a fiat currency on crypto exchanges. Most exchanges provide pairings of cryptocurrencies and fiat currencies such as the U.S. dollar (USD).
To learn more about the base and quote cryptocurrencies and main categories of crypto trading pairs, we suggest reading this article: 'Common crypto trading pairs explained'.
Similarities between forex and crypto trading
Since they both require a certain level of understanding and technical awareness, it might not be immediately visible but forex and crypto markets share a few similarities. Let’s take a look at what these markets have in common.
Foundational economic principles
Forex and crypto market operations are based on the economics of supply and demand. The price of any asset is based on the interplay of the laws of supply and demand.
Additionally, both forex and crypto trading can be done by using bots that provide automated trading options for forex or crypto trades.
The market's working hours
In contrast to traditional financial markets such as the stock market that work only during certain hours, forex and crypto trading is more flexible. The forex market is open 24/5, and the crypto market is open 24/7 which means that forex and crypto traders can take advantage of market movements anytime.
Traders also have the flexibility of conducting trades from anywhere in the world which take only a short amount of time in both forex and crypto markets.
Reliance on analysis
Both forex and cryptocurrency trading rely on particular types of analysis to spot market trends and predict price movements. Mainly, both of these types of traders rely on fundamental and technical analysis.
For example, technical analysis is a popular tool for both forex and crypto traders as it is used to analyse price charts and spot patterns in price fluctuations.
Key differences between forex and crypto trading
While crypto and forex trading share some similarities, there are several key differences you should be aware of. Let's explain them briefly.
Determining value
We have already stated that one of their similarities represents the use of technical and fundamental analysis as well as relying on supply and demand factors.
However, the fundamental analysis of forex trading also includes an analysis of a country’s economic data, a comparative analysis involving other countries whose currencies are being traded on the foreign exchange market as well as the influence of current political sentiment on the exchange rate.
While crypto assets are valued based on many factors, it is also taken into account how many people use it as well as analysing the development team behind a particular cryptocurrency.
Volatility
Volatility is one of the main differences between crypto and forex trading. While the crypto market is well-known for its volatility and significant price fluctuations, the forex market is rarely associated with volatility and sharp movements.
In case of significant changes in the economic or political sentiment, sharp movements can occur within the forex markets as well, but they are still considered more stable than the crypto space.
This also means that in terms of gaining profits, the crypto market provides more opportunities. On the other hand, it is easier to measure risk in the foreign market and lay down effective risk management strategies
Liquidity
The forex market is one of the largest financial markets in the world with an average trading volume of approximately $6 trillion. Forex markets are associated with high liquidity and therefore, larger forex trades don’t have a significant impact on the prices.
The forex market’s liquidity is bigger than the crypto market’s liquidity. Due to its decentralised nature, it is sometimes hard to acquire accurate numbers for the crypto market, but its daily trading volume amounts to approximately $200 billion.
Additionally, when it comes to popular crypto assets such as Bitcoin (BTC) and Ethereum (ETH), buying and selling can be done smoothly since the liquidity is high. However, when it comes to less popular cryptocurrencies, trading at the desired price could be challenging.
Security
Both forex and crypto are associated with particular risks. The key risk linked to forex trading refers to potential losses due to changing exchange rates while the crypto trading space is linked to additional risks such as scams and frauds.
Even though central banks guarantee foreign currencies in forex trading, scams and frauds can still occur. Therefore, the world of forex trading may sound a bit more stable than the crypto trading space but it is still important to be well informed.
Participants on the market
The forex market includes a wide range of international participants that are mainly financial institutions such as commercial and central banks, investment companies and hedge funds as well as retail brokers and traders.
On the other hand, the crypto market is mainly filled with individual retail investors and professional crypto traders.
The participation of institutions has increased within the crypto ecosystem, but it is still considered limited when compared to forex trading.