Cryptocurrency vs. Forex trading: Pros and cons

Cryptocurrency vs. Forex
Cryptocurrency vs. Forex trading: Pros and cons
October 22, 2018 Kiyoko Hill
Cryptocurrency vs. Forex

If you’re looking to start currency trading, you’re probably wondering…

“What’s the difference between currency trading and cryptocurrency trading? And which one is better?”

First fact: The foreign currency exchange (or Forex) market and the cryptocurrency market are separate.

These markets have unique aspects that make them appealing to traders.

The Forex market is the largest, most liquid market in the world. It’s a decentralized global market, where all the currencies in the world are traded.  As a global market, the Forex is influenced by many factors, such as political announcements, inflation numbers and jobs reports. On average, $5.3 trillion is traded in the Forex per day.

Cryptocurrencies, while often referred to as “digital currencies,” aren’t the same as currencies like the U.S. dollar or the Japanese yen.

While currencies in the Forex market are backed by a centralized government, cryptocurrencies are not. They are hosted online and backed by a peer-to-peer authentication process that prevents you from using a cryptocurrency (such as a Bitcoin) more than one time.

The network also generates cryptocurrencies in exchange for people working to secure the network and check entries in exchange for digital cash. These people are referred to as miners.

The global cryptocurrency market has previously reached a market cap of more than $700 billion. Some experts predict that number will only climb.

Cryptocurrency trading is similar to forex trading in that they both involve exchanging a currency for another currency. However, the cryptocurrency market and the forex market are influenced by different factors.

Historically, the crypto market is more unpredictable and volatile.  For extreme foreign currency couples in the Forex, volatility is around 1%, and .5% for most of the established currencies. To compare, Bitcoin has a volatility around 5% to 15%.  That’s why cryptocurrencies can be appealing to traders with a high risk tolerance.

Essential features of Forex and Cryptocurrency

Forex Trading

Cryptocurrency Trading

Unlimited supply.

As the Forex market consists of the world’s global financial markets, there is a unlimited supply of currencies available to trade.

Finite supply available.

Limited supply increases demand. Since there is a cap on how many cryptocurrencies can be created, the value often increases. For example, with Bitcoin.

Leverage.

Forex trading allows for leverage of 50:1, meaning you can take a Forex trading position worth $100 for only $2. However, this also means losses can escalate rapidly.

Quick, permanent transactions.

As central banking and other third party vendors don’t take on transaction fees, cryptocurrencies have low transaction costs.

Very high liquidity.

The Forex has more participants than any other market, so it is quick and simple to trade even large volumes of currencies. One single investor cannot massively influence the Forex like they can with the stock market.

Massive potential gains for investors.

Consider this: $1,000 invested in Bitcoin in 2013 would be worth over $400,000 less than 5 years later. The chance for higher rewards also means larger potential risks.

Influenced by global news, announcements, earnings reports, etc.

This can make it easier to find trading opportunities. Traders plan for these events ahead of time and can use techniques for fundamental analysis that are historically proven.

Available to anyone.

Levels the playing field by providing investment opportunities between parties anywhere in the world. This allows individuals even in undeveloped countries without nearby banking institutions to use and trade cryptocurrencies.

Both Markets

Can have high volatility.

This is both a positive and a negative. Volatility is present in both the Forex and cryptocurrency markets. However, the higher the risk, the higher the reward.  Though cryptocurrencies tend to wildly fluctuate, both the cryptocurrency market and the Forex market can be subject to a huge variation in price in a short period of time.

Bottom Line

Trading either cryptocurrencies or foreign currency involves a high level of engagement. It requires effective equity planning, proper risk-management, perseverance and a strong desire to continuously learn. But there’s no doubt trading either of these popular markets can lead to remarkable opportunities for an educated investor.

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