Forex and cryptocurrency trading are popular part-time activities among many people. Indeed, the daily volume of forex traded over $5 trillion, while cryptos worth more than $100 billion are traded every day. In this forex versus crypto trading comparison, we will look at the better option between the two.
What is forex trading?
Forex trading is the process of buying and selling currencies with the goal of making a profit. A broker works as an intermediary who provides the technology and liquidity to facilitate the transactions. Forex traders typically buy currency pairs they believe will rise and short those they believe will decline.
They use technical and fundamental analysis to predict the future direction of a currency pair. Fundamentals show overall market conditions like news, geopolitics, and economic calendar and can help to determine whether a pair will rise or fall. There are hundreds of pairs traded in the market. However, because of low liquidity among most minor currencies, most traders focus on the major ones like the USD/JPY, USD/CHF, and EUR/USD.
Currency pairs are moved by several factors. First, the prevailing economic conditions of a country can affect the value of its currency. For example, if a country’s economy weakens, its respective currency could drop as investors abandon it.
Second, the actions of the Central Bank tend to have an impact on a currency. For example, in 2020, the US dollar declined against other currencies after the Federal Reserve slashed interest rates and launched an open-ended quantitative easing.
Third, currency pairs are moved by geopolitical issues. For example, the US dollar tends to rise when there are geopolitical tensions because the currency is often seen as a safe haven.
Finally, commodity prices usually impact some currencies. Some of the most popular commodity-linked currencies are the Australian dollar, Saudi riyal, and Nigerian naira. The Australian dollar tends to lag when the prices of key commodities like iron ore and copper perform badly.
Other factors that move currencies are macroeconomic conditions like inflation, retail sales, and employment numbers.
What is cryptocurrency trading?
Cryptos are digital currencies, also known as coins or tokens, created using blockchain technology. Their history started in 2009 when Satoshi Nakamoto unveiled Bitcoin. Today, the number of coins has surged to almost 10,000, with BTC being the biggest one. It is followed by Ether and Binance Coin. Other leading coins are Cardano, Chainlink, and Bitcoin Cash.
Crypto trading is similar to forex trading in the aspect that the traders hope to identify market movements. They buy a cryptocurrency if they believe that its price will rise and vice versa.
The price of digital coins is moved by several factors such as a tweet or statement by an influential person or company and monetary policy conditions. For example, in the first quarter of 2020, Elon Musk helped push the prices of Bitcoin and Dogecoin higher. Similarly, the prices of digital currencies rallied during the coronavirus pandemic after the Federal Reserve slashed interest rates and unleashed its biggest quantitative easing program on record.
Crypto prices are also affected by network updates. In most cases, the price of a digital currency tends to rise ahead of a major currency. In 2020, the price of Ethereum rallied ahead of the launch of Ethereum 2.0, which shifted it from a proof-of-work (PoW) to a proof-of-stake (PoS). Similarly, Bitcoin rose ahead and after the 2020 halving event.
Crypto trading happens through exchanges like Coinbase, Binance, and FTX. Popular forex brokers like OctaFX, FxPro, and easyMarkets have also introduced cryptocurrency contracts for difference (CFD).
Forex vs. cryptocurrencies differences
In general, the process of forex and crypto trading is the same. If you can trade forex, you can trade cryptocurrencies as well, since the forces that move them are almost similar. Besides, a chart pattern like ascending triangle is a sign of continuation regardless of the asset class.
Still, there are several key differences between the two. First, there are more tradable assets in cryptocurrencies than in forex. According to CoinMarketCap, there are more than 9,800 cryptocurrencies in the world. At the time of writing, these currencies have a market capitalization of more than $2.28 trillion. This is in contrast to the currently available currency pairs.
Second, cryptocurrencies are typically traded every day at any time. All exchanges like Binance, Crypto.com, and FTX are never closed. This is helpful, especially when you are a part-time trader who prefers to trade during the weekend. The forex market, on the other hand, is usually open for 24 hours from Sunday to Friday.
Third, in most cases, forex trading is usually relatively cheaper than cryptocurrencies. Most forex brokers don’t charge a commission for their trades. Instead, they make money through the spread, which refers to the difference between ask and bid prices. This pricing tends to be relatively cheaper than the one that is commission-based. On the other hand, cryptocurrency trading tends to be relatively expensive since most exchanges consider the volatile nature of digital assets.
Fourth, when trading cryptocurrency CFDs, you have access to relatively lower leverage than currencies. For starters, leverage refers to the loan that is offered by the broker to help you maximize your profits. In Europe, in accordance with the MIFID regulations, brokers can offer a maximum leverage of 1:33 to forex traders. Still, advanced cryptocurrency traders can make money trading perpetual contracts that have higher leverage.
Finally, crypto exchanges are usually riskier than those dealing with currencies. This is partly because most crypto exchanges are newer than those dealing with forex. Also, the regulatory regime of digital currencies is not as tight as in forex.
Forex and cryptocurrencies are popular assets that you can trade today. As seen, there are pros and cons of trading the two assets. For example, the cost of trading cryptocurrency tends to be relatively higher than that of trading currencies. Also, forex offers higher leverage than cryptocurrencies. Still, it is possible to make a lot of money trading either of the two. All you need to do is to know how to do your analysis and manage your risk well.