Every forex or crypto trader, nay, every businessman, regardless of their craft, is in it for profit. Both markets we will be looking into provide numerous chances to do just that, but they are not without their risks. So as an aspiring investor, which market would best suit you? Read on as we demystify both of these trades.
Plainly put, this is the buying and selling of currencies for profit. This is done on a decentralized marketplace known as the forex market.
Due to a large number of participants and the vast traded volumes, this market is marked by volatility. This, in turn, presents traders with the opportunity to turn a profit from these price moves. On the flip side, it also presents the risk of substantial losses where the market moves against a trader’s position.
This volatility can be traced back to economic and political news from around the world. Since it involves trading various countries’ currencies, the state of their economies and their international relations have a pronounced effect on the value of their currencies. Therefore, in addition to studying price charts, FX traders have to keep up to date with news of the world.
- It has very high liquidity, owing to a large number of institutional participants and traded volumes.
- It has decent volatility, especially before and after major news releases or during periods of high trading volumes.
- Currency prices are reliant on global events. This gives opportunities to fundamental traders to profit from the FX trade.
- Most brokers offer margin trading, which means they allow their clients to trade on leverage. This allows them to trade much larger positions with just a fraction of the capital as margin.
- There is no limit on the supply of currencies. This is because the trade involves various fiat currencies from all over the world, whose supply has no maximum cap.
Unlike the FX market, which has been in existence since the 19th century, the crypto market is fairly young, having begun with Bitcoin’s inception in 2009. Since then, various altcoins and memecoins have sprung up, bringing rise to the popular crypto market of today. In essence, this market involves the trade of digital assets named cryptocurrencies.
Despite its growing popularity, it is still, by all means, a much smaller marketplace than the FX market. With a daily turnover of under $200 billion, it is easily dwarfed by forex’s $6 trillion turnover. Be that as it may, it offers traders huge profit potential, owing to the extremely high volatility of crypto prices.
The exchange platforms for trading crypto are always open, even on weekends. Since no governments or central authorities control these currencies, their prices are driven by forces of demand and supply, as well as the perceptions created around these coins. One such perception is called the fear and greed index, which measures market sentiment.
- Provides the opportunity to make significantly large profits. For instance, BTC was trading at nearly $1000 in January of 2017, and it had reached $20,000 by December. However, it also presents huge risks of loss.
- There are no barriers to entry. Unlike the forex market, which typically requires huge capital investments to make significant profits, anyone can enter the crypto market and buy coins worth any amount.
- Transaction costs are minimal. Depending on the exchange, transaction costs are relatively lower in this market.
- Most cryptocurrencies have a fixed supply. This makes them immune to inflation. In addition, due to their limited supply, they are also more likely to rise in value as their demand rises.
- It is more volatile compared to the FX market. Crypto prices can fluctuate largely over short periods of time.
Resemblances between the two markets
Though they take different forms, both markets deal in the trade of currencies. The only distinction is forex involves physical fiat currencies while crypto trading involves digital currencies. The participants of both markets range from individuals, businesses to other institutional investors. What’s more, both of these markets rely heavily on the internet. The forex market existed before the internet, but the internet really blew it up. The digital nature of crypto assets makes them impossible to trade without the internet.
1. Nature of exchanges
Forex trading, for the most part, utilizes over-the-counter trading. This involves using a broker to match both parties in a transaction. The strict regulation involved in this market makes it unsuitable for traders to directly access the market unless through a broker of some sort. In so doing, the trader incurs brokerage costs which vary according to the prevailing conditions in the market and the currency pair they trade. On the plus side, OTC trading increases the liquidity of this market.
Crypto trading utilizes exchanges on which both sellers and buyers interact and trade their assets. The exchange will still take a cut, but not as much as brokerage fees often are. Exchanges also offer peer-to-peer trading where traders exchange assets without a middleman, which further reduces trading fees.
2. Nature of currencies
Fiat currencies traded on the forex market are subject to governmental control, as well as the economic and political environments of their countries of origin. Therefore, traders often have to undertake fundamental analysis in tandem with technical analysis when trading these currencies.
Cryptocurrencies, in contrast, are influenced by factors such as their utility and the speculation by investors. Since these currencies are essentially after the same goal, the competition between them is often steep. However, no central authority controls their value.
Which market is more profitable?
The truth is, none of these markets is more profitable than the other. Some may argue that crypto is the more profitable option as it presents higher volatility and, consequently, higher profit potential. However, with the high-profit potential comes a higher risk of loss. The forex market is relatively more stable and more liquid, which means you’re more in control of your investment. The best way to benefit from either of these markets or both is to do extensive research into the assets you’re trading and the market forces behind their price moves.