What is the Difference between Forex and Cryptocurrency Trading?

Finance has a wide range of spectrum to invest or trade money in. However, new forms of trading have also opened new horizons. Between the two cryptocurrency trading is relatively fresher than forex trading. But there are a lot of misunderstandings, taboos, and differences that people still haven’t digested.

Considering the fair share of possibilities of such events, what is the difference between forex and cryptocurrency trading? Before jumping onto some serious stuff, let’s understand the basics.

Understanding the basics of Forex and Cryptocurrency Trading

Foreign exchange trading also called forex trading consists of the selling and buying of currencies at quoted prices. Currency trading happens almost globally, leaving some exceptions. Almost every currency in the world trades like the USD (U.S. Dollar), GBP (The British Pound), INR (Indian Rupee), JPY (Japanese Yen), and CNY (Chinese Yuan). 

Forex trading consists of pairs of currencies. These pairs form a very powerful force. Some famous forex pairs are EUR/USD, GBP/USD, USD/JPY, and AUD/CAD. Although the forex market is the biggest in the world, individuals are a part of it along with governments, banks, and corporations or hedge funds.

Meanwhile, cryptocurrency is a digital currency which is intangible. Cryptocurrencies are created out of computers or sophisticated hardware. It works as a medium of exchange similar to cash. It is also used to make payments. Cryptocurrency trading is a global phenomenon.

Some of the famous cryptocurrencies are Bitcoin, Ethereum, Lite Coin, Solana, and Dogecoin. These are traded in place of cash, most famously USD. Due to the traction created, the line of participants includes several governments, corporations or hedge funds, and individuals. Due to the higher volatility, corporations or hedge funds still take a cautious view of the cryptocurrency market.

Yet, the differences make these two markets unique in their own way.

3 Differences between Forex and Cryptocurrency Trading

Forex and cryptocurrency trading are certainly not related to each other. Their basic understanding, market dynamics, and a whole lot of factors make them different from each other.

Volatility and Risk:

Volatility and risk are part and parcel of trading. But understanding the level of risk is also crucial. Volatility and risk are related to each other. When volatility is high, the risk is high but also the reward. Currency trading is more volatile than stocks. However, the volatility reduces when compared with cryptocurrency trading. Because the regulations are much more widespread than the cryptocurrency market.

Meanwhile, the cryptocurrency market is extremely volatile. Just in the space of one year from March 2023 till March 2024, Bitcoin, the leading crypto, has jumped from $20,000 to $70,000. Most traders don’t realize that if a cryptocurrency can go high like crazy, it can also fall like crazy. So, the risk and volatility is poignant.

Trading Hours:

The foreign exchange market is a global marketplace. This means the trading or the market hours are from Monday to Friday and 24/7. The fact that the forex market is under government regulation, it remains closed on weekends.

However, the cryptocurrency market is not the same. It is not a regulated market. Meaning, no government or higher authority has made laws around it. That’s why it is more risky. Each individual trader is responsible for their own trade. This is the reason, the cryptocurrency exchange market is live 24/7 and 365 days.

Liquidity:

The Forex market has higher levels of liquidity. Millions if not billions of currencies are bought and sold each day. As foreign exchange trading is backed and regulated by the governments, more liquidity is available. 

As for the cryptocurrency market, liquidity is a big issue. Especially, during bullish and bearish markets, there are not enough sellers and buyers respectively. Being not regulated by governments created a huge hindrance to liquidity.

3 Similarities between Forex and Cryptocurrency Trading

Not only differences, forex and cryptocurrency trading have certain similarities. Finding common ground will help traders to jump from crypto to forex. These include the following:

Speculation:

Both trading styles are speculative to some extent, more crypto relatively. Foreign exchange trading is speculative in the sense that the happening of some event can change the prices of currencies. For example, if a trader is expecting The Federal Reserve will raise interest rates, then it will make the USD more expensive. Hence, profiting from the trade.

The same goes for cryptocurrencies. The demand and supply constraints can pull the prices up and down. However, the availability of people in both markets makes them speculative by nature.

Leverage:

Leverage is a crucial element of money markets. It allows the flow of money, hence the market function. Both forex and cryptocurrency trading have leverage attached to it. Forex is traded with leverage to garner maximum profits as well crypto trading happens with leverage.

Technology:

The fact that both markets traded 24/7 is the best example of technology being used. Allowing the traders to conduct themselves at their own disposal. Time not being a constraint makes both markets widely acceptable. 

Several Factors That Can Help Choosing Between Forex and Cryptocurrency Trading

Selecting the best market between the two is vital. As there are a lot of stigmas and beliefs attached to both of them. One must consider oneself to select the best possible option among the two. Factors to consider when choosing between forex and cryptocurrency trading are:

Risk Tolerance:

The enemy of profit is risk. Understanding the amount of risk before selecting the best option is vital. Forex trading is considered a healthy option in terms of risk. It could be said that it contains average risk. 

Meanwhile, cryptocurrency trading is the most risky trading form. The volatility on a daily basis is deadly. But when the trend is bearish, the cryptocurrency market is not kind. So, only people with a higher risk appetite should participate in crypto trading.

Regulations:

It is an important element that most people underestimate. Most commonly bearish markets tend to bring the power of regulations. In the forex market, the volatility is much more sustained due to the interference of governments. This move is done for the benefit of investors and traders alike.

Meanwhile, in the crypto landscape, there is no regulatory body. There is no government interference. When the cryptocurrency market goes south, the traders go out.

Conclusion

Most often when looking at both Forex and Cryptocurrency markets, certain differences and similarities pop out. Understanding the forex and the cryptocurrency exchange market is crucial. Most traders don’t realize this basic need. The differences in volatility, trading hours, and liquidity make them unique. Yet, the similarities like speculation, leverage, and technology bring them together. That’s why it is important to do your own research before selecting the right market.

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