What Are the Differences between Forex and Cryptocurrency Trading?
Ever since the first bitcoin block was mined back in 2009, cryptocurrencies have become very popular among traders and investors alike. Although they didn’t really take off immediately, the technology behind them was still both fresh and exciting at the time. Even today, many are baffled as to how these cryptocurrencies actually work. Nevertheless, they are being traded all the same and we’re more interested in that aspect of their use anyway. Yet, explaining how they’re traded would be too difficult without treading into unfamiliar ground. So, let’s take a look at some more common currency exchange platforms, such as Forex trading, and compare how well it fares against cryptocurrencies.
What are cryptocurrencies?
Cryptocurrencies are digital assets that use cryptography as a form of data security for their safe transaction and use. Even though they are regarded as digital currencies, they are in fact much closer to commodities, such as gold, rather than fiat money. They’re exchanged purely peer-to-peer without the usual intermediaries, such as banks and governments, due to their decentralized nature, making them a currency that is firmly controlled by people. They use blockchain technology to store data on public ledgers in the form of blocks which are linked together and cannot be altered, making them extremely efficient for securing valuable pieces of data. In addition, bitcoin is the best example of such a currency. It is generally regarded as their flagship because it’s the most common currency of the lot. Honorable mentions also include Ethereum, Ripple, and Dash which have increased quite significantly in value in recent times.
What’s Forex trading?
Forex is a synonym for the foreign exchange market where various foreign currencies are being traded worldwide. Like cryptocurrencies, it too has flourished due to recent technological advancements, namely the internet, as it’s mostly traded online. The gist of it is that you compare the value of one currency against another, in pairs, to determine which of them is worth buying or selling. Moreover, it’s not connected to any specific place as it’s a global market. Currently there are three versions of Forex trading: the spot market, forwards, and the futures market. Primarily, we’re interested in the first one, the spot market, as the other two just deal with contracts to claims for certain currency types on future dates, whereas on the spot market, currencies are traded according to their current value.
Already we can see that these two have a few things in common. For starters, both of them are without a central system of government, as they’re a part of the free market. Trade is conducted online in both cases and similar strategies are used to predict and analyze the price fluctuations for each of them. For example, by monitoring the price fluctuation in real time, and then comparing it to how it fluctuated in the past, predictions can be made on whether the price will rise or fall respectively. For this to work, a respectable Forex trading platform is used to streamline the data based on which one can more accurately assess and decide whether to buy or sell. Similarly, equivalent platforms are also used for each of the cryptocurrencies accordingly.
Cryptocurrencies are traded 24/7, whereas Forex trading closes for the weekend and doesn’t open up until Monday. For Forex trading, this brief pause doesn’t have any influence on the outcome. However, for cryptocurrencies, that time can make a difference between losing all of your invested money or quadrupling it and gaining a small fortune. This is due to the difference in volatility of these two. For example, with Forex trading, the price of one currency pair is measured in pennies and the difference between them isn’t at all that large. Likewise, larger sums of money are needed to make the trades more profitable. This is why such high leverage is used, ranging from a ratio of 50:1 to 200:1, depending on the country. Cryptocurrencies are highly volatile and their price is in a constant state of flux throughout the day and it can change quite rapidly. As a result of this instability, cryptocurrencies are heavily sought-after, as the higher the volatility, the more money you can earn if you get lucky. Forex trading isn’t based so much on luck, as it is on skill. Therefore, you need to have quite extensive knowledge of currencies and their track records. More specifically, the track record of the top four pairs: USD/EURO, GBP/USD, USD/JPY, and USD/CHF. Additionally, Forex traders need to monitor the geopolitical stability of the countries in question and not be in the dark. Inflation has a huge effect on the price range, which isn’t the case with cryptocurrencies as they aren’t tied to any specific country.
In conclusion, some basic elements of each trade are the same, but the fundamental difference here is in their overall stability. Cryptocurrencies are highly unpredictable and therefore a lottery ticket compared to the volatility of Forex trading.
You may also be interested in: Why Should You Trade in the Forex Market?
Writer: David Webb
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