It is not strange for beginner investors to conflate forex and crypto trading. Although they are similar in some ways, these two industries have significant differences.
As the new year approaches, new and seasoned investors alike need information on how the different markets are likely to turn out as we expect each market to behave uniquely. Some cryptocurrencies tend to boom in the last quarter of the year, as we’re currently seeing with Bitcoin. On the other hand, currency exchange pairs tend to be more affected by geopolitical and economic happenings.
While this article does not intend to claim that one is better than the other, we will highlight the key similarities, differences, benefits, and risks of both forex and crypto, with a focus on recent market trends. Hopefully, you will determine which investment will be suitable for you in the coming year.
What is the Forex Market?
The forex market is a decentralized market where foreign currencies are exchanged. Being decentralized means, there is no single global authority that controls the trade. However, the central banks in each country have a major influence on what prices their local currency fetches against foreign currency. This is how they balance imports and exports to keep their economies happy.
Anyone can participate in forex trade because it simply involves buying and selling currency, which most banks accept. Forex trading is usually done through FX brokers. Many online forex brokers such as IQ Broker offer convenient forex trading. With extensive research, some practice, a little courage, and luck, you can reap big trading forex.
What about Crypto Trading?
Crypto trading involves buying and selling cryptocurrencies – much like with forex. This activity happens on crypto exchanges like Etoro, Coinbase, and Binance. Like forex trading, crypto trading is usually done through brokers or exchanges, giving it as much flexibility. Also, anyone can be part of over the $250 B that changes hands daily (as of November 2020) on different crypto exchanges.
Forex and Crypto: Similarities
There’s so much similarity between forex and crypto trading that you’d be forgiven for conflating the two. Let’s look at some of the top similarities.
- You need to be knowledgeable enough to engage in either. Otherwise, you’d be setting yourself up for losses.
- Market forces, including investor sentiment and supply/demand, determine how both forex and crypto prices shift.
- One can close a trade in a relatively short time in either of the two.
- Both involve buying and selling instruments, including currencies, crypto coins, tokens, futures, and other complex financial assets.
- On the same note, both of these markets have different players. These include institutions and individual players, each looking to make some profits out of the market.
Technology, more so information technology, plays a crucial role in expanding these two markets. Although the forex market came in before the computers and the internet, forex is what it is today thanks to information technology. On the other hand, we could not be talking about Cryptocurrencies without the internet and computers.
Differences between Forex and Crypto Trading
Several differences distinguish forex markets from crypto markets.
- Forex markets usually operate during business days, typically Monday-Friday. On the other hand, the crypto market is on 24/7, 365 days a year. This gives crypto some edge when it comes to trading flexibility.
- Forex markets are inherently more stable, thanks to the involvement of central banks. Crypto markets, on the flip side, are notoriously volatile. Whether this is an advantage really depends on an investor’s point of view.
- Crypto markets tend to be riskier than forex markets, mainly due to their higher volatility.
- Forex trading is more regulated and protected, which means it can pose less trading risk. However, less risk means fewer returns.
- With forex, you do not need a wallet or the technicalities that crypto trading comes with. All you need is an account to deposit funds and you are ready to go.
Which One Is Better?
Now, investors themself can best answer this question. Generally, each market has unique characteristics that will appeal to some investors and not others. Still, the following factors can help you in determining which one would work better for you:
If you are more risk-averse, forex trading may be your go-to option. As we said earlier, crypto markets can be very turbulent. For instance, Bitcoin has been moving by even up to $2,000 USD a week, especially since October. No central bank would sit and watch such sudden price movements on their forex markets. So, if you thrill in dramatic movements in return for higher rewards, crypto sounds better.
The crypto market (led by Bitcoin) is currently on the bull run. The time is ripe for reaping huge from crypto. We’re not saying that crypto is now a get-rich-quick market. But all indications are that it is presently the most lucrative. On the flip side, many investors will lose big if the market goes on a free fall (an inevitability). Thus, short-term investors may find crypto more suitable in the coming months.
If you’re looking to grow your investment over a long time, say beyond 2021, crypto trading may give you a better platform. While forex pairs usually oscillate between stiff margins, cryptocurrencies can rise exponentially over time. This growth depends on how well the crypto’s backing project is implemented. However, you can multiply your investment by investing in crypto with the potential to grow – something that’s not possible with forex.
Now that you have more clarity on the way ahead, what would be the next steps? If you prefer to venture into forex trading, you need to find the best brokers. Check out our reviews for some of the top brokers you can choose from. On the other hand, if you prefer the ‘wild west’ crypto market, you can choose to trade with brokers that support crypto or opt for crypto exchanges.
Both forex and crypto trading offer investors opportunities for growing their investments. However, each market has its own characteristics. From a returns viewpoint, the main difference between the two is that forex offers moderate profits while crypto trading can have much higher returns. The bottom line is, forex trading favors investors who prefer less risk, while crypto is for more adventurous investors. Whichever investment you pick in 2021, ensure that the market’s risk and return profile are to your preference.