In the last few years, both forex and cryptocurrency markets have exploded in popularity as more people seek alternative ways of earning passive income. Forex currency exchange (forex), in particular, has been around for much longer but was initially accessible only to a wealthy class of investors. It was not until a few years ago that forex trading became accessible to all classes of investors, thanks to the proliferation of online brokers.
Cryptocurrency trading, on the other hand, gained most of its audience after the phenomenal 2017 market rally. Even though cryptocurrencies are speculative investments that may result in huge losses, the violent price swings can also bring in significant profits.
The two markets have their own unique aspects that make them attractive to different investors. At the same time, they share similar dynamics of supply and demand, which govern the prices of their respective assets. As such, it can be quite difficult, especially for new traders, to determine which market offers the best returns with minimal risks. A close examination of various market dynamics, however, can reveal which investment option aligns with your goals as an investor.
Liquidity and Volatility
Having been around for long, the forex market boasts the largest market liquidity with a daily trading volume of about $5.4 trillion. The crypto-market, on the other hand, had a cumulative market cap of $237 billion in 2019 alone.
With respect to these figures, the forex market is less volatile- thus, the market prices remain fairly stable even after large trades, like the ones placed by institutional investors. Also, the low volatility and high liquidity mean that the forex market can absorb economic shocks better than the crypto market, which has high volatility and low liquidity.
The forex market is, therefore, more appealing to risk-averse investors looking for more guaranteed returns. This is not to say that the crypto market is entirely unsafe for investment. For a trader, the high volatility of the market means that you can make significant profits, especially if you can correctly anticipate the market patterns using market analysis tools. The conservative traders also have an equal opportunity to thrive in the crypto market as the value of the underlying asset increases over time.
There’s no doubt that the forex market is more secure than the crypto market. For starters, the underlying assets in foreign exchange are regulated by the governments through central banks. Moreover, all trading transactions are facilitated by a tight web of brokers who are required to comply with anti-money laundering (AML) and the Know Your Customer (KYC) policies to protect traders from fraud. On the downside, giving online brokers access to your personal data with respect to KYC regulations exposes you to identify theft. The brokers may even decide to monetize your data by selling it to advertisers without your consent.
Cryptocurrencies, however, have little to no regulation. While they can be pegged to more stable assets, most of them aren’t and therefore derive their value from their own utility and speculation. What’s worse, there have been several cases of cryptocurrency scams where developers launch digital coins without any concrete use case nor utility value.
Despite the ill reputation, the security of your investment in the digital asset market is only limited by the extent of your research in finding a reputable cryptocurrency and an exchange platform. The viability of a digital coin depends on its whitepaper and roadmap, as the two outline the intrinsic usefulness of the digital asset. Ideally, crypto worth investing in should have a real-world use case in a niche where there’s less competition. This way, the crypto will derive much of its value not from speculation but from its usability.
Less competition ensures the asset maintains a high demand, which strengthens its overall value. Most importantly, the exchange on which a digital asset is listed should have a good history of securing investors’ funds. Exchanges with constant cases of being hacked may not be the right platform for trading cryptocurrencies.
Exposure to risks
In the market trends context, both cryptocurrency and forex markets share the same level of risk in the sense that it is almost impossible to accurately predict the market movements. This is why both markets require a sound risk management plan, such as stop-loss orders, to maintain profitability when the market is in a bear run.
To further limit losses and increase profits, you may consider leveraging the power of trading bots in both markets. These bots can be programmed to trade in line with your investment goals and execute orders autonomously. In the crypto market, they can be helpful since the market runs 24/7, unlike forex trading, which is limited to 5 days a week.
Essentially, choosing between forex or cryptocurrency trading boils down to what type of investor you are. If you are looking to make quick profits over a short period of time, then the crypto market is ideal, given its high volatility. At the same time, you should note that the volatility can easily work against you. To gain huge profits with minimal risk, invest in cryptocurrencies with a long-term goal. The market rewards patient investors generously, as evident from the historic increase in the value of most cryptocurrencies, which have turned out to be profitable to long-term investors.
Forex trading has less potential for huge gains, whether long or short-term, as the value of the underlying asset is determined by monetary policies set by the central bank. But, there is a way to enjoy the best of the two worlds – trading forex using cryptocurrencies. In this case, you’ll have the high liquidity of the forex market to your advantage as well as the volatility of cryptocurrencies. This combination works even better if you can trade using well-established cryptos such as Ethereum or Bitcoin, whose demand is high, rendering them valuable. Besides increasing your chances of making profits, trading forex using cryptocurrencies secures your financial data since you don’t have to share your bank or credit card details to make cryptocurrency transactions.