Forex, also known as foreign exchange or FX, is the largest financial market in the world. In fact, it is so big that it is estimated to have a daily trading volume of over $5 trillion. But, what is forex market cap and how is it calculated?
Market capitalization, or market cap, is a common metric used to measure the size of a company or an asset. In the case of forex, market cap refers to the total value of all the currencies traded on the market. It is calculated by multiplying the total number of outstanding currency units by their current market price.
However, it is important to note that unlike stocks, forex does not have a single market cap. This is because there is no central exchange for forex trading. Instead, forex is traded over-the-counter (OTC) through a network of banks, brokers, and other financial institutions. As a result, the market cap of forex can vary depending on the source of the data.
One way to estimate the market cap of forex is to use the Bank for International Settlements (BIS) triennial survey. This survey, conducted every three years, provides a comprehensive snapshot of the global forex market. According to the latest survey, which was conducted in 2019, the total daily trading volume of forex was $6.6 trillion. This represents a 29% increase from the previous survey in 2016.
While the BIS survey provides a good estimate of the size of the forex market, it is important to note that it only captures a portion of the market. This is because the survey only covers transactions between banks and other financial institutions, and does not include retail forex trading. The retail forex market, which allows individual traders to participate in forex trading, is estimated to be worth several hundred billion dollars.
Another way to estimate the market cap of forex is to look at the market capitalization of individual currencies. This is calculated by multiplying the total outstanding units of a currency by its current market price. For example, if there are 10 billion units of the US dollar in circulation and the current exchange rate is 1 USD to 1 EUR, the market cap of the US dollar would be 10 billion USD.
However, this method has its limitations as well. Firstly, it assumes that all currencies are equally liquid and tradable, which is not the case. Some currencies, such as the US dollar, euro, and Japanese yen, are more widely traded than others. Secondly, it does not take into account the fact that forex trading involves pairs of currencies. Therefore, the value of a currency is always relative to another currency.
In conclusion, the forex market is a vast and complex market that does not have a single market cap. While the BIS survey provides a good estimate of the size of the market, it only captures a portion of the market. Estimating the market cap of individual currencies is also limited by the assumption that all currencies are equally liquid and tradable. Nevertheless, the size and liquidity of the forex market make it an attractive market for investors and traders alike.
