Though the Forex market has existed for a long time now; the cryptocurrencies market is relatively new with the first cryptocurrency; bitcoin, created in 2009 by Satoshi Nakamoto.
Currently, there are now over 1300 different cryptocurrencies, the main ones being bitcoin, ethereum, litecoin, dogecoin, steller, cardano, tron, ripple and bitcoin cash.
The Forex and cryptocurrency markets have a lot of similarities but there are various traits that separate the two creating a dilemma for traders on which of the two to trade. Below are some of the fundamental differences between the two markets;
Security;
The Forex market is well regulated with several bodies offering oversight on Forex brokers and safeguarding traders’ interest. Most brokers are required to hold traders’ deposits in segregated accounts with most funds being guaranteed in case the brokerage is insolvent. On the other hand, cryptocurrencies have no legal backing and hence not regulated. This makes the market prone to scams as well as hacking. For instance, a bitcoin exchange; Mt Gox, was hacked in 2014 and about $460 million worth of bitcoin stolen. For this reason, the Forex market is still regarded by most traders and investors as a safer alternative to the cryptocurrencies market.
Middlemen;
Cryptocurrency trading is done through coin exchanges with no middlemen involved. Most of these exchanges offer their users a trading platform where trades can be done between different coins or fiat money. In contrast, the Forex market is available through a brokerage; acting as a middleman, connecting the traders to the larger inter-bank market. Lack of middlemen makes cryptocurrencies more easily accessible compared to the Forex market with the rules required to setup an account with the exchanges being more lenient. Increased regulation in the Forex market has made the Know Your Customer (KYC) protocols more strict while most crypto exchanges only require a simple registration with basic information.
Availability;
Before cryptocurrencies; currencies were instruments of choice to many due to their 24 hours availability during weekdays. Cryptocurrencies now offer much more availability as they can be traded 24 hours a day including the weekends. This makes the crypto market especially attractive to individuals with little or no time to trade Forex during weekdays.
Leverage;
Another trait that makes Forex trading attractive is the availability of leverage or margin trading. This enables traders to make large trade positions with limited amount of capital thereby increasing the profit potential. Up to now, most crypto exchanges do not offer trading on leverage limiting the profit potential of retail traders with limited amounts of capital at their disposal. Since leverage is a double edged sword; not only increasing the potential for profit, but that of loss too, the lack of leverage in the cryptocurrencies market can also be viewed as a desirable trait by some traders. With limited or no leverage; crypto trading is much safer eliminating the risk of getting a margin call as opposed to Forex trading.
Volatility;
Limited or lack of leverage in cryptocurrencies is compensated by their more volatile nature compared to the Forex market. The usual volatility range in currencies is between 0.5 and 1 percent compared to 15 percent in cryptocurrencies. This increases the amount of profit that can be made in the crpto market with one single investment. An example of this is the price of bitcoin which soared to over $20000 per coin from below $1000 per coin in less that 12 months.
Inflation;
Currencies are controlled by their respective governments making them susceptible to fiscal and monetary policies as well as other geopolitical events. On the other hand, cryptocurrencies are managed by algorithms and only affected by the activities of those using them. This makes the crypto market attractive to investors who do not want exposure to inflation or government policy decisions.
Conclusion;
Both the Forex and cryptocurrencies market offer different opportunities for profit to traders and investors alike. However, a trade off has to be made between the lack of enough safety in the cryptocurrencies market and the profit potential they offer. Fortunately, due to increased technology that has seen crypto exchanges providing charting platforms, the same technical strategies available to Forex traders can also be applied to cruptocurrencies trading.
Monday, February 17, 2020