Even in ancient times, money existed, going from cattle and cowrie shells to coins and paper. Many historians regard the 1800s as the period when different countries began exchanging currencies before the gold standard came into the picture.
1973 was another historic year for forex as it marked the end of the gold standard, ushering in an era of free float currencies and fiat money. Fast forward to 2009, and things were about to change dramatically with Bitcoin’s introduction.
We began seeing more and more cryptocurrencies coming onto the scene. At this point, the popularity of these coins has resulted in many crypto forex debates. Digital currencies and FX share some similarities but also vast differences, which we will look at in this guide.
What is crypto?
A cryptocurrency is a digital currency created by blockchain technology. We characterise it as decentralized because traditional financial institutions do not control its design, as with ordinary money.
Instead, the production rate depends on a unique set of principles from the original developers in accordance with a distributed network of computers. However, unique supply and demand forces determine the prices of digital currencies.
The first official cryptocurrency is Bitcoin, initially announced in October 2008 (but released in January 2009) by an anonymous entity named Satoshi Nakamoto. Ethereum is the second-most traded coin in crypto, which came onto the scene in July 2015.
This project introduced the idea of using digital currencies to build various decentralized applications rather than simply being a different version of money.
What is forex?
Foreign exchange, or forex, is a decentralized market for trading currencies. It consists of a network of distributed financial dealers called the interbank market. Like crypto, FX prices are determined by various and ever-changing market forces.
When we quote exchange rates, we refer to pairs consisting of two individual currencies, e.g., EUR/USD (Euro/US dollar). The euro or EUR/USD is the most traded forex market, accounting for the vast majority of transactions.
Before the internet became popular, only wealthy individuals and large financial institutions like banks could engage in FX. However, since the mid-90s, retail trading has become a mainstay with the growth of online trading platforms.
Crypto vs forex: the similarities
While distinctions exist in forex vs crypto, it helps to understand what is familiar between the two.
The common thread is that each market has specific fundamental supply/demand factors, some of which can intertwine.
For instance, investors buy digital currencies due to the inflation fears of fiat currencies, resulting in a bullish crypto market. Inversely, if the crypto market is down, it may be caused by a lack of confidence in the asset where investors prefer FX.
As a trader, your job is to understand the drivers behind what causes one market to rise and fall. Economic factors are not the only influential force in crypto, though. You often need to study individual project metrics.
With forex, economic drivers like interest rates can highly influence exchange rates between two countries. In either case, no market is necessarily easier to master than the other. Understanding price movements requires many years of charting experience to make profits.
Expression of pairs
We often express the most popular crypto and forex pairs based on the US dollar (USD). For instance, Bitcoin’s price is quoted in USD (BTC/USD). So, you need to study the individual drivers behind each respective currency.
If USD is falling across other markets, chances are that Bitcoin will rise, and vice versa. Although we refer to an instrument like the euro or Bitcoin as a standalone instrument, it consists of two distinct components.
Another resemblance is that we trade crypto and FX as CFDs (contracts for difference). What this means is that you do not own the underlying asset. So, with crypto, you don’t possess the actual coin, even though you are trading its price.
Similarly, with forex, you don’t own the currency in any form. A key feature with any CFD is leverage, which is vastly different between crypto and forex.
Crypto vs forex: the differences
The table below shows the main differences in crypto and forex in summary. We will then break these down in more detail.
|Volatility||More volatile||Less volatile|
|Liquidity||Less liquid||More liquid|
|Trading avenue||Primarily exchanges||Brokers|
One of the prominent distinctions between forex and crypto trading is the volatility. In simple terms, this term refers to the magnitude that prices change in a given period. So, a highly volatile market will experience massive and sometimes pronounced value differences.
The opposite is true for a less volatile instrument. Volatility is not all bad and is a necessary component to achieving large gains in a short period. Between forex and crypto trading, the former is the most volatile, even among other securities like stocks and metals.
As a tinier market, smaller amounts of money can significantly change value. Let us demonstrate the differences in the charts below using data from MarketMilk on BabyPips. The images below depict the real-time average volatility for Bitcoin and the euro over a week.
We can see that Bitcoin had a 3.17% difference, a lot higher than 1.38% for the euro. For less traded coins, the comparisons are greater. Overall, you can witness pronounced price movements in crypto than FX.
This is due to several reasons, like liquidity and market size (which we’ll cover later). Still, in the forex vs crypto discussion, forex is currently more profitable because of higher margin. Also, the lower volatility in FX results in stabler and less erratic prices than its counterpart.
In financial markets, leverage allows you to borrow from a broker to open far bigger positions on a relatively small account. We express this mechanism according to a ratio. For instance, it may be 1:50 or 50x.
This means that you can open a position 50 times the value of your account balance. So, for every $100, you can trade a maximum of $5000 ($100 X 50). When used with skill, leverage can amplify your gains (but can equally magnify your losses at the same rate).
In forex, the leverage ratios have increased quite a bit in the last decade. It’s not uncommon to find brokers providing 1:500, 1:1000, 1:2000, or, in some cases, an unlimited ratio. In crypto, the maximum presently is 1:200, with the normal rate averaging 1:10 to 1:50.
Of course, exchanges may bump this ratio up over time. The point is that forex is significantly more leveraged. When choosing crypto vs forex, you will need fewer funds in a forex account to achieve the same gains you would in crypto.
Currencies have been a formalised market for years, with financial regulators across most parts of the globe. Authorities have a keen interest in any entity that trades FX. For the most part, forex trading has fewer restrictions in many countries, making it pretty accessible.
However, one example of the strictness in certain areas is the lower leverage provided to American clients because of the nation’s regulators.
Conversely, cryptocurrencies have little supervision in most nations. The main reason is that the production of new coins is decentralized, relying on a network of computers not owned by governments and banks.
This distributed structure reduces the chances of manipulation from the powers that be and lowers the barrier to entry for investors.
However, in the same breath, it is difficult to enforce regulation in a non-centralized environment, leading to much criminal activity. Many countries like China, Colombia, and Indonesia have banned the use of digital currencies.
Although malpractice is also possible with forex, it is less common. In crypto, it is very challenging, if not impossible, to track fraudulent transactions. However, with fiat currencies, the chances of recovery are better since they are connected to recognised financial institutions.
Regulation also brings about a level of stability. One reason FX is less volatile is that central banks tend to intervene by stabilising their respective currencies with the appropriate interest rate hikes and dips.
This protects against unusual or excessive rapid price changes. Yet, crypto can be more unpredictable, meaning that ‘black swan’ events (as we saw with the Luna crash) can happen anytime.
So, when it comes to safety between forex vs cryptocurrency, FX is much safer.
Despite the immense growth in the crypto market, it pales in comparison to fiat currencies. According to the 2019 Triennial Central Bank Survey by the Bank for International Settlements, the total daily trading volume in forex exceeds $6.6 trillion.
This is higher than any other financial market. About two-thirds of the $6.6 trillion consists of spot transactions, the most accessible version of forex. This segment alone is far greater than even the entire US stock and futures markets.
On the other hand, CoinMarketCap shows the highest 24hr volume for crypto at $134.2 billion since April 2013. These numbers further exemplify the discrepancies in the forex cryptocurrency trading comparison.
This tells us that FX is more liquid than digital currencies. Liquidity is a term describing the ease at which you can trade a financial asset without any drastic price changes. There are significantly more participants in the FX market, which is understandable considering the global appeal of foreign exchange.
As more hands are swapping different currencies, dealers have a larger volume to offer. This also means the trading costs remain consistent for most periods. On the contrary, the liquidity in crypto gradually decreases as you go down the top traded list. An illiquid market may result in slippage, which can cause higher spreads. Slippage is less likely with FX.
Despite FX being more liquid, there are tons of crypto pairs. Technically, you can have substantial pair combinations from the 180 currencies traded worldwide. However, when referring to accessible markets, you generally don’t have above 150 with most brokers.
In most cases, excluding the exotic pairs, an average forex trader’s watchlist will not contain more than 28 pairs.
On the other hand, we have over 21 000 different coins (and growing), with exchanges like Binance and KuCoin offering 1000+pairs.
Yet, you should note that many markets will be correlated to a handful of fiat currencies like the US dollar, euro and British pound. Also, the majority of the crypto market moves in tandem with Bitcoin.
Still, the wider selection appeals to traders who prefer less established projects.
Because crypto is entirely decentralized, it doesn’t operate according to conventional business hours. Whether a special December holiday or an ordinary Sunday, you can exchange digital currencies any time, meaning more opportunities.
Conversely, the forex market is only available 24/5, from 17h00 EST on Sunday until 16h00 EST on Friday. Yet, it’s worth noting that you should engage with a crypto exchange for true 24/7 trading instead of a regular CFD broker.
It is common for people to use the terms ‘broker’ and ‘exchange’ interchangeably. While they perform similar duties, there are subtle differences. We trade forex through a broker, while crypto is largely traded through exchanges (although there are many brokers offering crypto trading).
The main distinction is that a broker is a middleman. With an exchange, you directly interact with other buyers and sellers on a platform. In forex, a broker facilitates your orders to the interbank market and other forex dealers. Alternatively, they may be the actual dealer.
In either case, you only deal with them and nobody else. With an exchange, while there is still a centralized entity, you can view real-time orders derived from the platform’s actual clients. This is what we call an order book, an electronic list of trading orders at incremental price levels.
Order books offer transparency because you can see information like position depth and price availability. Very few brokers have this facility, meaning that you cannot see who is buying and selling, and how much.
The picture below is the order book for Bitcoin on the Binance exchange to demonstrate an example.
When we look at forex vs cryptocurrency, we need to consider the perspective. You can choose to trade or invest in either of these markets. Trading and investing are quite different. We characterise the former as short-term speculation.
Meanwhile, the latter is a slower buy-and-hold approach where you aim to hold a financial asset for years. Currencies are best-suited for trading, while crypto is well-suited for both trading and investing.
Greater volatility means a market can travel further in the short and long term. Of course, it’s not only the volatility that makes digital currencies a potentially better investment. Many coins were designed to be deflationary or limited in supply.
This is in stark contrast to traditional currencies, where money is printed at will, lessening its value over time. Another point worth mentioning is that many people see crypto as a relatively untapped technology.
When something is still new-ish, there will understandably be a massive cohort of investors betting on its future. On the other hand, fiat currency is not a technology but simply a plain medium of exchange.
Therefore, it is not meant to increase in value. While it would be premature to say crypto will keep rising forever, it does have the potential, at least in the next decade.
Conclusion: what should you pick in forex trading vs crypto trading?
By now, you should understand the key differences between these two markets. Despite the growing popularity of digital currencies, forex remains more stable in price movements and safer regulatorily.
On the other hand, while crypto has been around for 13 years, many investors consider it a ‘new kid on the block.’ The number of years the currencies market has existed makes it a highly reliable and liquid trading vehicle. Also, FX offers more leverage, which, for risk-tolerant traders, is a massive advantage.
But, where does crypto shine above forex? Digital currencies can move further in a shorter period, given the number of speculators. However, this attribute doesn’t hold much weight with lower leverage.
Still, the high volatility offers a better long-term investment potential than forex. Many forex pairs haven’t experienced any long stretches moving in one direction. Instead, these markets often remain in predictable ranges.
On the other, crypto is the better option if you’re looking for parabolic moves in the long term. This also ties into the argument of digital currencies being a better investment over time. Also, the around-the-clock nature and the vast market selection are added benefits.
Ultimately, what should you pick in cryptocurrency forex discussion? As with any financial market, your decision depends on your preferences, experience, and risk tolerance.