Crypto trading has gained popularity in recent years, as the concept becomes more widely accepted and better regulated. A novice crypto trader is often told that the practice is similar to that of forex trading and that there are parallels between the two.
This is often true, and it’s a good way to explain how crypto trading works, but there are also some key differences that investors should be aware of. In this article, we’ll go over those differences and how they are obvious within the context of market behavior.
Trading Hour and Accessibility
Both forex trading and crypto trading are fairly accessible to an average user as both can be done online or using mobile devices, such as phones and tablets. The two differ, however, when it comes to trading hours.
Forex trading is available during working hours on foreign exchange platforms, which means you can’t trade on the weekends. Crypto trading, on the other hand, doesn’t follow such rules, and investors can react to any change in the market, regardless of when it happens.
Market Type
Foreign currency trading happens in a centralized market, which is highly regulated since it’s controlled by the central governments that issue fiat currencies. On the other hand, the crypto market is fully decentralized and works based on blockchain technology. This is the major difference and feature that created the crypto revolution in the first place.
The decentralized nature of the crypto market makes it react to general market forces rather than to the government fiat. Within that, there’s a lot of complexity as some cryptos are based on the value of fiat money. These are known as stablecoins.
Security and Safety
Both crypto and forex trading are relatively safe, but the decentralized nature of crypto trading presents some issues that forex investors aren’t facing. There’s a risk of hacking with crypto that doesn’t exist with any other trading and arrangement, and hacking attacks are known to happen even though rarely.
Some of the most secure crypto exchanges have features that minimize the risks, such as 2-step verifications, complex passwords, and advanced cryptography. Even with all of these features, the users are expected to take steps to prevent hacking and act responsibly when their assets are on the line.
The Size of the Market
The market for cryptocurrencies is much smaller than that for foreign currencies. Forex markets are the largest global markets out there as there are hundreds of foreign currencies and, therefore, almost countless options for trading one currency for another. As is the case with any other market, most investors focus on just a few currencies that are profitable to trade at any given moment.
It’s important, however, to note that the crypto market has been experiencing huge growth lately, both in terms of scope and in the growing number of cryptocurrencies available. Altcoins have grown in value and acceptance alongside Bitcoin, the biggest crypto out there.
Volatility
The crypto market is much more volatile than the foreign currency market. The value of cryptos depends on the market forces and changes daily, if only slightly. In this regard, it’s much more similar to trading stocks than foreign currency. The additional risk also brings bigger chances of profiting from these changes.
Therefore, even though the two are often compared, as both assets figure as currencies, there’s a big difference in terms of what kind of investors they attract. Crypto investors are more prone to risk, while forex investors are looking for steady and long-term profit in most cases.
Diversification
The methods used to fight volatility in both forex and crypto trading are the same. The best way to do so is to diversify your portfolio and trade different crypto and foreign currencies at the same time. That way, the risks are mitigated as safer and less lucrative trade balances out the more dangerous ones.
In both cases, the investors can use the services of portfolio managers to achieve this diversification on their behalf. This is, however, an additional expense that will cut into the profits the investors would otherwise keep to themselves.
Regulation
A few years ago, it was easy to claim that the foreign currency market was far more regulated than the crypto market. That was one of the reasons that so many investors have been drawn to it. The whole market and concept were new, and the government hadn’t adapted to it yet and, therefore, couldn’t regulate it.
Things have changed somewhat in recent years, however. With the general public embracing crypto, governments have adapted and created a regulatory framework for it. This framework is based on both those designed for foreign currencies and those made for stocks and bonds. Many argue that newly introduced regulations have also brought a new level of stability to the market.
Leverage
Leverage allows traders to control larger positions by using smaller amounts of capital. It works very differently for forex trading and crypto trading, as there is more fiat money out there than cryptos. Fiat money can also be created at any time, unlike crypto.
With foreign currencies, brokerage can offer a leverage of 500:1 in some cases. Crypto trading platforms differ in terms of the leverage they offer, but it’s still much lower than that investors could get with forex trading.
Conclusion
Foreign currency trade and crypto trade are similar in many ways, and many investors trade in both. The two aren’t, however, the same – as crypto often acts as a stock rather than a currency. The biggest difference between the two is in how volatile the crypto market is compared to that of foreign currencies.
Since the crypto market doesn’t depend on government regulations and central bank activity, the value of cryptos changes much faster. It’s what makes it both risky and lucrative, as is the case with any other investment. Cryptos can be traded at all times, and there are hacking concerns that both the trading platforms and the users should address.
