The post Forex vs. Crypto by Chris Davis appeared first on Benzinga. Visit Benzinga to get more great content like this.
At its core, any comparison between the forex market and the cryptocurrency market boils down to old and new ways of thinking about money. It may seem difficult to correlate currencies backed by countries with those by coding. But people are creating real buying power in their day-to-day lives learning both types.
If you’ve ever had forex vs crypto thoughts rolling around in your head, read on for some context that could help inform your decision.
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What is Forex?
Forex, also known as foreign exchange or currency trading, is the global market in which currencies from different countries are traded against each other. The forex market is the largest and most liquid financial market in the world with a daily trading volume of more than $5 trillion. It operates 24 hours a day, 5 days a week and enables people to trade currencies from anywhere in the world.
Pros and Cons of Forex Trading
On the surface, forex is safer than crypto, but you still need to know what you’re getting into. Compare the pros and cons of both to determine if the cons outweigh the pros in your mind. Because it’s your money and your portfolio, you can do what best serves you in the moment.
Pros
- Use of leverage
- High liquidity
- Measure of centralized protection against fraud and theft
- KYC standards protect traders and brokers from fraud
Cons
- Gains are easily tracked and taxed
- Higher barriers to entry
- Unexpected news events can shock the market and cause major losses
What is Crypto?
Cryptocurrency, also known as digital or virtual currency, is a form of digital money that is secured by cryptography. Each cryptocurrency has its own blockchain and is not controlled by any central authority. Cryptocurrency transactions are recorded on the blockchain and validated by a process called mining. These transactions are secure, transparent, and immutable, making them attractive to investors looking for an alternative to traditional banking systems.
Pros and Cons of Cryptocurrency Trading
Before making a decision to invest in this quickly changing environment, consider the following pros and cons. Comparing these lists helps you understand how significant the drawbacks of crypto might be in your mind. Invest in crypto when you feel the pros outweigh the cons. If not, you may want to choose a more stable investment vehicle.
Pros
- Anonymity
- Low barriers to entry
- Low fees
- Increasing acceptance into mainstream society
Cons
- No government insurance for accounts
- Less secure marketplace
- Probability of total currency default
- Lower levels of liquidity
- High volatility
- Errors in underlying technology can drastically affect markets
Similarities Between Forex vs Crypto
Before we move into the differences between crypto and forex, let’s see why these markets may not be so different after all.
Forex and Crypto Play Together
The most important similarity between crypto and forex is that they now hold value relative to each other. You may not believe in Bitcoin or Ripple as a legitimate currency, but forex exchanges do. The Chicago Board Options Exchange (CBOE) also believes in crypto enough to offer options contracts on them.
Although the CBOE only offered crypto futures contracts from December 2017 until March 2019, the Chicago Mercantile Exchange (CME) currently offers bitcoin futures. You can also trade contracts-for-differences (CFDs) of reputable cryptocurrencies on platforms like eToro just like CFDs of forex currency pairs.
Because cryptocurrencies and foreign currencies ebb and flow in similar ways, you can think of each investment similarly. Yes, you must use different strategies and study different indicators to make wise decisions, but these financial tools are not opposites.
Decentralization
If you’ve read anything about crypto, you’ve heard about the concept of “decentralization.” All that means is there is no central regulation on the market. Here’s a little secret: The forex market is also decentralized. No, FOREX.com is not a central regulatory body for forex, just a well-named exchange! (Click here for a FOREX.com Review to learn more about it.)
On its own, decentralization does not mean that a market is less stable. It does mean you need to watch your back when investing, but that should go without saying.
Similar Market Physics
The same basic money physics that regulate movement in forex also regulates crypto. The notion of basic supply and demand is in effect: If there are more buyers than sellers for a crypto coin, the price of that coin generally goes up. More sellers than buyers means a crypto bear market, just like in forex.
Efficient market absorption of news means that both forex and crypto respond instantly to market shocks. For example, if a BTC whale converts $30 million BTC into Japanese yen, it affects the cryptocurrency market just as talk of war in the White House would change the value of certain U.S.-based forex currency pairs.
Differences Between Forex vs Crypto
Differences between the markets will ultimately tell you which you prefer to invest in. Yes, you might invest in both, but the average investor often chooses one or the other as a starting point. When you get your feet wet, you might get to know other markets that you did not fully understand when you started investing.
Keep your eyes open for these differences.
Market Size
The forex market is the No. 1 market in the world for trading volume—by a wide margin. As of May 2020, the cumulative market cap for the crypto market totaled around $256 billion. The Bank for International Settlements also reported an average of $7.5 trillion daily trading value in the forex market as of April 2022.
The large size of the forex market also gives it different levels of volatility and liquidity (concepts that will be discussed below). Forex beginners can start out trading currency pairs from stable countries with more protection from large losses before moving on to more speculative trades.
Keep in mind that currency pairs may seem simple when presented by industry experts, but they are new to you. Because the market is so massive, you can comfortably start with a simple pairing, learn what to do and slowly expand your portfolio without encountering anything that feels too complex to manage.
Volatility and Liquidity
Crypto is a smaller market than forex, so smaller amounts of money can move crypto more substantially than forex. If another $256 billion entered the crypto market, we could ideally expect the prices of all crypto to double. That same $256 billion represents a change of about 4% in the forex market. As a result, the crypto market is much more volatile than the forex market.
A higher volatility means more risk for investors — a greater chance of an exponential upside as well as huge, financially crippling losses. Higher volatility also means less liquidity (ease of trading), because more people are naturally attracted to a smooth marketplace. Low volatility and high liquidity means the forex market can better absorb economic shocks. This benefits the average person — both investor and noninvestor — with relatively stable currencies even in bad economic times.
At the same time, an experienced investor can do quite well for themselves on the crypto market—if they do their research and know when to buy and sell.
Anonymity
Cryptocurrency first took off primarily because of its ability to foster anonymous transactions. Government intervention has limited the ability of top coins like Bitcoin and Ethereum to hide identities, but smaller coins like Monero, Zcash and Verge retain this characteristic.
Forex transactions, on the other hand, are regulated by a tight web of forex brokers and financial professionals known as the interbank market. Since 2014, the interbank market has incorporated a “know your customer” (KYC) standard that requires traders to provide personal information to access an exchange. Perhaps spurred on by crypto’s anonymous structure, companies like EagleFX that subvert or ignore KYC rules are popping up for forex traders.
Best Brokers for Forex Trading
The broker you use for trading forex can make a huge difference in your success. Here are some of the best forex platforms to consider.
get started
securely through eToro’s
website
Though Australian and British traders might know eToro for its easy stock and mobile trading, the broker is now expanding into the United States with cryptocurrency trading. U.S. traders can begin buying and selling both major cryptocurrencies (like Bitcoin and Ethereum) as well as smaller names (like Tron Coin and Stellar Lumens).
eToro offers traders the opportunity to invest their assets into premade portfolios or cryptocurrencies, similar to services offered by robo-advisors through traditional brokers. Though eToro isn’t a one-stop-shop for everything an investor needs, its easy-to-use platform and low spreads is a great way to enter the cryptocurrency market.
Best For
- International Forex/CFD Traders
- New cryptocurrency traders looking for an easy-to-use platform
- Traders who want to buy and sell cryptocurrencies on-the-go
- Simple platform that is easy to master
- CopyTrader feature that allows new traders to copy the same strategies used by professionals
- Virtual dummy account that gives you $100,000 to practice trades
- U.S. traders currently limited to cryptocurrencies
- Only 15 major coins available to trade
get started
securely through FOREX.com’s
website
FOREX.com is a one-stop shop for forex traders. With a massive range of tradable currencies, low account minimums and an impressive trading platform, FOREX.com is an excellent choice for brokers searching for a home base for their currency trading. New traders and seasoned veterans alike will love FOREX.com’s extensive education and research center that provides free, informative forex trading courses at multiple skill levels. While FOREX.com is impressive, remember that it isn’t a standard broker.
Best For
- MetaTrader 4 users
- Beginner forex traders
- Active forex traders
- Impressive, easy-to-navigate platform
- Wide range of education and research tools
- Access to over 80 currencies to buy and sell
- Leverage available up to 50:1
- Cannot buy and sell other securities (like stocks and bonds)
get started
securely through IG Markets’s
website
IG is a comprehensive forex broker that offers full access to the currency market and support for over 80 currency pairs. The broker only offers forex trading to its U.S.-based customers, the brokerage does it spectacularly well. Novice traders will love IG’s intuitive mobile and desktop platforms, while advanced traders will revel in the platform’s selection of indicators and charting tools. Though IG could work on its customer service and fees, the broker is an asset to new forex traders and those who prefer a more streamlined interface.
Best For
- New forex traders who are still learning the ropes
- Traders who prefer a simple, clean interface
- Forex traders who trade primarily on a tablet
- Easy-to-navigate platform is easy for beginners to master
- Mobile and tablet platforms offer full functionality of the desktop version
- Margin rates are easy to understand and affordable
- Access to over 80 currency pairs
- U.S. traders can currently only trade forex
- Customer service options are lacking
- No 2-factor authentication on mobile
Best Brokers for Crypto Trading
You can divert quite a bit of risk trading crypto with the right broker. Take a look at some of the more reputable and popular choices.
Get started
securely through HYCM’s
website
HYCM is 1 of the world’s leading forex brokers, offering investors access to over 69 unique currency pairs. However, forex isn’t the only thing the broker offers — HYCM also offers high rates of leverage, stock and ETF trading, commodity investing and much more. Getting started with HYCM is quick and easy, and most investors can open an account in as little as 10 minutes.
HYCM offers a varying fee structure, which allows investors to choose the spread option that’s best for them. A wide range of educational and investing tools are available, which can be equally beneficial to both experienced and novice traders. Though HYCM isn’t currently available in the United States, it can be a great choice for residents of the other 140 countries where it offers service.
Best For
- Investors who want a customizable fee schedule
- Traders comfortable using the MetaTrader platform
- Islamic traders who need swap-free accounts that don’t build interest
- Mobile app with a simple trading experience
- Wide range of currency pairs available
- Excellent selection of educational tools
- Not currently available to traders based in the U.S.
get started
securely through eToro’s
website
eToro is headquartered in Cyprus, England and Israel. A major eToro plus is its social trading operations, which allows new clients to copy trade the platform’s best performers. Its social trading features are top notch, but eToro loses points for its underwhelming research and customer service features.
Best For
- Investors looking to CopyTrade other traders
- Simple user interface
- Several major cryptocurrencies and altcoins
- Expansive network of social trading features
- Large client base for new traders to imitate
- Only 29 coins available
get started
securely through Plus500’s
website
86% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
Plus500 is a European derivatives broker focusing on contracts for difference (CFDs). CFDs are similar to binary options in the U.S. where traders take all-or-nothing speculation on the prices of certain securities like indices, commodities or currencies. While not legal to trade in the U.S., CFDs are legal in many jurisdictions across the globe and Plus500 offers a wide array of tradable markets using these instruments.
Plus500 doesn’t charge commission and only profits off the spread, which is the difference between the buy and sell price of a specific security. But Plus500 is not a broker for beginners — the education materials are sparse and CFDs are risky derivatives capable of sapping out all of an investor’s capital. Only trade these instruments if you understand how they operate and the risks involved with buying them.
Best For
- Traders looking for a smooth mobile experience
- Great mobile app
- Low spreads and commissions
- Unlimited demo account
- Only derivatives are available
- Not open to U.S. residents
Which Market is Right for You?
The forex and crypto markets share characteristics but they couldn’t have a more different risk-reward dynamic. If you want a smooth, liquid market that rewards patience, forex may be your game. If you’re looking for pure growth, then you may want to look into cryptocurrencies. Consider talking to a financial advisor about forex vs crypto, and never speculate in any market with money that you are not willing to lose.
Frequently Asked Questions
What is more profitable, crypto or forex?
It’s not a matter of profitability but rather liquidity and volatility when it comes to crypto vs forex. Forex can offer more liquidity while crypto is usually known for being more volatile, which can mean a higher reward with a higher risk.
Answer Link
Is crypto riskier than forex?
The short answer is that both forex and crypto come with their own risks. Forex trading involves the buying and selling of currencies, while crypto trading involves the buying and selling of digital tokens. Both types of trading involve speculation about the future value of a currency or token, so there is always some risk involved.
Answer Link
Is forex better than crypto?
When considering whether forex is better than crypto, it really depends on the individual investor’s goals and risk tolerance. While both can be highly profitable investments, they offer different benefits and drawbacks.
Answer Link
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The post Forex vs. Crypto by Chris Davis appeared first on Benzinga. Visit Benzinga to get more great content like this.