Forex in the Age of Cryptos: How does Bitcoin and Co. Impact the Traditional FX Market?
At first glance, answering the question posed in the title above is easy: it doesn’t. There’s far more to this story though, and all those involved in crypto and FX trading know that too well. Let’s take a closer look at how these currently well-segregated markets influence each other in the short- and long run.
The FX and crypto markets are currently segregated by the existence of regulation and the legitimacy stemming from it. Long story short: for the time being, there is no regulated crypto trading. None of the exchanges, no matter how popular, hyped, and indeed: serious they appear to be, are currently regulated by state financial authorities. If you want to “proper trade” Bitcoin or Ethereum, as in actually purchasing and owning/holding currency, you need to go on one of these unregulated exchanges and buy/sell them there. That’s exactly the reason why there’s so much gloom and doom spewed each day in regards to China’s and South Korea’s crackdown on crypto exchanges. The two countries are hotspots for crypto mining and trading, hence the problem. While some people think that the aforementioned countries are in fact banning Bitcoin, that is not the case. China has simply banned its exchanges, and South Korea is currently exploring ways to tighten security around its lot.
How come then that no matter where one looks these days, he/she is bound to bump into an online Forex brokerage dangling BTC and ETH trading, as its main sales angle?
In fact, crypto trading has become something of a trend for these online brokerages, who outbid each other, offering access to more and more cryptocurrencies.
To understand what’s really going on, you need to read into the fine-print. Every one of the above-described crypto offers is essentially a crypto-based derivative, called CFD (Contract for Difference). Through these Contracts for Difference, traders trade the difference between the entry and exit prices of the positions they take. The direction of the asset-price movement is obviously extremely important to predict, but the actual magnitude of the price movement matters as well when positions are settled. When trading CFDs, one never gets to own any of the “underlying asset” — in this case the “traded” cryptocurrency. That makes it rather clear that when trading such derivatives, contrary to the intentionally generated hype, one is not actually trading crypto currencies after all. Furthermore, given the volatility of cryptos, and the fact that such financial products are not regulated, the trading conditions on these crypto CFDs (the spread, commission, margin requirement and leverage) are usually abysmal from the point of view of the trader.
The recent introduction of Bitcoin futures products by the Chicago Mercantile Exchange and the Chicago Board of Options Exchange (CBOE) is an entirely different matter, which is why it generated so much press, expectations and price-fluctuation in the crypto markets.
According to some, the arrival of REGULATED futures trading is the beginning of a new era for cryptos. Through this move, albeit reluctantly, US authorities have given a massive nod to the legitimacy of cryptos. They also opened the way for traders to profit from betting against cryptos, thus hopefully contributing to the long-term stabilization of the notoriously volatile crypto markets. Indeed, the price-discovery mechanism associated with futures contracts can exert such an influence over time.
So, what exactly does all this mean for Forex trading as a whole?
Some may argue that cryptos have drawn funds away from the “traditional” Forex market, through the explosive profits they offer. Simply buying and holding onto cryptos was a massively profitable undertaking through 2017, though the currently ongoing massive price-correction may have put quite a few dents into that “business model”. The above floated assertion (regarding the crypto market taking a bite out of Forex investments) does not really hold water though. The Forex market is so massive that next to it, the entire crypto industry is but a drop in the bucket. Furthermore — at least as far as Bitcoin is concerned — the market cap, which is currently in the hundreds of billions, is mostly made up funds held by a few thousand early adopters and larger investors. The amount of money actively pushing BTC’s levers is most likely not more than a few billions.
Will BTC and the other cryptos ever reach the kind of legitimacy government-issued fiat currencies currently enjoy? That is difficult to say. What’s certain though is that if they ever do, their current prices will look like Bitcoin’s initial sub-one-USD infancy does nowadays.
