Forex vs Cryptocurrency Trading: Are They Different?
Forex and cryptocurrency trading are becoming a popular trend in today’s world, even among relatively inexperienced traders, thanks to the increased accessibility of forex and crypto trading platforms.
In the past half a decade, the number of people willing to give trading a shot has increased dramatically, as the prospect of earning significant sums with seemingly little effort is particularly appealing to most people. After all, a quick browse on the internet will pull up dozens of success stories, about how one guy went from rags to riches in months or even weeks by applying basic trading strategies.
However, it’s crucial to know about the differences between forex and cryptocurrency markets, since they are two completely different beasts — each of which poses its own benefits and challenges which you should be aware of before making your first trading moves.
What is Cryptocurrency Trading?
Once a relatively niche industry, the cryptocurrency trading industry has grown dramatically in the last three years, as cryptocurrencies and their use as speculative assets has skyrocketed as a result of incredible bullish price action.
Nowadays, cryptocurrency trading is a popular activity among cryptocurrency holders and speculators, who use one of the myriad cryptocurrency exchanges to perform peer-to-peer trades or open derivative positions.
As it stands, there are three main ways to trade crypto markets. OTC trading is a popular method of exchanging cryptos directly between two parties without needing to rely on centralized order books to execute a trade. This method is typically reserved for high volume traders, like hedge funds or other crypto institutions.
The second type of trading is known as spot trading, a practice that involves the exchange of assets between 2 counterparties through a centralized matching service. Spot exchanges allow you to directly purchase, store, and withdraw a variety of cryptocurrencies, but lack some of the most advanced trading options present when trading derivatives.
Derivatives trading allows you to speculate on the price of a cryptocurrency without necessarily having to own it. There are numerous benefits to this type of trading, including increased accessibility, more control over order execution, and the ability to easily trade on the short side — all without needing a brokers license. As of mid-2020, the majority of cryptocurrency trades occur on modern cryptocurrency derivatives trading platforms, rather than on spot exchanges.
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This type of trading allows speculators to trade on leverage, which essentially allows them to open positions larger than their own capital. At KoinPro, traders can use up to 100x leverage — thereby multiplying their profits by 100x! This is equivalent to turning 5% profit into 500% profit.
When it comes to trading, cryptocurrencies bring numerous benefits to the table. They are highly volatile, which means that you don’t need to invest huge sums to see impressive gains, and there are a huge number of markets to trade, making profitable opportunities plentiful. That said, volatility can be a risk, and must be carefully managed to maximize profits.
Traders can easily find arbitrage opportunities due to the sheer number of markets and cryptocurrencies available (several thousand). As such, if you are looking for arbitrage opportunities, it’s hard to argue that crypto markets are the best place to find them.
What is Forex Trading
Foreign exchange (forex) trading is the exchange of one fiat currency into one or more other fiat currencies. According to recent statistics, the average daily trading volume of Forex is around $6.6 trillion. As such, the forex trading industry remains at least a dozen times larger than the crypto one.
In general, forex markets are less volatile than cryptocurrency and most other markets due to the incredible amount of trading volume. Because of this, it is rare to see significant price swings over short-term times frames — but that doesn’t mean traders are not profiting.
The price of any currency is heavily determined by current interest rates, economic sentiment in the country or countries that use the currency, sentiment towards other potentially dangerous situations like war, and a huge number of other variables. Because of the huge number of contributing factors, forex trading is generally a no-go for beginners, unless they wish to dedicate significant time and resources to keep up to date on a variety of currencies. Likewise, it can also be challenging to make much money without trading with significant leverage, since the market generally moves just a fraction of a percent each day.
There are two main types of forex trading: day-trading and swing trading. The first type generally requires more time and attention, but is also arguably the best way to make quick gains. Swing trading, on the other hand, is a slower approach which sees the trader hold a currency for days or even weeks before taking their profits. There is less risk associated with this trading method, but the potential wins are also lower.
Although forex trading can be a profitable endeavor, new traders commonly struggle with the high account balance requirement needed to turn a substantial profit. Although there is no legal minimum to start trading forex, traders will almost certainly need to be working with sizeable amounts in order to generate a good return on the spot markets due to the limited volatility.
Luckily, thanks to the forex derivatives market, traders can leverage their positions and see bigger gains without large initial investments. The typical leverage available ranges from 50x to 400x times (sometimes even more) and is an essential tool for forex traders for a more modest starting balance.
How Cryptocurrency Trading Differs From Forex Trading
Cryptocurrencies are essentially digital currencies, because of this, the forex and crypto markets are similar because both of them involve the exchange of currencies in some form. However, the cryptocurrency market is open 24/7 while the forex market is open on weekdays, but is closed on the weekends.
Many traders want to benefit from the volatility of crypto markets by trading derivative contracts. Platforms like KoinPro mitigate the risk of bankruptcy through partial liquidations, which helps traders to keep some of their balance instead of getting entirely liquidated if the market moves against them. Beyond this, traders are typically able to access crypto markets without needing to complete any form of identity verification — something that is simply not possible in forex markets.
Nonetheless, the forex market has far more daily trading volume than the crypto market. As of writing, the peak volume of the crypto market was around $266 billion in 24 hours, whereas the forex market frequently tops $5 trillion in 24-hour trading volume.
This difference deeply influences the volatility of both markets as the crypto market regularly experiences moves of up to 10% in a day on a regular basis, while forex traders would typically be surprised to see a daily move of more than 1% on their positions. Despite this, cryptocurrency trading tends to incur much lower fees than with forex, which means greater profits for traders even with low balances.
Forex traders typically enter the market with a much higher initial investment than crypto traders simply because it’s not volatile enough to generate the kind of profits seen in cryptocurrency markets — even when trading on leverage. This is also the reason why algorithmic bots and quantitative traders heavily govern the forex market, whereas these are only starting to achieve success in crypto markets due to their sentiment-driven nature.
Nonetheless, both markets suffer from the same big misconception of being ‘get rich quick schemes’. The truth is, without time, practice, and knowledge, traders will likely struggle in either market.
