AT first glance, there’s a great deal that binds the forex and cryptocurrency markets, with the former facilitating the trading of fiat currencies and the latter dealing exclusively with digital alternatives.
Both markets are also vast and fast-growing entities, with the foreign exchange seeing an estimated $6.6 trillion trade globally every single day.
Conversely, the total market capitalisation value of the crypto market is currently around $1.70 trillion, while this continues to evolve as third-generation blockchains become increasingly prevalent.
However, there are also numerous factors that distinguish forex trading forex trading from crypto trading, and it’s important to understand these in detail before choosing your preferred asset class.
1. Volatility
While both the forex and cryptocurrency markets are inherently volatile, crypto assets are prone to more extensive bear and bull runs. This is thanks largely to their lack of underlying claim or value, which makes them particularly vulnerable to market sentiment and speculative valuations.
The recent crypto crash has borne this out, with the market’s aforementioned capitalisation value having fallen from a little over $2 trillion in May.
During the same period, Bitcoin has shelved nearly than 50% of its value after hitting an all-time high of $63,223.88 on April 14th, while Ethereum has also recorded losses of more than 20%. Such depreciation has been largely triggered by the threat of increased regulation and the simple decision of Tesla owner Elon Musk to stop accepting Bitcoin as a viable payment method.
The level of volatility in the forex market is far less pronounced, especially when trading major currency pairings like the EUR/USD and USD/JPY. Such pairings are typically considered as relative safe-haven assets, while they’re also highly liquid and easy to buy or sell in real-time.
2. Security and Regulation
The concept of blockchain and cryptocurrency gained traction with the advent of Bitcoin in 2009, making the technology relatively new and exciting.
As an emerging tech sector, however, the crypto market carries inherent risk from the perspective of security, with holdings stored in online or desktop wallets often providing soft targets for hackers or cyberthieves.
The immutable nature of blockchain (which is one of the decentralised technology’s main advantages) often makes such rogue transactions irreversible, with this threat exacerbated by the lack of a universal regulatory framework that stretches across the globe.
While there’s no single body responsible for overseeing the forex market, each jurisdiction has its own robust regulator for the purpose of licensing brokers, communicating key changes of service and undertaking regular audits.
In the UK, the Financial Conduct Authority (FCA) is responsible for this, while the regulator also announced at the end of 2020 that it was creating a ‘temporary registration regime’ for existing crypto firms. However, it has so far been unable to assess and register all operators that have applied for registration, and it’s unclear how long this process could take.
3. Transparency and Accountability
Despite the lack of a regulated and fully secure crypto market, the fundamental nature of blockchain and assets such as Bitcoin does help to protect holders from market manipulation.
Conversely, this is something that has plagued the forex market in the digital age, with various scandals having seen the collusion of banks and central authorities to manipulate currency exchange rates for their own financial gain.
This is virtually impossible in the cryptocurrency market, as blockchain is completely decentralised and separated from any central point of control.
This technology subsequently creates a transparent and immutable ledger of records and transactions, which cannot be altered for the gain of a select few individuals.
There’s no doubt that this is a significant advantage of trading crypto assets like Bitcoin over fiat currencies, and it’s something to keep in mind when building your portfolio.
This is a submitted article.
