- Cryptocurrency and forex trading are not the same thing. Everything revolves around exchanging currencies for profit.
- Cryptocurrency is electronic money for the modern era. It’s like conventional money, but it only exists in digital form.
- In forex trading, one normal currency is exchanged for another regular currency. Forex trading includes, for instance, the exchange of dollars and euros. However, these financial products are extremely similar when it comes to trading.
What Is Forex?
International currencies are purchased, sold, and exchanged in forex markets as speculative assets and in pairs.
This means that one can speculate on and profit from certain price changes without taking ownership of the underlying financial asset by using one currency as a hedge against another.
In broader terms, one will invest in the rates at which various currencies and forex pairings are exchanged while potentially taking advantage of the market’s inherent volatility to earn short- and medium-term gains.
What Is Cryptocurrency?
Blockchain technology, which produces decentralized and distributed ledgers that provide an immutable record of transaction data, is the foundation upon which cryptocurrency assets are formed. As a result, there is greater openness and less chance of market manipulation, and there is also no need for a central authority or other outside party to manage assets or establish transaction costs.
Forex Vs. Crypto As An Asset
As one can see, these two asset types do share certain similarities; however, forex and cryptocurrencies differ greatly. But how precisely do investors view these risky asset classes in comparison? The following are some things to remember:
- Market Size and Diversity
Given that both have enormous marketplaces and an almost excessive number of tradeable assets, forex and cryptocurrencies are similar in this regard. Although there are a few thousand more crypto assets than there were at the time of writing, investors have an abundance of options regardless of the market they choose.
The ease with which an asset may be bought and sold is referred to as liquidity, and in this regard, FX is significantly more liquid than cryptocurrencies. This is especially true for popular currency pairs like the EUR/USD, which represents about 24% of daily forex volumes and enjoys practically continuous, unbroken demand.
The only cryptocurrency asset that can be broadly characterized as liquid is BTC, but even then, there is a limited supply of Bitcoin tokens in circulation. Demand changes dramatically along with market sentiment, which causes liquidity to occasionally drop significantly and make an asset difficult to sell.
As it is already mentioned, the foreign exchange market is quite volatile; therefore, no investor should undervalue it. Although prices can still move significantly over relatively short periods, major currency pairs are significantly less volatile than exotic and even minor pairings; therefore, assets like the EUR/USD normally trade in defined ranges.
The same cannot be true of cryptocurrencies, though, as Bitcoin has repeatedly seen bull runs and crashes throughout its lifetime. For instance, after reaching a market cap and value peak in November of last year, it has since lost roughly 70% of that value throughout a tumultuous 2022. Similar to less well-known assets, real-time crypto holdings are prone to sharp rises and falls with little notice.