By Nathan Ferguson
More often than now, many people especially the old folks have confused crypto trading and forex trading. Many couldn’t lay their hands on the distinctive features of the two nor could they mention the relationship between them in the financial industry.
One of the pitfalls of an upcoming trader is to treat crypto trading like he would treat forex trading and vice versa, or even go on another exquisite adventure to gather a whole new set of information to deal with the two entities separately while in the real sense, there is a common body of knowledge he needs to run the two simultaneously.
So, take this article as a guide, either for an upcoming trader or established ones who seek to understand better the difference between the forex trading experience compared to crypto trading as much as the similarities between the two.
To begin with is an in-depth explanation of what these two terms mean, after which the differences and similarities will come out like crystals in crystallization. Without any further ado, let’s get started:
Everything about Forex Trading
Forex, which is called Foreign Exchange in full, is the process of exchanging a country’s currency for another one. There are different reasons why people do so, and it does not have to be primarily for profit even though there is a potential of making a profit over some time.
Reasons, why people engage in foreign exchange, including tourism, commerce, relocation before we now start talking about trading. Just consider a man vising the Eiffel Tower in Paris, France, from the United States of America. The man must first know that the accepted currency in France is not the US Dollars and it will almost be useless even, if he carries it in millions to France, but rather prepare to spend Euro. For this reason, he must exchange his US Dollars for Euros before entering France, so he can perfectly blend with the economic and financial activities in the new country. This same must be done to his Euro perhaps he has leftovers when he is returning to the United States after the set period.
So, take that illustration for some other reasons listed up there. The person who wanted to buy something in another country other than his must first exchange his primary currency to that of the country he wanted to transact with.
Though, there are ventures who through the aid of technology have breached the gap between walking to a physical Bureau de change before engaging the transactions especially when it comes to commerce. You just pay the equivalent in your local currency through the platform, and the receiver receives it in their currency.
However, there is a side of foreign exchange that allows people to exchange to another currency over a period knowing the currency will appreciate and will eventually make a profit off the exchange; and that is what is called Forex Trading. This is because the exchange rate of a currency to another is not fixed permanently, but rather some factors affect the shift which traders can bank on to make a financial decision and make a profit.
So, just because of the varieties of currency across the globe, Foreign Exchange or Forex Trading has become almost a way of life for everyone, either for profit-making or other reasons. According to a report from BIS – Bank for International Settlements in 2019, the daily volume of foreign exchange in the world is about $6.6 trillion (such a huge amount of currency exchange, guess the need is more after all).
When it comes to forex trading internationally, there is no central assembly of ‘exchangers’, but rather the exchanges are done over the counter (OTC) electronically. This means that these transactions are done over the internet among traders in the world rather than waiting for a centralized body to coordinate them. This means that the willingness to buy or sell, which is technically the law of demand and supply has a huge role to play in the exchange rate of each currency.
To put in perspective, the foreign exchange market is open for the entire day (24 hours) but for five days excluding weekends. Also, because of the difference in time zones across the globe, the trading activities are separated into major trading zones based on time namely, Hong Kong, Tokyo, Sydney, London, Paris, Zurich, Singapore, Frankfurt, New York. This means that the end of a trading day in the United States is the beginning of another one in Hong Kong and Tokyo.
How does Forex Trading work?
There are different ways to trade the forex market:
- Spot Trading: this is the exchange of a currency pair physically on the spot as a set/current exchange rate.
- Futures and Forward Trading: this is the kind of forex trading where an agreement is reached to buy or sell a particular amount of a currency on a set date in the future at a specified amount.
Good to note that because the exchange of a currency can only be done with another singular currency (not a group of currencies), the term “currency pair” is used to measure the relationship between the two currencies involved in the exchange.
In a currency pair, however, there is the base currency and the quote currency. The base currency is the first currency listed on the left-hand side of the pair, while the quote currency is listed on the other side just after the forward-slash (/). So, to put in better perspective, in forex trading, you are selling one currency to put the other. To recap, you are selling the quote currency to buy a unit of the base currency.
For example, USD/JPY: the base currency is USD, while the quote currency is JPY. Every currency is written with a three-letter code, with the first two letters being a shortcode for the country and the last letter being the first letter of the currency itself. In the case of JPY, JP is the shortcode for Japan, while Y is the first letter for Yen. This means that JPY in full is called the Japanese Yen.
So, if the exchange rate for USD/JPY is 140.23, that means to get a unit of the US Dollar, you will spend 140.23 Japanese Yen.
However, these pairs are categorized based on their popularity in the currency market. There are the Major pairs (GBP/USD, EUR/USD, USD/CHF, AUD/USD, USD/CAD/, and USD/JPY) which make up to 80% of the whole market. There are the minor pairs which is the list of the less traded pairs, and there are the exotics which is the list of a developed economy to developing economy pairing.
Also, there are some terms in the foreign exchange market like Pips, Lots, Leverage, and Spread.
What Determines the Exchange Rate in the Currency Market?
Many factors affect the exchange rate in the currency market, and since these currencies are a representation of each country, you will be right to first mention the economic stability of the country. However, some other factors contribute to the fluctuation of the exchange rates.
One of them is the central banks, which control the supply and, also release regulations that can affect a region or a particular country. Another factor is news reports from each country. Other factors include market sentiments, credit rating, and economic data.
Everything to Know About Cryptocurrency and Crypto Trading?
While Forex Trading has been for a while, it is nothing like cryptocurrency trading, which surface in the financial industry in less than 20 years. However, its novelty has not in any way impeded its growth as it has grown to be the talk of the town, and many even think it is better than forex trading.
The objective of this guide is to examine the lines separating the two trading experiences and also to point out where they intersect.
Whatever is called cryptocurrency is not known until 2009 when someone with the pseudonym, Satoshi Nakamoto created the first cryptocurrency with the motivation of creating digital money that solves the issues attached to the usage and interaction with the traditional currencies, and the financial industry at large.
With Bitcoin, which is the first cryptocurrency ever, many have gone ahead to dub it to create thousands of others, either to expand the usage or solve the limitation with the first one. According to Statista.com, there are over 6,000 other cryptocurrencies created after Bitcoin since 2009 within which Ethereum, Bitcoin Cash, Litecoin, and others were captured. Currently, on coinmarketcap.com, a website curating the data of all cryptocurrencies in existence, there are about 10,000 cryptocurrencies.
Cryptocurrencies and the Blockchain Technology
The first crypto made, Bitcoin, and a sizable number of other cryptocurrencies built their functionality on Blockchain technology which is praised for its huge transparency potential. As you can predict from the name, blockchain means a network of blocks – a name for an online ledger. In each block is a set of transactions that are verified independently by a separated member of the network. This verification and confirmation process made it impossible to forge the histories of any transaction in the blocks, hence, the source of its transparency.
Every member on the network (node) must agree on the content of the block, or a computer keeps a copy of the ledger.
Blockchain technology has been employed in other industries like the supply chain and some processes like crowdfunding and electoral processes because of diversified applicability.
Different Types of Cryptocurrencies
As mentioned, while Bitcoin is the first and most popular in the crypto space, there are several others with different specifications and functionalities. Examples are Ethereum which because popular with its smart contract mechanism and Ripple’s XRP which is built basically to facilitate cross-border transactions.
Some of the cryptocurrencies in existence are just a clone of Bitcoin (forks) while others were developed from scratch but altogether, they are referred to as Altcoin.
As of November 2021, the total market capitalization of the crypto market has risen more than $2 trillion, and about 41% of it represented the market cap of BTC.
The Legality of Cryptocurrency
Since its inception, the cryptocurrency has entered a turf of war with the political sphere because of the disruption it is causing the financial industry.
While the crypto market is decentralized (meaning there is no central authority regulating it), different country has taken the war against crypto personally through their diverse regulatory framework under different regulatory agencies. Other countries like China have placed a blanket ban on the asset class making it illegal for anyone in the country to participate in any operation related to it.
However, El-Salvador, a North-American country, has developed a BTC Law that approves Bitcoin as a legal tender despite criticism from individuals and corporate organizations. There are other countries and individuals with some other level of positive disposition to the asset class making it more acceptable than projected.
Apart from the disruption, the asset class is causing the financial industry, the basis of rejecting it has always been based on its volatility and the tendency to be used for illicit activities like money laundering and terrorism financing among other things.
Different Ways to Trade the Crypto Market
- Spot Trading: treating cryptocurrency as a commodity, spot trading is like buying the cryptocurrency to keep in a cold/hot wallet with the plan to sell when the value increases.
- Futures Trading: This is a process that enables investors to get exposed to the crypto market without necessarily holding the tokens in their wallets.
- Peer-to-Peer trading (P2P): This is an alternative to using centralized exchanges to buy and sell crypto. This process of trading involves reaching an individual that has the token you want to buy or is interested in the one you want to sell for exchange.
Crypto trading is about speculating the price movements of the assets through a CFD account or just engaging in buying and selling, including P2P trading via an exchange. To engage in crypto trading, you will need an account with an authorized exchange in your country, or at least have a crypto wallet that will allow you to use the decentralized exchanges.
Similarities Between Forex Trading and Crypto Trading
- From the aforementioned explanation, one of the similarities is that the two kinds of trading involve currencies. But at the same time, this fact can still be a difference on its one because one currency (in forex trading) is real while the other is virtual.
- For the two types of trading, making a financial decision requires some elements of speculation, which must be informed and guided by the ability to learn how the two markets work. To be successful in the two markets, you need to put in the work to learn how to analyze the market (both technical and fundamental analysis).
- Getting involved in both markets involves a stable internet connection and a computer or at least a smartphone. This is will allow for fast market execution.
- Both markets are controlled majorly by the demand and supply of the currencies. This means that the inflow and outflow of sellers and buyers determine the movement of the price; higher prices indicate more buyers, while lower prices indicate more sellers.
Difference Between Crypto Trading and Forex trading
- A forex trader only has access to the market for five working days, while the crypto market is open for trading 24/7 without any break, weekend, or holiday.
- In forex trading, there is a limited number of currency pairs available to trade but there are way more options available in crypto trading. As mentioned earlier in this guide, there are more than 10,000 coins available to trade.
- Liquidity and Volatility: In terms of liquidity, the forex market is extremely liquid. Recall that the daily trading volume in forex is about $6.6 trillion as of 2019. But when it comes to the crypto market, there is limited liquidity which in a way affects the volume of your investments and returns.
- Apart from liquidity, one of the battles against crypto trading has stemmed from its extremely volatile nature compared to the forex market, which is moderately volatile based on its price history unless in rare cases of adverse news reports.
- Security: Because of the novelty of cryptocurrency, the concern is still around its security. Diverse scams are rising from the market. Unregulated exchanges are rising every day and it is leading to more investments getting burnt. Compared to the crypto market, the forex market is considered safe.
- Another difference between the crypto market and forex market is that the crypto market attracts some unexpected fees which can be considered too much compared to forex trading. Sometimes, the transaction fees in the crypto market can be overwhelming depending on the network you are dealing with, but in forex trading, your profit is calculated based on the asking and bidding price with no other extra or hidden fees.
Conclusion
Beyond these differences, some forex brokers have added a few crypto options to the list of their offerings which opens you up to some benefits that exist in forex trading. This is a good way for a forex trader looking to get exposed to the crypto space to diversify their portfolio.
By the way, there are some other differences and similarities that may not be captured in the list above. But this is a comprehensive guide to bring things to perspective.