As a trader, you see many terms everywhere – the most common being forex and crypto. Both deal with some sort of currency, but they are not the same. To be a good trader, it is essential you know the key differences between the two. This article will bring you up to speed with the basics.
Defining Forex and Crypto
Forex is short for foreign exchange. This financial market allows you to obtain access to international pairs of currencies. To put it in simple terms, the forex market enables you to exchange one currency with the other, gaining profit from the price volatility. Some common exchanges are EUR/USD, EUR/JPY, or GBP/USD.
Cryptocurrency works similarly to forex. Still, unlike forex which is based on a centralized system (banks), crypto is decentralized. The cryptos are stored on a Blockchain, which helps improve the transparency of the process. Since no central authorities are used, the “middle man” is removed – and therefore, additional transaction fees are also taken out.
Key Differences between Forex and Crypto
When comparing crypto and forex, there are several factors to keep in mind. These are:
Market Size and Diversity
When it comes to forex and cryptocurrency, their market size and diversity factor are fairly similar. Most brokers offering crypto & currency trading allow you to trade any currency pair that you want. Crypto is pretty much the same, as you have thousands of projects to potentially invest in. However, you need to narrow down the trades to the most popular cryptos and currency pairs if you wish to have any success.
The forex market generally has much higher liquidity compared to cryptocurrency. While popular, regular currencies have been around for a much longer time. This means that there are more tokens in circulation as compared to cryptocurrency. The overall value of the cryptocurrency market is somewhere around $2 trillion. On the other hand, the forex market capped at $6.6 trillion. This gives it much higher liquidity as compared to the crypto counterpart.
Even though the forex market is quite a volatile one, crypto is even more volatile. While forex steadily changes value as a result of inflation and other economic elements, crypto is also affected by “celebrity” events. For example, after Elon Musk made his appearance at the SNL (Saturday Night Live), Dogecoin plummeted by almost 30%. You never know what’s going to cause a cryptocurrency to lose its value.
The forex market is backed up by authorities such as banks, which makes it highly regulated. While crypto markets say that there are numerous regulations behind the system, it still feels like something out of the Wild West. Some may say that this is a risk, but others see it as an advantage. This means the regulatory hurdles are not that difficult to pass.
The Bottom Line
While crypto and forex function in a similar manner, there are still numerous differences to keep in mind. Weigh them and figure out which market works best for you.