Many cryptocurrency traders are considering ways they can diversify their investment portfolio in an attempt to limit exposure to risk. If you enjoy the quick-paced nature of cryptocurrency trading, then you may also enjoy trading in the forex market. Here, we’ll breakdown the similarities and the differences between cryptocurrency trading and forex trading.
What is Forex?
Forex, also known as either FX or foreign exchange, is the largest financial market in the world. On average, over $1 trillion is traded on the forex market every day, which is approximately $220 billion per hour.
The forex market allows individual traders and large institutions such as banks to exchange one currency for another. When you trade forex, you’re always trading a currency pair, so you sell one currency while you buy another for an agreed price. This is similar to the process of buying travel money over the counter when you go on holiday.
Instead of using a centralized exchange like a blockchain, forex trades take place over the counter (OTC) through the interbank market. When trading forex, transactions are split into four zones. These are in London, New York, Sydney, and Tokyo. As there’s no centralized location for forex trading, you can trade forex 24 hours a day.
The Differences Between Forex Trading and Cryptocurrency Trading
Generally speaking, the forex market is less volatile than the cryptocurrency market, although both have experienced flash crashes in recent years.
The forex market is less volatile than the cryptocurrency market due to the increased liquidity. This means that large trades (like the ones placed by financial institutions) do not have a significant impact on the bid/ask prices for the currencies, so the market remains fairly stable.
Another key difference between forex trading and cryptocurrency trading is the security and regulation in the forex market. Cryptocurrencies are still a new technology, which means that accounts can be hacked and coins can be stolen. This was the case when bitcoin was hacked and $40 million was stolen last year.
On the other hand, the forex market is heavily regulated, and many brokers are registered with the Commodities Futures Trading Commission and the National Futures Association. This does lead to a higher cost though, as middlemen, like brokers, charge you for use of their services, such as account fees and trading fees.
The Similarities Between Forex Trading and Cryptocurrency Trading
But, despite the differences between these forms of trading, there are similarities between the two sectors. For example, both forex prices and crypto prices are determined by levels of supply and demand in the market. Similarly, both involve the digital trading of multiple assets in the digital world. For this reason, in many ways, trading coins is an updated version of the way that many people have been trading currencies on the forex market for quite some time.
Finally, both cryptocurrency trading and forex trading require a relatively short amount of time to see through, and both markets operate day and night. This means that traders have a great amount of flexibility in deciding when they trade.
Which is Best for Me?
Whether you’d prefer to trade forex, crypto, or both is a matter of personal preference. Diversifying your investment portfolio can help you minimize risk, but education is essential for ensuring you have the knowledge required to trade effectively. Both forms of trading require a high level of engagement, so plan your trading and investment strategies and educate yourself before you trade in either market.