Forex vs. Crypto Trading: Which Should You Choose?

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Over the past few years, trading in cryptocurrencies has grown, becoming more mainstream as we experience a “digital” gold rush of new technology and innovation. This rise in digital currency investment has pushed the total market valuation of cryptos to above $3 trillion.

The speculative rise in blockchain technology and its many cryptocurrencies has caught the attention of traders, who are afraid of missing out on significant gains.

This is a huge difference from forex (FX) markets, where the exchange rates between currencies hardly move. The leverage that’s applied to forex is what creates its appeal for traders.

In this article, we’ll discuss the similarities and differences between forex and crypto trading.

The Landscape of Crypto and Forex Trading

Crypto and forex trading have both commonalities and differences. Crypto trading is the buying and selling of digital assets, such as cryptocurrencies, tokens and NFTs (non-fungible tokens). Forex trading means swapping one fiat currency for another in the hope the currency will rise in value, which the trader can then reconvert for profit.

The mechanics that drive the valuations of cryptocurrencies and fiat currencies are similar, such as supply and demand. However, the specific forces behind the supply and demand are significantly different for crypto and forex.

For example, cryptocurrencies are run on blockchain technology involving a distributed and decentralized ledger. As a result, enormous investment is being put into this new infrastructure, with demand for cryptocurrencies going through the roof.

Forex trading — essentially, pitting one economy against another, in the hope that the value of the currency you’ve bought will increase — has been around for decades. The forces behind supply and demand in forex are large, and any significant imbalances can have a tremendous impact on the world economy.

When conducting technical analysis, the basic mechanisms used to analyze price charts are the same between crypto and forex trading. However, one huge difference stands out: the volatility of crypto markets is significantly higher than that of FX.

Crypto vs. FX Volatitly
Image from TradingView.

In the image above, the average true range (ATR) indicator has been applied to the weekly closing prices for the largest cryptocurrency (Bitcoin) and the most actively traded forex pair (EUR/USD). The ATR has been standardized to determine a volatility percentage, which reflects how far the asset might move in any given week.

The chart above indicates that the forex’s ATR is between 1.1% and 1.4%, whereas that of Bitcoin ranges between 7.5% and 25%.

Market Capitalization

Just as cryptocurrencies help fuel various blockchain projects, forex is the fuel for the world’s economies. One of the benefits that Satoshi Nakamoto created when developing Bitcoin was a transparent ledger of ownership for the cryptocurrency. As a result, we can easily determine the size of the cryptocurrency market.

The total market capitalization for crypto is about $3 trillion. It took 12 years to generate the first $1 trillion combined valuations, then another 11 months to add the next $2 trillion. The total value of the crypto market is quickly accelerating higher.

It’s more difficult, on the other hand, to determine forex’s value. Economists can estimate the total value of the worldwide economy, which in 2017 was estimated to be $80 trillion. 

Every three years, the Bank for International Settlements (BIS) estimates the world’s trading volume in foreign exchange. The most recent report came out in September 2019, when BIS found that forex traded $6.6 trillion per day, up from $5.1 trillion three years earlier.

Due to the decentralized nature of crypto, it’s difficult to arrive at a conclusive figure for trading volumes, but estimates range between $100 billion–$500 billion per day.

Forex trading is well-established, and the systems and mechanisms for trading it has been in place for some time. Even though Bitcoin has been around for 13 years, acquiring Bitcoin has only become easy to do within the past several years.

Market Participants

In the early days of Bitcoin, there were miners, retail clients and some small centralized exchanges. These exchanges have now expanded to offer hundreds of cryptocurrencies.

In addition, in crypto’s early days, the ability to hold crypto custody on behalf of another party hadn’t yet been worked out. It wasn’t until MicroStrategy (MSTR) announced its first purchase of Bitcoin in August 2020 that the door opened to corporations who wanted to make cryptocurrencies a part of their treasury plans. 

This allowed a larger pool of crypto “whales” to enter into the picture. Bitcoin and Ethereum are the two primary cryptocurrencies which institutions are gobbling up.

With forex trading, banks are swapping currencies all the time, and have done so for decades as multinational corporations need to make payroll in other countries. Banks deal with each other in “yards,” which are one billion units of currency. Within the past 20 years, smaller forex dealers have figured out the technology to allow them to buy and sell currencies while netting off the exposure to bigger banks.

As you can see, one main difference between the evolution of crypto and forex trading is that crypto started off with the little retail trader in mind, while forex trading was reserved for large banks. Eventually, larger institutions were included within crypto, while the “little guy” was eventually given access to forex trading.

Trading Pairs

When trading a market, you’re always swapping one thing for something else. For example, if you’re going to buy Tesla stock, you’re likely exchanging your US dollars for TSLA.

Forex traders have a very good understanding of the swap, which is why their currencies are quoted in pairs. As an example, there are seven main currencies which traders speculate in. When you place those currencies in a matrix, you get 21 pairs (see green highlights).

USDEURGBPJPYCADAUDNZD
USDEURUSDGBPUSDUSDJPYUSDCADAUDUSDNZDUSD
EUREURUSDEURGBPEURJPYEURCADEURAUDEURNZD
GBPGBPUSDEURGBPGBPJPYGBPCADGBPAUDGBPNZD
JPYUSDJPYEURJPYGBPJPYCADJPYAUDJPYNZDJPY
CADUSDCADEURCADGBPCADCADJPYAUDCADNZDCAD
AUDAUDUSDEURAUDGBPAUDAUDJPYAUDCADAUDNZD
NZDNZDUSDEURNZDGBPNZDNZDJPYNZDCADAUDNZD

With most FX brokers, you can log in and find a quote for an exchange rate on any of these pairs. You don’t even have to have European euros or Japanese yen in your account to make a EUR/JPY trade. By trading EUR/JPY, you’re speculating on the movement of the exchange rate for EUR against JPY.

Crypto is still within its early adoption curve. Although you can easily create your own cross rate, most crypto pairs use Tether (USDT), Bitcoin (BTC), Ethereum (ETH), or the exchange’s native coin as the quote currency.

On top of that, there are over 10,000 cryptos now available. It’s simply too cumbersome to create a swap from two relatively small cryptos. Therefore, an intermediary like Bitcoin, Tether or Ethereum is used: for example, you first trade into Ethereum, then buy the coin you’re interested in.

Taxation Mechanisms

IRS rules within the United States treat forex gains and losses differently from crypto gains and losses.

First of all, forex is considered as a Section 1256 contract of the IRS tax code. This means that 60% of the gains or losses are counted as long-term capital gains or losses, and the remaining 40% are counted as short-term, regardless of how long you’ve held the trade open.

Spot forex traders can opt to be taxed according to Section 988, which treats the gains or losses as ordinary income. A profitable trader will likely see more advantage in choosing the Section 1256 contract route, while a trader taking losses may experience more benefit going the Section 988 route.

Before beginning trading, forex traders must decide which route they plan to go, as they cannot change their election afterward.

With crypto, on the other hand, there is no choice in the matter. Crypto is treated as property, and it’s taxed similarly to stocks. The tax is figured when you sell the crypto and depends on how long you’ve held the position open. A trade that’s been held for 365 days or less is considered a short-term gain or loss. This short-term gain or loss is payable at the same tax rate as your ordinary income.

If, on the other hand, the crypto has been held for 366 days or more, then it’s considered a long-term gain or loss. Typically, you’ll pay less tax on a long-term gain than on a short-term gain because the rates are generally lower.

The big difference between forex and crypto when it comes to taxes is that forex traders have to choose ahead of time how they want their gains and losses treated, while all crypto trade is treated the same.

Profitability

It’s widely known within the forex trading community that the majority of traders lose money. Depending on the quarter, typically between 25–35% of the traders produce at least $1 more in their account through the course of that quarter. This means that 65–75% of traders don’t — and therefore lose money.

A large contributing factor in the traders’ losses is leverage. Leverage is a financial tool that can magnify losses and gains. Therefore, when large amounts of leverage are used, the market only needs to move a little against the trader’s position to trigger a margin call — which wipes out a significant portion of their trading account. Generally speaking, less than 10× leverage allows traders enough breathing room to withstand sharp changes in pricing.

With the advent of high-speed computing and the decentralized nature of both forex and crypto, arbitrage opportunities can exist between two different dealers or exchanges. In arbitrage, a trader will buy at one venue and then sell at another, realizing the difference between the prices at the two venues.

Liquidity

The smaller price movements in forex trading allow dealers to offer deeper levels of liquidity. This is part of the reason why forex trades about $6.6 trillion daily, while crypto trading is estimated at between $100 billion to $200 billion daily and as high as $516 billion in May 2021.This places the liquidity within the forex market at 12 to 60 times greater than that in the crypto market.

Both markets are large. With more liquidity, it’s easier to get into and out of large positions.

Volatility

Crypto trading is inherently more volatile than forex trading. As a result, a higher margin is generally required (the more volatile the product is). Therefore, you typically see higher leveraged amounts available in forex trading than in crypto trading.

Market Operations

Both forex and crypto trade around the clock to meet the needs of investors and traders across the globe. As a result, both types of exchanges have offices scattered around the world to service local clients.

Operating Hours

Forex trades 24 hours per day, 5 days a week, from Monday morning in Wellington, New Zealand to Friday afternoon in New York City. Some forex brokers offer trading over the weekend, but usually, you’re simply transacting against your broker in those situations.

Crypto, on the other hand, never sleeps. In addition to trading 24 hours per day, crypto trades a full seven days per week. At any time of any day, you can buy and sell crypto with your exchange.

Market Structure

Forex pricing is created through the interbank market. Brokers then fatten the spreads to generate their own pricing feeds.

The crypto market was created based on the amount of liquidity being offered by participants at each of the locations. As a result, the crypto exchange you’re using to trade large amounts might not have enough crypto to transact at the time you want to purchase.

DEX vs. CEX

A DEX is a decentralized exchange, and a CEX is a centralized exchange. The main difference between the two is that with a DEX you have complete control over the private keys to your crypto, while a CEX maintains control over your funds.

The trading volume on DEXs is quite small compared to their CEX counterparts, but it’s been growing over time. Currently, nearly $6 billion is traded each day on DEXs.

Is Forex Safer than Crypto from a Regulatory Perspective? 

Forex trading may be considered a little safer than crypto. Unlike forex, the crypto market has no central authority, and is highly volatile; hence, it’s prone to wild market swings.

Additionally, the crypto market is less liquid and has lower trading volumes, making it more difficult to get into and out of large trades.

For these reasons, forex traders are generally offered more leverage, allowing them to make larger trades.

Is Forex More Beginner-Friendly than Crypto Trading?

Market newbies need to become familiar with the lingo specific to that market, the risks they’ll generally be exposed to, and the platforms from which to trade.

For beginning traders, both forex and crypto use terms that can be intimidating. Understanding those terms can take a little time. The risks are slightly different between forex and crypto. With forex, the risk of too much leverage is the main reason traders lose. Within crypto markets, the volatile conditions are generally what hurt traders.

Due to the relative difficulty in the past of onboarding new customers, crypto exchanges have gotten better at making their platforms user-friendly — once the trader understands the associated lingo.

Number of Available Instruments

Depending on the broker, forex and CFD brokers will have more trading instruments available as they strive to be that one-stop shop for a trader’s needs. Crypto exchanges offer dozens of instruments as well, but not as many as forex and CFD brokers. 

KYC Procedures

After 9/11, “know your customer” (KYC) laws were put into place to prevent criminals and terrorists from integrating illegal funds into the world’s banking system.

In essence, KYC was instituted in order for traders to prove that they are human (not a bot) and that the source of their account funds is legitimate and not laundered.

Entry Levels

Both forex and crypto dealers’ websites contain beginner-friendly content to help new traders. Look for sections that appeal to beginning traders, or for websites’ education pages.

Forex vs. Crypto Trading: Hedging The Risks

Depending on their exposure to certain markets, traders may want to hedge those risks by using futures, options or perpetual swaps. For example, a person who earns their income from a smaller coin may want to diversify their crypto exposure into some of the larger cap crypto, such as Bitcoin or Ethereum. Investors could also hedge investment risks by staking their assets to earn interest or convert their assets into stablecoin that is pegged to the US currency. Another strategy that involves hedging crypto risks is to perform liquidity assessment by determining the market’s integrity, transaction speed and market fluidity. That’s to allow traders to have quick access to exchanging their assets for cash with minimal exposure to price slippage. 

For example, a forex trader may have an income earned in Mexican pesos, and wants to hedge that exposure if the peso loses value. Accordingly, they could convert some pesos into U.S. dollars, or consider buying crypto. 

Do You Have What It Takes to Trade Crypto or Forex?

In conclusion, forex and crypto are both volatile, and they’re not for the faint of heart. Carefully consider the unique qualities and risks of each market to decide if you’re ready, as well as which one is better for you. Depending on your risk appetite, 

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