Forex vs. Crypto Trading: Which Should You Choose?

Trading in cryptocurrencies has risen significantly over the last few years, becoming increasingly widespread as we witness a "digital gold rush" of new technological advancements and innovations. As a result of the recent surge in investment in digital currencies, the total market value of cryptocurrencies has surpassed $3 trillion.

Traders, who are frightened of losing out on huge profits, have been paying attention to the speculative surge in blockchain technology and the multiple cryptocurrencies it supports because of the rise in blockchain's value.

In contrast to foreign exchange (FX) markets, where there is very little fluctuation in currency exchange prices, this one is quite unusual. The leverage that may be used in forex trading is a large part of what attracts traders to this market.

In this essay, we will compare and contrast forex trading with cryptocurrency trading, looking at both of their similarities and differences.

The Landscape of Crypto and Forex Trading

Trading in cryptocurrencies and foreign exchange both have certain similarities and distinguishing features. The purchasing and selling of digital assets such as cryptocurrencies, tokens, and other types of non-fungible tokens is referred to as crypto trading (non-fungible tokens). When trading foreign exchange, one fiat currency is exchanged for another with the hope that one of the currencies will rise in value, allowing the trader to sell the asset again at a higher price.

The mechanisms, such as supply and demand, that influence the prices of cryptocurrencies and fiat currencies are comparable and include the following: However, the exact dynamics that drive supply and demand in the cryptocurrency market and the FX market are quite different from one another.

To provide one example, cryptocurrencies are powered by a technology known as blockchain, which involves a distributed and decentralized ledger. Because of this, a lot of money is being put into this new infrastructure, and the demand for cryptocurrencies is going through the roof.

Trading in the foreign exchange market, which basically involves betting on the performance of one economy relative to another in the expectation that the value of the currency that you have purchased will rise, has been around for decades. There are a lot of things that affect supply and demand on the foreign exchange market, and even small imbalances can have a big effect on the economy of the whole world.

When it comes to doing technical analysis, the fundamental methods utilized to examine price charts are the same for crypto and forex trading. Still, one major difference stands out: the volatility of crypto markets is much higher than that of FX markets.

The average true range (ATR) indicator has been applied to the weekly closing prices of the most regularly traded FX pair (EUR/USD) and the biggest cryptocurrency market (Bitcoin). The average true range (ATR) has been normalized so that a volatility percentage may be calculated. This percentage represents how much the asset might change in any given week.

According to the chart seen above, the ATR of the FX market falls somewhere between 1.1% and 1.4%, while the ATR of Bitcoin fluctuates between 7.5% and 25%.

Market Capitalization

In the same way that cryptocurrencies like bitcoin and ethereum help feed different blockchain initiatives, foreign exchange is the gasoline that drives the global economy. When Satoshi Nakamoto was inventing Bitcoin, one of the perks he provided was a transparent register of ownership for the cryptocurrency. Because of this, it's not hard for us to figure out how big the cryptocurrency market is.

The whole value of the cryptocurrency market is close to three trillion dollars. It took a total of 12 years to create the initial combined value of one trillion dollars, and then it took an additional 11 months to add the subsequent two trillion dollars. The cumulative worth of the cryptocurrency market is swiftly and decisively climbing upward.

On the other hand, determining the value of a foreign currency might be more challenging. Economists can give an estimate of how much the whole world economy is worth. In 2017, they came up with a figure of $80 trillion.

The Bank for International Settlements (BIS) compiles an estimate of the total number of foreign currency transactions worldwide once every three years. The BIS released its most recent report in September 2019. It said that the amount of foreign exchange traded every day had gone up from $5.1 trillion three years earlier to $6.6 trillion.

It is difficult to come up with a definitive number for trade volumes in the cryptocurrency market due to the decentralized nature of cryptocurrencies. Yet, estimates vary anywhere from $100 billion to $500 billion every day.

Trading in the foreign exchange market is well-established, and the procedures and processes required for doing so have been in place for some time. Even though Bitcoin has been around for the previous 13 years, it has only been in the past few years that it has been simple to acquire Bitcoin.

Market Participants

In the early stages of Bitcoin's existence, there were three main types of participants: miners, retail customers, and a few tiny controlled exchanges. These exchanges currently provide a selection of hundreds of different cryptocurrencies for trading.

In addition, during the early stages of cryptocurrency's development, the capability to keep cryptocurrency in custody on behalf of a third party was not yet fully developed. It wasn't until MicroStrategy (MSTR) announced its first purchase of Bitcoin in August of 2020 that the door was opened for corporations that wanted to make cryptocurrencies a part of their treasury plans. MicroStrategy's announcement marked the beginning of a new era in corporate investment in cryptocurrencies.

This opened the door for an increased number of crypto "whales" to participate in the market. Bitcoin and Ethereum are the most important cryptocurrencies on the market right now, and institutions are buying up both of them.

As a result of foreign exchange trading, banks are constantly exchanging currencies and have been doing so for decades as a result of the requirement for international firms to make payroll in other nations. Yards, which are equal to one billion units of cash, are the standard unit of exchange between banks. Within the last 20 years, smaller foreign exchange dealers have found the technology that enables them to purchase and sell currencies while simultaneously netting off the exposure to larger banks. This ability was previously only available to larger financial institutions.

As can be seen, one of the most significant distinctions between the development of cryptocurrency and that of foreign exchange trading is that the former was initially designed with the individual retail trader in mind, whilst the latter was restricted to huge financial institutions alone. Later on, bigger institutions began to participate in crypto, while the "little man" gained access to FX trading. Both of these developments occurred in due time.

Trading Pairs

Trading in a market usually involves exchanging one product for another of a different kind. For instance, if you want to invest in Tesla stock, you will most likely trade in some of your U.S. dollars for TSLA shares.

Because Forex traders have such a deep understanding of the swap, their currencies are always quoted in pairs. To provide one example, there are seven primary currencies in which traders engage in speculation. You will end up with 21 different currency pairings after placing those currencies in a matrix.

You may obtain a quotation for an exchange rate on any of these pairings by logging into your account with the majority of foreign exchange brokers. You don't even need to have any euros from Europe or yen from Japan in your account in order to conduct a transaction in euros and yen. When you bet on how the exchange rate between EUR and JPY will change, you are said to be trading EUR/JPY.

Cryptocurrency is still in the early stages of its adoption curve. Most cryptocurrency pairings use Tether (USDT), Bitcoin (BTC), Ethereum (ETH), or the exchange's native coin as the quote currency, but it's easy to make your own cross rate.

In addition to that, there are currently more than 10,000 different cryptocurrencies accessible. It is simply not possible to establish a swap using two cryptocurrencies that are on the lower end of the size spectrum. Because of this, an intermediate currency like Bitcoin, Tether, or Ethereum is utilized. For instance, you would first trade into Ethereum, and then acquire the coin that you are interested in.

Taxation Mechanisms

Foreign exchange profits and losses are handled differently under the IRS guidelines in the United States than cryptographic gains and losses are handled.

To begin with, under the Internal Revenue Service tax law, foreign exchange is classified as a Section 1256 contract. Regardless of how long you've had the transaction open, this implies that 60% of the profits or losses will be recognized as long-term capital gains or losses, while the remaining 40% will be counted as short-term capital gains or losses. This applies to both long-term and short-term capital gains and losses.

Spot forex traders have the option of electing to have their earnings or losses treated as regular income under Section 988 of the Internal Revenue Code. A trader who is experiencing a profit will likely see more benefit in following the path of the Section 1256 contract, while a trader who is experiencing a loss may see more benefit in going the route of Section 988.

Forex traders are required to settle on a strategy before they begin trading, since they are unable to alter their decision once it has been made and trading has begun.

On the other hand, one does not have a choice on the issue while dealing with crypto. Cryptocurrency is categorized as property for tax purposes and is taxed in a manner similar to that of stocks. When you sell the cryptocurrency, the tax is calculated based on how long you've had the position open and is determined at the time of sale. A gain or loss that was realized via a deal that was kept for less than a year is considered to be short-term. This gain or loss that occurred over a short period of time will be subject to the same tax rate as your regular income.

On the other hand, if the cryptocurrency has been held for 366 days or more, then either a gain or a loss is regarded to have occurred over the long run. Because the rates are often lower, you might expect to pay less tax on a gain that was realized over a longer period of time as opposed to a gain that was realized over a shorter period of time.

When it comes to taxes, the biggest difference between trading forex and trading crypto is that forex traders have to decide ahead of time how they want to tax their profits and losses, while crypto traders' transactions are always taxed the same way.

Profitability

Within the group of people who trade forex, the fact that the vast majority of traders end up losing money is a well-known fact. The percentage of traders who end the quarter with at least one dollar more in their accounts ranges between 25 and 35 percent, though this varies by quarter.This indicates that between 65 and 75 percent of traders don't, and as a result, they lose money.

Leverage is a significant contributor to the losses that were incurred by the traders. A financial technique known as leverage has the potential to multiply both earnings and losses. Because of this, when huge levels of leverage are utilized, the market only has to move slightly against the trader's position for a margin call to be triggered, which results in a big chunk of the trader's trading account being wiped out. In general, a leverage of less than 10 gives traders enough room to breathe, allowing them to withstand price fluctuations.

There is the potential for arbitrage possibilities between two distinct dealers or exchanges now that high-speed computing and cryptocurrency both have a decentralized character. A trader will engage in arbitrage by first buying at one venue and then selling at another in order to profit from the price differential that exists between the two venues.

Liquidity

In the foreign exchange market, deeper levels of liquidity may be offered by dealers as a result of the smaller price swings. It is for reasons such as this that the daily trading volume of forex is around $6.6 trillion, but the daily trading volume of cryptocurrencies is anticipated to range from $100 billion to $200 billion, and might reach as high as $516 billion in May 2021. Because of this, the level of liquidity in the FX market is anywhere from 12 to 60 times higher than that of the cryptocurrency market.

Both markets are enormous. Now that there is more liquidity, it is much easier to buy and sell large amounts of stocks.

Volatility

Trading in cryptocurrencies is inherently more volatile than trading in FX. As a consequence of this, a larger margin of safety is often needed (the more volatile the product is). Because of this, the amounts that can be leveraged in forex trading are usually bigger than those that can be leveraged in cryptocurrency trading.

Market Operations

The foreign exchange market (forex) and the cryptocurrency market (crypto) both operate non-stop trading to cater to the requirements of investors and traders located all over the world. Because of this, both kinds of exchanges have offices located in various parts of the globe to better serve the customers in those areas.

Operating Hours

The foreign exchange market is open for business around the clock, five days a week, from Monday morning in Wellington, New Zealand, all the way through Friday afternoon in New York City. Although some foreign exchange firms allow trading throughout the weekend, in most cases, you will be dealing directly against your broker in these kinds of scenarios.

On the other hand, cryptocurrency is always active. Trading in cryptocurrency occurs not just around the clock but also around the clock, seven days a week. You may buy and sell cryptocurrency via your exchange at any hour of the day or night.

Market Structure

The price of foreign exchange is determined by the interbank market. The spreads are then widened by the brokers so that they may develop their own price feeds.

The liquidity that was being supplied by participants at each of the several venues served as the basis for the creation of the cryptocurrency market. As a consequence of this, the cryptocurrency exchange that you are using to trade huge sums may not have enough cryptocurrency to transact throughout the time that you want to make a purchase.

DEX vs. CEX

The term "CEX" refers to controlled exchanges, whereas "DEX" refers to decentralized exchanges. The main difference between the two is that with a DEX, you keep full control over your cryptocurrency's private keys, while with a CEX, the exchange keeps control over your cash.

When compared to their CEX equivalents, the trade volume on DEXs is rather low, but it has been steadily increasing over the past several years. At the moment, about $6 billion is traded across all DEXs every single day.

Is Forex Safer than Crypto from a Regulatory Perspective?

Some people believe that trading forex is somewhat safer than investing in cryptocurrencies. The cryptocurrency market, in contrast to the foreign exchange market, does not have a central authority and is very volatile. As a result, it is susceptible to huge market fluctuations.

Because the cryptocurrency market is less liquid and has smaller trading volumes, it is more difficult to enter and exit major transactions on this market.

Because of these factors, forex traders are often provided with a greater amount of leverage, which enables them to place bigger deals.

Is Forex More Beginner-Friendly than Crypto Trading?

Traders who are new to a market need to familiarize themselves with the unique jargon used in that market, the kinds of risks to which they will often be exposed, and the trading platforms available to them.

Both the forex and cryptocurrency markets use jargon that can be confusing to new traders.It can take a little bit of time to get a handle on those phrases. The dangers associated with forex and cryptocurrencies are somewhat distinct from one another. One of the primary reasons traders incur losses when trading foreign currencies is because they use excessive leverage. When it comes to cryptocurrency markets, the circumstances of high volatility are often what hurts traders the most.

Once a trader is familiar with the accompanying jargon, cryptocurrency exchanges have become much better at making their platforms user-friendly. This is a direct answer to the historically important problem of getting new customers on board.

Number of Available Instruments

In addition, Forex and CFD brokers, depending on the broker, will provide a greater variety of trading instruments accessible to their clients in an effort to fulfill all of a trader's requirements in one location. Cryptocurrency exchanges, like forex and CFD brokers, provide hundreds of different instruments to their customers, although not quite as many.

KYC Procedures

Following the attacks of September 11, 2001, legislation requiring financial institutions to "know your customer" (KYC) was enacted to prevent criminals and terrorists from laundering illicit payments via the global banking system.

In essence, Know Your Customer was established so that merchants could demonstrate that they are real people (and not bots) and that the origin of the money in their accounts is lawful and not the result of money laundering.

Entry Levels

New traders may find helpful information on how to get started trading on the websites of forex and cryptocurrency dealers. Look for websites that provide instructional pages or parts that cater to those who are just starting out in trading.

Forex vs. Crypto Trading: Hedging The Risks

Traders may choose to hedge their risks by using futures, options, or perpetual swaps, depending on the degree to which they are exposed to certain markets. For instance, a person whose primary source of income is a lesser-known cryptocurrency may choose to broaden their exposure to the cryptocurrency market by investing in some of the larger-cap cryptocurrencies, such as Bitcoin or Ethereum. Investors also have the option of hedging their investment risks by staking their assets in order to earn interest or by converting their holdings into stablecoin that is fixed to the currency of the United States. Perform liquidity evaluation by analyzing the market's integrity, transaction speed, and market fluidity. This is yet another technique for hedging crypto risks that entails doing liquidity assessment. This is done so that traders have easy access to trading their assets for cash while being exposed to just a limited amount of price slippage.

For instance, a forex trader may have an income generated in Mexican pesos and want to protect themselves against the possibility of a decline in the value of the peso. So, people might think about buying cryptocurrency or exchanging some pesos for dollars in the U.S.

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

In conclusion, forex trading and cryptocurrency trading are both risky endeavors because of their high degree of volatility. Before deciding if you are ready to get into any of the markets, you should carefully think about the pros and cons of each one.

That's all for today, see ya tomorrow! If you want more, be sure to follow our Twitter (@croxroadnews)

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.

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