The concept of trading cryptocurrencies is coming up fast on the outside of forex trading as a popular way of investing funds in financial markets. Some people believe that the mechanics of crypto trading are similar to trading fiat currencies like the US dollar or the British pound.
But although there are some undeniable areas of overlap, there are plenty of areas where cryptocurrency trading differs from conventional foreign exchange trading too. Let us take a closer look.
Where crypto trading differs from trading forex
• Cryptocurrencies can be traded 24/7
Unlike the foreign exchange markets, which are only accessible 24 hours a day, five days a week, cryptocurrency markets are open 24/7. There is always an opportunity to buy or sell a cryptocurrency, regardless of which cryptocurrency exchange you use. Think of cryptos as a byproduct of today’s digital society. Just like the always-on, always-connected digital world, cryptocurrency price moves wait for no-one.
• Forex liquidity is still much greater than the likes of Bitcoin
The Daily Hodl’s report into forex and crypto trading found that forex liquidity is still far greater than even the biggest crypto assets like Bitcoin. In 2016, some $5 trillion of US dollars were traded daily in the forex markets. Compare that with just $1 billion in the Bitcoin markets and it’s easy to see that cashflow still reigns supreme in the traditional forex markets – for now.
• Cryptos tend to be much more volatile than flat currencies
As cryptocurrency markets are much, much newer than conventional forex markets, they tend to be considerably more volatile. With little history to go by, the markets can fluctuate enormously in the space of 24 hours based on economic or political news. For instance, the price of Bitcoin crashed by 20% in under an hour, back in March.
Similarities of crypto and forex trading
• Both markets are driven by supply and demand
One attribute that’s similar in both the crypto and forex markets is that price activity is driven largely by supply and demand. When there is heightened demand for Bitcoin or the US dollar, its price will go up and, similarly, it will fall when supply exceeds demand.
• Both types of trading can be automated
There is software that can be used to automate the execution of trades in both the forex and crypto markets. This software can automatically set entry and exit points in the market, as well as stop-loss points, to ensure that you manage your risk. A popular crypto trading robot is one that was said to be backed by Peter Jones Bitcoin Trader, which yields daily returns of as much as 400%.
• Risk management is vital to be profitable in both markets
It’s impossible to know which way the cryptocurrency and forex markets will move with each trade you open. That’s why both forms of trading require rock-solid risk management to maintain profitability. You may have sound fundamental and technical analysis awareness but, without stop losses to protect your positions, you could face losses far greater than your losses if the markets don’t move the way you expect them to.
Put simply, there are pros and cons of trading either market. Given that crypto trading is more volatile than forex, it’s possible that you could trade both simultaneously, with the slower-paced forex markets offering lower-risk opportunities and cryptos giving you a chance to generate those higher returns.