These days, there are more avenues to trade than ever. For novices looking to break into the world of trading, it can be overwhelming to even decide on the type of instrument they would like to trade. While stocks and commodities are relatively straightforward, some struggle to make the decision between forex or crypto trading.
For many, forex seems like a ‘stable’ and traditional way to trade currencies, yet the appeal of crypto remains ever-present. Ultimately, the most important thing is that traders understand what forex and crypto trading is and what each one entails so they can make an informed decision.
The Nature Of Forex And Crypto
Firstly, traders must understand that both forex and crypto rely on the laws of supply and demand to determine their price.
When trading forex, traders exchange fiat currencies. Fiat currencies are legal tender and have a measurable value that is more or less derived from real-life conditions such as the stability of the economy of its issuing country.
Crypto, on the other hand, is purely speculative and entirely digital. As crypto is not backed by any government, much of its price movements are based on investor sentiment which creates momentum and drives prices up or down.
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Factors to consider when deciding between the two
While there are plenty of similarities and differences between forex and crypto trading, when it comes down to making the decision, there are a few factors that can aid you in making the choice.
Market size is something that traders should factor in when choosing between forex and crypto. As it stands, the forex market is the biggest financial market, with trillions of dollars in trades executed daily. This high volume of trading is refleccUted in the high liquidity of the seven major currencies – the US dollar, the Great Britain pound, the Swiss franc, the Japanese yen, the Australian dollar, the Canadian dollar, and the Euro.
This high liquidity is favorable for traders who like fast-moving environments with a relative level of stability, as it guarantees that currencies can be bought and sold efficiently.
The crypto market is relatively new compared to the forex market. Though it has gained immense popularity over the years, it still enjoys far less volume and activity than the forex market. Nevertheless, just like the seven major currencies, popular cryptocurrencies such as Bitcoin, Ethereum, and Litecoin have high liquidity, and traders who wish to experience fast-moving markets can also find that in trading them.
Hours Of Operation
Forex markets are, on paper, open 5 days a week, for 24 hours a day. However, in reality, traders get to trade for more than 120 hours each week. This is because there are four major trading sessions – Sydney, Tokyo, London, and New York – with each one open for about seven to eight hours a day in their respective time zones.
Due to time differences and session overlaps, traders gain more time to trade as they are free to participate in any session regardless of their geographic location. When the Sydney market opens in the morning in Australia, American traders can begin trading even though it is technically only Sunday afternoon in their time zone. Similarly, before New York sessions close on a Friday afternoon, Australian traders can remain trading even though it is technically Saturday morning down under.
Crypto markets, on the other hand, never close. Open 24/7, they may be appealing for traders who prefer to trade during weekends.
In forex trading, currency pairs can consist of different fiat currencies, such as GBP/USD and USD/JPY, and different pairs can be more or less traded directly provided there is sufficient supply and demand.
In crypto trading, cryptocurrencies (such as Bitcoin, Ethereum, Tether) and other types of digital assets (such as NFTs – Non-Fungible Tokens) are bought and sold in different exchanges.
Over 10,000 cryptos are available these days. However, not all crypto pairs are available for direct trading. Crypto traders who want to create a swap between two relatively small cryptos may need to use an intermediary like Bitcoin – converting a small crypto into Bitcoin, and then converting Bitcoin into the other small crypto you were interested in.
The crypto market is inherently more volatile than the forex market, because it is based entirely on speculation and driven by market sentiment. In the past, we have seen huge crashes in Bitcoin in short periods of time, and we have also seen it skyrocket with just one tweet from a famous persona. There is little rhyme or reason to the performance of crypto, making it exciting for thrill-seekers.
The forex market has also had its own ups and downs. However, the market consists of participation from central banks globally, whose role is to keep their currencies from experiencing massive fluctuations. Therefore, there is a degree of stability afforded in the forex market that is not present in crypto markets, making it more palatable for the risk-averse.
Finally, the question of profitability pops up. Many trades to make a profit, but in the case of forex versus crypto, the truth is, that profits will always be directly proportional to how skilled a trader is. A good trader can yield great profits trading both forex and crypto, while a bad one can incur losses no matter what they trade.
So, Should I Trade Forex or Crypto?
There is no right or wrong answer to this question. You can even trade both (as many do) or trade neither. The point of outlining some characteristics of traditional forex and cryptocurrency trading is so that traders can make their own decision based on factual information. At the end of the day, trading is a personal matter and it should align with an individual’s preferred style, available trading times, and risk appetite.