The growing popularity of cryptocurrencies has given rise to the total trading volume of the cryptocurrency market in the past few years. The ever-increasing list of new cryptocurrencies and blockchain projects has made the cryptocurrency market a new gold mine for amazing investment and trading opportunities.
Because of the increased volume of trades in the cryptocurrency market, the overall market valuation of cryptocurrencies has gone over 3 trillion dollars.
Speculative trading fuels the cryptocurrency economy around the globe and is the main reason why lots of traders are trying their luck to strike gold in the crypto market.
The cryptocurrency market is very different from the international forex market, which changes in value rather slowly in the long run. Leverage is the main driving force behind the interest of traders in the forex market.
This guide article discusses the key differences between cryptocurrency and forex trading and which one is the better option for traders.
Crypto vs Forex Trading: Key Differences
Both crypto and forex trading have their similarities and differences. For example, cryptocurrency trading involves traders buying and selling assets like NFTs, cryptocurrencies, and blockchain-based tokens.
On the other hand, forex trading involves traders buying a specific currency with another currency in the hopes that the currency they buy will increase in value and will benefit them when they convert their currency back in the long run.
The key principles that set the values of cryptocurrencies and fiat currencies are the same. For example, the supply and demand theory works in both these markets. However, the factors that control the supply and demand of these assets are entirely different in the case of crypto and fiat currencies.
One of the factors behind the supply and demand of cryptocurrencies is the distributed ledger technology and decentralization behind their creation. People interested in either one or both of these features are investing enormous amounts of money in new and old cryptocurrency and blockchain projects.
This increases the demand for cryptocurrencies significantly and shortens the supply, thus resulting in rapidly increasing values of cryptocurrencies.
In forex trading, traders buy and hold certain currencies in the hope that the economy attached to that currency will flourish and will cause the currency to increase in value, thus providing the trader with a net profit when they close the trade.
Forex trading has been around for many decades and is an established alternative to cryptocurrency trading. The factors that control the supply and demand of currencies in forex trading are huge, and any significant developments require enormous economic changes in the global economy.
When it comes to technical analysis, the basic tools used in forex and crypto trading are usually the same. However, the volatility factor is huge in the case of cryptocurrencies. On the other hand, the forex market is relatively stable.
When an Average True Rate chart is made to compare the volatility of the crypto and forex markets within the same period, the ATR of the forex market comes out to be around 1.4%, while the ATR of the crypto market goes as high as 25%.
Market Cap
Crypto trades and investments play an essential role in fueling new blockchain projects. On the other hand, trades and investments in the forex market help fuel whole economies.
The crypto market is very clear about the ownership data of all its cryptocurrencies. This is why we can easily determine the size and value of the whole crypto market at any given time.
As of 2023, the global market capitalization of the crypto market sits at around $3 trillion. Upon close analysis, we can see that the crypto market achieved the $1 trillion market cap goal in 12 years.
However, the growing popularity of this market attracted huge investments, and the rest $2 trillion came in only 11 months. Currently, the market cap of the crypto market is growing faster than ever before.
The forex market isn’t as clear and transparent as the crypto market. That’s why determining the market cap of the forex market is more difficult as compared to the crypto market. According to the total value of the world economies calculated by economists in 2017, the world economy was evaluated at around $80 trillion.
The trading volume of the global forex exchange market is evaluated by BIS, or Bank for International Settlements, every three years. According to a 2019 report by BIS, the forex market traded around $6.6 trillion per day, which is $1.5 trillion more than the trading volume just about three years ago.
Since the crypto market is decentralized, it is significantly harder to calculate the trade volume in this market. However, the crypto market is estimated to have a trading volume of around $500 billion per day.
Forex trading is currently more accessible because of the wide range of applications and platforms providing forex trading services for beginners. On the other hand, acquiring and trading cryptocurrencies like Bitcoin has become easier only in recent years.
Market Players
In its early days, Bitcoin was mostly held and traded by Bitcoin miners, centralized exchanges, and some clients. As the crypto market expanded with the introduction of many new cryptocurrencies, crypto exchanges have also expanded their operations and have added hundreds of cryptocurrencies.
Moreover, the crypto market didn’t have the feature of holding the custody of crypto assets for a third party. All of this began to change in 2020 when MSTR (MicroStrategy) decided to buy Bitcoin. This triggered many large-scale corporations to follow the trend and add Bitcoins to their treasury plans.
As the Bitcoin buying trend started to gain momentum, big whales entered the market, and the price started to skyrocket. Currently, Bitcoin and Ethereum are two of the biggest cryptocurrencies companies investing in right now.
On the other hand, forex trading works by banks swapping one cryptocurrency for another. This is done to ensure a steady stream of fiat currency for multinational companies looking to make payments in other currencies.
When the banks have to deal with each other, they use the term “Yards”. One yard represents one billion in any fiat currency. However, with the introduction of new forex trading technologies, smaller forex traders have also found methods to trade in smaller amounts.
One of the key differences between cryptocurrency trading and forex trading is that while cryptocurrency was invented to facilitate smaller trades, forex trading was made for larger banks. With time, large organizations made their way into the cryptocurrency market, and smaller investors managed to make some room in the forex market.
Trading Pairs
The very definition of trade is to swap one asset for another. For example, if a user wants to buy Apple stocks, they’ll have to swap them for USD or any other fiat currency of their choice.
In forex trading, all the currencies are always shown in pairs. Most of the trades are made in 7 top fiat currencies. These currencies are USD, EUR, GBP, JPY, CAD, AUD, and NZD.
All of the forex trading platforms will show you the exchange rates in these currencies as pairs right after you make an account with them and log into your newly created account.
To execute a trade in a specific currency pair, let’s say USD/JPY; you’ll have to use your currency (not necessarily USD or JPY) to speculate on the future price movement in the USD/JPY pair. If your speculation turns out to be true, you’ll end the trade with a profit.
The crypto trading market, on the other hand, is still in its early days. You can use the cross/ isolated margin features to give the market your buying/ selling price. Just like the most popular fiat currency pairs, most of the crypto trades are made in pairs, including BTC, ETH, and USDT.
On major cryptocurrency exchanges, users can also use the native currency of the exchange to execute trades. An example of this is BNB, which is the native token of the Binance cryptocurrency exchange.
Due to the widespread expansion of the crypto market, over 10,000 cryptocurrencies are being traded in the market. Due to this much saturation, every major cryptocurrency exchange can’t create swap pairs for every cryptocurrency, especially for smaller cryptos.
This is why the users have to swap their fiat currency for a major cryptocurrency like BTC or ETH before swapping that cryptocurrency for the coin of their choice.
Crypto vs Forex Trading: Some Factors to Consider
Taxation
In the US, IRS deals with taxes related to forex and crypto trading. Taxes are calculated by different methods by the IRS.
Forex is a conventional market and has been taxed by the IRS for many decades. Capital gains and losses in the forex market are always taxed.
According to section 1256, 60% of all the gains are calculated as long-term gains, and the rest 40% are counted as short-term gains. This doesn’t take into account the length of time you’ve been in a trade.
Another option for forex traders is paying their taxes under section 988. This section includes gains and losses as a part of the ordinary income of a spot forex trader.
However, going with section 1256 for tax returns is probably the better route for forex traders with net profit. However, traders taking more losses should go with section 988.
Before you start trading, you should choose the section you want to choose for taxation purposes. Once chosen, the section can’t be changed.
On the other hand, cryptocurrency is treated as property by the IRS, and its taxation is carried out just like stocks. Tax is calculated when you end a cryptocurrency trade and take the profit or loss. The tax also depends on the amount of time you’ve held the crypto for.
If you hold a cryptocurrency position for less than 365 days or a year, it will be taxed as a short-term gain. The tax rate in cryptocurrency trading is similar to the regular income tax in your country.
Things start to change when a crypto trade stays open for 366 days or more (over one year). After this time, the trade goes into the long-term gain and loss tax bracket. Long-term trades and gains usually encounter low tax rates as compared to shorter trades.
So, the key difference between taxation laws related to forex trading and crypto trading is that forex traders have to decide their tax section ahead of time, and every crypto trade is taxed under the same taxation laws.
Profitability
It is a widely known fact that most forex traders end up in a loss. According to quarterly data, only around 25% of all forex traders can end up with a profit in their account. This means around 75% of forex traders have to incur a loss.
Leverage is one of the biggest reasons why most forex traders lose money. Leverage is a financial tool provided to every forex trader and has the power to multiply both gains and losses for the forex trader.
When a forex trader uses too much leverage, even the slightest market movement against their trade triggers a margin call and wipes out most of the capital from the trader’s account. This is why forex traders should always use 10x or lower leverage on their trades. This provides the trader with some breathing room to compensate for the loss whenever the market goes against their trade.
Due to the accelerated forex and cryptocurrency markets at most times, various arbitrage opportunities are created for traders. Forex and crypto arbitrage is the act of buying an asset from one exchange or broker and selling it at another exchange with a positive difference in the value of that asset. This is a rather safe trading practice but yields fewer profits per trade.
Liquidity
Since prices move slowly in the forex market, traders and investors have the luxury of providing more liquidity to the international foreign exchange market. This is the main reason why the daily trading volume of the forex market sits at around $6.6 trillion.
On the other hand, cryptocurrency trading is only around $200 billion per day. According to these numbers alone, the liquidity of the forex market is around 60 times greater as compared to the liquidity in the cryptocurrency market.
While both the forex and crypto markets are huge in their volume, the higher liquidity of the forex market allows traders to enter and exit their trading positions quickly.
Market Operations
Both forex and crypto markets keep up their operations around the clock, as this helps them meet the needs of their traders. Forex and crypto exchanges have their offices set up around the globe, and phone applications are making trading even easier with every passing day.
Volatility
When it comes to volatility, crypto trading wins by a huge margin. Crypto trading is always more volatile and requires a high margin. This is why forex trading provides high leverage as compared to crypto trading.
Market Hours
The forex market stays open for trading around the clock five days a week and rests on Saturday and Sunday. While some forex brokers do provide trading over the weekend, you’ll be placing most of the trades against your broker, which isn’t a good idea.
On the other hand, the crypto market never shuts down. The market stays open 24/7 and operates normally over the weekends as well. This gives crypto traders the liberty to trade any time of the day.
Pricing Structure
In the case of the forex market, the interbank market controls the price of currency pairs. Brokers use their spreads to create their pricing by taking the interbank price as a template.
On the other hand, the value of a cryptocurrency is automatically calculated by the algorithm according to the amount of liquidity provided by investors of that crypto.
Cryptocurrency exchanges have reserves of cryptocurrencies which you can buy or sell from at any given time.
There are both centralized and decentralized cryptocurrency exchanges operating in the international crypto trading market. Centralized exchanges keep hold of all your cryptocurrency and can even freeze your account.
On the other hand, decentralized cryptocurrency exchanges are completely unregulated, and users have complete ownership of their cryptocurrency. However, both centralized and decentralized cryptocurrency exchanges come with their benefits and risks.
Conclusion
By taking a look at the forex and cryptocurrency trading markets, we can easily conclude that both of them come with their benefits and risks.
From a regulatory point of view, the forex market is more regulated and is thus safer for large-scale investors.
On the other hand, the cryptocurrency market is completely decentralized and unregulated and thus loved by investors and traders who are not big fans of the current centralized forex market.
However, because of the significantly lower trading volume of the cryptocurrency market compared to the international foreign exchange market, cryptocurrencies have less liquidity, and exiting large trades quickly becomes difficult for traders. The forex market, on the other hand, is very liquid, and you can enter or exit the market at any given time.