If you've been thinking about trading currencies, you might be wondering whether you should trade fiat money or cryptocurrencies. The two markets share some similarities, but they are actually quite different. Here's everything you need to consider when deciding whether to trade cryptocurrencies or forex.
The basics of the forex market
Investors trade currency pairs on the foreign exchange market. The forex market is the world's largest trading market with about $5 trillion worth of daily trades. US forex brokers work with financial institutions and banks, retail investors and businesses to exchange fiat currencies with the intent of making a profit. Most forex trades are conducted over the counter. In the States, forex brokers can facilitate transactions around the clock Monday through Friday.
On the other hand, cryptocurrencies are usually traded on exchanges, and trading happens 24 hours a day, seven days a week. The crypto market is only about 11 years old, and it only deals with digital assets rather than fiat currencies. Bitcoin was the first cryptocurrency, but today there are many digital assets to choose from. Additionally, funds like the Grayscale Bitcoin Trust have made it easier to invest in bitcoin.
Similarities and differences between forex and cryptocurrencies
The forex market tends to be very volatile and move quickly, and that is something it shares with cryptocurrencies. Many traders find the volatility to be exciting and an excellent way to make money. More volatility means prices change quickly, which provides opportunities to profit off rapid changes in prices.
One other thing they have in common is the fact that both markets are mostly unregulated. There is no central bank overseeing each individual trade. However, one difference between the two is that central banks back fiat currencies, while nothing backs cryptocurrencies. It’s possible to trade cryptocurrencies even with Forex brokers, like Etoro, if you are in US.
The drivers of the forex and crypto mare also quite different. The forex markets are driven by whatever happens in the economies of the nations whose currencies you want to trade. Central banks do have an indirect impact on trades of their fiat currencies even though they do not directly oversee them.
Speculation and sentiment are the main drivers of cryptocurrencies. Any news about regulation tends to send digital assets into a downward spiral. On the other hand, headlines about institutional adoption of cryptocurrencies cause them to spike. Sometimes it isn't always clear what causes a change in the direction of bitcoin or other cryptocurrencies.
Making a decision
As you try to decide where to invest your money, it's important to understand the inner workings of each market before you dive in. US forex brokers can be an excellent source of information, although you must handle crypto trades yourself through an exchange unless you opt for a fund like the Grayscale Bitcoin Trust. Further, you will need a digital wallet to trade and hold cryptocurrencies. Computers play an essential role in both forex and crypto trades.
Choosing between forex and cryptocurrencies may be a difficult decision. No two investors are alike, so what's right for one might not be right for the other. You should take the time and do your research before you decide anything.
Image by Pete Linforth from Pixabay
