Crypto trading is the latest trend of investment that is popular among the younger generation. However, before cryptocurrencies, there were other trading options available in the market outside of the stock market as well.
One such alternative for trading is Forex Trading. Investors are always looking to diversify their portfolios by dividing their investment capital. This article will discuss all the similarities and distinctions between cryptocurrencies and forex trading.
What is Forex Trading?
Anyone who has heard about crypto trading must be aware of forex trading as well. The modern world is divided into different states and sovereign nations. Every independent nation issues a local currency that is classified as a legal tender within its jurisdiction.
The forex traders intend to make profits by exchanging one legal tender with another. It means that forex traders measure the difference in value between one fiat currency with another and make trades to grow their profits.
There are also institutional and government financial enterprises that perform forex trading as a means of diversifying their trading portfolio.
How does Forex Trading Work?
Forex trading is going to work in the manner that the investors need to understand all the related costs for purchasing the currencies of another country. There are around 193 member states of the United Nations in the world today.
It means that the forex traders have to make they are trade based on these 193 member states. The investors must take into account all the expenses that they have to pay when they wish to purchase the currency of another country.
Today, the process of forex exchange is also a necessity for people who are traveling abroad or wish to make international trades.
Forex traders must use a combination of technical and fundamental analysis to make sure that they can understand the market properly. If a foreign currency is currently undervalued, it can purchase for lower prices and sell it when its value increases in the international markets.
The intrinsic value of a fiat currency can increase depending on the productivity of that country. Therefore, if the country is set to generate considerable GDP in the future, it means that the forex traders might add it to their portfolios.
Types of Forex Traders
There are four basic types of forex traders based on their trading strategy and style. A brief description of these trading options is given as under:
Day Trading is a short-term trading technique where investors purchase and sell a new position within 24 hours or lesser. Day traders take advantage of highly volatile trading products. Therefore, forex trading markets are ideal for day traders.
Some day traders use margin trading options to increase smaller profit ratios into huge returns. However, margin trading can increase the risk for traders by a great amount. Therefore, investors who have considerable experience and a suitable risk appetite should use leveraged positions only.
Furthermore, Day traders also try to eliminate the influence of emotional biases when trading and make their trading decisions based on market analysis and solid facts only.
Position Traders are long-term traders who can hold their trading positions for a long duration. These position traders can purchase new positions, for example, a considerable amount of fiat currency, and they can hold on to it for years and sometimes decades.
The position traders base their trading decisions on fundamental analysis and keep a sharp eye on the latest developments in the market through news and other resources.
Swing trading can hold a new forex position from overnight to several weeks. It can be categorized as a medium-term trading option in terms of the trading period. Swing traders focus on trading periods when the markets are showing signs of an upward movement and sell when the upward appreciation stops.
In the same manner, investors can also perform shorting swing positions and trade when the markets are showing signs of a downward swing and stop when the depreciation streak is broken. Swing traders keep an eye on both fundamentals and technical analytics.
Scalping is a type of trading where the investors are trying to scrape the smaller profit margins based on the small volatility. This type of trading has the potential to make big returns when the magnitude of an investment portfolio is.
Scalping may require creating leveraged positions to increase the size of short-term trading positions, and it can also siphon off the profits on account of increasing trade-off costs.
Therefore, forex investors with considerable resources, such as institutions and with formal training and experience, tend to adopt this method.
What is Crypto Trading?
Cryptocurrencies are the main products of blockchains. They are used as an alternative to fiat currencies to conduct online transactions and perform other financial functions such as trading. The first ever blockchain, named Bitcoin, is a decentralized and open-sourced project.
Therefore, it has allowed other developers to generate new blockchain projects such as Ethereum.
Several blockchains have improved their mechanisms, and they can issue more than one cryptocurrency, which is called tokens. Furthermore, there are several types of tokens, such as stablecoins, NFTs, governance tokens, liquidity tokens, yield tokens, utility tokens, etc.
It means that there are countless options for trading for investors. Some people have argued that cryptocurrencies are like stocks, but they do not offer ownership. Others try to claim that crypto is like a commodity, but it is an intangible asset.
How does Crypto Trading Work?
The crypto market crossed the threshold of $3 trillion last year. There are thousands of cryptocurrencies available in the market, and the most popular gain a rank in the top 10 cryptocurrencies on account of their market cap.
Cryptocurrency traders focus their attention on the technical analysis and the underlying value of a digital asset before purchasing them. Investors can also purchase cryptocurrencies as an investment by buying them from exchanges.
On the other hand, they also have the option to hold them for long-term like commodities. At the same time, cryptocurrencies can also be exchanged or swapped with other cryptocurrencies on DEX or CEX platforms. It shows that cryptocurrencies combine the qualities of many financial instruments, such as fiat currencies, commodities, stocks, and forex products.
However, they cannot be fully defined as any one of these trading instruments and remain a standalone trading product.
Types of Crypto Trading
Depending on the different trading strategies and techniques, crypto trading can be divided into the following types:
Range traders take advantage of trading brackets that are classified as support and resistance levels. It means that the investors try to aim for a range where they would enter and exit the market. The investors try to get full control of their trading positions.
They can use techniques like limit orders and stop-loss to ensure that they can precisely enter and exit a position based on the specified price mark. Range traders can also use candlestick chart analysis to learn about the best trading options available in the market.
High-Frequency Trading (HFT)
High-Frequency Trading, or HFT, is a type of cryptocurrency trading technique that involves betting massive amounts of capital on one type of trading bet. For example, if a person is sure that the price of a currency is going to increase, they can purchase it in massive amounts.
However, HFT requires massive amounts of trading capital to generate big returns from small market movements or short-term trading positions. It can require considerable experience and market insight on account of massive risk exposure.
Dollar-Cost Averaging (DCA)
Dollar-Cost Averaging, or DCA, is a type of trading option where the investors opt to put their money into new positions at regular intervals. It means that the investors do not intend to make big lump sum buy-ins in a new position.
Instead, they divide their trading capital and invest it into the market at small and regular intervals. In this manner, these investors can have better control of the market and can terminate or increase a position depending on market conditions.
Leveraged trading involves drawing out loans from the market and putting it into the investment market. The investors must submit collateral to qualify for becoming a leveraged trader.
The DeFi market offers simpler and easier options for cryptocurrency traders to draw out loans from the market. Leveraged trading is simpler due to DeFi lending protocols; however, it can generate greater risks for inexperienced investors.
Furthermore, the investors also have to return the loans at regular intervals with the addition of interest rates that can be dynamic and increase with the increasing duration.
At the same time, the investors are under obligation to maintain a collateral amount in the leveraged trading accounts that can trigger a margin call if the prices of the leveraged cryptocurrencies fall in the main market.
Therefore, investors must always proceed with caution when it comes to leveraged trading.
Trading with Bots
A very innovative method of trading cryptocurrencies is using bots. There are many types of trading bots available in the market; some use AI technology to learn and improve the process of trading. On the other hand, others perform trade-offs based on the predetermined trading strategies created by the investors.
Since cryptocurrency trading is a wholly digital process, trading bots are gaining more popularity within the DeFi networks. However, trading bots are at risk of malware or hack attacks.
On the other hand, they might face accuracy issues and require a massive amount of technical knowledge. Non-technical investors can use bots, but they are often expensive and need time to master. On the other hand, if an investor can master trading with bots, they can make tons of profits.
Differences Between Forex and Crypto Trading
It is best to start with the main differences between crypto and forex trading that can give the investors a good idea of how both options fare against each other:
Trading Products and Tools
Forex exchanges and cryptocurrency exchanges do not offer similar trading options for both. Forex trading is very much like arbitrage trading, which requires a detailed comparative analysis of the market. Meanwhile, cryptocurrencies have a very diverse amount of trading functions; such can be used as stablecoins or stores of value.
They are sometimes accepted as a mode of payment for investors. There are also derivative trading products available for cryptocurrencies, such as futures, options, forward contracts, and others. Meanwhile, forex is limited to exchange pairs, and it has a limited amount of derivatives options, such as CFDs.
The Forex exchange market is based on fiat currencies that are backed by sovereign governments. As long as these governments are intact, these forex currencies are very likely to retain their value.
However, some currencies are less valuable than others, and if the investors are not careful, they can sustain massive losses with forex trading.
On the other hand, cryptocurrencies are globally applicable. Anyone hailing from any nation can trade cryptocurrencies at any given time. Therefore, there are lots of liberties and ease that come with cryptocurrency trading.
However, in most cases, it is impossible for people to trade cryptocurrencies physically because they are intangible. On the other hand, the forex trading market has also turned predominantly online today, but people still use them are paper currency sometimes.
At present, the most powerful currency in the world is the USD on account of its use in international trade. Every country in the world has to purchase USD if they want to conduct international trade.
For this reason, the USD is also a very popular choice among forex investors. However, other currencies also carry considerable value in the forex market. The market dominance of USD in the forex market is not as high as Bitcoin in the crypto market.
In comparison, the cryptocurrency market is dominated by Bitcoin. Since its inception to date, Bitcoin has managed to retain around 44% of the market share.
Bitcoin is the introductory cryptocurrency for many investors. At the same time, there are other popular cryptocurrencies such as ETH, SOL, XRP, ADA, MATIC, etc.
Forex is the largest trading market in the world on account of its size and prevalence around the world. Therefore, as long as a currency is classified as legal tender, it has plenty of liquidity in the market. Just about every government in the world prints more money every year.
On the other hand, there are some cases, such as Quantitative Easing, where the government can opt to decrease liquidity by buying more bonds and bringing down the interest rates.
In contrast, cryptocurrency enterprises use platforms like liquidity pools to ensure that they have enough liquidity to remain operational and for emergencies.
At present, cryptocurrency exchanges are using methods like Proof of Reserve to bring their liquidity on public record. However, the process is still in need of improvement.
Business hours for forex trading exchanges are defined by the local governments. In most cases, forex markets are open during business hours, and they close on weekends and other public holidays.
It happens because forex exchanges are run by regulators who need rest and a break to keep functioning properly. However, there are some online trading options for forex traders today.
In contrast, cryptocurrency markets are decentralized, and they remain operational at all times. Furthermore, crypto is a global financial instrument, and traders might have to follow some rules that persist in the country.
Investors can create and dissolve cryptocurrency positions at any time without worrying about breaks or temporary halting.
The fundamentals that can impact the price of a forex product may not always have the same impact on cryptocurrencies. In most cases, the factors that are negative for forex currencies prove positive for cryptocurrency traders.
When there is increasing inflation, the value of the money falls, and it can result in losses for forex traders. However, if inflation increases, more people are going to invest in cryptocurrencies which will increase their value.
Similarities Between Crypto and Forex Trading
There are also some qualities that Forex and cryptocurrencies share. Some of these are given as under:
- Both forex and cryptocurrency traders need to have the market knowledge to make the best trading decisions.
- Forex and cryptocurrency traders can make profits using the principle of arbitrage.
- Cryptocurrencies and forex trading products are affected by supply and demand forces that could enable investors to perform technical analysis.
- Investors can create long or short positions with both cryptocurrencies and forex.
- Forex trading and cryptocurrency trading are done on online platforms.
Investors who are learning about financial markets must keep in mind that every trading product has personalized intricacies. The rules that are applicable to the forex trading market may not always work for cryptocurrency trading and vice versa.
Therefore, investors should be mindful of doing their research properly and make sure that they are aware of the shared and distinct traits of both trading options.