The financial world around us is changing rapidly as new ways of money management and transactions are coming into the picture. In the last decade, cryptocurrencies took the world by storm. In the past 10 years, we’ve seen that though digital currencies may not have proper centralized control, they allow hassle-free transactions that operate as a unit of account in a democratized financial system. Visit multibankfx.com
Look at it against the typical fiat financial system, which relies on central banks and governments when it comes to the issuance of physical currency and regulating the money supply. These financial systems are also responsible for facilitating transactions using a proper system of payments besides several other responsibilities. Typically, a country has its own fiat currency or has one which is linked to an international reserve currency such as the U.S. dollar or Euro. Every time you exchange the fiat currency of one nation with another through a decentralized, over-the-counter market, it is known as a foreign exchange (or “forex”).
Cryptocurrency and forex differ not just because they are two very different financial instruments but because of the market participants as well.
It is not just individual investors who trade in forex markets, there are also leading governmental and institutional participants:
- Governments have a major role here since they must make sure that the market is liquid enough to achieve the key economic goals. On the other hand in the crypto market, the governments are marginal players despite the recent interest of these central bodies in the market.
- Banks and credit suppliers are the ones who make the market liquid. According to most experts, this is because they are the ones who exchange money on behalf of their customers who travel or carry out business overseas or perhaps for the ones who choose to invest in foreign securities markets.
- Investment funds can make use of their excess funds or leverage to either invest in forex or speculate on future prices.
- Corporations that are based in a number of markets around the world can use forex to hedge against fluctuations in currency prices to safeguard profits.
Crypto markets generally have smaller players and there is not a lot of institutional or governmental presence. Governments, banks, investment funds, and corporations do not hold as many cryptocurrency assets yet. Their stakes in the forex markets, however, are much higher. Though a popular cryptocurrency, Bitcoin does not accurately represent the entire cryptocurrency asset class, the breakout between market participants who own Bitcoin can give a fair estimate of the degree of institutional or governmental involvement in the market.
Forex markets have the largest trade volume as compared to any financial market around the world. As per the latest survey (August 2021), over $6.6 trillion is traded daily in the over-the-counter markets.
Cryptocurrency markets’ popularity has skyrocketed in the past few years. But that is yet to translate in terms of the volume and trading activity that remains much lower than forex markets. The overall everyday crypto market volume was $1.3 trillion as of September 2021.
Hours of Operation
Forex markets operate round the clock, 24 hours a day, 5 days a week. Crypto markets on the other hand trade non-stop even on weekends.
Where crypto vs. forex trading coincides with how the two assets are traded: over-the-counter, directly between parties, or via a broker or exchange. This implies that prices are negotiated on the basis of supply and demand without any regulatory body overseeing the transactions. On the other hand, we have stocks that can be traded on organized exchanges such as New York Stock Exchange, Nasdaq, etc.
The use of “trading pairs” is another differentiator between forex and cryptocurrency. Every time you exchange a currency, say U.S. dollars for euros, the value of one currency on the exchange would be relative to another. You would be particularly shown how many units of currency X will be needed to buy currency Y, where X is the base currency and Y is the quote currency. In forex trading, you buy the base currency and sell the quote currency.
If the trading pair includes USD, they are known as “currency pairs” and if they don’t, they are referred to as “currency crosses.”
The logic is similar in crypto trading. Crypto trading pairs, or cryptocurrency pairs, are where you trade one crypto for another like Ethereum/Bitcoin Cash (ETH/BCH). It is important to remember that you cannot trade every crypto for another currency, be it fiat or virtual. Trading pairs in crypto is important as some cryptocurrencies can be purchased only with another and you should be aware of the pairs so you are able to expand your crypto holdings. This allows investors an opportunity to arbitrage between trading pairs and also assess and draw comparisons between the relative worth of coins.
On the basis of an asset’s classification, it may come under certain rules and regulations of certain regulatory bodies. While cryptocurrencies remain largely unregulated and there is no central authority to check on them, it depends on regulatory supervision.
Despite the asset’s monumental growth, the regulations have failed to keep up with its pace.
On the other hand, forex or traditional currencies are comparatively better regulated and are classified as securities. Thus, fiat currencies tend to fall under many higher levels of regulatory checks and investor protections.
Crypto vs. Forex: Neither Is for the Faint of Heart
A decade ago, when one mentioned cryptocurrencies, the discussion remained limited to internet forums and online chat rooms. It was discussed as a potential new solution for a number of issues such as privacy concerns, having a command and control centre, theft and fraud, and more.
However, the current cryptocurrencies address do cover a lot of these concerns, they are offered largely as an alternative to fiat currencies in our everyday lives.
In the future, we would see a new form of crypto that would change the way it is regulated, issued, and traded. On the basis of the way various governments approach different virtual currency classes, there may no longer be a lot of differences between forex vs. crypto trading.