Is Cryptocurrency Trading More Profitable Than Forex Trading?
Profit, profit, profit—that’s what it’s all about for traders, right?
In just the past decade alone, the trading spaces around us have evolved so much. There are new players in the game like cryptocurrency trading; then there’s the old reliable forex trading.
The problem is that both markets are complicated and intimidating in their own way, making it difficult for people to choose a path.
How do they differ from one another? How are they similar? Which is the right market for you? These are the questions we’ll be answering in this article. Let’s get right into it.
What is forex trading?
The foreign exchange (forex) market is easily the largest and most liquid market in the world. It’s a global and decentralized platform for people to trade the world’s currencies.
The market is composed of banks, businesses, retail investors, and financial institutions. These bodies exchange an estimated $5.3 trillion every single day in the hopes of making a profit.
The forex market emerged in the 19th century due to the creation of the gold standard (a monetary system in which a country’s fiat is directly linked to gold) and the ensuing establishment of the USD as the world reserve currency.
However, it was really in the 1970s that institutional and retail investing began to pick up, creating the kind of trading space we see now. Once Internet trading came on the scene in the 1990s, it made the forex trading space more accessible than ever, allowing it to develop into what it is today.
We now know the forex as a market that can move quickly and be volatile, attracting traders over the past decades because, as we all know, it’s this volatility that allows for incredible money-making opportunities.
When it comes to forex’s volatility, it may have a lot to do with economic and political news. Since forex trading is basically the trading of various national currencies, the strength of a country’s economy and its international relationships can play crucial roles in the value of its currency. For those essential roles, forex traders not only look at charts and graphs, but they might also look at GDP reports, economic calendars, and current global conflicts.
The forex market operates 24 hours a day, 5 days a week, and primarily deals with decentralized, over-the-counter (OTC) trading.
What is cryptocurrency trading?
Unlike the forex market, the crypto market is still young—it’s only a little over 11 years old. Cryptocurrencies, by definition, are digital assets, so the market deals exclusively with digital assets.
The crypto market quickly blossomed in the recent decade due to the rise of various altcoins and the establishment of many prominent exchanges and marketplaces.
Compared to forex’s $5.3 trillion daily average, the crypto market has a daily volume of around $100 billion—it’s puny compared to forex, but $100 billion is still a lot of money. Most of this money is traded through exchanges. Although OTC trading for crypto exists, the use of exchanges is still the most prominent way to trade bitcoin and other cryptos.
Crypto exchanges are always open—24/7/365. However, the trading regulations for these exchanges vary depending on the ways in which different countries perceive and understand cryptocurrencies.
Cryptocurrencies are notorious for being volatile, which can make them appealing as investment opportunities. In terms of what affects a cryptocurrency’s price, there are many factors such as supply and demand, regulation, and media perception, to name a few.
As compared to forex traders, crypto traders are less likely to be looking at news headlines. Instead, they’re more likely to be paying attention to charts, graphs, and making use of technical analysis.
Essential features of each market
Before we get into an in-depth comparison between the two, let’s first go over each market’s essential features.
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It’s easy to see the similarities between the markets. Mainly, they have three major similarities:
An excellent place to start is their involvement in currencies as opposed to other tangible commodities. Although not all digital assets get the title of “currency,” many cryptos seem to emulate the model.
The wide range of players
Players in both markets also range from aspiring individuals to big-time financial institutions, with all of them having the goal to earn money off the volatility.
The involvement of technology
The last significant connection they have is their integration of technology into daily operations—mainly computers and the Internet. Although forex was alive well before the age of the Internet, the technology aspect was what caused it to explode (in a good way), and now, it is the primary way to execute these trades. With cryptocurrencies existing purely digitally, there is no way to trade them without an Internet connection.
Despite the three major similarities mentioned above, the two markets still have fundamental differences:
Exchange trading vs. OTC trading
The majority of forex traders make use of OTC trading, while crypto traders use exchanges.
OTC trading, while it offers global liquidity, often has to make use of a broker to facilitate the trade. Although traders could go directly to the market, the market was highly regulated. This made going through brokers more straightforward for traders and investors. The downside is that the broker will take a cut from your earnings, with the percentage depending on factors like the institutions involved, the current market conditions, and the trading pair you choose.
Exchange trading, on the other hand, is the more prominent means of purchase for the crypto market. Traditional bitcoin exchanges will often act as a middleman, therefore taking a cut as well. However, these fees are usually lower because they have fixed rates that apply to all trades. It simplifies the trading, but it means that there is no negotiating, you’ll just have to agree to the exchange’s terms.
Recently, a new form of trading crypto has emerged: peer-to-peer (P2P) trading. P2P bitcoin marketplaces like Paxful, as compared to traditional bitcoin exchanges, do not act as a middleman. Instead, the platforms allow the buyers and sellers to complete the trades themselves with a wide variety of payment options—allowing leeway for even lower fees.
Global currencies ≠ cryptocurrencies
As mentioned earlier, global currencies have direct relationships with key factors of a specific country—the strength of their economy, how well they’re doing against other nations, etc. This means that the value of a global currency can be tied to specific things and are regulated by governments and financial institutions, so be sure to always check the latest exchange rates.
Cryptocurrencies are kind of the opposite. Although some can be pegged to other assets, most of them aren’t. Instead, factors like their utility and the speculation of investors can be ways to determine the value. This means that in a lot of cases, the value of a cryptocurrency can heavily depend on its usability. However, the competition in this space is fierce, with multiple projects trying to fulfill the same goal.
Which trading space is for you?
Now that you know a little more about each kind of market, you can finally choose which one to trade on. Ultimately, the decision lies in your hands. Which trading environment suits you more?
The forex market can offer more built-in stability and liquidity in a trading space that has lasted decades, while the cryptocurrency market can be more of a “wild west” with a higher risk, high reward opportunities. Both can be good ways to earn money, but neither of them is necessarily more profitable than the other. It all depends on how you conduct your forex trading or cryptocurrency trading.
No matter which of them you choose (or even if you choose both), the most important thing that you have to do is research. You have to know that there are always going to be risks with both of these markets and the key to minimizing those risks is through education.
If you stay informed on the matters at hand, you can make your best trading decisions and possibly prepare yourself for the worst. At the end of the day, we all have to earn our money, and as Warren Buffet once said:
“The most important investment you can make is in yourself.”
Stay focused, stay informed, and stay the course. Good luck!