We’ve all heard about cryptocurrencies at least once in the past four years. Many of us understand what it is and how it works but for those who are unsure, here it is: cryptocurrency is a digital currency where transactions are verified and records maintained by a decentralized system. So how does this tie into foreign exchange, as well as other exchanges? We’ve looked at some of the similarities between crypto and forex, as well as some differences too.
What is crypto?
Cryptocurrency is a decentralized digital payment system. This means that it does not depend on banks to verify transactions, instead, it uses a blockchain ledger to verify transactions. Crypto is also a peer-to-peer system that allows anyone, in any part of the world, to send and receive payments. This is all purely digital. Furthermore, all transactions are recorded in a public ledger that is available to everyone. Crypto is also stored in digital wallets. There is a lot to look out for so keep your eye on the next crypto boom.
What is foreign exchange?
FX is what happens when you trade one currency for another. An example will be when you swap a Pound for a Euro. FX transactions, for the most part, take place in the foreign exchange market. This market is the most liquid, as well as the largest in the world with no centralized location. So how does it work? The FX market is run via an electronic network of banks, institutions, brokers, and individual traders.
Crypto VS. FX
While both are highly different, their outcomes and aims are largely the same since both rely on supply and demand to determine prices. Below are some of the key similarities with some differences too; you can find even more information and a deeper look at similarities on the internet.
- Tradable assets: Firstly, crypto might be relatively new in the financial world but offers many more opportunities. It is estimated that there are currently 17 000 coins. These are the biggest coins: Bitcoin, Ethereum, Binance Coin, Solana, and Cardano. From this, the biggest one out on the list is Bitcoin. Bitcoin has the largest user base even though new coins enter the market at a rapid pace. Both crypto and forex have tradable currency, however, forex has far less. With FX, the currency pairs are what’s tradable. The major currency pairs include EUR/USD, EUR/GBP, and AUD/USD. These currency pairs are less risky and come with higher liquidity.
- Profitability: We can argue that there is a clear winner between the two but it is what you do that determines how profitable either one can be. Trading cryptocurrency does offer way more potential in terms of profits, initially, traders were coining it, but this does come with some risk. The FX market sees much lower fluctuations, making it more attractive to traders looking for something more long-term and secure. So, while you can make a profit from both, crypto offers this much quicker than FX would, but with FX you will see much better returns over time.
- Safety and security: Each exchange has some form of regulation because Central Banks will intervene and protect against rapid and unwarranted changes if and when needed. While we’ve looked at the similarities between FX and crypto, safety and security are where the two differ greatly. Firstly, crypto is decentralized meaning that it is unregulated by any central bank or institution. This is where the risk comes in. FX does pose some risk, but because it’s regulated you have much more peace of mind. This regulation allows for stability and also prevents currencies from becoming under or overvalued.
- Which one is easier to trade: Another thing the two have in common, both are easy to trade, but this also depends on where you are on your trading journey. Either crypto or FX can be difficult for a novice trader, but once you understand the basics and get on your way, both are relatively easy. With a decentralized system like with crypto, it makes it easy to trade because you can buy and sell on different platforms without a service charge – some platforms do charge a minimal fee. With FX, the market has a much higher level of liquidity. For this reason, it makes it extremely easy for traders to buy and sell currencies. This is why you are more likely to turn a profit over time because the market has high liquidity. However, both are easy when it comes to trading, it just depends on where you are in terms of skill.
