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How Does Cryptocurrency Differ From Forex?

3 months ago

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- This post has been written by UK Bitcoinblog.com

     

UK Bitcoinblog.com, one of Top 10 Bitcoin blogs in the UK, is a blog about Cryptocurrencies such as Bitcoin, Ethereum, Dogecoin and Mining Bitcoins.

     

     

     

     

One of the things that has turned cryptocurrency into such an appealing investment opportunity for so many is that it’s original. For a number of reasons, it is unlike any other investment opportunity on Earth. That being said, people still seek for comparisons, and the two most logical ones tend to be gold and the foreign currency trades. Discussions about how cryptocurrency investment is similar yet different to trading gold have been held ad nauseam around the internet for years now. But what about cryptocurrency’s relation to forex markets?

   

The similarities are clear on the surface. After all, forex trading involves the exchange of currencies, and in a literal sense, these investments could be described the same way. Even so, for those interested in the comparison, there are some key differences to keep in mind.

   

     

The Nature of the Cryptocurrency Assets

     

As we said above, the literal descriptions of forex and cryptocurrency trading could match up: They both involve the exchange of monetary assets. However, those assets have very distinct differences. The forex market weighs very real, traditional currencies against one another; the actual buying power of a given currency comes into play on a day-to-day basis. Where cryptocurrency is concerned though, the practical utility of the assets still up for debate. We covered ‘Cryptocurrency Mainstream Adoption’ back in 2018 and pointed out that challenges remained, and that is still the case today. In some ways, this likely accounts for the greater volatility in cryptocurrency as compares to forex markets.

   

   

Trading Hours

     

One of the things people typically like about the forex market is that it’s billed as being open at all times. Indeed, an FXCM guide to trading hours says as much: While highlighting the busiest times of the day for activity, the guide states that “the sun never sets on the forex trading day.” However, it’s important to stipulate that this only means during business weeks; the same guide refers to forex markets as “running on a 24/5 basis.” That still makes forex more accessible than regular stock markets. However, cryptocurrency trading truly never closes. Without attachment to a country, stock exchange, or currency, any given cryptocurrency is available for purchase or sale at all hours, every day.

   

     

Liquidity

     

Arguably the defining feature of the forex market is its high liquidity. More people participate in the currency trade than any other market in the world, and this has been true for some time. The benefit of this is that individual investors or particularly large trades do little to affect the markets. By contrast, cryptocurrency markets have relatively low liquidity. While these markets have grown busier over the years, they can still be influenced heavily by so-called “whales” holding and moving immense quantities of cryptocurrency.

   

     

Security & Regulation

     

Cryptocurrency is often promoted for being inherently secure. It’s a fair point regarding individual transactions and the fact that blockchain technology ensures the integrity of those transactions. However, there are still some questions about security. CPO Magazine outlined crypto security nicely, acknowledging both the pros and the cons, but pointing out that a lack of regulation and exchanges’ vulnerability to hackers do lead to some real concerns about cryptocurrency security. In theory, forex exchanges could also be vulnerable to hacks. But these exist within a more directly regulated market, and — almost ironically — faulty or criminal transactions may be addressed more effectively (whereas with cryptocurrency the blockchain makes transactions, including improper ones, irreversible).

     

https://i1.wp.com/www.ukbitcoinblog.com/wp-content/uploads/2020/04/b8022b9f1986a8abc68340fe3449c818-1.jpg?resize=350%2C246&ssl=1

     

     

Potential

     

This last category needs to be considered carefully because the point is not to suggest that one form of investment or another is necessarily more strategic or more beneficial. However, we can say fairly that there is more potential for a sudden, significant gain — or loss — in cryptocurrency trading. Back in 2017, bitcoin more than doubled its value in a matter of weeks; recently, CNBC noted that it lost half its value in two days. Volatility is simply part of the cryptocurrency market at this stage. By contrast, while relatively sudden movements do happen in the forex world, they are nowhere near as dramatic or consequential, in either direction.

     

Ultimately, the cryptocurrency and forex trades are actually quite different. There are conceptual similarities regarding the exchange of monetary assets. But the differences above amount to two entirely different forms of investment — each with unique pros and cons.

     

     

     

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Published 3 months ago