Cryptocurrency vs Forex – Which One to Choose?

A cryptocurrency is a digital or virtual currency. Every crypto is secured by cryptography to prevent double-spending and fraud. The distinguishing factor of cryptocurrency is that it is decentralized, which means it is not issued or controlled by any central authority. Crypto exchanges are digital marketplaces that facilitate cryptocurrency trading.

Cryptocurrency has introduced a new paradigm of money – one that is controlled by no single entity. Bitcoin, the most popular crypto coin, was created to offset the wide-ranging impact of economic crises in a small section of financial institutions, which caused the recession of 2008.

Cryptocurrency Pros

• Cryptocurrencies simplify cross-border payments, eliminating intermediaries and the associated costs.
• Cryptocurrency transactions are fast, secure, and more reliable than any other class of assets.
• Cryptocurrencies have exhibited exponential growth over the years and have the potential to replicate this.
• Cryptocurrencies have introduced decentralized finance, which has facilitated flash loans that can be processed without collateral and take only seconds to be issued.
• Cryptocurrencies may work as a potential hedge against inflation

• Despite the claims, most cryptocurrencies are not truly anonymous. They leave digital trails that can often disclose the identity of the owner.
• The ownership of cryptocurrencies is concentrated among the tech-savvy.
• Cryptocurrencies have also exhibited steep declines when investor risk sentiment is hit by economic turmoil.
• Cryptocurrency transactions have eased the financial flow of criminal activities due to the difficulty of tracking them.
• Cryptocurrencies have still not gained truly widespread acceptance.

The simplest meaning of foreign exchange is the systematic conversion of one currency into another at an exchange rate. The foreign exchange (Forex) market is the global financial market that allows the trading of fiat currencies. It is the most liquid and largest financial market in the world. The daily turnover of the Forex market reached $7.5 trillion in April 2022. 

Forex Pros

• The Forex market has a low entry barrier, and attracts retail traders, institutional investors, and multinational organisations alike.
• The market is highly liquid with abundant opportunities and low trading costs.
• There is never a bear market. When one currency declines, it does so versus another currency, which means the other rises.

• Small traders are up against some of the biggest players, like banks, asset management companies, hedge funds and other financial institutions.
• Exchange rates can be influenced by a multitude of factors.
• The Forex market typically does not offer significant returns unless you trade with leverage.

The question as to whether crypto or Forex is more profitable is an important question when choosing between these unique asset classes. To answer this, here are some similarities and differences between the two.

Trading Currencies

Crypto and Forex are both currencies and their prices are driven by demand and supply. While the Forex market facilitates trading fiat currencies, the crypto market involves trading digital currencies. Traders must remember that crypto trading requires an initial fiat deposit to purchase one or more cryptocurrencies.

The Wide Range of Players

Both cryptocurrencies and Forex involve a wide range of players in terms of investment size and experience level, from retail traders to large institutional investors and from beginners to seasoned professionals.

The Involvement of Technology

Both cryptos and Forex can be traded electronically on digital platforms and with trading bots. Additionally, price charts and technical indicators help traders uncover trading opportunities for both markets.

Despite many similarities, the Forex and cryptocurrency markets have several essential differences.

Market Participants

Banks, multinational companies, fund managers, and governments have been key players in the Forex market for decades. It was only after the introduction of online trading that retail traders entered this market.

Cryptocurrencies, on the other hand, began with only a handful of individuals trading them and have not yet received government approval in many countries, while many financial institutions also remain wary. The three key players in cryptocurrencies are:

• Exchanges – that facilitate crypto trading.
• Miners – those who use technology to bring more coins into circulation.
• Traders – those who buy and sell cryptocurrencies to take advantage of price fluctuations.

Size

The cryptocurrency market is still probably at a nascent stage, despite its phenomenal growth over the past couple of decades. It is projected to reach $3.24 billion by 2027, growing at a CAGR of 58.4% from 2022. The Forex market, on the other hand, has matured considerably. The Forex market is expected to grow at a CAGR of 7% from 2023, to surpass $1.14 trillion by 2028.

Structure

Both the crypto and Forex markets are decentralized. However, Forex is more formalized and regulated due to the involvement of central banks that issue the fiat currencies. The crypto market is unstructured and relies completely on supply and demand. Cryptocurrencies can be exchanged on crypto exchanges only via digital wallets, whereas over-the-counter trading is common in Forex.

Accessibility of Assets

Both can be traded directly or via derivatives, like CFDs, futures, ETFs, and options. As fiat currencies have been established and trusted over centuries, they are more accessible to the wider public than many cryptocurrencies. Top crypto currencies like Bitcoin and Ether enjoy higher accessibility on both exchanges and via brokers than some of the lesser-known ones.

Volatility

Cryptocurrencies are extremely volatile as their prices can double or triple within days or even hours. Although fiat currencies can also be volatile, such equivalent massive moves are very rare in Forex, the Swiss Franc unpegging in 2015 being a notable example of such a rare occurrence.

Liquidity

The Forex market has much more liquidity than the cryptocurrency market. The Forex market has the highest liquidity among all financial instruments. Over 11,000 cryptocurrencies are actively traded on decentralized exchanges worldwide. However, the liquidity of cryptocurrency overall is much less than Forex.

Profit Potential

Cryptocurrencies offer huge profit potential and have exhibited periods of outsized growth. While their high volatility can offer attractive opportunities, the risk associated with them is also high. Traders generally make smaller profits in the Forex market. They often use leveraged instruments such as CFDs to magnify their profitability.

Huge Differences Between Coins

There are thousands of cryptocurrencies that are valued at huge price differentials. For instance, when Bitcoin was trading at around $23,000 in January 2023, Dogecoin was worth less than 9 cents. This kind of gap is not seen proportionally in fiat currencies.

Market Hours

Online trading has made both markets popular. Forex markets operate 24 hours per day 5 days per week, while crypto markets are open 7 days a week.

Security

Scams, characteristic of any nascent and booming market, are common in cryptos. Additionally, traders often dive into the crypto space without appropriate due diligence, which opens them up to being conned. As the Forex market is heavily regulated and liquid, traders usually face fewer risks and scams there.

For any trader, the market they understand and learn to trade through regular practise is safer. A trader’s goals, available capital, and trading style determine the asset class that suits them.

You could consider trading both markets to see which fits you best. This can also be a good way to diversify your portfolio. Why not make the most of both asset classes?

The choice of Forex vs. crypto trading depends on individual preferences. Both assets are widely traded and can present attractive opportunities for both investors and traders, although investors will probably find more scope for big long-term profits in cryptocurrencies than in fiat currencies, while traders may find the Forex market’s major currency pairs more suited to orderly trading, especially day trading.