Forex vs. Cryptocurrency – Analysis
The recent years saw the rise of a new market that only a decade ago was impossible to think of: the cryptocurrency market. Using an innovative technology like the blockchain, the crypto-world was initially set to disrupt the current financial system, making it easier and simpler for people to transfer capital.
It quickly gained worldwide followers, and the market capitalization of some of the crypto-currencies reached sky-high values. The peak of the market as we know it today came in December 2017, when cryptocurrencies like Bitcoin traded almost at $20000.
The volatility on the cryptocurrency market was so high that retail traders were attracted by the vast potential of making a quick profit. However, with high volatility comes high risk too, and many fell prey to the quick market moves.
The Forex market quickly embraced the new crypto-coins as any Forex broker that respects itself started to offer crypto-trading from the same Forex account. Therefore, besides the classic FX pairs, indices and stocks, now traders can buy and sell crypto-coins from the same trading account.
It comes with one tremendous benefit: the crypto-market is open 24/7, and not 24/5 like the Forex market.
Trading the cryptocurrencies comes in the form of CFD’s (Contracts for Difference), just like in the case of trading an individual stock or index using a Forex trading account.
CFD’s have a higher margin level than the standard Forex pairs and wider spreads and commissioning on the broker’s side, but they compensate with the high volatility and more significant potential for strong trends to ride.
Just like in the case of Forex trading, the cryptocurrency market is organized based on the USD. The USD, as the world’s reserve currency, is the benchmark for the crypto-market too.
In other words, cryptocurrencies like Bitcoin, Ethereum, Ripple, and so on, are quoted against the USD. The correlation degree is much higher than the one on the regular FX market, and thus the risk of overtrading is much higher.
For instance, when the Bitcoin gains against the USD, all the other cryptocurrencies gain too. Or, when it losses in value, all the rest do.
Therefore, it makes no sense to buy Bitcoin and Ripple against the USD, as it is like you’re investing two times the amount in Bitcoin. If you’re wrong and the market falls, instead of rising, the trading account will take a big hit.
The cryptocurrency market suffers from transparency problems and lack of regulation. For this reason, many traders are still skeptical about it, especially when fraud is at elevated levels.
However, for some reason, the market survived a few years, reaching spectacular capitalization. In the end, from the hundreds and hundreds of coins that exist today, probably only a few ones will survive the test of time if any.
For the time being, the cryptocurrencies are part of any trading account’s offering and represent an opportunity to diversify from the classic FX trading. However, without knowing how to do it, the trader just exposes his/her capital to a new class of risks.