Forex vs crypto: what are the differences?
Trading foreign exchange currencies on the financial markets is popular. Trading cryptocurrencies has also taken centre stage over the years. Discover the difference between trading currency pairs (forex) and cryptocurrencies.
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What is forex and what is crypto?
Forex is an abbreviation for foreign exchange – a financial market that enables you to get exposure to international currency pairs. Essentially, it’s the market in which one currency is converted into another.
When trading forex, you’d buy and sell one currency against another at an agreed price. If you’ve ever bought an item from an international online vendor in a currency that’s different to your native tender, you’ve had exposure to forex.
Crypto is short for cryptocurrency – digital currencies where a record of the transactions is verified and recorded on a decentralised system instead of a centralised or single authority. In other words, it’s a non-physical currency, but it can be used similarly to traditional tender.
Most cryptocurrencies store their transactions on blockchains to increase transparency. This aids in lowering risk and removing the ‘middle man’ that often results in additional transaction fees.
Forex vs crypto: what are the differences?
Even though the forex and crypto markets have similarities, such as being driven by supply and demand, they do have some significant differences. We discuss these differences in detail below:
There are several participants that make up the forex market. These range from central and commercial banks, investment funds, companies, retail brokers and traders.
Different foreign exchange participants have a role that they play in the market. For instance, commercial banks are the main hub or cornerstone that facilitate an exchange of currency pairs being traded on an international level. Central banks enter this market not to make profits, but to stabilise the national currency exchange rate, which impacts the country’s economy.1
In the cryptocurrency market, there are three types of participants – exchanges, miners and traders. Exchanges are digital marketplaces where you can buy and sell cryptocurrencies. Crypto miners are people or companies that complete blocks used verify transactions within the blockchain network. Cryptocurrency traders, on the other hand, speculate on the rise and fall of the price movement and don’t take ownership of the underlying crypto coins.
The forex market is large, mainly since it’s composed of transactions from international entities such as companies, banks, investors, funds and individuals, who depend on this system to exchange foreign currencies in real time.
While still in its teen years, the cryptocurrency market has made huge strides as blockchain networks have expanded. In 2021, the global cryptocurrency market was valued at $1.5 billion and is expected to reach $2.3 billion by 2028.2
The forex and cryptocurrency market structures are mostly dependent on demand and supply, which have a bearing on how traders can negotiate on the price without the approval of government agencies. Trading forex and cryptos can be done over the counter (OTC) and or through an exchange or brokerage.
The market structure for both forex and crypto are also decentralised, meaning they are not issued by a central authority like the government, therefore no single party controls the market. Some consider this transparency to be the strength of the market, especially in the case of cryptos.
Compared to traditional currencies traded on the FX market, cryptocurrencies mainly exist only in the digital space and are stored on a blockchain. Cryptocurrency transactions only take place via digital wallets and are verified once they have been mined.
The forex structure is mostly within the formalised markets and regulated. On the other hand, cryptocurrencies have a less formal structure, making them more susceptible to criminal activity and or fraudulent transactions.
Accessibility of assets
The forex market provides more accessibility as compared to digital assets like cryptocurrency. With us, you can trade over 80 exchange currency pairs available globally. These include major pairs like AUD/USD, EUR/CHF and EUR/GBP. The minor pairs are CAD/CHF, CAD/JPY and CHF/JPY. While the exotic currency pairs include CHF/HUF, EUR/CZK and EUR/HUF.
Cryptos have less liquidity. They also require a wallet and an exchange account to trade, which have deposit limitations and can be expensive to maintain.
Unlike the limited number of foreign exchange currency pairs available worldwide, there are over 11,000 cryptocurrencies, and counting, that’re actively traded on the blockchain, in addition to the well-known ones like bitcoin and ether. This also makes it hard, if not impossible, to track the cryptocurrency market in its entirity.3
Both markets are volatile, however cryptocurrencies tend to experience more volatility than forex pairs. This means crypto prices are highly likely to be affected by even the smallest of market movements, leading to significant fluctuations in a single trading session.
Forex pairs, on the other hand, have high daily trade volumes with frequent movements within narrow bands. This high volatility rate, as compared to other asset classes, aside from cryptos, is what attracts a lot of traders.
How do you trade forex markets?
When spread betting on forex, you’ll speculate on the rise and fall of the currency pair price. This will be done by betting on the amount of money per point of movement in the underlying market.
Alternatively, you can trade forex CFDs which are contract agreements for exchanging the currency pair price difference from when you open and close a position.
When trading the forex market using spread betting or CFD trading you won’t take ownership of the physical currencies. You ‘ll make a profit if the price moves in your favour and incur a loss if it moves in the opposite direction.
Spread bets and CFDs are leveraged derivatives. Leverage enables you to increase your exposure to the forex market by paying an initial deposit – called margin - that’s a fraction of the full value of the underlying market.
Your profit or loss is still calculated according to the full size of your position, so leverage will magnify both profits and losses. Note that losses can exceed deposits – manage your risks carefully.
You can buy and hold the underlying cryptocurrency coins in a digital wallet using an online broker. We don’t offer cryptocurrency trading or the purchase of cryptos via an exchange to retail clients.
Trading or investing in forex
- Choose a currency pair to trade
- Decide whether to ‘buy’ or ‘sell’
- Set your stops and limits
- Open your first trade
- Monitor and close your position
Forex vs crypto: which one is safer from a regulatory perspective?
It’s important to note that both the forex and cryptocurrency market aren’t regulated by the same authority. The forex market is OTC, which involves numerous transactions among several market participants such as central banks and investment funds and is heavily regulated.4
For instance, in the UK, brokers like us who trade forex markets are regulated by the Financial Conduct Authority (FCA). This industry body works closely with the Bank of England to ensure that brokers create and promote an environment that places the interest of the traders ahead of their own.5
Buying and owning cryptocurrency is allowed in the UK. However, since 6 January 2021, the FCA has banned the trade of crypto derivatives and exchange traded notes that reference certain digital or cryptocurrency assets to retail consumers. The UK regulators only enable professional traders or institutional firms with a history to access these riskier financial products.
The FCA’s reasons for banning cryptocurrencies were that the digital asset had unreliable valuations, had a prevalence of market abuse and financial crimes, as well as increased volatility of cryptocurrency price movement. The regulatory body further said retail consumers had inadequate understanding of how the cryptocurrency market works, and there weren’t legitimate requirements for them to invest in the derivatives.6
Forex vs cryptos summed up
- Forex is the market in which one currency is converted into another, enabling you to get exposure to international currency pairs
- Crypto is a digital currency that records and verifies transactions on a decentralised system that can be used similar to a traditional lender
- There are a several differences between forex and cryptos from markets participants to size, structure, accessibility to assets and volatility
- Both markets are volatile, however cryptocurrencies tend to experience more volatility than forex pairs
- The forex and cryptocurrency market aren’t regulated in a similar manner
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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