Forex vs. Crypto Trading: Which Should You Choose?
Forex trading is extremely popular among institutional and retail investors, thanks to its substantial liquidity, flexibility and healthy potential for returns. In recent years, cryptocurrency trading has emerged as a high-risk/high-return market, in which traders can start with modest capital and still turn significant profits.
Both trading environments — forex and crypto — operate according to less centralized and regulated formats than the stock market does. This means they are not issued by a central authority, such as a government, so no single entity has control over the market. However, the nature of their respective decentralization is very different, and the forex market — which is part of the traditional finance ecosystem — is relatively more regulated than cryptocurrency.
Over the past few years, the level of regulation for crypto trading has been increasing, making this asset class more attractive to investors who prefer to stay within the realm of a regulated environment. With the increasing regulation of crypto, and forex's lightly regulated environment (at least compared to that of the stock market), the differences between these two popular markets are now more attenuated than ever.
Such developments are making many investors curious as to which of these two markets, forex or crypto, can deliver better returns and suit their investment goals. In this article, we aim to answer these fundamental questions.
Key Takeaways:
Forex refers to a web of decentralized international over-the-counter (OTC) markets where fiat currency pairs are traded.
Compared to crypto trading, forex trading features a somewhat more regulated market, more liquidity, higher leverage ratios, higher barriers to entry, a more mature trading environment and, generally, a more complicated setup for beginners.
The choice between crypto and forex investment ultimately depends upon a trader's preferences and experience. However, it's generally recommended that these asset classes are both included in a well-diversified portfolio.
What Is Forex Trading?
The forex (foreign exchange) market is the world's most liquid financial market, enabling the trade in pairs of national fiat currencies, such as the U.S. dollar (USD), euro (EUR), Canadian dollar (CAD), Singapore dollar (SGD), Swedish krona (SEK), Japanese yen (JPY) and many more. Trades and positions on the forex market are all expressed in pairs of currencies (e.g., USD/EUR), with the first ticker called the base currency and the second one called the quote currency. A forex pair price indicates how much of the quote currency you need to pay to buy one unit of the base currency. For instance, a listing of USD/EUR 0.9 means that to buy one U.S. dollar, you'd need to pay 90 Euro cents.
The forex market features the highest liquidity out of all financial markets, with daily trading volumes above $7 trillion. Unlike the stock market, which operates within centralized and tightly regulated environments of stock exchanges, forex is a decentralized international market in which trades are conducted in an OTC format between market participants, such as brokers, central banks, commercial banks, foreign currency exchange bureaus and other financial entities. Retail traders typically use the services of forex brokerages to participate in the market. While a certain level of regulation is applied to forex markets, it's less stringent and detailed than the regulatory framework governing the stock market.
The majority of forex trade occurs in four main forex markets: Sydney, Tokyo, London and New York. Each market operates Monday through Friday, roughly during the local time’s business hours. Their working hours are designed so that when trade in one location wraps up, it starts in the next major market, ensuring that the overall international forex market remains available 24 hours a day, Monday through Friday. The market doesn't operate in any of its locations on Saturdays and Sundays.
There are seven major currency pairs (or “majors”) in the forex market:
Euro and U.S. dollar: EUR/USD
U.S. dollar and Japanese yen: USD/JPY
British pound and U.S. dollar: GBP/USD
U.S. dollar and Swiss franc: USD/CHF
Australian dollar and U.S. dollar: AUD/USD
U.S. dollar and Canadian dollar: USD/CAD
New Zealand dollar and U.S. dollar: NZD/USD
The first four of these are the traditional major pairs, while the latter three are often referred to as commodity pairs, since they represent economies whose national currencies are sensitive to fluctuations in commodity prices.
Over 80% of all forex trade is concentrated in these seven major pairs.
What Is Crypto Trading?
Crypto trading involves buying and selling cryptocurrencies via dedicated centralized exchange (CEX) and decentralized exchange (DEX) platforms. Around 85 to 90% of crypto trading occurs on CEXs. The crypto market is decentralized, and features even lower regulation than the forex market. However, regulatory bodies worldwide have ramped up their oversight of cryptocurrencies and crypto trading in recent years.
Crypto markets are characterized by high volatility, which presents both improved return opportunities and increased risks. The world's highest-capped cryptocurrency,Bitcoin (BTC), holds more than half (around 54%) of the entire crypto market capitalization as of Oct 22, 2024. It's also the second-most-traded crypto asset [behind the Tether (USDT) stablecoin] by daily trading volume. Other popular high-cap and actively traded cryptocurrencies include Ethereum (ETH), Solana (SOL), BNB (BNB), XRP (XRP) and the USD Coin (USDC) stablecoin.
Similarities Between Forex and Crypto Trading
24-Hour Trading
Both forex and crypto markets are open 24 hours a day, enabling flexible trade across all geographical time zones. One distinction, however, is that forex operates Monday to Friday only, while crypto markets are available 24/7.
Leveraged Trading
Both markets are known to prominently feature leveraged trading opportunities. However, the typical leverage ratios are higher in forex. The usual leverage ratios offered by popular crypto exchanges vary between 5x and 100x. Leverage over 100x may also be available, but is less common. In contrast, leverages in forex are typically between 20x and 400x, with some brokers offering ratios as high as 5,000x.
Speculation Opportunities
Both forex and crypto are popular with investors who aren’t shy of risk. Those who tend toward high-risk speculation can find ample opportunities in both of these markets. At the same time — not counting the risks amplified by high forex leverages — cryptocurrencies feature a larger degree of price volatility than forex pairs. If you like active speculative trading, crypto's price volatility and forex's steep leverages can both satisfy your needs. However, forex pairs are a notably less volatile option in the absence of leverage use.
Decentralization
Unlike the stock market, both forex and crypto trading are conducted in decentralized trading environments. The vast majority of forex trade happens via decentralized OTC markets, while cryptocurrencies themselves are well-known to be based on the principle of decentralization that underpins the operation of blockchain networks — platforms where crypto coins and tokens are issued and circulated.
Differences Between Forex and Crypto Trading
Asset Nature
There's a fundamental difference in the nature of assets traded in these two markets. Forex trading involves fiat currencies issued by governments and guaranteed by them. Crypto trading involves digital currencies whose issuance, operations and value are ensured through the functionality of blockchain networks or blockchain-based decentralized apps (DApps). In a practical sense, the viability of crypto trade is also highly dependent upon the operational health and reserves maintained by the leading crypto exchanges.
Regulation
While forex is known to be less regulated than the stock market, forex brokers and other entities participating in the forex market still need to meet a variety of qualification requirements. For instance, in the U,S,, brokers need to be registered with the Commodity Futures Trading Commission (CFTC), and to fulfill other requirements.
In contrast, the cryptocurrency market is notably less regulated. This is changing, however, with the increasing regulatory attention directed toward it from authorities like the U.S. Securities and Exchange Commission (SEC) and other regulatory bodies around the world. In the U.S., the SEC has declared some cryptocurrencies to be securities, potentially bringing them under the same regulatory framework as stocks — financial products considerably more regulated than forex.
Liquidity and Volume
Forex's trading volumes are vastly higher than those of the crypto market. As of late 2024, forex has typical daily volumes above $7 trillion, while the entire crypto market's daily turnover is around $110 billion. The cryptocurrency market's lower liquidity is one of the key reasons for its higher volatility.
Market Maturity
Forex is also a much more mature market as compared to crypto. The first instances of trading fiat currencies date back many centuries, and modern, active currency trading started in the early 1970s when the U.S. dollar and other major national currencies transitioned to a free-floating exchange rate format. In contrast, the first cryptocurrency trading platforms — Bitcoinmarket.com and Mt.Gox — were launched only in 2010, making crypto trading a relatively young market at just 14 years old.
Pros and Cons of Forex Trading
The main pros of forex trading over crypto trading include more stability in price movements, much higher liquidity, somewhat more stringent regulatory protections and a more established market that allows traders to apply proven strategies and approaches.
At the same time, forex has specific disadvantages and risks associated with it. These include steep leverages, which can be a minefield for inexperienced traders or those who might overestimate their experience; fewer trading days compared to crypto markets, which may not satisfy the needs of weekend warriors; and lower variety in terms of products/assets on offer, since the bulk of forex trade is concentrated in the seven major pairs. The rest of forex trading volume is attributable to minor pairs (those involving the trade between EUR, GBP, CHF and JPY, e.g., EUR/JPY or GBP/EUR) and exotic pairs (those involving USD, EUR, GBP, CHF or JPY on one side and a lower-volume currency, typically from a developing or smaller economy, on the other side).
Pros and Cons of Crypto Trading
The key pros of crypto trading include greater potential returns due to high volatility, a 27/4 market, relatively low barriers to entry and a widely diverse choice of assets.
However, the same elevated volatility that might deliver staggering returns also increases the overall risk in trading cryptos. Other cons of crypto include a less mature market, which makes established trading strategies more uncertain in terms of their effectiveness; lower levels of liquidity; regulatory uncertainty; and the potential of hacks on blockchain platforms.
Forex vs. Crypto: Which One to Trade?
Reasons to Trade Forex
Forex can be suitable for traders who would like to utilize an established market with substantial liquidity. It might also provide a more stable trading environment than for trading crypto, particularly if you’re careful with the generous leverages on offer.
Many traders also prefer to combine forex trading with other asset classes to diversify their portfolios. For such users, Bybit offers the MT5 account — a mixed-asset-class, unified account that you can fund with the USDT stablecoin and then use to trade forex, commodities and major stock market indices in the format of contracts for difference (CFDs).
Until Nov 8, 2024, new Bybit MT5 users will also be eligible to participate in the Gold&FX Quest campaign. Under the rules of the quest, new users need to deposit and trade just 100 USDT for the chance to win over 1,000 USDT worth of prizes.
Reasons to Trade Crypto
Cryptocurrencies suit traders who prefer high-risk/high-return strategies to maximize their profits in a volatile environment. Due to its decentralized nature and low regulation, the crypto market also has low barriers to entry, making it suitable for those starting with limited capital. The diversity of assets traded is also vast, with around 15,000 cryptocurrencies in existence as of October 2024 and hundreds of the leading ones offered on major CEXs.
For instance, as of late October 2024, there are over 600 crypto pairs available on Bybit, definitely a richer variety than forex's seven majors; around 20 minors; and fewer than 100 exotics. Bybit also gives you a vast array of options to trade crypto assets via the spot market and various derivatives, such as standard futures, perpetual futures and options.
Which Is Better for Beginners — Crypto or Forex?
While it's up to debate which market is more suitable for beginners, some factors point in the direction of crypto. First, while crypto markets are more volatile, forex markets feature significantly higher leverages, which can create a much more risky scenario for an inexperienced trader. The crypto market also has lower barriers to entry, with generally lower minimum initial deposit requirements and the ability to register an account directly with trading platforms (such as CEXs) without a broker. The easier initial setup also suits beginners.
Closing Thoughts
Both forex and crypto trading come with their own unique benefits. Ultimately, the choice between the two will depend upon your risk management approach, familiarity with each market, trading style, overall trading experience, penchant for leverage and long-term investment goals. Note, however, that the best traders generally diversify their portfolios and endeavor to use a variety of asset classes. Thus, it might not be a question of which of these two markets is better, but rather how to mix and combine your investments — including forex and crypto.
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