Forex vs Crypto – What Are The Differences?

The financial world is filled with many different types of assets that you can trade with. On one hand, we have the largest and the most liquid market in the form of Forex trading. On the other hand, a new player has managed to take this field by storm, and that is the crypto market. These two markets share many similarities, as they are both forms of currency. But despite these similarities, these two markets are nothing alike when taking a deeper look and considering which to invest in.

Since there has been an influx of people who are getting into investment and trading, due to the popularization of cryptocurrencies, these people also look at different markets, with Forex being one of the most popular ones. Because of this, there are many who are wondering what are the main differences between these two assets and what these differences mean when it comes to investing or trading with them. This is exactly what we will be taking a look at today in our crypto vs Forex guide.

Crypto

First let’s take a look at the newcomer to the financial world, crypto. Cryptocurrencies are digital assets that are part of a blockchain and operate on blockchain technology. They are digital assets that are not associated with anything, meaning they are not backed by any hard assets. This results in crypto being a really volatile asset since without anything backing this asset, their prices are purely dependent on people’s belief in them and the general market sentiment. This makes crypto a speculative asset, and it is pretty hard to do a thorough analysis of this market. It is quite common in cryptocurrencies for the market to show signs of the prices going up, but then suddenly the price falling or vice versa.

The main idea of crypto and the reason Satoshi Nakamoto created Bitcoin, was to challenge traditional fiat currencies that make up the Forex market. Cryptocurrencies have decentralization and anonymity associated with them, making people who deal with these tokens relatively invisible in the eyes of governments or other bodies that are looking over our shoulders. But, there are still some regulations in place, meaning that most people will not be able to access the biggest crypto markets anonymously, and there are different ways being used to track these people.

Forex

While cryptocurrencies are big, they are dwarfed by the mammoth that is the Forex market. The Forex market, which essentially is the market of trading with different regular fiat currencies from all countries of the world, has a daily average trading volume of $5 trillion. Alongside stock markets, the Forex market is one of the go-to investment and trading avenues that the majority of traders head down. There is no successful investor or trader who made millions or billions of dollars and has not dipped their toes into Forex at some point.

The Forex market, which is essentially a currency trading market contains many currencies, but the majority of the market is taken up by just a few of them, called major currencies. What differentiates them from crypto is that these currencies are backed by different hard assets, with gold being the most common. This gives Forex a backbone. For example, if you see that a country plans on printing more money, and they are not backing this new money with anything, the price of this currency will go down, essentially creating inflation.

But this is not the only difference, there are other major differences between these two assets. But what are they exactly?

Forex vs Crypto – Major Differences

Cryptocurrencies were created in order to challenge the fiat system and the Forex market. What this means is that, there are some similarities between these two assets, but most importantly there are major differences since one was created to fix the problems associated with the other. Below we will list a few of the differences between these two assets, and what they mean for each respective market.

Size

One of the major differences between these two assets is their size. While cryptocurrencies are new assets, only being on the market since 2009, they managed to grow very rapidly. Currently, the market capitalization of the whole crypto market is $1 trillion, with the highest peak being in 2021, when it reached $2.9 trillion. But despite this, crypto is dwarfed by the Forex market, and currently, the Forex market is valued at $1.9 quadrillion, with the highest valuation ever being $2.4 quadrillion in 2020.

While the Forex market is not as old as the stock market, as it was first created in 1972, it still managed to grow astronomically. The reason is that Forex is the market where you trade the national currencies of all countries around the world. The participants of the Forex market are central and commercial banks, huge investment firms, major companies, and the ocean of retail investors and brokers that speculate on it. While on the other hand, cryptocurrencies are digital assets that are not associated with anything major and have a lot of skeptical eyes on them. Also, the participants of the crypto market are crypto exchanges, traders, and to some extent crypto miners, meaning that there are fewer market participants. While there are also some investment funds that have started to invest in crypto, the majority of their portfolio is still taken up by traditional assets such as stocks and Forex.

Liquidity

When it comes to liquidity, the Forex market is the most liquid. Since central and commercial banks and very large investment firms are the main players in this field, the liquidity in this market is very high. This can be seen from the daily trading volumes of the Forex market, as on average, the Forex market sees $5 trillion changing hands each day. This is also caused by the nature of this market as it is associated with national currencies. A good example is central banks using this market, not for profits, but to stabilize their currencies, trading billions of dollars each day.

On the other hand, cryptocurrencies are not that liquid. Just by taking a look at the diversification of cryptocurrencies, we can see that 44% of the whole crypto market is taken up by just Bitcoin, which in itself has a limited supply; unlike fiat currencies which can be created unlimitedly. Also, just the whole value of crypto does not come anywhere close to the market cap of Forex, which drives this liquidity margin even further down. You can see most crypto exchanges asking their users to provide liquidities to the exchange in exchange for APY on their stakes. This sometimes makes it hard to satisfy the demand for crypto, and some of the world’s biggest crypto exchanges have collapsed due to these liquidity problems.

Laws and regulations

Another major difference between these two assets lies in the laws and regulations governing them. Forex, being associated with countries, government agencies, banks, and the world’s leading institutions force it to be very tightly regulated. While no single entity holds authority over this market, it is still being regulated by each government in order to make sure no one manipulates the prices in a way that will cause their nations significant harm. What this means is that your activities on the Forex market are more transparent, this should not be surprising as whenever you are dealing with fiat currencies, you have to use banks to provide necessary services, which themselves report to governments.

On the other hand, the crypto market is not as tightly regulated and scrutinized. Since cryptocurrencies operate on blockchains and do not require any third-party involvement, you can easily make crypto transactions without being seen by any governments. But most leading crypto exchanges need to adhere to regulatory requirements in order to operate in different countries, and because of this, trading in these markets will remove most of this anonymity. But still, due to this anonymity trait of crypto, criminals have started to flood this market as it is much easier to move dirty money around.

Volatility

Forex and cryptocurrencies are both volatile assets, though Forex tends to be less volatile than the crypto market. Forex prices change constantly throughout the day, and it should not be surprising as these are assets that are tied to the whole world’s economic system. But since most countries are trying to stabilize their currencies, the volatility rarely gets out of hand. What this means is that, if you are investing or trading with Forex, the volatility alone will not be enough to result in you making good profits, unless you use margin trading and borrow funds from brokers.

On the other hand, cryptocurrencies tend to be really volatile. Since these assets are speculative assets their price depends on people’s perception of them. This results in drastic price changes, and you can even see 10-15% daily price changes of some cryptocurrency. This volatility can be good as even with small starting capital you can make decent profits if your trading goes well. But this volatility can also be a dagger in your back, as a sudden fall in prices can wipe out a big chunk if not all of your profits. Because of this, the crypto market is a high-risk high reward market that requires a cautious approach.

Which market should you invest in or trade at?

Now that you know what the differences are between forex trading vs crypto trading, you might be asking yourself, which of these markets you should use. The answer to this question should come down to your personal preference, trading capital, risk tolerance, and many other factors. If you are someone that is looking for a more stable market, where risks are not too high, then Forex should be your choice. But in order to trade on the Forex market and make good profits, you would need to have big trading capital, or you would need to use a margin that will make your trading riskier.

If you are looking for higher profits and are willing to take higher risks, the crypto market should be your go-to destination. Since cryptocurrencies tend to be highly volatile, you can make good profits even with a small amount of trading capital. But you can also lose a lot of money because of this volatility. Even one sudden price drop can wipe out all the profits you have made up until then, and it is hard to diversify your portfolio since most cryptocurrencies are co-dependent, meaning that if one of the major cryptos falls, other tokens will most likely suffer some sort of losses as well.

FAQs on Crypto Trading vs Forex

Is crypto more stable than Forex?

Cryptocurrencies are way more volatile than Forex pairs. Since cryptocurrencies are speculative assets, they tend to change their value quite often throughout the day. While on the other hand, Forex is way less volatile than crypto, but it still has volatile traits.

Is Forex bigger than crypto?

Forex is the largest financial market in the world and is larger than crypto by miles. Forex, on average, has a daily trading volume of $5 trillion, which is almost double the whole crypto market capitalization at its peak. But this should not be surprising considering that the Forex market is filled with commercial and central banks and some of the biggest investment firms in the world. This gives Forex a massive market capitalization and makes it the largest market by far.