In the past few years, cryptocurrencies have become mainstream, and many traders are wondering whether they should focus on the cryptocurrency market instead of forex, or whether they should try to operate in both markets. This article explains the similarities and differences between digital currency and forex markets so that you can make an informed decision
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Similarities of digital currency market and forex markets
To start trading, you need a trading account and a modern electronic device with a stable Internet connection. If you have experience trading with forex or digital currency, you can easily learn the basics of trading. Charts are widely available and execution is fast, so you can focus on your trades.
Like forex markets, digital currency markets are affected by the balance of supply and demand. When there are more buyers than sellers, the price goes up and when sellers outnumber the buyers, it goes down. Therefore, when trading cryptocurrency, you can use familiar indicators and chart patterns.
The difference between the digital currency market and the forex market
While cryptocurrency trading is very similar to on-screen forex trading, there are many differences that are discussed below.
Number of tools available
In Forex, traders usually focus on major currency pairs (EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, NZD/USD). Some traders prefer to work with exotic currency pairs, which include a major currency and a developing economy such as South Africa or Mexico.
Currently, there are more than 11,000 different cryptocurrencies and the number is still growing. Some are actively traded, such as Bitcoin or Ethereum, but many cryptocurrencies are only known to cryptocurrency enthusiasts.
There are many instruments to choose from in the cryptocurrency market, while forex markets can sometimes experience quiet trading days for days or even weeks.
It is impossible to track all cryptocurrencies, so traders should choose a limited number of coins to track. Therefore, traders will still work with a limited watch list.
Digital currency market liquidity and forex markets
Forex is an extremely liquid market and the volume of Forex transactions in 2019 exceeded $6.6 trillion. Regardless of the size of your position, you can easily buy or sell the instrument of your choice without price slippage. This is a big advantage because you will always be able to exit the trade at a price equal to or very close to the price you see on the screen.
This is not true for most cryptocurrencies. The total market capitalization of digital currencies is less than 2 trillion dollars and more than 45% of this market value is taken by Bitcoin. For most cryptocurrencies, trading is not nearly as active as Bitcoin, so traders may struggle to exit trades at a desired price.
Big difference between coins
Due to the large number of digital currencies available, there is a lot of difference between different coins. Anyone who wants to trade lesser-known cryptocurrencies should dig deep into the basics.
As mentioned above, there is no way to track all opportunities in the cryptocurrency market, so traders should focus on coins they understand well. This makes their trading watchlist size similar to the size of a typical watchlist for forex traders.
Digital currencies are very volatile while forex markets are more stable. Bitcoin, the world’s top digital currency, started this year at $29,000 and climbed to $65,000 before falling back to $30,000 and back to $45,000. Smaller cryptocurrencies can make big moves in short periods of time.
Such moves are rare in the forex market and mostly occur in odd pairs. In this sense, it is easier to control risk in forex, but the potential for profit is greater in the digital currency market.
Profit potential in digital currency and forex markets
The digital currency market has gained popularity by offering opportunities to earn more profits. In trading, risk increases with potential profit. Therefore, traders should be prepared to take more risks when trading digital currencies. In fact, if many coins do not perform well or capital flows to stronger coins. The value of many coins may eventually drop to zero, which is normal for more advanced stages of developing markets.
It should be noted that traders can always increase their potential in forex trading by using leverage. Leverage is a double-edged sword, so the risks are also increased, but traders can manage the risks by choosing the right amount of leverage for their trades.
Read more: Digital currency training
The digital currency market is open 24 hours and 7 days, while the forex market is open 24 hours and 5 days. This is a huge difference in lifestyle. Forex traders can turn off their screens and enjoy their weekend. Crypto traders should always be in touch with the markets as cryptocurrencies often perform on weekends.
While both markets are open 24 hours a day, forex market activity follows a typical pattern as forex trading is driven by large institutions. The situation in the digital currency market is different as larger institutions. Recently, they have increased their activity and many coins are driven by individual traders or small crypto investment companies.
Security of digital currency and forex markets?
Digital currency markets are still in their early stages of development and appropriate regulations are currently being developed in various countries. Crypto traders have to deal with counterparty risks (frauds that are common to booming markets) and hacking risks. Recently, hackers stole $600 million on the Poly Network (strangely, they have returned about half of the stolen assets at the time of writing).