Supply and demand are the main influencers of the value of assets in both cryptocurrency and forex trading. But, how do these two different types of investment compare?
The Advantages and Disadvantages of Crypto and Forex Trading
If you want to gain profits for investing in either crypto or forex, you must have knowledge of how their respective markets operate. Tanzeel Akhtar broke it down on a recent article on News.Bitcoin. Here is a an overview:
Cryptocurrencies and forex are both a digital store of value and can be easily traded, according to Alex Mashinsky, the CEO of Celsius Network. Their high volatility means that profits and losses can be realized within short periods.
Mashinsky believes that the dominance exerted on crypto and forex trading by large financial players is beneficial to investors. The financial firepower of such institutions can’t be matched by most individuals, a factor that reduces the risk of manipulation.
Alex adds that the BTC market is dependent on retail transactions whereas the forex market relies on institutional investors. This is the primary reasons why BTC trading patterns differ from forex markets.
Invictus Capital’s chief investment analyst, Kyle Cox, says that the limited supply of BTC and the mechanisms that control block generation are enough to prevent manipulation of BTC markets. Cox is certain that BTC trading is entirely dependent on the demand and adoption rates of the cryptocurrency. This means that the value will increase steadily as the coin gains more utility.
Unlike Bitcoin, fiat money has an infinite supply. The supply of such currency depends on the monetary policy of the issuing country.
The aforementioned monetary policies usually consider factors such as interest rates and repurchase of a specific fiat currency, according to Kyle Cox. The policies are also influenced by prevailing economic conditions both locally and internationally. In turn, they affect the supply and demand of the fiat currency.
Most forex investors purchase currencies whose pointers indicate a future increase in value. Likewise, they sell currencies whose value is being affected by the prevailing or upcoming conditions. Although this trading requires skill, luck is also pivotal.
Crypto Trading is Cheaper
BTC trading is cheaper that forex trading because of the direct peer-to-peer transactions enabled by the underlying blockchain. Cox notes that the absence of intermediaries (who are present in forex trading) is the reason behind the price difference.
Cox, however, believes that crypto exchanges can be reviewed as intermediaries. Essentially, these platforms store digital assets and charge fees for enabling transactions involving virtual currencies. The fees levied by exchanges are determined by trading volume, trading pairs, and many other factors.
Forex Markets have More Liquidity
Crypto trading is still new to the market. Contrarily, forex trading has existed for ages, making its relatively higher liquidity explicable.
Kyles links the high liquidity of forex markets to the advancement of technology and the rapid increase in cross-border transactions. For instance, the US dollar is used by most nations as the reserve currency. This explains why the forex market is worth trillions of dollars.
The dominance of the US dollar is arguably comparable to the superiority of BTC over other cryptocurrencies. Nonetheless, Cox points out that the trading volumes of the two are incomparable because the Bitcoin market is worth billions while the forex market is worth trillions. In addition, the BTC market is more volatile than forex.
Few Traders Extract Profits
It is hard for crypto traders to disagree that 2018 was unfriendly to them, especially considering the records set in 2017. Indeed, Cox believes that very few of crypto investors got profits over the past 12-month period.
While Cox acknowledged a few success cases, he reiterates that most people lose their funds while trying to ‘time’ the renaissance of markets.
George Soros vs. the Pound Sterling
In 1992, George Soros made a staggering $1 billion by simply betting against the pound sterling. A deeper look at this case can assist investors in understanding how certain crises can affect the prices of investment assets (both crypto and forex).
Over the years, Soros has successfully traded against several central banks, including the Bank of England. In the pound sterling case, he capitalized on the then high inflation rates in the UK. Soros also noticed that the pound was faltering against the US dollar. Because the UK had to trade with America, Soros sold the devalued pound and made $1 billion in return.
Bitcoin and fore trading have their differences as well as their similarities. Regardless, the thought of incorporating both into the global financial system is not impractical.