Forex vs. Cryptocurrency: Why They’re Not Really “Apples and Oranges”
While the exchange of currencies is an ancient practice, forex became a widespread investing phenomenon in the mid-1800s, coinciding with both the adoption of the gold standard and growing globalization of commerce and finance. There’s a long history behind the trade of foreign currencies, making it one of the most common forms of investment.
Cryptocurrencies, on the other hand, are relatively untested. Unlike the dollar, the euro and other traditional currencies, these digital, encrypted, decentralized currencies aren’t connected to a central bank. Instead, they’re issued by independent crypto-technology developers and traded among a world-wide cryptocurrency community.
Despite these differences, many of forex’s principles apply to cryptocurrency trading as well. They share similar market mechanics and underlying structures, and a considerable amount of savvy — and luck — are required to successfully navigate each market.
The similarities start before you even make a trade, with both cryptocurrency and forex transactions requiring you log on to web-based trading platforms known as exchanges. This lowers the bar to entry significantly, giving newbie investors immediate access to global markets.
Both forms of investment are known for high volatility. The cryptocurrency market is still in the “wild west” stage of its evolution, so this precariousness is much more pronounced. But forex was viewed similarly when it first gained traction, with few investors willing to trade on such unstable markets.
Trading traditional currencies has become more regulated and stable over the years, as will the crypto market. And while the volatility and risk of both investments remains, there’s also an elevated potential for large, quick (if unpredictable) returns.
Forex and cryptocurrency trading also share two essential methods of assessing investments. The first, fundamental analysis, looks at big-picture considerations such as economic, political and commerce-related factors. The second, technical analysis, focuses on the market itself, examining patterns that point to price movements.
Forex investors rely more heavily on fundamental analysis as it lends itself to larger markets that aren’t easily manipulated by a small number of players, as can happen with “crypto whales.” Technical analysis is at the forefront for day traders of foreign exchange and crypto currencies, as both focus on short-term price movements.
Nature of Speculation
These comparisons continue into how investors make predictions and decisions. Some of the most significant factors in forex speculation are:
- the issuing government’s economic health
- political stability
- global commerce policies
This means that investors need to keep track of political, economic and business news to pick up on trends that could signal when it’s time to buy or sell.
With forex, the current usage and circumstances of a currency are key. The recent trade war between the U.S. and China is a good example of how factors such as political turmoil can affect forex trading, with the value of currencies throughout the market fluctuating wildly as tariffs were repeatedly imposed and withdrawn between both sides throughout 2018.
Conversely, outside of regulatory news, most of the action that moves crypto markets is within the cryptocurrency bubble, making it easier to follow. Innovations in blockchain technology, initial coin offerings and news about coin development teams influence the value of individual coins as well as the market as a whole.
Trading cryptocurrencies also tends to be a bit more speculative in nature due to the value of coins often being tied to current popularity as well the future utility of both the coin and any related projects or technology.