There are many differences between forex and cryptocurrency which make them unique asset classes. But, an understanding of cryptocurrency trading can be gained by comparing it to forex, of which most traders already have an understanding. A solid knowledge base of cryptocurrency is vital to ensure safe risk management practices can be implemented and opportunities can be seized when they appear.
Cryptocurrency trading is relatively new compared to forex trading. Bitcoin, cryptocurrency’s first mainstream project, and which the cryptocurrency market as a whole has sprung, is less than 15 years old. The trading market for Cryptocurrency is thus even younger than this, having only gained huge adoption in the past 5 years or so. Meanwhile, the forex market has been in existence for decades. Retail forex trading exploded in the 90’s aided by the proliferation of the internet. As such, the number of forex market participants hugely outnumbers cryptocurrency participants, which means the volume and value of trading is much greater for forex.
The forex market is the largest and most liquid market in the world, meaning that spreads can be very thin. Conversely, the relatively smaller trading volume in the cryptocurrency market means that spreads can be wider than what you would experience in forex, especially for the smaller less popular cryptocurrencies. However, the number of cryptocurrency market participants is growing at a very fast pace, as investors are attracted by the wild swings that can occur and the trading opportunity this presents.
While forex is a very volatile product, cryptocurrency may have it beat in this domain. It is generally uncommon for major forex pairs to move more than 2.0% in a single trading day. Minor forex pairs are more likely to make such movements but are generally capped to 3.0 - 4.0%. I am speaking generally here, and movements greater than this can and do occur in the major and minor pairs, but they do so infrequently.
When it comes to Cryptocurrency, swings in price are typically a little more exaggerated. Just today, at the time of writing, Ethereum, the second largest cryptocurrency in terms of market capitalisation, has risen by 6.58%, while Bitcoin is up 3.33%. Although these wild swings do not occur every day, they are far more frequent in the cryptocurrency market than with the forex market.
In forex trading, price action is largely tied to economic and political events that impact the country that issues the currency. Crucial data releases regarding Gross Domestic Product Growth, Unemployment, Interest Rates, and Confidence Surveys are frequently watched by forex traders as they play into the price changes that occur in this market.
The forces that are present in cryptocurrency markets are still being determined as it is still a young industry. Public perception, developing regulation, institutional and retail adoption rates, and media attention seemingly play an important role.
Currently, it is murky how tightly correlated cryptocurrency is to wider macro-economic forces, such as global growth rates or recessions in major economies. Complicating the problem further is that cryptocurrency is not a homogenous product. Rather, each cryptocurrency project can have a different use-case and thus can be affected by the different micro-economic forces.