Through the past decade, cryptocurrencies have penetrated mainstream consciousness due to their rapidly growing userbase and infamously volatile price changes. In 2020, a surge in popularity caused the value of top cryptocurrency Bitcoin to jump from $13,803 in October to $61,203 in March. The asset’s high potential for profit only created further intrigue, attracting new investors in droves.
However, does popularity make cryptocurrencies a wise investment? And will its rise continue, come to a halt, or fall? To help forex traders determine the effectiveness of cryptocurrencies as investment vehicles, this article will take a closer look at cryptocurrencies and how they compare to the foreign exchange trade.
Assets
Forex traders mainly work with popular currency pairs, such as EUR/USD, GBP/USD, and USD/JPY. Since fiat currencies are tied to countries, the number of fiat currencies will always remain below two hundred.
In comparison, thousands of cryptocurrencies have been invented after the success of Bitcoin. Many of these cryptocurrencies, called altcoins, attempt to improve upon Bitcoin’s shortcomings, be it in its technology, price, or even community. Users that trade Dogecoin seek to participate in a more lighthearted cryptocurrency community. Though initially conceptualized as a joke currency, Dogecoin has become a widely accepted payment method among crypto-friendly companies, such as VPN and gaming sites. Other examples of altcoins include Ethereum, which aims to power blockchain applications beyond currencies (such as NFTs), and Litecoin, which seeks to make a cheaper and faster Bitcoin alternative.
Volatility
Fiat currencies are generally more stable since governments and banks have control over each country’s money supply. On the other hand, the defining characteristic of cryptocurrencies is that they need no involvement from a central authority. Many cryptocurrencies, such as Bitcoin, also have a limited supply.
And because cryptocurrencies aren’t usually tied to existing assets, their value stems mainly from how the public views their effectiveness as currencies or investments. As Disrupt Magazine explains, world news can have a significant impact on price. Endorsements from major companies, such as Elon Musk’s Tesla, can foster public trust and thus increase prices. On the other hand, anti-crypto restrictions, such as China’s crypto ban, have caused significant price drops.
Liquidity
The foreign exchange trade is the world’s most liquid market. The market is open 24 hours a day for 5 days each week and sees a high volume of transactions each day. Thanks to the high level of trading activity, it is very easy for forex traders to enter and exit positions at their ideal price.
Because the cryptocurrency trade is still growing, the market has fewer participants and is thus less liquid. Low liquidity makes it harder for investors to cash out without having price fluctuations affect their transactions. Fortunately, the popularity of cryptocurrencies like Bitcoin and Ethereum have increased liquidity for those networks, but less popular altcoins might have lower daily trading volumes.
Leverage
Fortunately for traders that don’t want to put down large amounts of capital, cryptocurrencies and forex both have available leverage programs. Leverage allows traders to take a position in the market using borrowed investments. However, price movements in forex are less drastic, so the forex market tends to offer bigger leverage margins to improve profitability for smaller retailers.
Risk
Both assets come with their own sets of risks. With forex, risk is usually associated with bad leverage deals. Leverage allows traders to stake borrowed capital, so it has just as much potential to amplify losses as it does gains. On the other hand, risk in cryptocurrencies is associated with the market’s current volatility.
To mitigate risks, beginner traders can practice using demo accounts. As our guide titled Is Forex Trading Profitable? explains, demo accounts let users test different trade strategies using virtual money, which allows them to get hands-on experience before staking real capital. Most forex and cryptocurrency platforms online will allow traders to create demo accounts.
When it comes to volatility, liquidity, and leverage, forex trumps cryptocurrencies. These features make forex a better option for active day trading. However, cryptocurrencies remain a wise investment for traders that see potential in the asset’s promise of decentralized finance.
