At first glance, there are obvious similarities between fiat and cryptocurrency, with both classed and viable mediums of exchange and at the centre of incredibly lucrative markets.
For example, the total value of the forex market is estimated to be in excess of $2.409 quadrillion, while the combined market cap of the crypto market was $809.00 billion as of December 21st, 2022. While the latter is lower than the market’s peak of £1 trillion recorded last November, it’s still indicative of a lucrative market with huge capital value.
However, there are also marked differences between these two asset classes, and while there may be considerable overlap, they can each help to diversify your trading portfolio in 2023 and beyond.
We’ll compare both of these asset classes in the article below, while asking how you can leverage these to your financial advantage.
Getting Started – What is Forex?
Forex markets involve the buying, selling and exchange of international currencies, which are traded in pairs and as speculative assets.
This means that you can use one currency to hedge against another, as you look to speculate on and profit from specific price movements without assuming ownership of the underlying financial instrument.
In more general terms, you’ll invest in the exchange rates between different currencies and forex pairs, while potentially leveraging the market’s innate volatility to secure short and medium-term profits.
Due to this volatility and the relative complexity of the forex market, it’s not necessarily an ideal space for beginners. After all, there’s no single marketplace place or regulatory framework in which to operate, while the majority of individual currency pairs are subject to free-floating exchange rates that are subject to macroeconomic factors, geopolitical tumult and fundamental drivers such as supply and demand.
OK, So What About Cryptocurrency?
While fiat currencies are tangible assets that theoretically have an unending supply (as they are supplied by central banks), cryptocurrencies are completely digital assets that have a finite supply.
This means that crypto tokens have no tangible value or corporeal form, and therefore cannot serve as a secure store of wealth. At the same time, the finite supply impacts directly on each token, according to factors like scarcity and a generally high level of demand.
Crypto assets are built on blockchain technology, which creates decentralised and distributed ledgers that create an immutable store of transaction data. This creates heightened transparency and minimises the risk of market manipulation, while there’s no central authority or third party to control assets or enact transaction fees.
While crypto is now in its third generation (and the latest crypto assets like Cardano are considered to be technological entities that directly tackle the scalability issues associated with first generation alternatives like Bitcoin), this asset class remains gripped by even greater volatility.
This level of volatility is more pronounced than what you’ll encounter as a forex trader, due largely to the lack of tangible value that underpins crypto and the asset’s vulnerability to speculation.
Forex vs. Crypto as an Asset
As we can see, there are some similarities between these two asset classes, but in many ways forex and cryptocurrency are diametrically opposed.
But how exactly do these speculative asset classes compare in the eyes of investors? Here are some considerations to keep in mind:
#1. Market Size and Diversity
In this respect, forex and crypto are largely the same, as both are home to huge markets and have an almost inordinate amount of assets that can be traded.
Sure, there are slightly more crypto assets (around 12,000 at the time of writing), but investors are spoiled for choice regardless of which market they target.
However, it should be noted that both marketplaces are considerably narrower in practice, with the seven major currency pairs accounting for 68% of the market’s total daily trading volumes.
At the same time, Bitcoin accounts for approximately 70% of the entire crypto market too, creating concentrated market segments for investors to focus on.
Liquidity refers to the ease with which an asset can be bought and sold, and in this respect, forex is considerably more liquid than cryptocurrency.
This is particularly true in the case of major currency pairs such as the EUR/USD, which accounts for approximately 24% of total daily forex volumes and benefits from almost constant, uninterrupted demand.
Conversely, BTC is the only crypto asset that can be broadly described as liquid, but even then, there are only a fixed number of Bitcoin tokens in circulation. Demand also fluctuates wildly in line with market sentiment, meaning that liquidity can also diminish considerably at different times (making the asset difficult to shift).
As we’ve already touched on, fx is a highly volatile market, and one that shouldn’t be underestimated by a particular investor.
However, major currency pairs are considerably less volatile than exotic and even minor pairings, meaning that while prices can still fluctuate considerably in relatively short periods of time, assets like the EUR/USD typically trade in narrow and predictable ranges.
The same cannot be said for cryptocurrency, however, with Bitcoin having experienced recurring bull runs and crashes throughout its history. Having peaked in terms of market cap and value last November, for example, it has since shed nearly 70% of its value through a turbulent 2022.
Less well known assets are similarly volatile, meaning that real-time crypto holdings can rise and fall markedly and with minimal warning.
The Last Word
Despite being speculative and volatile asset classes, forex and crypto are markedly different from the perspective of liquidity, supply and long-term stability.
Ultimately, forex and major pairings offer the most value for cautious or risk-averse investors, whereas crypto is ideal for risk hungry traders who have a foundation of knowledge pertaining to blockchain and digital currency.