How does crypto trading vs forex trading? We are going to take a look at their market structures, exchanges, regulation, and more in this article.
As the financial world revolves around us, new ways of managing, trading, and investing our money are constantly emerging. One major change seen over the last decade has come with the rise of cryptocurrencies (or “crypto”, if you prefer brevity). Digital currencies that have no central control but allow for smooth transactions. And as a unit of account services in a democratized financial system.
This is similar to the traditional fiat financial system, which relies on central banks and governments to issue and regulate the money supply while also facilitating transactions through an orderly payment system, among other duties. Most countries have their fiat currency or one pegged to an international reserve currency like the US dollar or the euro. When you exchange one country’s fiat currency for another country’s in decentralized, over-the-counter markets, you call it a foreign exchange (or “forex”).
There are clear differences and similarities in how these currencies are used to buy and sell goods and services. The same goes for investing: forex trading shares some of the same characteristics as crypto trading. But many make each one unique.
This article goes through the market structures and exchanges used in forex and crypto. We compare the differences in regulatory treatment and other aspects of trading.
The Nature of Crypto Trading vs Forex Trading
First, it is important to understand the nature of these assets. Both rely on the laws of supply and demand to determine their price. But both have different risk profiles because of the way they derive value.
“Fiat currencies have measurable value [while] cryptocurrencies are purely speculative,” said Justin Grossbard, founder of CompareForexBrokers.com. A currency has wide acceptance as legal tender and is used as a common medium. Additionally, it comes with the support of a government capable of controlling its supply.
A cryptocurrency does not offer the same features because, with few exceptions, it does not qualify as legal tender, is not backed by a government, or is not controlled by a central bank. Cryptocurrencies are solely based on a shared belief in their value between two parties.
But the nature of these assets is not the only difference between cryptocurrency and forex. Who participates in these markets is also different. Not only individual investors participate in trading activities in the forex markets, but also important governmental and institutional participants:
Governments play a role in ensuring markets have the right liquidity to achieve their economic goals. Conversely, governments currently represent smaller players in the crypto market, although interest in state-controlled cryptocurrencies has increased.
Banks and lenders provide much of the liquidity to the market. According to Grossbard, these participants often play the role of liquidity providers in the foreign exchange markets. They need to exchange money on behalf of clients traveling or doing business abroad, or for individuals investing in foreign securities markets.
Mutual funds can use their excess funds or leverage to speculate or invest in Forex. Companies operating in multiple geographic markets may use foreign currency hedging against currency fluctuations to protect profits from anticipated changes in currency valuations. Crypto markets tend to have smaller players and less institutional or governmental presence.
According to data from Bitcoin Treasuries, a much smaller proportion of the Bitcoin market has a government, bank, mutual fund, and corporate owners than the forex markets. While bitcoin isn’t perfectly representative of the entire cryptocurrency asset class, we can at least get an idea of how little if we look at the split between market participants who hold bitcoin – the largest cryptocurrency by market cap – and those who do not compare to Forex, institutional or governmental organizations are involved. It’s a small number. Less than 8% of all Bitcoins mined are held by these investors.
Crypto Trading vs Forex Trading: Market Size
Forex markets experience the largest volume among world markets. According to the Bank of International Settlements’ most recent triennial central bank survey, as of 2019, well more than $6 trillion traded each day in these over-the-counter markets.
The popularity of cryptocurrencies has increased over the past few years, but for now, they are still much smaller and more active than the forex markets. The total daily volume of the crypto market until September 2021 was $ 1.3 trillion.
Crypto Trading vs. Forex Trading: Hours of operation
Forex markets trade 24 hours a day, 5 days a week. Not only are crypto markets seeing the same type of non-stop activity on weekdays — this action extends to weekends as well.
Crypto Trading vs Forex Trading: Market Structure
Where crypto trading and forex trading converge is how these assets are traded: over the counter, directly between parties, through a broker or exchange. This means that traders negotiate prices based on supply and demand without controlling oversight.
Stocks, on the other hand, are traded on organized exchanges such as the New York Stock Exchange, Nasdaq, or other national exchanges and are subject to stricter issuance and disclosure rules and guidelines.
Crypto Trading vs Forex Trading: Access to Assets
Because these assets are all in different markets, you may need different brokerage accounts and systems to access them. Some services provide access to one, two, or all three.
Coinbase, for example, is limited to cryptocurrencies, while TradeStation and Interactive Brokers allow you to invest in digital currencies, forex and stocks.
If you decide to use an investment app to trade crypto, you may not have the option to withdraw your cryptocurrencies to crypto wallets or a safe place to store your private keys tied to your unique coins. If you want to withdraw your virtual currency to a crypto wallet, you can do so on dedicated cryptocurrency exchanges like Binance and Coinbase.
In addition, you can withdraw your virtual currency and load it onto anonymous prepaid debit cards to withdraw money from ATMs. Depositing and withdrawing funds from forex accounts has a more familiar flow. Traders can make ACH transfers from their bank account, make wire transfers, use online checks, or even use credit cards in many cases.
Crypto Trading vs Forex Trading: Trading Pairs
Another difference between crypto trading and forex trading is the use of “trading pairs”.
When you exchange one currency for another — let’s say US dollars for euros — the exchange shows the value of one currency relative to another. In particular, it shows you how much it would cost to buy the second currency (called the quote currency) with a single unit of the first (base currency). When trading a currency pair, you buy the base currency and sell the quote currency.
For example, if you want to exchange USD for EUR, you might see a quoted price of $1.20 for buying one euro. That means it costs you $1.20 for every euro you buy.
In forex trading, trading pairs that include the USD are referred to as “currency pairs”. Pairs that do not include the USD are referred to as “currency crosses”.
Technically speaking, the same logic applies to crypto trading. Crypto trading pairs or cryptocurrency pairs involve trading one crypto against another such as Ethereum/Bitcoin Cash (ETH/BCH). (Note: Not every crypto can trade against another currency, fiat or virtual.)
Trading pairs in crypto are important as some cryptocurrencies can only be bought with other cryptocurrencies, making knowledge of these pairs necessary to grow your crypto holdings. This gives investors the ability to arbitrage between trading pairs and compares the relative value of coins.
How Regulators View Crypto Trading vs Forex Trading?
Depending on how an asset is classified, it is subject to the rules and regulations of certain regulatory agencies in the United States and other countries.
The US does not currently have comprehensive oversight of cryptocurrencies; instead, it relies on a hodgepodge of regulatory oversight. Regulators and investors have traditionally viewed cryptocurrencies a bit like a spectator watching Superman and asking, “Is it a bird? Is it an airplane?” says Greg King, founder, and CEO of Osprey Funds, which offers multiple cryptocurrencies funds.
While this asset class has grown at breakneck speed, the regulations around it have lagged. But here are some important regulatory facts for cryptocurrencies:
In 2014, the U.S. Commodity Futures Trading Commission (CFTC) trades virtual currencies as commodities. This decision makes cryptocurrencies subject to regulation by the CFTC. It happens when they are used in connection with a derivatives contract or when there is evidence of fraud or manipulation in interstate commerce. The CFTC regulates digital currencies through the Commodity Exchange Act (ECA). The Internal Revenue Service (IRS) treats taxes on crypto similar to other investments, levying capital gains and losses taxes. The Securities and Exchange Commission (SEC) remains focused on taking action against unregistered Initial Coin Offerings (ICOs).
The Federal Deposit Insurance Corporation (FDIC) recently requested information on digital assets. But does not currently insure cryptocurrency deposits for member banks. The Securities Investor Protection Corporation (SIPC) does not protect cryptocurrencies held in investor accounts with stockbrokers as they are not classified as “collateral” under the Securities Investor Protection Act Section. Forex, or traditional currencies, on the other hand, meets a higher regulatory definition, being classified not just as commodities but also as securities, Grossbard says.
“Currencies can act as commodities in the sense that traders buy and sell them to take advantage of exchange rate fluctuations,” he says “. But they are a security because they released from a central point”. As a result, currencies are subject to multiple levels of stricter regulation, as well as investor protection through FDIC and SIPC insurance.
Historically, to qualify as a security, an asset must meet the requirements of the Howey test, King says. This test stems from a Supreme Court case to determine whether a transaction qualifies as an “investment contract”. According to the 1946 Supreme Court ruling, all transactions constituting an investment contract are security. They are subject to disclosure and registration requirements.
As of now, the SEC states that crypto does not meet this definition. However, that could change in the future as the Biden administration investigates the matter further.
Ten years ago, the conversation about cryptocurrencies remained largely relegated to internet forums and chat rooms as a possible solution. The solutions to a variety of problems that describe our current Fiat currency systems. They are privacy concerns, centralized command and control, theft and fraud, and more.
But while these new cryptocurrencies address many of these issues, they still primarily serve as an alternative to fiat currencies in our daily lives. What we will see in the coming years could transform how crypto will regulate, issue, and trade. Depending on how governments treat the virtual currency class, we could see fewer differences between crypto trading vs forex trading. And perhaps more similarity.
Either way, neither forex nor crypto trading is for the faint of heart as both carry risks related to trading, volatility and complexity. Currently, experienced traders are the best candidates to trade. They trade in these markets as they can use more risk mitigation techniques and adequately hedge their trades.
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