A broad spectrum of individuals actively engage both the foreign exchange (forex) and cryptocurrency markets in pursuit of opportunity. Arbitrage, short-term trading strategies and long-term investment plans may be executed in both.

However, each market is very different, offering its own unique advantages and disadvantages to aspiring participants. Before entering the forex or crypto market, it's important to understand the functionality of both venues.

A Brief History Of Forex

The exchange of foreign currencies has been a pastime of traders since the widespread adoption of the gold standard during the late 19th century. Determining a currency's worth in relation to gold established a standardised manner of valuation. In time, hedgers and speculators alike were able to swap currencies in an attempt to realise profit or preserve wealth.

As technology evolved, the global currency trade transitioned from the physical transfer of money to an electronic one. This transition brought the markets to the masses. Essentially, anyone who wanted to start trading could now do so because of the vastly reduced barriers of entry.

By the turn of the 21st century, international currency exchange revolved around the newly digitised over-the-counter forex marketplace. As a decentalised venue, people around the world were able to become remote forex traders. Subsequently, the forex market grew into an enormous marketplace, generating a massive daily trading volume.

The Rise Of The Cryptocurrency Market

Technology did not cease moving forward with the advent of the electronic marketplace. In 2009, an anonymous computer programmer under the alias Satoshi Nakamoto invented a revolutionary digital form of money known as bitcoin (BTC).^[1] Based on blockchain technology, Bitcoin was designed to be an anonymous, decentralised, peer-to-peer payment system. BTC quickly became the standard for a budding asset class of internet-based modes of payment labeled "cryptocurrencies."

As BTC became more accepted by consumers, its popularity grew in trading circles. On the back of BTC's popularity, various altcoins and stablecoins were created to fulfill exploding demand. Ethereum (ETH), Litecoin (LTC) and Ripple (XRP) are a few examples of prominent digital currencies.

Bitcoin and other digital assets have been touted as the future of money. While that may or may not eventually be the case, the traditional global financial system remains the benchmark of value and stability when it comes to commerce.

Market Capitalisation

Before deciding to trade BTC or forex pairs, it is important to understand the contrast in size of each market. Typically, the larger the market, the greater liquidity, depth and stability. This is certainly true in the case of BTC and forex.

The forex is by far the largest marketplace in the world. Participants from around the globe engage the forex remotely on a daily basis, ensuring liquidity and relative pricing stability. Rapidly advancing internet technologies have promoted robust growth of the forex for the last 20 years.

The degree of forex expansion is evident when examining traded volumes. Average daily turnover exploded from just over US$1 trillion in 1998 to US$5 trillion in 2016.^[2] A dominant portion of this volume is readily attributable to the public interest facing the seven major global currencies.

Each currency in the following list is involved in the corresponding percentage of the US$5 trillion in aggregate daily forex turnover^[2]:

• United States dollar: 89%
• Euro: 31%
• Japanese yen: 22%
• British pound: 10%
• Australian dollar: 7%
• Canadian dollar: 5%
• Swiss franc: 5%

Conversely, BTC are traded on a much smaller scale and represent only a portion of the total cryptocurrency marketplace. With a limited supply predetermined to be a maximum of 21 million^[3], BTC is a miniscule market in comparison to the trillions included by the forex.

In terms of value, BTC has proven desirable to investors. For the year of 2017, BTC rose to more than US$4,000 apiece, with a total market capitalisation valued at over US$70 billion.^[4] Daily BTC market turnover regularly exceeds US$1 billion.^[4] Four years later, BTC rose to all time highs of US$69,000 in fall 2021.^[10] At that time some pundits and many trading cryptocurrencies predicted the price of BTC was to rally upwards of US$100,000.^[11]

In comparison, the least traded major currency on the forex, the Swiss franc, has an average daily turnover of US$243 billion.^[5]

Simply put, the relative size and value of the BTC market is microscopic in comparison to the forex. Nonetheless, it's important to understand that BTC is a single asset, whilst the forex comprises dozens of global currencies. And, despite the market cap discrepancy, many traders and investors prefer crypto because of its long-term growth potential.

Governance

One of the premier differences between BTC and forex is governance.

Forex Regulation

Although each is a decentralised financial market, the forex market is subject to oversight. However, there is no universal forex governing body. Regulators are largely regional, local to a municipality or country.

For instance, in the U.K., the Financial Conduct Authority (FCA) is tasked with regulating banks, liquidity providers and forex brokers. In the U.S., the Commodity Futures Trading Commission (CFTC) has jurisdiction over derivatives products and market participants. Bodies such as the FCA and CFTC work to reinforce market stability and integrity in their respective regions.

Crypto Regulation

The regulatory environment facing crypto is much more unique. It varies wildly per country, as governments around the globe have taken vastly different stances toward digital currency. The spectrum of regulation ranges from outright bans (China, India, Colombia)^[12] to national adoption (El Salvador).

In the EU, U.K. and U.S., crypto governance is in a state of flux. Nonetheless, it remains legal to open a cryptocurrency trading account and trade digital assets.

The Pros and Cons of Trading Bitcoin

From a perspective of market liquidity and depth, BTC is no match for the forex. However, this can afford active traders several advantages:

• Volatility: The limited BTC float creates ideal conditions for substantial daily trading ranges and spikes in volatility. Value fluctuations of greater than 5% are commonplace.^[6] Given the enhanced price action of BTC, short term trading can be difficult for beginners.
• Ease of entry/exit: All that is needed to enter the BTC market is capital and an online platform. Exchange accounts can be opened quickly, with only moderate due diligence required. By a wide margin, the barriers of entry to the crypto markets are some of the lowest in the world of finance.
• Limited costs: Transaction costs are limited. If using a broker, fees may be assessed upon the purchase or sale of BTC. If directly accessing the market, fees may be greatly reduced.
• Insulation: BTC is not subject to fluctuations created by conventional currency stimuli. Geopolitical issues or domestic economic performance do not dictate value. Due to Bitcoin's relative isolation from traditional market drivers, many investors view it as a viable safe haven asset.

From a practical standpoint, many opportunities are furnished to individuals trading BTC. However, there are a few drawbacks:

• Hacking: Instances of hacking have cost holders of BTC millions of GBP.^[7] Over time, hackers have grown more sophisticated. Online BTC wallets, exchanges and crypto transfer systems have all fallen victim to cyber criminals.
• Glitches: Due to the technical nature of BTC, any disruption in the "blockchain" or untimely computer glitch can be very costly.^[8] Glitches can delay BTC transfers, which are subject to market forces when in transit. If the price movements turn out to be bearish, it's possible for BTC to lose value while being transferred.
• Counterparty Risk: Counterparty risk occurs when a participant in a transaction cannot honor their financial obligations. Insolvency has been a historical issue for crypto vendors, exchanges and Defi companies. In the event of a vendor default, depositors may lose some or all of their crypto assets.
• Limited Availability of Leverage: BTC is actively traded in several different fashions, each with various degrees of leverage being available. Similar to forex currency pairs, BTC contract-for-difference (CFD) products typically offer low margin requirements and extensive account leverage. In addition, BTC may be traded using margin on certain cryptocurrency or derivatives exchanges given specific trader requirements being met.^[9] There is no industry standard for BTC margin trading—each brokerage or exchange affords clients a unique suite of leverage options.

As with all modes of trade, it's up to the participant to weigh the pros and cons of a particular financial instrument. If one decides to trade BTC, it's imperative to respect the volatility of the market while pursuing profit.

Forex Pros And Cons

Trading currencies on the forex furnishes participants with numerous advantages and disadvantages. The forex possesses several favourable characteristics that BTC does not:

• Liquidity: The size of the forex ensures a considerable depth of market facing a wide range of popular currency pairings. Liquid markets are advantageous as slippage is minimal. The vast forex market depth ensures limited volatility, which is a major risk management benefit.
• Diversity: Major, minor and exotic pairs are available for active trade. The extensive lineup of forex pairs opens the door to countless trading opportunities. Scalping, day trading, swing trading and long-term investment are all possible.
• Stability: Aside from extraordinary circumstances, foreign currency exchange rates are relatively stable. Fluctuations of large magnitudes are infrequent because of the volumes being traded. The relative stability of the forex market speaks to the number of traders and the pricing efficiency created by the enormous environment.
• Leverage: Extensive leverage is available in the forex. Brokerages typically offer 50:1, 100:1 and even 200:1 leverage to clients. Reduced margins and high degrees of leverage boost the trader's purchasing power. While added risk does come with leverage, the ability to generate extraordinary profits does as well.

Although it is the world's biggest destination for investment and trade, engaging the forex does have a few drawbacks:

• Lack of pricing volatility: A lack of inherent volatility can make realising regular profits from exchange rate discrepancies a challenge. Long periods of "flat" price action are common, specifically during neutral economic and geopolitical cycles. During such periods, choppy price action is the norm, with trends and breakouts being rare.
• Institutional involvement: Investment banks, proprietary firms and high-frequency traders place retail participants at a competitive disadvantage. In some cases, spreads can be influenced greatly by institutional block orders, which can cause slippage for retail traders. Also, institutional participants enjoy a major speed advantage over retail traders due to their advanced market access. This may promote slippage, fluctuating spreads or unfilled orders at market.
• Cost: Costs associated with rollover, fees and the bid/ask spread can be substantial. For smaller retail traders, these fees can significantly cut into profitability and negatively influence performance.

Summary

In many ways, the BTC to forex comparison is an apples to oranges analogy. It is true that both involve the electronic trade of various currency forms. Yet, the size, structure and behaviour of each venue is very different. Perhaps the main difference is governance. Fiat currencies are managed by central banks and regulators, and BTC governance is inconsistent and still very much in its infancy.

Of course, opportunity knows no bounds. Many active traders have foregone the relative safety of the forex market for the potential of BTC and cryptocurrencies. Ultimately, the decision of whether or not to trade forex or BTC is dependent upon an individual's objectives, risk tolerance and resources.