A broad spectrum of individuals actively engage both the 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.
A Brief History of Forex and Bitcoin
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. By the turn of the 21st century, international currency exchange revolved around the newly digitised over-the-counter forex marketplace.
However, 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). 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.
Bitcoin and other cryptocurrencies 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: David Vs Goliath
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. 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:
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, 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 cap valued at over US$70 billion. Daily BTC market turnover regularly exceeds US$1 billion.
In comparison, the least traded major currency on the forex, the Swiss franc, has an average daily turnover of US$243 billion.
Simply put, the relative size and value of the BTC market is microscopic in comparison to the forex.
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.
Ease of entry/exit: All that is needed to enter the BTC market is capital and an online cryptocurrency broker or direct market access.
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.
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.
Glitches: Due to the technical nature of BTC, any disruption in the "blockchain" or untimely computer glitch can be very costly.
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. There is no industry standard for BTC margin trading—each brokerage or exchange affords clients a unique suite of leverage options.
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.
Diversity: Major, minor and exotic pairs are available for active trade.
Stability: Aside from extraordinary circumstances, foreign currency exchange rates are relatively stable. Fluctuations of large magnitudes are infrequent because of the volumes being traded.
Leverage: Extensive leverage is available in the forex. Brokerages typically offer 50:1, 100:1 and even 200:1 leverage to clients.
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.
Institutional involvement: Investment banks, proprietary firms and high-frequency traders can place retail participants at a competitive disadvantage.
Cost: Costs associated with rollover, fees and the bid/ask spread can be substantial.
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.
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.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…