What is Forex?
Forex stands for foreign exchange and it is a global market of exchange between national currencies, with the highest trading volume and liquidity. Every day transactions are concluded worth a total of approximately $6.6 trillion, made up of over 150 government-backed national currencies.
When the exchange rate of two currencies quoted against is other is given, it is called a currency pair or cross. When the biggest currencies by volume are quoted against each other – all involving the U.S. Dollar – they are called “currency pairs”. Pairings not involving the U.S. Dollar are called “currency crosses”. The most important currencies, i.e. those with the greatest trading volumes, are the U.S. Dollar, the Euro, the Japanese Yen, and the British Pound.
Usually, Forex pairs are offered for trading as contracts for differences (CFDs). This means that you don’t actually buy legal ownership of any currencies when you make a trade, you just agree to make profit or loss by a defined amount according to the movement of the broker’s price feed. Even where brokers offer Forex trades as “spot” and not CFDs, there is almost always a legal mechanism in place to stop you ever having to take delivery of any amount of actual currency.
Top Forex Brokers
Pros and Cons of Forex
The Forex market is highly sensitive to global events which makes foreign currency exchange rates very susceptible to economic data releases, central bank policy changes, and macroeconomic and political events.
Forex as an asset class has relatively low volatility. This is because Forex assets are fiat currencies managed by central banks, and these banks can expand or reduce supplies of their respective currencies as they wish, giving them the ability to turn both demand and supply on or off. As central banks generally strive for relatively stable exchange rates for their currencies, Forex tends to be a relatively stable mean-reverting market most of the time, although persistent trends do of course happen, especially in the biggest currencies such as the U.S. Dollar and the Euro.
The cost of trading Forex is relatively low. For example, retail Forex traders typically pay a spread and/or commission of approximately 1 pip on a round trip trade in the benchmark EUR/USD currency pair, which represents a cost of approximately 0.08% of the value of the asset traded. The costs of trading or investing in cryptocurrencies tends to be considerably higher.
As price movements in Forex tend to be relatively calm with low volatility, regulators tend to allow retail Forex brokers to offer high leverage in Forex currency pairs – as much as 30 to 1 even in highly regulated jurisdictions. This means that if you trade Forex, you can usually buy and sell much more Forex than the actual money you have deposited in your account, although it is not generally a good idea to be very highly leveraged.
The retail Forex market is generally open from Monday morning in the far east until Friday night in the U.S.A. Essentially, it is open for business 24 hours per day, 5 days per week – and there are even a few brokers beginning to offer trading over the weekends, too.
There are three major Forex market sessions: American, European, and Asian, which occur during the usual business hours of these geographic areas. The sessions are dominated by New York, Tokyo, and London as the most important global financial hubs. Broadly speaking, the Forex market is most active and best traded during the London / New York session overlap, from approximately 9am to Noon New York time.
What is Cryptocurrency?
Cryptocurrencies are digital currencies, which have been created by private individuals, groups, and in some cases banks and other companies. Cryptocurrencies are not legal tender which means they are not readily exchangeable for goods and services in the way that national currencies are, but one day they may be – there are already many business which accept the larger cryptocurrencies as payment.
If you buy and sell cryptocurrencies in the real market, your transactions are made through a decentralized and encrypted system, which goes a long way towards ensuring anonymity.
Transactions in cryptocurrencies are enacted through blockchain technology, which also regulates a finite supply and the integrity of its ecosystem, ensuring that it cannot be debased.
The cryptocurrency market had in 2020 an average daily trading volume of approximately $4.1billion, making it about two-thirds as large as the Forex market. The first digital currency was Bitcoin, launched in 2009. Bitcoin is by far the largest and most famous cryptocurrency. In October 2020, the market capitalization of Bitcoin was estimated at $204 billion, and the market capitalization of all cryptocurrencies at $350 billion.
There are two ways to trade or invest in cryptocurrencies. If you want to buy real cryptocurrencies and hold the legal ownership, you can do this through major cryptocurrency exchanges. There is typically some kind of fee for ensuring security of the custodianship plus a commission, but this can be the most effective way to make a long-term investment. On the other hand, you can trade cryptocurrencies with most major Forex / CFD brokers today packaged as contracts for differences (CFDs) and as ownership is virtual – you are just betting on price fluctuations here – you do not have to worry about security and storage and any such associated fees. However, retail brokers apply overnight financing charges / swaps which mean in effect that you pay a fee for every day you keep a crypto trade open, which is why this route is better for short-term trading than long-term investing.
Pros and Cons of Cryptocurrencies
If you are buying and holding the legal ownership of cryptocurrencies, you will have security and storage issues which will impose a cost.
I mentioned earlier that major Forex currency pairs can be traded at a cost of only about 0.08% of the value of the asset traded. It is relatively considerably more expensive to trade cryptocurrencies. For example, the major cryptocurrency Bitcoin typically has a spread/commission structure of about 0.40% of the asset traded, about 5 times the cost of trading EUR/USD. This can make profitable short-term trading in cryptocurrency more challenging to execute in cryptocurrency than in Forex.
Cryptocurrencies, with the possible exception of Bitcoin, are much smaller in capitalization than the national currencies which are traded in Forex. They are more sensitive to micro issues that affect their own markets such as their integrity, adaptability, and popularity. In a sense, it is widely believed that in the end there will be a few successful cryptocurrencies which become widely used, so the value of the smaller cryptocurrencies will tend to rise or fall depending upon how their chances of becoming a “successful” cryptocurrency are seen.
Cryptocurrencies have, in recent years, been far more volatile than Forex currency pairs or crosses. Over a year, a cryptocurrency might rise in value tenfold – 1,000% - while a major Forex currency pair might typically fluctuate by 10% over a similar period of time. Forex currencies have central banks and national governments managing them, while cryptocurrencies really have nothing but market forces acting on them, meaning they are far more likely to fluctuate wildly in price. This means that large amounts of money can be made by trading or investing in them, but risk levels are much higher. Cryptocurrencies are also far less liquid than most national fiat currencies.
Due to their relatively high risk and volatility, most brokers offer trading in cryptocurrencies at very low rates of maximum leverage – typically 2 to 1 in more tightly regulated jurisdictions.
Unlike Forex, crypto markets tend to be open at weekends, meaning you can trade them on Saturdays and Sundays. You cannot do this with Forex with most brokers.
Finally, note that although more and more brokers are offering cryptocurrencies, typically only the larger cryptocurrencies such as Bitcoin, Ethereum, Tether, and Ripple are commonly available.
Forex vs Crypto: What is Best for Me?
You may choose to trade only Forex, only cryptocurrencies, or both.
The below table summarizes the factors you should consider in making this decision.
Forex | Crypto | |
|---|---|---|
Cost of Trading | Lower | Higher |
Market Hours | Weekdays | Weekdays and Weekends |
Accessibility | All brokers offer at least the major Forex pairs | Many, perhaps most brokers now offer major cryptos |
Leverage / Volatility | Low volatility, high leverage | High volatility, low leverage |
Exponential Trends | Less common | More common |
Major Price Drivers | Macroeconomic factors, large option barriers | Microeconomic factors, popularity of particular crypto |
Top Brokers |
We encourage you to spend some time to do analysis and research on both markets before choosing which one to trade. If you are interested in Forex trading, we recommend that you start your trading journey by reading our experts FXTM review. FXTM allows its clients to trade Forex currency pairs and crosses, the precious metals gold and silver, crude oil and natural gas. If you wish to explore the Crypto market, AvaTrade allows its clients to trade 14 cryptocurrencies. We encourage you to read our experts AvaTrade review that covers everything you need to know about AvaTrade so that you can determine if this is the right broker for you.
