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To the untrained eye, the forex and crypto markets might seem similar. However, there are some considerable differences between the two that make them quite distinct. In this article, we’ll explain what forex and crypto trading is, discuss their key participants, market structure, and size, and explore the pros and cons of trading each market.
Forex trading, short for foreign exchange trading, is the act of buying and selling currencies in financial markets. It plays a crucial role in the world economy, facilitating international trade, investment, and tourism by enabling the exchange of one currency for another. According to the Bank for International Settlements, the forex market is the world's largest and most liquid financial market, with daily trading volumes of approximately $7.5 trillion.
Forex trading involves buying one currency and selling another, based around forex pairs, such as the EUR/USD (euro/US dollar) or USD/JPY (US dollar/Japanese yen). The fluctuations in exchange rates between currency pairs are driven by various factors, most notably interest rates, economic releases, and geopolitical events.
The forex market operates on an over-the-counter (OTC) basis, which means that transactions are conducted electronically between participants, including financial institutions, corporations, governments, and individual forex traders. Unlike centralised stock market exchanges, the forex market is decentralised and operates 24 hours a day, five days a week.
Forex traders aim to profit from price movements in currency pairs by speculating on their future direction. Since it’s rare for a currency pair to move more than a couple of per cent each day, trading on margin (using leverage) is typical. Traders often employ technical analysis or fundamental analysis, or a combination of both, to inform their decisions.
Cryptocurrency trading is the buying and selling of digital assets, such as Bitcoin, Ethereum, and other altcoins, on online platforms known as cryptocurrency exchanges. These digital assets, or cryptocurrencies, are decentralised and rely on blockchain technology.
Blockchain refers to a distributed ledger system that allows for secure and transparent transactions without the need for oversight from a central authority like a bank or government. Daily total crypto market volume varies significantly due to cryptocurrencies' hype-driven and highly speculative nature. Daily volumes also differ between sources, although CoinGecko has reported fluctuations between $30 billion and $150 billion in 2023.
Like forex trading, cryptocurrency trading involves placing directional trades on the price movements of these digital assets. Pairs are typically quoted against fiat currencies like the British pound (e.g., BTC/GBP) or other cryptocurrencies (e.g., ETH/BTC). Factors like speculative demand, technological advancements, investor sentiment, regulatory changes, and media coverage often drive the price fluctuations of cryptocurrencies.
Cryptocurrency trading takes place on a 24/7 basis, meaning the market never closes. Traders commonly participate in the crypto market through spot trading (buying and selling cryptocurrencies on the spot [immediately]) and use margin (leveraging positions).
The cryptocurrency market is relatively new and constantly evolving. Consequently, it often exhibits higher levels of volatility compared to traditional financial markets like forex. It’s not uncommon for cryptocurrencies to rise or fall 10%, 25%, or even 50% in a single day. This can lead to both significant potential returns and increased risks for crypto traders.
Various participants, including retail traders, institutional investors, and large corporations, engage in the forex and crypto markets. However, the specific types of participants and their roles within each market differ.
In the forex market, major players include:
This isn’t a complete list; other participants include money transfer firms, market makers, retail brokers, proprietary trading firms and sovereign wealth funds.
In the crypto market, you’ll find participants like:
The crypto market sees a much larger proportion of retail interest compared to forex, with retail investors holding 17% of the total Bitcoin supply (BeInCrypto). In contrast, retail traders account for 2.55% of the forex market’s volume, according to the Bank for International Settlements.
To truly comprehend the differences between the forex and crypto markets, it’s important to look at two key measures: daily trading volumes and overall market capitalisation.
Daily trading volumes refer to the total value of an instrument bought and sold within a single trading day. Higher trading volumes typically indicate a more active and liquid market with a larger number of participants and transactions.
The forex market is the largest financial market, with daily trading volumes of around $7.5 trillion. This massive size can be attributed to foreign currencies' vital role in international trade, investments, and tourism. Major banks, governments, and multinational corporations drive most of the trading volume.
On the other hand, the crypto market sees much less daily trading volume. While estimates can vary wildly between sources (CoinCodex reports $374.57 billion on the 27th of April 2023; CoinGecko puts it at $62.7 billion), the chart above from The Block shows a 7-period average total daily volume across 38 leading crypto exchanges. While these figures are impressive, they are still dwarfed by the sheer size of the forex market.
Market capitalisation, often abbreviated as market cap, is the total value of all outstanding units of a financial asset. It’s calculated by multiplying the current market price of an asset by the total number of outstanding units.
Currencies are distinct from asset classes like stocks and cryptocurrencies in that they don’t have outstanding units; their supply is typically controlled by a central bank. It’s, therefore, impossible to apply the concept of market cap to the forex market.
The closest comparison would be to extrapolate its daily trading volume over a year (~$7.5 trillion x 365), roughly equaling $2,737.5 trillion, or $2.737 quadrillion. Note that this simply reflects annual trading volumes, not the total value of the forex market (as has been claimed).
However, it’s perfectly possible to calculate the market cap for the crypto market. According to CoinGecko, the total crypto market cap currently stands at $1.26 trillion - 16.8% of the forex market’s daily volume and ~0.0004% of its annual volume!
The structure of the forex and crypto markets differ significantly due to the nature of the assets being traded and the primary participants in each market.
The forex market is a decentralised market where transactions occur directly between participants instead of through a centralised exchange. Its structure consists of various levels, with the interbank market at the top, where large commercial banks trade with each other, either directly or through electronic systems (primarily EBS and Refinitiv). These rates influence the bid-ask spread for the rest of the chain.
Next in the hierarchy are smaller banks, hedge funds, retail market makers, retail Electronic Communication Networks (ECNs) and corporations. The participants have less favour with the larger banks, and so deal with slightly worse rates. At the bottom of the ladder are retail traders, tourists, and small firms, amongst others.
The crypto market operates through centralised and decentralised exchanges and OTC desks. Centralised exchanges, like Binance and Coinbase, facilitate transactions and provide liquidity with user-friendly trading platforms.
Meanwhile, decentralised exchanges (DEXs) enable peer-to-peer trading without a central authority, allowing users to connect their crypto wallets and trade directly with each other. OTC desks typically deal with institutional investors that wish to limit their market impact when placing large orders.
The nature of crypto has also led to new firms that mimic traditional financial players but with slight differences. For example, retail and institutional lending firms, stablecoin issuers, and custodial platforms each play a unique role in the crypto market’s day-to-day function.
So what exactly are the advantages and disadvantages of trading forex?
In summary, the forex and crypto markets offer unique opportunities for traders and investors alike. While the forex market is the world's largest and most liquid financial market, playing a vital role in international trade and investment, the crypto market offers a newer, more volatile, and technology-driven alternative for traders seeking potentially higher returns.
Their size and age explain much of their differences; large financial institutions dominate forex, whereas the crypto market is characterised by a greater proportion of retail investors and innovative companies exploring the world of digital currencies. By understanding their fundamental differences, you can now make more informed decisions about which market may be better suited to your trading style and risk tolerance.
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