Previously viewed by many in the financial world with suspicion, bitcoin has now become a household name in all advanced economies. And traders are quickly getting on board.
But should you take the leap of faith and switch your focus from forex to bitcoin just yet? Or perhaps make the best of both worlds and exponentially increase your profit potential?
To help you make an informed decision between the two, this article will discuss what forex and bitcoin have in common as well as how they are different from one another.
How are Bitcoin and Forex Similar?
Starting with the similarities between the two markets, the first thing you need for both is a trading account and an electronic device with a good internet connection. You may also trade via trusted platforms only (for e.g. Independent Reserve in crypto’s case).
Like the crypto market, forex trading also depends on the supply-demand balance. As more traders buy a unit instead of selling, the prices increase. Similarly, prices drop when more traders decide to sell the unit.
If you are familiar with bitcoin but not with forex, your transition to forex should be simple as the indicators and the chart patterns are similar for both.
How are Bitcoin and Forex Different?
For those who aren’t aware of the term, liquidity refers to how effortlessly you can convert an asset into cash without changing the current market price.
When it comes to forex, it is an incredibly liquid market. In fact, the forex trading volume surpassed $6.6 trillion in 2019. You can easily buy or sell your favorite currency pair. And the best thing is that you can get out of the trade at a reasonable price.
But things aren’t the same for cryptocurrency. Out of the $2 trillion crypto market capital, around 45% is dedicated to bitcoin. So if you are dealing with most other cryptocurrencies, trading may not be as active as bitcoin. And you might not be able to get out of your trade at your desired price.
Easily the most significant difference between bitcoin and forex markets is the number of available instruments.
Forex traders primarily deal in currency pairs, including EUR/USD, USD/CHF, AUD/USD, USD/CAD, USD/JPY, and NZD/USD. Some traders also deal in exotic currency units like currency of a developing country like Madagascar.
As for the crypto world, there are over 11,000 different cryptocurrencies available. This number just keeps growing and is hard to keep track of.
While traders commonly deal with popular cryptocurrencies such as bitcoin and ethereum, some hardcore crypto enthusiasts dabble in the lesser-known coins too.
This means that the crypto industry offers you countless options for trading, which makes it very difficult to track every cryptocurrency. In comparison, the forex market offers a limited number of instruments only, in comparison.
As far as volatility goes (how vulnerable an asset’s price is to fluctuation), bitcoin takes the lead here.
Because a small number of individuals hold ownership of a large number of bitcoins, any one of these traders can go ahead and sell their shares. And this could potentially flatten the crypto market. Such traders are referred to as ‘whales’ in the crypto industry based on the percentage of bitcoins they possess.
On the other hand, such practices are rarely seen in the forex industry and mainly occur in exotic pairs only. And even so, risk management can be a lot easier than crypto.
With plenty of potential opportunities to gain some profits, cryptocurrency is rapidly climbing popularity charts. But you should remember that higher the profit potential, the higher will be the risk margin usually.
In the crypto world, you must be prepared for the value of your coins to drop to zero if the project fails or if money flows into more established coins.
As for forex, you can always increase your profit potential by using leverage. But be careful because using leverage could backfire and you may end up with more risk (although you can contain the risk by opting for appropriate leverage for your trades).
And that’s a wrap…
Remember, choosing between forex and bitcoin is not straightforward — it depends on your individual financial goals, budget, and trading fashion.
The good news is that you aren’t bound to choose between one of the two markets. Meaning that you can maximize your earnings by taking advantage of the ample opportunities available in both industries.
Pro Tip: Some believe that the best way to go about this is to try your hand at both bitcoin and forex with a small account. Within a few months or so, you’ll be able to find the perfect market for yourself. Here’s a beginner’s guide on forex trading.