Old vs. New: The Difference Between Forex and Bitcoin Markets
Forex traders and those that dabble in crypto-currencies such as Bitcoin (BTC) see quite a bit of overlap, with many of them having some interest in both fields. The fact is, wherever there is opportunity for profit, you will find traders gathered. As you can execute virtually all of the same transaction types and strategies on both platforms, you might say that the skills needed to succeed in one are the same that are required to operate successfully in the other.
Even with that said, it has to be acknowledged that there are significant differences between the two markets, and these should be well considered by any potential trader looking to dive into either one, or both, of them. After all, trading success is not simply about figuring out how to pick the best performing stocks, as any beginning trader learns for themselves quickly enough.
Forex and Bitcoin Trading Origins
Perhaps it would be instructive for us to take a quick jog down memory lane, back to the beginnings of the forex markets and Bitcoin’s admittedly more recent birth. Ever since world economies adopted the gold standard back in the 19th century, currency swapping to either store or create value has been a dear pastime of traders. The gold standard made it possible to standardize valuations, and with this came the opportunities for speculation, hedging, and arbitrage.
Technological leaps saw the move to electronic money transfer, which has been the favored trading format for many decades. Technology, however, never really sleeps. A new era in its constant march forward came to life a few years ago when blockchain technology made Bitcoin, the world’s first crypto-currency, available to the public. Bitcoin took the trading world and the world at large by storm as people quickly realized its potential usefulness and the opportunities it presented.
While the market volume of Bitcoin lags light-years behind that of the forex market, there are plenty of up-sides to the crypto-currency market.
- Ease of entry and exit: You don’t need much to get into BTC trading – simply get your hands on a little bit of capital, register with an online broker, or get involved directly with the market.
- Volatility: The fact that BTCs float is relatively limited means that you can have vast daily trading spikes and ranges in the coin’s volatility. This is an ideal scenario for savvy traders to take advantage of and make large returns on their investments.
- Insulation: BTC is independent of the external stimuli conventional currencies are influenced by such a nation’s economic health.
- Low cost participation: Brokerage fees for Bitcoin are low enough as it is, but they can be even lower when you choose to access the market directly.
It’s not all roses, however.
- Hacking Vulnerability: The nature of the crypto-currency makes it a target for hackers, who have stolen millions of dollars form BTC users in the recent past.
- Glitches: The technical foundation and infrastructure of BTC means that should there be any glitch or failure in the technological side of things, billions could potentially be lost in the span of a millisecond – a risk many are not willing to take.
- Limited Leveraging Opportunities: Owing to the relative novelty of BTC, no industry standard has quite been established when it comes to margin trading and leveraging allowances, meaning most broker will make up their own rules. This results in diminished leveraging opportunities in many cases.
- Diversity: You have the option of trading minor, major, or exotic pairings actively.
- Liquidity: These markets are incredibly deep owing to the vast ranges of popular currency pairings available.
- Stability: Unless truly catastrophic or exceptional circumstances prevail, we can be confident of a somewhat stable trading environment. The volumes in activity are a large reason for this.
- Leverage: You have great access to leverage here, with brokers willing to give you up to 200:1 leveraging.
- Minimal Volatility: The relative stability of the market means that the opportunities for big profit margins are few and far between. Even the best performing stocks will only see a few units of appreciation or depreciation in a trading day, as opposed to the massive price changes crypto-currencies may see in the same span of time.
- Cost of Participation: Rollover, transaction fees, bid/ask spreads all combine to make forex trading relatively costly.
- Institutional Involvement: Proprietary firms, investment banks, and high-frequency traders automatically put retail and beginner traders on a losing footing from the very beginning.
As we’ve seen, both sides of the divide have their own attractions for traders. It’s up to the individual trader to assess their goals, capabilities, and risk-appetite before settling for either one, or a mix of both.