Last Updated on 11 months by Komolafe Bamidele
Cryptocurrency and foreign currency are very similar and are even confused to be the same by many investors.
Many also think that other non-US currencies and cryptocurrencies like Ethereum both share the same rules and should occupy the same part of your financial planning.
This is very far from the truth and if you want to succeed you have to learn it. In reality, the only thing they both share is a name feature.
They are different assets and they have different forms and functions. Here is all you need to know.
What Is Forex?
Forex is short for the Foreign exchange market which is a field for investing in foreign currencies.
For example, you invest in the exchange rates between currencies and you make or lose money as these currencies gain or lose value against each other.
Investing in forex means trying to predict which economies will gain or lose strength against the other and how this will reflect on their currencies.
This is a very complex area of investment as it doesn’t have one marketplace. Also, it is not advised for beginners.
There is no central market which means that these trades are not controlled by anything and the stocks just get listed on exchanges.
What Is Cryptocurrency?
Cryptocurrency, on the other hand, is a digital asset.
This means that there is no physical form of any unit of crypto asset that you can pull out and physically hold in the same way you will hold a dollar.
Instead, this type of currency exists in the digital account created by you where you store all your tokens.
The technology behind cryptocurrency is very complex and if you want to be successful in the field, it is worth studying.
However, you should know that traditional currencies also work via the same mechanism.
There are about 6200 individual cryptocurrencies available for trade, although the number is not stable. Some currencies are pure currencies like Bitcoin.
This means that the code behind those tokens does not do anything else but create and regulate the supply of said tokens.
The idea of cryptocurrency is for you to spend it the same way you spend U.S dollars or Nigerian Naira to pay for goods and services.
Other cryptocurrencies like Ethereum were created as technology projects.
This means that this cryptocurrency does not just create tokens but it uses its token as a means of funding or advancing the project.
These types of tokens are called utility tokens because they are created to do something other than just existing as a pure financial product.
#1 Crypto vs Forex as an Asset:
Cryptocurrency and forex are similar in the sense that they are both volatile financial assets.
Investors buy and trade these assets not just for their value but people also buy and hold a stock for the value of owning a part of a company’s underlying equity.
The value of owning a foreign currency or cryptocurrency is obtained when you resell the asset to someone else.
There are several differences between both currencies though:
#2. Crypto vs Forex Market Size/Diversity:
Cryptocurrency and Forex are quite similar in this aspect. Both have a massive amount of assets that you can acquire and trade at will.
A forex investor can trade any currency in the world they want to, while a cryptocurrency trader can only trade the thousands of crypto assets available.
Cryptocurrency has a narrower market than forex although both have a large asset class that is primarily defined by a small number of tokens.
#3. Crypto vs Forex Liquidity:
The forex market is much more liquid than the cryptocurrency market.
The cryptocurrency market is largely defined by the market for bitcoin and there is a certain number of bitcoins in circulation.
The cryptocurrency market is smaller than it looks and there is a limited amount of room for investment in any token other than the high-volatility Bitcoin product.
On the other hand, Forex has a wider range of assets than the cryptocurrency market and it also has a wider range of investors meaning it will have a much easier time finding someone to trade with.
#4. Crypto vs Forex Volatility:
Forex is a highly volatile market and this cannot be underestimated by any newbie looking to get into the field.
It is very difficult to accurately predict how a currency will fare at any given time and it takes a significant amount of money to make a good investment. This is a high-risk investment.
Cryptocurrency is also very volatile. Some currencies have experienced swings that doubled and even tripled their value before cutting their market cap in half.
It is very common for investors to make a large amount of money and lose it all in the same day or week in the cryptocurrency market.
#5. Crypto vs Forex Regulation:
Forex is a highly regulated market as they make use of foreign currencies.
Governments take an interest in people who trade these currencies as there are volatility and global implications.
However, cryptocurrency is decentralized and it is not overseen by anyone. This is one of the benefits of investing in cryptocurrency.
Government officials do not take part in any part of cryptocurrency regulation and the market has grown bigger and bigger.
Which is Riskier? Crypto or Forex:
The cryptocurrency market is more volatile in comparison to the forex market and this leaves a possibility for those who want to make large amounts of profits in a short amount of time.
Tokens with a low trading volume fluctuate rapidly while the ones with higher market caps are stable for longer periods.
Low fluctuations in forex help you control risks that are associated with investments.
If you are just beginning, cryptocurrency is better for you as you can stable coins and minimise your losses or gain profits steadily.
In conclusion, both markets are extremely volatile and it is not for anyone to just jump into this space.
You have to carefully consider all the risks and benefits of each market to decide if you are ready to go into the market, and determine which one is better for you.