Are there any considerable differences between trading and investing in forex and cryptocurrencies? Although some disparities exist, for any trader or investor looking to venture into either, it helps to understand some of the individual structural tendencies to make an informed decision.
Forex and cryptocurrencies provide interesting parallels as both entities are practically two sides of one coin. Observing both markets should reflect the unique differences amongst each and what it means to be a trader and investor in either.
Many forex traders question whether they should trade cryptocurrencies, despite it being a new market with a lack of regulation and being prone to pump and dump schemes.
This article will discuss why cryptocurrencies are a better option to invest rather than trade and the similarities and distinctions between trading and investing in both markets that have considerable effects.
Differentiating between trading and investing in forex and cryptocurrencies
Although we can trade and invest in both markets, it’s vital to understand how each style affects an individual market separately. While one can argue many technical distinctions between trading and investing, we can best summarise that the former is more short-term, while the other is more long-term.
Forex is a particular favorite in trading circles for unique reasons, while cryptocurrencies have inherent qualities that perfectly suit investing more.
The fundamental shift from forex to cryptocurrencies
What is also important to realize is the fundamentals between the two. There has been a growing narrative over the last few years that cryptocurrencies are the ‘new gold’ because many are deflationary and scarce, meaning they increase in value.
In contrast, fiat currencies (which is forex) is technically inflationary and not rare, meaning it loses purchasing power. There is a specific relationship between the US dollar (and a few other so-called reserve currencies) and cryptocurrencies; when people lose faith in the dollar, they hoard crypto (and vice versa).
If we look at the recent bull markets in cryptocurrencies, we can observe a trend of early investors who bought at low prices and hoarded for the long-term because of the argument previously mentioned.
In forex, it is rare for the masses to ‘buy and hold’ because of the fluctuating nature of this market, as currencies are very dynamic and aren’t scarce or special assets like cryptocurrencies.
Which is the better market to trade (and why)?
We now have to answer, based on either market, which one is better suited towards trading or investing and why. Without a doubt, forex is the better instrument to trade for numerous reasons.
- As the available leverage has increased over the years, it’s made it possible for smaller accounts to function in forex as trading inherently relies on profiting off tiny price fluctuations.
Many can still capitalize on price movements without having to subscribe to an investing mentality. Although technically, you can also trade cryptocurrencies, one is better off doing so on forex since the former is a lot more volatile.
We could consider forex to be more ‘stable’ comparatively. Due to boasting significantly superior liquidity than its counterpart (at least $5 trillion daily volume), this ensures ‘getting in and out’ is quick, which is crucial for speculating.
- Structurally, due to its long age, forex markets tend to stay in range-bound conditions far more than trending ones. These are all tradeable circumstances. It is more difficult to invest in a ranging markets.
So while forex is technically an investment, there are very few genuinely long-term buy and hold investors who hold positions for years, as you would find in the cryptocurrencies or even the stock market.
Most investors typically look for new instruments to invest in rather than established ones, which is why investors take advantage of initial coin offerings in cryptocurrencies. This market is still relatively new and hasn’t yet reached its maximum potential.
A good tradeable market should have high leverage, enormous liquidity, and conditions favoring trading both in trending and ranging markets. Although the cryptocurrency market does also boast similar conditions to its counterpart, these qualities are more notable in forex.
Which is the better market to invest in and why?
Our only option here is cryptocurrencies, and between the two, they provide more benefits that favor investing.
Greater upside potential
Inherently, cryptocurrencies are more of an asset than fiat currencies. While the latter does exist in physical money, due to inflation, they gradually lose value over time. Let’s make a simple example.
Assuming one had £1,000 and converted that to US dollars (real paper money) at an exchange rate of 1.2000 (1 British pound equals $1.2), they would have $1,200. If the pound saw appreciation, taking its rate to 1.3000 (which is a 1000 pip increase), converting the $1,200 back to British pounds means the result is £1,560 (a profit of £360).
We should also remember this large move rarely happens in one go as we’ve established that forex frequently fluctuates (which is partly the reason for range). So, the time horizon of such an increase occurring may take many months, if not years.
Here is a simplified example that refers to exchanging paper money.
In the trading world, due to leverage and the fact one does not need to own the physical asset (i.e., the paper money), the gains on the same 1,000 pip increase can result in greater profits with the same investment (making it more suitable to trade than to invest).
On the other hand, if one bought £1,000 worth of BTC from an exchange (the actual asset) since cryptocurrencies are more volatile presently, they can quickly move 1,000 pips.
Consequently, there is a higher chance of at least tripling the same £1,000 in a shorter timespan. Although there is also margin in digital currencies, it is significantly lower than forex.
So, we can invest and own an actual digital coin since there is greater upside potential and lower risk without trading on margin. Buying a physical currency will not yield significantly due to its lower worth.
Hence, using margin here is the only way for any real gains. In contrast, as investing doesn’t rely on leverage, buying a real digital coin is considered more of an investment due to its higher perceived market value.
Long-term investment prospect
With many investments, you can use dollar-cost averaging (DCA). Even if the value decreases, if an investor still believes in what they’ve invested in, they can still buy more at lower prices in the hope of cashing out in profits much later.
The possibility of employing something exactly or similar to DCA in forex is equivalent to ‘adding onto a losing position.’ Since most traders use some degree of leverage, this practice is rare because the account would be blown by adding more orders.
Even though no currency technically goes to zero, traders cannot stomach a loss for very long. Also, most investments involve the act of ‘buying something’ rather than selling it. With a leveraged market such as forex, you can also ‘sell something’ without buying it.
Although there are leveraged cryptocurrency markets too that allow for both buying and selling, again, as an investment, you can buy the real asset and hold it for several years even when it’s in some loss (and even buy more if employing DCA).
So, what does one do with this information? Ultimately, we should appreciate both of these markets as they relate to each other yet are also distinct at the same time. There may be those who’ve religiously stuck to just trading and not given any thought to becoming investors (the same is true for the inverse).
This article may provide some insights into the opportunity for traders to become investors or investors to become traders based on doing more research about these two respective markets.