Since an increasing number of traders are considering both crypto and FX trading, they should know some of the key differences. When choosing which one is suitable for each trader, there are a few factors that should be kept in mind. Professional and beginner traders alike need to be aware of these differences. Here are four key aspects worth considering when choosing the right trading strategy for you.
Even though Bitcoin went mainstream in 2021 and now the crypto space has become very popular, valuations are still volatile. That’s in a complete contrast to fiat currencies, which tend to fluctuate in narrow ranges.
Sure, there are exceptions, such as the Turkish Lira, an emerging currency that showed high volatility during the end of 2021, but generally, FX volatility is lower compared to crypto. This can be used to your advantage, as you can blend both asset classes and come up with a portfolio that is overall balanced in terms of volatility.
Elevated volatility in the crypto space is a result of an important factor – liquidity. Compared to forex trading, in the digital assets sector, daily volumes remain relatively low. That is the case because we have yet to reach a point of global adoption of cryptocurrencies.
Companies, governments, and people still rely on fiat currencies to conduct financial transactions, and that is the main reason why the daily FX volume continues to exceed several trillion USD.
Keeping liquidity conditions in mind at all times is important for a retail trader. In a highly liquid environment, breakout strategies are more efficient. When liquidity is thin, price swings are wilder and waiting for a stronger pullback is recommended, in order to get in at a more attractive price. In order to avoid your trades remaining in the negative for an extended period, make sure you approach crypto and FX differently.
This is another important factor linked to volatility and liquidity. You should know the differences in terms of trading costs. If you take a look at your trading platform, it’s easily noticeable that spreads are much wider for cryptocurrencies, while FX pairs are the cheapest in the industry.
Brokerages charge higher spreads when liquidity is lower because executing accurate trades is more difficult. Altcoins had an impressive run in 2021, while currencies posted single-digit price ranges during the same period.
Emerging vs mature markets
Fiat currencies have been around for decades, during which they have matured and grown into assets with stable valuations. That is not the case with cryptocurrencies. Bitcoin emerged in 2008 and on top of that, some of the largest altcoins in the industry were launched during the past few years.
This is a market that still has room to mature and because of that, valuations can’t be maintained for an extended period. During its short history, the crypto market fluctuated impulsively in 4-year cycles, posting significant price rises followed by rapidly-developing bear markets.