forex vs crypto trading

Comparative study between crypto and forex trading

One has been in the trading market for decades while another is a disruptive force aiming to change the face of the economy overall. Forex and crypto are two of the most popular trading zones in the 21st century and both markets carry excellent profit potential- as well as risks. Interestingly, forex and crypto trading shares a bunch of certain similarities and dissimilarities. Are you in a dilemma on whether to opt for crypto trading or forex trading? Well, in that case, you would need to have a basic idea about the similarities, differences, profit prospects, and associated risks with both trading markets.

The post below offers a brief on similarities as well as differences in between both forex and crypto trading.

The core asset

This is the fundamental difference when it comes to forex and crypto trading.

Crypto trading involves trading with digital currencies. Also known as electronic cash, digital currencies were introduced in 2009. Cryptocurrencies are developed by crypto companies. There are over 18,000 cryptocurrencies and more will be introduced in future.

Forex trading involves trading with fiat currencies- paper currencies that are minted by national governments. FX trading refers to the process of purchasing and selling physical currencies or foreign exchange.  Unlike cryptos, the number of fiat currency is always limited and fixed- unless a new country is born and it comes up with a new national currency.

It’s to note here that the basic mechanics behind up and down of valuation of fiat and crypto currencies are similar- the law of supply-and-demand. The valuation of both currencies will rise if there is more demand as well as less supply- and will plummet if there is less demand. But, the typical drivers that propel and demand and supply principles are different for the two different trading zones.

Cryptos are developed on a cutting-edge blockchain platform that features a decentralized and distributed ledger. The crypto world, and also the mainstream fintech world are making huge investments in crypto’s underlying technology to provide the world with a futuristic payment, trading, and investment vehicle. Forex trading pits the economy of one country against another. Cryptocurrencies are not limited to any particular country and every crypto carries a universal value all across the world.

Market capitalization and trade volume

Crypto market shot up to the whopping $3 trillion mark in 2021. After the 2022 May-June crash, the crypto scene plummeted down below $1 trillion. However, as of October 2022, the crypto market has rallied slightly above $1 trillion.

It’s not much of a task to gauge the size of the crypto market, thanks to Satoshi Nakamoto. The legendary BTC founder created transparent record of ownership of cryptocurrency which makes it convenient to calculate overall size of crypto market.

Now, it’s not that easy to determine the overall size of the Forex market. According to economists, the overall value of the economy worldwide is around $80 trillion (based on calculations from 2017). Forex has been in the trading zone long before crypto and also covers a far wider trader base. As a result, FX market cap will always be greater than that of crypto, even if we depend on just an estimate.

However, it’s not very difficult to calculate trading volume when it comes to FX trade.  It’s mostly because FX trading occurs in a regulated and organized market- which is not the case with crypto. The BIS takes an estimate of global trading volume in the FX scene after every 3 years. In its last report in 2019, the BIS had revealed that daily trading volume of Forex was $6.6 trillion.

But it could be slightly difficult to come up with a concrete figure when you want to know about the trading volume of the crypto market, especially because it’s new and still disorganized. However, according to analysts, the estimated daily trade volume for crypto is around $100 billion to $500 billion.

The ATR factor

You need to conduct TA for trading in both the trading markets and the price chart analysis mechanisms are also same for both forex and crypto trading. But, then, there is one fundamental difference- the crypto market is way more volatile in comparison to the FX trading market.

If FX ATR comes at 1.1 percent to 1.4 percent, the one that of crypto (say BTC) would be way higher, say 7.5 percent to 25 percent!

The taxation part

Both forex and crypto trading are taxable but there are separate rules for both.

Forex trading is covered by Section 1256 of IRS taxation code. According to this section, 60% of losses and gains are regarded as capital gains/losses in the long-term. The rest will be regarded as short-term. If you are a spot FX trader, your taxation from spot FX trading will come under Section 988. In this case, the losses and gains are treated as “ordinary income”. FX traders have the opportunity to choose the trading part as per their preferred taxation protocol.

However, crypto traders are unable to enjoy such privileges. According to IRS regulations, “crypto” is regarded as “property”. Thus, the taxation rules for crypto are similar to that of stocks.  In crypto trading, if you hold a trade for 365 days (and even less), it would be regarded as a “short-term” loss and gain, based on the outcome of the trade. In this case, the tax rate would be the same as “ordinary income”.

But, the trade will be regarded as “long-tern loss or gain”, if the trade is being held for at least 366 days. In this case, the tax rates would be usually lower in comparison to short-term crypto trade.

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Forex trading market enjoys higher liquidity, thanks to smaller price swings. In fact, the liquidity of the FX market is usually 12-60x higher in comparison to the crypto market.

Wrapping up

So, which one would you go for?

Well, FX is an age-old but mighty market while crypto is a new and booming one. If you want a safer trade, FX would be a better option as it’s more organized, assures higher liquidity, and also allows traders to choose from taxation options.

But the crypto trading market assures way higher profit potential for traders, thanks to its extreme volatility. If you are an adventurous trader with a solid risk appetite, crypto would make a strong choice.

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