The Difference Between Forex And Crypto
Forex, or to give it its full title: Foreign Currency Exchange, is well established as one of the most popular trading products in the world with around $5 trillion traded every day. The Forex market deals only in the 180 worldwide ‘fiat’ currencies; these are all currencies which are legal tender and backed by a centralised government.
On the other hand Cryptocurrency aka ‘digital currency’ is a relative newcomer, but is rapidly making its mark with the number of investors increasing every year. Cryptocurrencies are purely a ‘virtual’ currency and although often described as coins, there is no physical element.
Other than the word “currency”, these products have little in common and are traded in two very different ways. Perhaps it is their unique aspects that make them both so appealing to traders?
In this guide, you will learn:
- More about potential payouts and losses
- The trading costs you could incur trading
- If Forex or crypto trading is best for you
Trading Payouts And Losses
Forex and cryptocurrencies both offer excellent trading prospects with the potential to produce excellent results. However, both have their pitfalls and the potential for high losses to be incurred.
Forex offers an unrivalled opportunity to enter the world of trading with a very moderate investment and the possibility of unlimited tax-free payouts. But the same must be said for the potential to incur high losses, especially if suitable precautions are not in place to prevent them.
With cryptocurrencies, there are numerous ways to trade, but the most common option is to buy the asset itself. In straightforward terms, the aim is to buy at a low price and then hold until there is potential for selling higher to achieve maximum payout.
Selling at the wrong time or buying at a high price and being forced to short in the interest of ‘damage limitation’ will result in a loss, the extent of which will depend on several factors including the level of your original investment and any trading fees incurred.
On the whole, crypto trading is easier to understand but is also extremely volatile.
The Costs of Each Method
Both Forex and cryptocurrency trading will incur expenses in addition to your investment. Both are very different markets and it is essential to understand the differences between a Forex broker and a cryptocurrency exchange platform; not only in terms of their function but in the calculation of your overall trading costs.
Forex trading is not taxable, but trading fees are inevitable and the actual cost of each trade remains unknown until it is complete. A broker may offer you a fixed rate per trade or may take fees as a percentage commission based on the value of each transaction. Also, longer trades may attract ‘overnight funding’ fees and there will be the cost of the spread, which will vary depending on the end price.
Crypto trading is subject to Capital Gains Tax based on profit. You will also have to pay for the use of an exchange platform, which will inevitably charge fees per trade, but may also take a small percentage when depositing or withdrawing funds. Currently, there is much variation in the terms and conditions between exchanges, so it is well worth doing your homework to find the best option.
Lastly, you will need to store your cryptocurrency in either a digital wallet or in ‘cold storage’ with a specialist provider. Both options have either one-off or ongoing periodic fees to add to the overall cost of trading.
Which Trading Type Suits You
Forex trading is the most popular form of trading in the world. All fiat currencies are legal tender which is government-backed; in that respect, they are considered reliable and tangible commodities.
Conversely, Forex is undoubtedly a volatile market, much-affected by political and economic events. It requires a good level of understanding and there is the potential for significant losses, primarily if you use high leverage.
Cryptocurrencies are the complete opposite, there is no government backing, you have to trust the integrity of the company responsible for creating the currency and there is no actual commodity.
On the whole, crypto trading is easier to understand but is also extremely volatile. It is more susceptible to market trends than world events, making it much harder to formulate a solid trading plan.
The Final Pros And Cons
Both the Forex and cryptocurrency markets experience volatility, a factor which is either seen as a negative or a positive, depending on your trading strategy. Either of these commodities will need you to acquire specific skills and have the right mindset to make the most of opportunities.
Forex Pros: The Forex market has a continuous and liquid supply of numerous currencies. Entry costs are low and there is a wide variety of trading options. There is potential for high, tax-free payouts, especially when leverage is used to its best advantage.
Forex Cons: There is a level of complexity to the Forex market and thus more to learn. Inappropriate use of leverage increases the possibility of high losses. There are hidden costs, which will not be clarified until a trade has completed.
Crypto Pros: Cryptocurrency is a finite commodity, making it more desirable: low supply = high demand. Anonymous transactions mean that the market is open to all. Trading costs are low and there is potential for high returns.
Crypto Cons: Cryptocurrency trading is taxable, meaning you must maintain extensive (per trade) records. Crypto wallets are essential and it is your responsibility to keep passkeys safe, failure to do so will mean total loss of the contents.
Although you may ultimately choose between these two forms of trading, it is equally plausible to use both or even binary options as well in your quest to achieve a well-balanced, enjoyable and hopefully profitable investment portfolio!
Ben’s contributions as a freelancer to the site since 2013 are highly valued. He has a real talent particularly within short-term speculation, making many successful trades on the directions of the global financial markets. Learn more.