Today, most Forex and CFD brokers also provide their clients access to trading in cryptocurrencies. But if you are a newbie investor, you might not be entirely sure which option is best for you.
Plus, you may wonder whether crypto is riskier than forex.
Crypto is riskier than forex because the market is highly volatile. Unlike forex, the crypto market has no central authority to govern its running; hence it is prone to wild market swings brought on by market forces. Also, it’s less liquid, has lower trading volumes, and offers less diversification.
The rest of this article will expound further on the reasons that make crypto riskier to invest in than forex. In addition, you will find information on how you can trade in crypto, as well as the pros and cons of investing in cryptocurrencies.
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Why is Crypto Riskier Than Forex?
Crypto is riskier than forex because of the following reasons:
The Crypto Market is Highly Volatile
Unlike forex currencies which fall under the regulation of central banks and governments, cryptocurrencies have no such regulation or backing. Instead, they operate through a network of computers.
As a result, cryptocurrencies are highly susceptible to market forces which cause their prices to fluctuate wildly.
In comparison, global currencies like the US dollar, Japanese Yen, or British pound undergo minimal fluctuation. This is mainly because of strict government regulation.
Yet, the rapid intraday price fluctuations provide you with unique opportunities to trade. However, they also come with heightened risks as prices can soar high and then crash all within a single day.
Such a move could effectively wipe out your entire investment.
So, while you can make an enormous amount of money buying and selling crypto, you can also lose heavily.
Cryptocurrencies Are Less Liquid Than Most Major Forex Currencies
The crypto market has a much lower market capitalization compared to the forex market. According to CoinMarketCap, the total crypto market capitalization stood at $2.48 trillion in May 2021, while daily forex transactions can go up to $6.6 trillion.
Due to the lower trading volumes, the crypto market is less liquid, which leads to rapid price movements. This makes crypto trading riskier than forex.
Another factor that contributes to an illiquid crypto market is the nature of transactions. Since they occur across multiple exchanges, small trades can significantly impact market prices, leading to increased market volatility.
Reduced liquidity also means that trading large amounts of crypto presents a challenge.
Crypto Market is Not as Developed
Bitcoin, the most prominent crypto, launched in 2009. The crypto market is thus relatively new and underdeveloped, while the highly developed forex market features high-level trading by market movers, individuals, large banks, and hedge funds.
This makes the crypto market less reliable or stable, thus riskier.
Given its young age, the market is still trying to appeal to big players as most beginner traders learn by holding small initial positions.
Crypto Don’t Allow for Much Portfolio Diversity
Forex brokers are increasingly offering cryptocurrencies for trade as well, but the most commonly available large crypto is Bitcoin, Ethereum, Ripple, and Tether. This doesn’t provide traders much diversity in their investment choices, and investing in a single crypto puts them at higher risk.
How to Trade in Crypto
Cryptocurrencies are virtual currencies created by a pool of private individuals, groups, companies, and banks. However, since no government or central bank oversees their operations, cryptocurrencies are not legal tender.
Thus they are not as readily accepted in exchange for goods and services like national currencies. They also hold no intrinsic value.
You can invest in crypto via two primary methods. You can either buy the crypto outright or speculate on its price movements:
Trading Crypto Through Cryptocurrency Exchanges
This is the best option to go for if you are looking to invest in crypto for the long term. Trading via cryptocurrency exchanges allows you to purchase real cryptocurrencies. You also acquire legal ownership of the crypto.
Once you buy your tokens, you store them in a digital wallet.
Note that to buy crypto through an exchange, you will need to pay a fee to ensure the security of your ownership, plus a small commission.
Trading Crypto Through a Forex and CFD Broker
Trading Crypto through a forex and CFD broker grants you virtual ownership of the crypto you buy. Brokers typically package crypto assets as contracts for differences (CFDs) which means you don’t actually get to own the crypto purchased during trading.
You can also open a position on margin, at a fraction of the value of the trade, through leveraging. And since you merely speculate on price fluctuations, you do not incur security or storage fees.
Retail brokers usually apply swaps or overnight financing charges, so you need to pay daily fees to keep your crypto trades open. This makes trading crypto through a forex and CFD broker most suitable for traders who prefer short-term investing.
Pros & Cons of Investing in Crypto
Let’s go over the pros and cons of investing in crypto.
Here are the advantages of investing in Crypto:
- You can trade crypto 24/7. Crypto markets don’t close. They remain open for trading throughout the week, including over the weekend. This is unlike forex markets which only open 5 days a week and remain closed during weekends. In addition, they operate mostly between 9 am and 4 pm.
- Your identity remains secure. Trading cryptocurrencies in the real market offers you anonymity since transactions take place via a decentralized and encrypted system.
- The system is incorruptible. Crypto transactions occur through blockchain technology, a system that regulates a finite supply of crypto as well as the integrity of the network system.
- Economic and political factors do not affect crypto trading. Cryptocurrency movements depend on market demand. This means that supply and demand variables move crypto market prices, and most of the economic and political issues that affect traditional currencies have minimal effect on crypto. This is because the crypto market is decentralized.
- Crypto transactions are much cheaper. In the crypto market, traders trade on a peer-to-peer platform. This does not entail using any intermediaries; hence costs are pretty minimal. In the forex market, brokers play the role of facilitators; therefore, trading transactions come with relatively higher fees.
Investing in crypto also comes with some disadvantages. These include:
- Crypto is relatively more expensive to trade than forex.
- Crypto markets are far more volatile and riskier than those of forex currency pairs.
- Most cryptocurrencies (except major ones like Bitcoin) feature a much smaller capitalization than major forex trading currencies.
- Forex brokers offer crypto at extremely low leverage because of the associated high risk and volatility.
- As leveraged products, cryptocurrencies can magnify your losses if the market does not move in your favor.
To recap, here is a summary of why crypto is riskier than forex:
- The crypto market has high volatility levels.
- Cryptocurrencies are less liquid.
- The crypto market is underdeveloped.
- The crypto market has less diversified products.
Trading in either crypto or forex trading is risky. This is because risk is inherent in any tradable financial asset. While crypto can be more volatile than forex - hence riskier- the best thing to do is learn how to manage your potential risks.
The ideal way to do this is to open an account with a broker that offers access to both markets. Then, practice trading crypto and forex using a demo account.
This way, you get to understand how both markets work, figure out which option best suits your risk appetite, and build an appropriate risk management strategy.
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