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January 10, 2021

4.2

Forex vs Crypto Exchanges: what is the difference?

In the XV century, the Medici family was opening banks all over Europe. They had to deal with multiple currencies to lend and collect money in their deals with kings, bishops, and traders. So they created the first complex system of foreign exchange and effectively launched a new practice - organized institutional trading of currencies.

Over time it evolved into the largest financial market in the world. Despite taking its modern form only about 50 years ago, the forex market reached a daily volume of $6.6 trillion. For comparison, NASDAQ’s average volume is around $4 billion.

Nevertheless, currency exchanges don’t seem to be interesting for the public. They’ve had their share of scandals and investigations, but they are not nearly as famous (or infamous) as stock exchanges. Most people don’t care about who deals with currencies and what they do.

Crypto exchanges, on the other hand, are a much more exciting and even infamous subject. They handle a much lesser amount of money - at the start of the year, the Top 3 exchanges had a cumulative daily trading volume of only about $21.6 billion. And yet, crypto enthusiasts are often watching them closely and react sharply to news and updates.

Just take a look at the reviews of crypto exchanges on Revain. They are emotional and detailed, authors are interested in the subject. Some praise their favorite platforms, while others express their disappointment in less successful projects.

So why are crypto exchanges more interesting than forex? Obviously, there is the matter of novelty. Crypto is still exciting and mysterious. It’s usually easier to get people talking about Bitcoin than about the US dollar or British pound.

But that is not all. Crypto exchanges and forex have other fundamental differences and similarities.

Similarities

Both kinds of exchanges are similar in three ways:

  • Accessibility
  • Affordability
  • Flexibility

First of all, both forex and crypto trading are usually very easy to access. While you usually can’t buy Bitcoin and Ethereum at your local bank - not yet, at least - you can acquire them online, same as with fiat currencies. In some cases, you might need to submit some documents, but no extensive paperwork is required.

Second of all, both kinds of trading are affordable. While buying a plot of land or a house is usually pricey, anyone can become a crypto or a forex trader with just $100 or even less. It is also possible to gradually expand your position at an adjustable rate.

Finally, both kinds of trading can provide reliable protection against inflation. Forex can save your wealth because of its flexibility. When a currency is expected to lose value or is already depreciating, anyone can just buy another asset.

At the same time, cryptocurrencies are often praised as highly secure assets because of their potential for growth and independence from fiat. There are also purely unique technological advantages - for example, it will never be impossible to print more than 21 million Bitcoin and lower its value via oversaturation.

The main commonalities end here. Now, onto the most important differences.

Differences

Forex and crypto exchanges differ in five major ways:

  • Mediation
  • Regulation
  • Dependency on politics
  • Security
  • Profitability

Forex involves a lot of mediation from brokers, banks, and other middlemen. In crypto trading, there are only a buyer, a seller, and an exchange.

Forex is also heavily regulated, exchanges need to meet local, as well as some international criteria. Crypto trading still operates in a sort of a grey area - governments around the world are already creating new laws around new digital assets, yet crypto exchanges remain mostly free. Besides, they are usually quite difficult to regulate because of their decentralized nature.

Fiat rates depend on politics and national economies - after all, these are state-issued assets. Crypto can be impacted by these things as well, however, there is seldom any direct correlation. In fact, some experts predicted that Bitcoin’s price is not going to be impacted even by the US presidential elections and will grow no matter who wins - and this is precisely what happened.

Forex exchanges are usually secure and have certain safety mechanisms in place to protect the traders. Besides, you can simply buy cash and forget about hackers.

Crypto exchanges, however, are riskier. They are often targeted by hackers who aim to get control over other people’s crypto wallets. The infamous hack of Mt. Gox exchange in 2014 resulted in over 840,000 bitcoin being stolen. It even partially inspired the creation and development of cold wallets.

Forex traders have different levels of success, but on average they get around 10% of returns per month. Crypto investment is much more volatile and its returns are much more difficult to measure. Sometimes the average results are approximately the same as with forex, around 11%. But in other cases, they might be as high as 20 times higher than profits from forex trading.

Conclusion

Foreign exchanges and crypto exchanges deal with assets that have symbolic value. While gold, real estate, and other kinds of investments have a “real” materialistic value, currencies are valuable because people say so.

But while forex is a well-established and truly massive sector of the global economy, cryptocurrencies are still an emerging and developing industry. It is inclusive, easily accessible, and largely self-regulated.

And most importantly, they often create very different emotions. Forex is a purely professional and materialistic endeavor. At the same time, many crypto investors are not simply pursuing profits. They believe in technologies and a decentralized dream.

These unique sentimental ideas coupled with the growth potential is what sets crypto exchanges apart from their fiat counterparts. Because new and exciting things always get more attention, even if there are fewer profits in them.

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