Many people want to make extra money and have heard that financial trading is the best way to do this. However, many get-rich-quick advisers don’t actually speak about what type of trading one must do, they simply throw the word ‘trading’ around without any real context.
There are two types of markets – cryptocurrency and forex market, which though similar they have their differences. Let’s look at what each market is about and how it works, then we’ll look at the similarities and compare the differences.
Crypto market functions
Cryptocurrency is not tangible, it cannot be held like coins or bills. It only exists on a digital platform with a digital record of ownership, stored on a blockchain. These currencies are exchanged by sending the digital currency to another’s wallet. The exchange is only final once it has been recorded on the blockchain and went through the process called ‘crypto mining’.
The crypto market is where cryptocurrency is traded. These markets are decentralised meaning that they are not backed by a central authority, except in the case of El Salvador, which has turned cryptocurrency into legal tender.
Take part in trading within the crypto market, all one needs is a digital device (like a smartphone, laptop, or PC) and a stable internet connection. The market runs across a series of devices and is usually stored in ‘wallets’ where the currency can be exchanged and stored.
New cryptocurrencies are created using blockchain technology and the crypto mining process. The process is painstaking and makes use of hardware and software to make the process possible.
Forex market functions
Foreign exchange (forex) markets are where foreign currencies are traded. The process involves trading one currency for another, usually for use of commerce, tourism, or trading purposes. Trading on the forex market allows for purchasing goods and services across borders as well as locally.
For example, when a person in Europe wants to buy something from the US, they need to pay for the goods in US Dollars. The best way to do that is to trade their Euros for Dollars and then make the payment to the US business.
With tourism, the same thing happens. If someone from the US visits Paris, they need to pay for their stay in Euros, as Dollars are not accepted as local currency. So, American tourists need to exchange their Dollars to Euros to be able to pay for things in Paris.
Forex trading has no central marketplace and currencies are exchanged electronically over the countertop. Trading does not take place on one centralised exchange; it takes place via computer networks amongst traders internationally.
The forex market is open 24 hours a day in different parts of the world, from 5pm EST on Sunday until 4pm EST on Friday. The ability of the forex to trade over a 24-hour period is due in part to different international time zones, which house the major financial centres worldwide. Cryptocurrency markets are open 24 hours a day, 365 days a year.
What are the similarities
One major similarity is that crypto and forex markets are both traded online and make use of a trading platform that is usually offered by a broker.
Cryptocurrency and forex markets allow for automatic trading, which means that the trader does not have to be in front of the computer the whole day to trade on the markets.
Both of these markets share a speculation in market prices. Trading with unpredictable currencies like this leaves the trader to guess which way the market is heading.
To be able to start trading, traders need to make a deposit of money from their personal account, usually made to a broker.
What are the differences
Cryptocurrency is decentralised, while forex is centralised and regulated by central banks. One cannot trade foreign currencies on a cryptocurrency platform.
The value of cryptocurrency and forex are impacted by different factors. Cryptocurrencies, being digital currencies are more volatile than the currencies involved in forex trading. The value of a cryptocurrency can be impacted by a tweet from Elon Musk or something weird happening to its algorithm. However, forex value is impacted by the economy of the country it represents or market inflation.
Cryptocurrency and forex trading platforms differ mainly in the way that they are funded. When purchasing cryptocurrency, the funds are converted into cryptocurrency (usually a coin) and, until you sell that currency, you will be the main owner of the coin. With forex, there is no record of who owned which dollar. It is a state in which your money is displayed and can be exchanged for other currencies soon after.
For example, you can buy Bitcoin by making use of money in your bank account, but you cannot use Bitcoin to purchase another cryptocurrency. When you trade foreign exchange, then you can change your Dollars for Euros and then change your Euros for Pounds.