Investors have no shortage of vehicles into which to put their money. There are stocks and bonds, commodities, real estate, and other opportunities. Investors who prefer to trade money itself can invest in different currencies by way of the FOREX market. Cryptocurrency is yet another option.
For money traders, investment decisions often come down to deciding between FOREX and crypto trading. Evangelists in both camps push their preferred option over the other. Smart investors do not take sides. They understand that both FOREX and crypto trading have their pros and cons. They are willing to at least look at both opportunities, if not actually invest in both.
— Advertisement —
Fiat Currency vs Cryptocurrency
Table of Contents
Before investors ever get to decide what to trade, they have to understand the fundamental difference between fiat currency and cryptocurrency. FOREX (foreign currency exchange) trading involves trading the 180 fiat currencies recognised as legal tender by their relevant government authorities. The euro, US Dollar, and British pound are all examples of fiat.
Cryptocurrency is a digital currency created by computer software. It is not considered legal tender in any country in the world, with one or two exceptions. Venezuela comes to mind, though their national cryptocurrency might just as well not be legal tender as it has virtually no value.
Among the many differences between fiat and crypto, the most significant is issuing authority. Fiat currencies are created and issued by central banks and backed by central governments. Cryptocurrencies are created and issued by private organisations. As such, they are not protected by law. When you trade in cryptocurrency, you are at the mercy of the rest of the crypto community with an interest in that particular asset.
How Currencies Are Traded
The actual process of trading currencies differs between FOREX and crypto. Currencies are traded on the FOREX market through software platforms similar to those used by securities traders. Trading platforms for currency traders are plentiful, and some platforms are easier to use than others. Essentially, you log on to your chosen platform where you can do research, track prices, and initiate buy and sell orders.
Trading cryptocurrency is a bit more complicated, although it is not hard. To trade, you need to have an account on a cryptocurrency exchange. Like cryptocurrencies themselves, exchanges are privately run organisations that are only loosely regulated in most countries.
Crypto trading can be done in one of two ways. The first option is a straight-up buy or sell that is no different from e-commerce. The exchange lists a price and you buy at that price. The same goes for selling. The second option is to trade the same way fiat currencies are traded. This involves tracking prices and initiating buy and sell orders.
Successful trading in both markets is not a matter of chance. Traders have to stay abreast of market conditions in the short term. They also need to be able to look toward the future in hopes of anticipating what might be coming.
Both FOREX and cryptocurrency trading share one primary characteristic: volatility. Despite how currency values are determined – FOREX pricing is determined by pairing one fiat with another while all cryptocurrencies are valued in US dollars – both types of trading are subject to huge market swings.
The price of a given currency can be sky-high today and rock-bottom tomorrow. It doesn’t take much, either. For example, movement in unemployment numbers can affect fiat and cryptocurrencies. Major events, like unrest in the Middle East, can send prices tumbling. Trading in either asset is not for the faint of heart. You have to be willing to endure the volatility if you expect to make money.
Taxes and Fees
One last thing to consider about FOREX and cryptocurrency trading are those costs incurred via taxes and fees. Both types of trading are subject to fees. Trading platforms charge fees, usually on both sides of the transaction. In other words, both buyers and sellers pay a fee as a percentage of the transaction. Some platforms also charge a flat fee on top of the percentage cut.
Fees in the FOREX market tend to be more comparable from one platform to the next. This is likely due to the fact that FOREX trading is heavily regulated to the extent that all trading platforms exist on a level playing field. There is less stability in cryptocurrency fees. A lack of crypto regulation lets the exchanges in some countries do as they please.
The one advantage FOREX trading has is taxation. Profits from FOREX trading are not taxed in most countries. This is largely due to the fact that currencies are not considered securities. Traders are making money simply by taking advantage of exchange rates. Most central governments do not see the results of such trading as profits.
On the other hand, most central governments view cryptocurrencies as securities. They are classified as no different than stocks, bonds, etc. for tax purposes. Thus, profits from cryptocurrency trading are generally taxed under capital gains regimes.
When you take all this into consideration, the differences between FOREX and cryptocurrency trading are not as drastic as they might seem. There is no need to choose one over the other; you can trade in both and do very well. You just have to be cautious and never stop learning.