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If you’re interested in investing, you might be considering cryptocurrencies and forex. There are many investment opportunities and it can be overwhelming to figure out what to invest in.
One of the hottest investment trends right now is Bitcoin and other cryptocurrencies. With a sky-high price tag, Bitcoin has captured the imagination of many investors. However, just because something has a high price and has seen an enormous increase in a short period doesn’t mean it’s the right investment for you.
So, is Bitcoin a good investment? How about traditional currency trading? In the end, it depends on your goals and where you think the future lies. But let’s unpack how you can decide where to invest in a comparison of forex vs. crypto.
The Short Version
- Forex is when investors trade in different fiat currencies that are backed by governments, like dollars to euros. Cryptocurrencies are a form of currency but are digital in nature and are not backed by any government.
- Each provides exciting investment opportunities but they are risky investment strategies that are not recommended for beginner investors.
- Since crypto is relatively new, it’s regulated differently than forex and there are more unknowns.
Similarities Between Forex and Crypto
Forex is industry slang for foreign exchange, the trading of international currencies. As a forex trader, you may find yourself converting dollars to euros, pounds to yen, or trading many other supported currencies. When buying and selling, you’re buying and selling real government-backed currency (also called fiat currency) in your trading account.
Similarly, cryptocurrencies are a form of currency. The mechanics of buying and selling crypto is almost identical to forex. However, instead of purchasing fiat currencies, you’re buying digital currencies that are not backed by any government.
Trading platforms and calculations work similarly. In fact, some cryptocurrency exchanges also support exchanging your funds for other national currencies, in addition to cryptocurrencies, using the same interface. If you’re an expert in trading either forex or crypto, you should find the transition to the other reasonably intuitive. However, there are also crucial differences to understand, which we will get into next.
Any time you invest in an asset class, you run the risk of losing your money. On the other hand, you also have the chance to see a return. This is true whether you invest in forex, cryptocurrency or even the stock market.
Differences Between Forex and Crypto
While the trading systems powering cryptocurrencies and forex look similar and are both forms of money, what you’re buying is different in several important ways.
Cryptocurrencies are digital assets that can be used as mediums of exchange in addition to a potential store of value. Most of them are built on blockchain technology and are represented as digital tokens. The value of cryptocurrencies is determined by the fundamental economic forces of supply and demand.
On the other hand, fiat currencies are government-backed assets intended to act as a medium of exchange. The investment value in forex comes from a variation in price between currencies. In most cases, well-managed fiat currencies won’t deviate too much outside of a reasonably narrow range. Forex rate changes often follow government or central bank actions, such as fiscal or monetary policy changes. However, forex rates are constantly changing, offering savvy traders an opportunity to profit.
Active forex and crypto trading are both relatively high-risk activities. But certain fiat currencies may be more likely to withstand the test of time, as they’re backed by a legal body rather than simply an active user base. Some cryptocurrencies may survive in the long run, but others may fade away. Fiat currencies are unlikely to disappear for the foreseeable future.
Pros and Cons of Forex
- Assets are government-backed: The United States dollar is backed by the “full faith and credit of the United States government.” Most other national currencies are supported by similar central bank and government guarantees.
- Long established markets available: Forex trading has been around for decades and operates with the support of major financial companies.
- Most fiat currencies are relatively less volatile: Forex markets may be volatile, but government backing tends to limit major swings.
- Rates can change from government actions: A government-official press conference or policy decision can instantly influence rates.
- Exchange rates are influenced by complex factors: Rates are affected by trade deficits, financial and economic data, and other complex factors that may be difficult to track and follow.
- Markets may be subject to government intervention: Some governments take a heavy hand and actively work to peg currencies to another or meet other political goals.
Pros and Cons of Crypto
- Potential for asset value gains: Cryptocurrencies may quickly grow in value, as demonstrated in the past by Bitcoin, Ethereum, Dogecoin, Shiba Inu, Cardano, Avalanche and other cryptos.
- New and exciting opportunities: Cryptocurrencies have been around for about 10 years, but their technology quickly evolves with new and exciting currencies created regularly.
- Technology-driven asset class: Instead of government management, cryptocurrencies are managed by a community-created technology that’s highly secure and difficult to manipulate.
- Future regulatory uncertainty: New government laws or regulations may be introduced that limit the use or value of certain currencies or the entire crypto market.
- Limited investor protections: Unlike a bank account or credit card, there’s no bank to help you if you make a mistake with your crypto. In the event of an account hack or other losses, you are unlikely to recoup your currency.
- High volatility: While some currencies have seen a meteoric rise in value, they’ve also seen rapid declines. This level of volatility is not appropriate for all investors.
How Are Crypto and Forex Regulated?
As of this writing, cryptocurrency regulations are still in flux. Many governments, the United States included, are working to figure out the best way to treat cryptocurrency assets.
No current laws make cryptocurrencies illegal in the United States, though some currencies have been treated like a stock issue rather than a new currency, which landed the creators in legal hot water.
If you do enter the crypto markets, your assets are treated like a stock by the IRS. You’ll owe capital gains on any profits from cryptocurrency investing, which you may be required to track and report to the IRS yourself.
There’s always a risk of new laws in the future, such as regulations in China that severely limit cryptocurrencies. It’s up to you to decide if the risk and potential benefits make crypto the right fit for your portfolio.
Find out more >>> What is the Future of Crypto & Bitcoin Regulation?
Fiat currencies are legal, government-supported assets. With forex, your biggest concern should be how government regulations influence the relative value of each currency.
Savvy traders follow new announcements and policy decisions from governments with large economies and major currencies. Major forex currencies include the United States dollar, euro, Japanese yen, Great British pound, Australian dollar, Canadian dollar and others.
Find out more >>> What to Know About Buying Yuan as an Investment
Should I Invest in Crypto or Forex?
If you’re deciding on investing in forex vs. crypto, you don’t have to pick one or the other. You may find a combination of the two to be right for your trading strategy and investment goals.
Both crypto and forex are considered risky trading products, so it’s best to limit your investments to what you can afford to lose. In an ideal situation, you’ll walk away with significant gains. But it’s also easy to make expensive mistakes and poor investment choices, particularly when actively trading.
Only invest in crypto, forex and other asset types if you understand how they work and the risks involved. You may find neither forex nor crypto to be a good fit for your portfolio. It’s ultimately up to you to decide on the best course for your investments.
The Bottom Line
In the debate on forex vs. crypto, there’s no right or wrong answer. Each asset works differently and it’s up to each investor to research currencies and make trading or investing decisions.
You may pick just crypto, you may prefer just forex or you may invest in a combination of the two. With a clear knowledge of how they work and the pros and cons of forex vs. crypto, you’ll be in the best position for a successful investing or trading strategy.