Bitcoin trading and Forex trading do share some similarities. On one hand, valuation of trading assets in both cases is heavily influenced by factors such as supply and demand. On the other hand, assets in both cases are traded in pairs, meaning that investors exchange one asset for another. In the case with Bitcoin, market players exchange one type of cryptocurrency for one type of conventional currency – for example, Bitcoins for US Dollars, or BTC/USD, Bitcoins for euros, or BTC/EUR, and so on.
Explaining the key differences between the two markets
Despite such similarities, we should note that Bitcoin trading and Forex trading differ in a distinct way.
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First, as we have already clarified in our Forex trading-related guides, to trade the Foreign Exchange Market with success is a skill that requires a longer period of time to master. It also requires a more profound knowledge of factors and mechanisms, which have an impact on currency pairs, especially factors having influence in the long term, such as capital flows, trade flows, purchasing power parity and interest rate parity.
Meanwhile, if you strive to be successful in Bitcoin trading, you need to obtain a basic understanding of factors driving that market and also to develop a good skill for analyzing price data on charts (in other words, to understand and use to your advantage technical analysis tools and indicators as well as price patterns).
When trading Bitcoin in a shorter term, it is advisable that you employ a well-tested technical approach and examine charts with time frames such as 5 minutes, 15 minutes, 30 minutes, or 1 hour. If you prefer to use larger time frames (1 day, 1 week, 1 month), it would be better if you combine technical analysis with some news background. This is understandable, because the influence caused by fundamental factors on valuation of cryptocurrencies appears to be more evident on larger time frames. Although there are Bitcoin traders who feel more comfortable using day trading strategies, they are far fewer compared to position traders. We shall discuss different types of Bitcoin market players later in the guide.
Second, a specific feature of cryptocurrency exchanges is that they remain active 7 days in a week, 24 hours a day. On the other hand, the Foreign Exchange Market is open for business 5 days in a week, 24 hours a day and a single trading day is comprised of four sessions that overlap each other.
Third, if you intend to trade Forex, it is advisable that you place an initial deposit of, say, several thousand US Dollars at least. Or, we could say that getting started with only a few hundred US Dollars and achieving success in such a complex and dynamic market is a terribly wrong notion. Even if you apply a strict money management system, it would still be almost impossible to survive with an amount that low. Needless to say that unreasonably high leverage will also be of no benefit in this case.
In comparison, if you intend to trade less expensive altcoins, it is possible to begin with a preposterously low amount of money, but you should use reasonable leverage and a strict money management system in order to survive during the first several months of trading. On the other hand, a small initial deposit may not be a good idea for Bitcoin, because of tougher margin requirements associated with it and because of its tremendously high volatility. Given these circumstances, in case the market turns against you, a thinly capitalized account may face a margin call almost immediately, especially if high leverage is in play as well. For a detailed discussion on leverage and margin requirements, you may check the respective article included in this guide.
Fourth, market players seeking higher risk and higher gains respectively will usually appreciate the appeal of Bitcoin or other cryptocurrencies. Bitcoin’s average annual volatility is about 10%. In comparison, major currency pairs demonstrate annual volatility of between 0.5% and 1.0% on average, while some exotic pairs – volatility of a bit more than 1.0%-1.3% on average. We should note that cryptocurrencies demonstrate considerably higher average intraday and daily volatility as well. That is the reason why traders are able to generate higher gains in a relatively short period of time, when operating with Bitcoin or other cryptocurrencies.
Fifth, the Forex market has an unmatched liquidity, depth and is by far the largest marketplace worldwide. Its average daily turnover has grown considerably over the past two decades – from $1 trillion in late 1990s to more than $5 trillion in 2016.
In comparison, Bitcoin is a rather miniscule market. Its average daily turnover tends to fluctuate around $1 billion, while its total market capitalization, though constantly expanding, is estimated at approximately $282 billion.
Sixth, what is specific about centralized conventional currencies is that their demand is uniform and they are indisputably distributed within a national economy.
In comparison, demand for Bitcoin and other cryptocurrencies is usually influenced by a string of factors, including the establishment of marketplaces where cryptocurrencies are accepted, to what extent cryptocurrencies are adopted by the public and how confident in the ability of digital currencies to maintain their value users are.
Seventh, supply of a given national currency is usually regulated by the respective central bank.
Meanwhile, an exponential algorithm controls production of Bitcoin as well as that of other cryptocurrencies. The algorithm is designed to systematically suppress inflation as the stock of Bitcoins expands. It also makes sure that the cryptocurrency is generated at a fast rate initially and as soon as a certain amount of coins is produced, there will be an exponential decrease in its production. We can say that such a design reduces unpredictability, as the number of coins generated in the near future and in the long run remains known.
We should also note that as soon as the number of coins in circulation reaches 21 million, Bitcoin will become immune to monetary inflation.
In comparison, conventional currencies regulated by governments can be issued at any time by the respective monetary authority, which, in turn, boosts monetary inflation.
Eighth, the value of Bitcoin and other cryptocurrencies is not affected by geopolitics or macroeconomic performance, or factors which tend to have a significant impact on the Forex market.
On the other hand, occurrences such as hacking, computer glitches or any other kind of disruption in the blockchain tend to influence Bitcoin strongly, because of its purely technical nature.