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Forex vs. Crypto – these two markets have a lot of similarities and a sea of differences. Still, they are the two major markets in which investors and traders trade to make money.
What are their similarities and difference, and how do they behave in these times of a health crisis?
We’re going to attempt to answer those questions in the following article. Read on and see whether you’re more of a forex or crypto trader.
What is the Forex Market?
The forex market is the market where traders and investors trade using currencies. In simple words, they exchange one currency for another. It’s a trillion-dollar market, the most liquid of financial markets, with the highest daily trading volume.
A Decentralized Market
A unique aspect of this market is that its decentralization, which means there’s no central marketplace for foreign exchange.
The trading of currencies happens over the counter (OTC). Transactions occur via computer networks. This quality differs from other financial markets, like the stock market, where trading happens through central exchanges.
A 24-hour Market
The forex market operates 24 hours a day, five days a week. Different major financial centers around the world are open at different times per day.
Among these financial centers are:
- London
- New York
- Zurich
- Tokyo
- Frankfurt
- Singapore
- Paris
- Hong Kong
- Sydney
As you might have noticed, these countries have different time zones. So, when one market closes, another opens, making for a seamless flow of trade all day long.
Currency Pairs
Currencies are always traded in pairs, with the value of one currency quoted against another. The first currency in a pair is called the base currency, while the second is called the quote currency. Therefore, in the pair EURUSD, the euro is the base currency, while the USD is the quote currency.
Major Currency Pairs
There are thousands of currency pairs around the world. But there are only a bunch of currencies that are considered majors. These are:
- EURUSD
- USDJPY
- GBPUSD
- USDCHF
- AUDUSD
- USDCAD
- NZDUSD
These pairs have the most substantial trading volume and liquidity among currency pairs.
The Role of Central Banks
Central banks around the world are huge participants in the world of forex trading. More importantly, central banks are in charge of interest rates.
And interest rates move the value of currencies. Changes in currency pairs give traders a reason to shift investments from one currency to another.
The major central banks around the world and their respective currencies are:
- US Federal Reserve – US dollar
- European Central Bank (ECB) – Euro
- Bank of England (BOE) – British Pound
- Bank of Japan (BOJ) – Japanese Yen
- Swiss National Bank (SNB) – Swiss Franc
- Bank of Canada (BOC) – Canadian Dollar
- Reserve Bank of Australia (RBA) – Australian dollar
- Reserve Bank of New Zealand (RBNZ) – New Zealand Dollar
What is the Crypto Market?
The crypto market is where so-called cryptocurrencies traded. It’s a new market that started in 2009 when a certain Satoshi Nakamoto published a White Paper of a cryptocurrency called bitcoin.
Satoshi described bitcoin as a “peer-to-peer electronic cash system.”
The virtual currency has the security of cryptography (hence the crypto- in cryptocurrency). These security features make it impossible for anyone to double-spend a unit of the currency.
A Decentralized Market
Just like the forex market, the cryptocurrency market is also decentralized. No central authority regulates or issues cryptocurrencies.
Instead, the transactions take place on a digital public ledger called the blockchain. And the blockchain technology is also another innovation that is proving useful not only for cryptocurrency trading but also for other case uses.
Anonymity
People can use cryptocurrencies to buy goods and services. Purchases happen online, and there’s no need to disclose any personal information.
On the other hand, there’s no complete anonymity. The system allows consumers to buy and sell without providing personal information, but law enforcement can still track the purchase back to a person or entity.
No Middlemen
Another thing that makes cryptocurrencies unique is there are no middlemen or intermediaries necessary for any transaction.
As we’ve mentioned, it’s a peer-to-peer system, meaning financial institutions are out of the equation. This means lower transaction costs for participants.
Most Popular Cryptocurrencies
The following are the most important and biggest cryptocurrencies right now.
- Bitcoin (BTC)
- Ethereum (ETH)
- Ripple (XRP)
- Litecoin (LTC)
- Tether (USDT)
- Bitcoin Cash (BCH)
- Libra (LIBRA)
- Monero (XMR)
- EOS (EOS)
- Bitcoin SV (BSV)
- Binance Coin (BNB)
Each of these cryptocurrencies have their own unique stories. Bitcoin, of course, is considered the most significant and most important of them all, but each has its usage and significance.
Major Crypto Exchanges
Among the biggest cryptocurrency exchanges around the world are:
- Binance
- Upbit
- Bittrex USA
- Bithumb
- Bitfinex
- Coinbase
These crypto exchanges facilitate the trading of cryptocurrencies to cryptocurrencies, cryptocurrencies to fiat currencies, and fiat currencies to cryptocurrencies.
Legality Issues
While cryptocurrencies are gradually entering the mainstream scene, law enforcement, tax, and legal authorities around the world are attempting to understand and pass regulations for the crypto sphere.
In some countries, bitcoin and other cryptocurrencies have been outlawed.
That’s because legality issues aren’t new in the history of cryptocurrencies so far. Authorities are worried about the digital currencies’ appeal to the traders of illegal goods and services. Other concerns include money laundering and tax evasion schemes.
The Blockchain Technology
As hinted at earlier, the blockchain tech underpinning cryptocurrency transactions is also a hot topic among participants and supporters.
Many experts consider blockchain to have excellent potential for other uses such as online voting and crowdfunding.
Major financial institutions also see blockchain as useful for lowering transaction costs and streamlining payment processing.
Of course, this technology also suffers from the same risks that authorities are worried about in terms of bitcoin and other cryptocurrencies.
For one, a digital currency balance on the blockchain can be wiped out by the loss or damage of a hard drive if the backup doesn’t exist. This scenario is not uncommon in the world of cryptocurrencies.
How COVID-19 Affected Both Markets
The year 2020 was supposed to be a year of recovery in financial markets after a turbulent 2018 and a lackluster 2019. However, it proved to be far worse than expected after the novel coronavirus pandemic struck the world and pummeled major economies down to their knees.
The coronavirus was first reported in December 2019, hence the name coronavirus disease 2019, or COVID-19.
Around the world, infection rates have risen. The number of fatalities are also growing, while the recovery rate remains low.
How has COVID-19 affected both markets?
Coronavirus and the Forex Market
The US dollar has been a significant mover among currencies in the forex market. At first, investors tended to flock to the greenback because of its safe-haven appeal. However, recent developments have also seen the dollar fall because of the Federal Reserve and the US government’s statements and actions.
Other countries’ central banks also made some moves against the coronavirus pandemic and to prop up their economies – which inevitably moved their currencies.
Sharp Interest Rate Cuts
The trend among central banks are emergency rate cuts. For example, the Reserve Bank of Australia slashed interest rates early in March 2020 to a new record low of 0.5% because of the “significant effect” of the COVID-19 outbreak on the Australian economy.
The US Federal Reserve followed suit, initially cutting 50 basis points off of the interest rate, but following it up later on by putting the interest rate to virtually zero.
The Bank of Canada and Bank of England, as well as other major central banks also cut interest rates.
As a result, currencies moved in different directions. But the general trend among traders is to favor perceived safe-haven currencies over riskier currencies.
Therefore, the US dollar, Japanese yen, and Swiss franc, all safe-haven currencies, rose. Meanwhile, riskier currencies like the British pound, Australian dollar, and Canadian dollar weakened.
Stimulus Packages
Stimulus packages have also been the primary weapons of central banks and governments to help the ailing economy.
The US, for instance, has approved a historic $2 trillion stimulus deal amid the escalating coronavirus fears. This package is one of the most expensive and far-reaching measures the US Congress has ever considered.
Other countries have also unveiled their efforts, including quantitative easing and fiscal policies, as the major cities around the world imposed community lockdowns and shut borders. Which disrupted supplies and dampened demand for products and services.
Coronavirus and the Crypto Market
With an increasing market alarm, investors in the crypto market have also been primarily affected by the pandemic.
In mid-February, the price of bitcoin plunged more than $10,000. On March 13, the price went briefly below $4,000.
Other particularly pessimistic investors believed the cryptocurrency’s price would slip below three figures.
Meanwhile, the cryptocurrency community has adopted some insights and practical approaches to the crisis.
Codified Action
As the coronavirus affects global businesses, especially those with extensive links to China, companies have imposed measures to cover their backs.
Apple, Google, and Amazon have requested their employees to work from home to enforce a strict quarantine policy.
Cryptocurrency exchange Coinbase, meanwhile, has codified a multistage disease response plan into company policy. It based its system on how employees and offices will act when specific scenarios happen.
A Remote World
In China, several blockchain and startups have started to take countermeasures. There have been complete overhauls of work-from-home protocols.
The decentralized nature of the cryptocurrency and blockchain space has been a great advantage for this. That’s because many workers are already accustomed to getting sophisticated projects off the ground, minus the burden of physical meetings.
Safe Haven or Risk Asset?
For so long, many participants touted bitcoin and cryptocurrencies as “digital gold,” making it a kind of a safe-haven asset.
But with the recent events, the safety-ness of the asset has been tested. And some observers will say it has failed, given its crash at the beginning of March.
This points to others describing bitcoin as more of a risk asset, like stocks, rather than a safe haven.
The fall in bitcoin prices recently, for instance, has been in lockstep with the equity markets. Equity markets fell, and so did the crypto market.
More recently, however, there has been some bullish momentum building for bitcoin, even as equities remain sullen and weak.
Conclusion
The forex and crypto markets are two different markets with significant similarities and unique differences. The forex market involves currencies that the world trades and central banks influence. Meanwhile, crypto markets are in their infancy and are taking baby steps towards worldwide adoption.
The COVID-19 pandemic has also impacted both markets quite differently. Currencies in the forex market have weakened against safe-haven currencies and assets. Meanwhile, the crypto market also declined but managed to perk up, treading the line between being a safe-haven asset and a risk asset.
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