Forex and crypto markets both present traders with opportunities to profit in various financial situations, yet each asset class presents unique differences which should be carefully considered before engaging in either market.
Forex trading entails purchasing one currency and selling another using leverage, or borrowing more money than you currently possess in an account. Leverage allows traders to leverage more than what’s actually in their accounts for trading purposes – something which can greatly increase profits but also expose you to large losses – so when choosing your broker make sure it offers low spreads and fees so as to limit potential downside risk.
Cryptocurrency trading resembles forex in that both markets rely on supply and demand to drive prices. A cryptocurrency market features a finite number of coins available for trading; when there are more buyers than sellers, their price rises; conversely, when sellers outnumber buyers, its price falls. Cryptocurrency trading can be highly speculative as inflation data or political developments can impact its price.
One key distinction between forex and crypto trading lies in their respective liquidity levels. Forex is the world’s most liquid financial market with daily trading volume reaching $7 trillion; this 24-hour, 5-days a week market serves banks, businesses, investors, hedge funds and retail traders alike. Note: To start trading forex it may require some form of identification including full name and address before you can trade; typically this information will need to be provided before trading begins.
The crypto market, however, offers much lower liquidity. Due to a wide array of assets according to CoinMarketCap – with 223,49 of these currently trading – finding suitable trading pairs may prove challenging and their liquidity levels can fluctuate substantially over short intervals resulting in sudden gains or losses for your portfolio.
Another distinguishing characteristic between crypto and forex trading is regulation; forex brokers tend to be better-regulated, making it easier to locate an appropriately licensed broker. Regulators typically have more power to enforce rules, as well as being more capable of investigating complaints against brokers more quickly. Furthermore, many forex brokers provide their traders with futures contracts which enable them to buy or sell an amount of currency at an agreed exchange rate on a future date.
The IRS assesses forex and cryptocurrency gains differently, with forex typically classified as a Section 1256 contract while crypto gains or losses should generally be treated as short-term capital gains or losses. Both markets involve high risks; therefore, only invest in them with money you can afford to lose.