A Tale of Two Speculative Assets: Forex & Cryptocurrency Trading and The Exchanges That Support Them

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The forex market has grown to become a major economic driver globally because it is open 24/7, liquid, and it is open to all interested players. The forex market has an average trading volume of about $5.4 trillion each day based on data from Bank of International Settlements. In addition, forex trading is an undeniable parallel economy to the traditional world of trading stocks, funds, and ETFs on Wall Street.

However, in the last couple of years, the forex market is slowly being challenged by the rising popularity of cryptocurrency trading.  For one, the cryptocurrency market is worth $700 billion as more than 1,380 coins are being traded in the market.

Whereas, forex is a great way for to diversify your wealth by holding the currencies of different economies, cryptocurrency is setting up shop as a smarter way to safeguard your wealth without subjecting its value to the whims and caprices of any government.

Hence, it is not surprising that some forex traders are thinking of joining the capital flight to move their trading capital from forex into cryptocurrencies. This piece provides an objective insight into some key considerations for forex traders thinking about becoming cryptocurrency traders.

Cryptocurrency exchanges are evolving

One of the key factors that originally gave forex trading an edge over cryptocurrency trading is that forex trading happens in a regulated environment while the cryptocurrency industry seems to be doing its best to fend off any attempts at government involvement and regulation.

In addition, forex trading platform provides access to a wide range of currency pairs but cryptocurrency exchanges tend to restrict the cryptocurrency pairs you can trade on their platforms. Hence, the cryptocurrency market essentially disenfranchises traders from accessing some potentially profitable trading pairs.

Forex trading platforms are also required to have a semblance of deposit insurance to protect the trading funds of traders. You can be sure to recover some/all of your trading deposits up to a certain amount if the exchange suffers a security breach or it suddenly goes under the water.

Thankfully, new cryptocurrency exchanges such as Legolas are starting to fix some of the underlying shortcomings of existing crypto exchanges. Legolas is working on a centralized-decentralized hybrid to ensure that trading data on its exchange is unalterable, transparent, and immune to front running and manipulation. The best part is that Legolas is making itself accountable by using real time proof of reserve and reporting to ensure that its order book and trade history can be audited.

Legolas also has strategic alliances with traditional financial institutions to make it easy for traders to make large fiat deposits and withdrawals without being forced to convert their trading capital to BTC before they can access the exchange. For instance, Legolas is in partnership with global brokerage Makor Capital to keep the deposits of investors domiciled with major banks such as Merrill Lynch in order to avoid the loss of trading capital.

Legolas also goes the extra length to make serious investments in the security of its exchange using the latest solutions such as smart card based hardware wallets and hardware security modules.  The firm is implementing multi-signature and it is working on segregated custody of cryptocurrencies using dedicated HSM storage. You can also expect your order to be immune from the knowledge of Legolas as the firm maintains an unbiased zero-knowledge encryption on orders using keys provided by CertEurope PKI on blockchain services.

Forex is fundamentally less volatile than cryptocurrency

Forex traders profit from the volatility in the value of one currency in relation to another currency; hence, volatility is not necessarily a bad thing. However, forex traders might find it very difficult to stomach the volume of volatility inherent in the cryptocurrency market. Cryptocurrencies such as Bitcoin, Litecoin, and Ethereum could experience uptrend/downtrend of as much as 20% many times within a trading session. In fact, Bitcoin is currently trading at a 47% discount to the $20,000 high that it made in December 2017.

Forex also has its fair share of volatility but it often takes events of significant economic importance such as Brexit to move forex prices to headline-grabbing proportions. Cryptocurrency however moves based on many different kind of news from the story of a teenager who became a Bitcoin millionaire to the statement of Wall Street bankers who think Bitcoin is a fraud.  Hence, if wild price swings make your stomach turn, you might want to think twice about trading cryptocurrencies.

Cryptocurrency can outperform currency with impressive price gains

Forex traders may want to consider diversifying their trading portfolio with positions in cryptocurrency because cryptocurrency assets are always delivering impressive gains. The inherently high volatility found in cryptocurrencies often leads them to reward investors with exponential gains beyond imagination of even  the best-performing assets on Wall Street.

In the last one year, Bitcoin has delivered 1,070% gains to dwarf the performance of traditional Wall Street assets as seen in the chart below.

Cryptocurrency is immune from inflationary headwinds

Another important reason you should not disdain the idea of trading cryptocurrencies is that cryptocurrencies are immune from monetary inflation. Inflation is a huge market driver for forex traders – you can expect forex prices to go up or down based inflationary headwinds and tailwinds. For one, many governments have irresponsible fiscal policies in which they print out money as they deem fit. Irresponsible printing of money however increases the supply of money in circulation thereby causing the currency to command a lower value in the forex market.

In contrast, cryptocurrencies by default have a capped supply and they are not subject to a central bank that can create new policies to increase the supply indiscriminately. For instance, the total supply of Bitcoin is capped at 21 million coins and the total supply of Litecoin is capped at 84 million coins. Hence, the price of cryptocurrency should technically increase as the demand for the cryptocurrency increases. Hence, cryptocurrency traders can reasonably expect to book bigger gains than forex traders because the market is already “rigged” in their favor from the onset.



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