CRYPTO vs FOREX Trading: Which market to trade as a DayTrader? (Part 2)
Hi there,
Welcome to part two of our analysis of Crypto vs. Forex, in which we outline all the important differences of the crypto vs forex market for retail traders, especially Daytraders.
By the way, this article also exists as Video on YouTube here:
In part one of the article (LINK), we already covered the dimensions of volatility, liquidity & market volume, fee levels, pricing mechanisms, and asset variety.
In this second part, you will learn about
- asset dominance & correlation,
- exchange and broker availability,
- available leverage,
- trading software, and
- available trading hours in the forex vs crypto trading market.
Without further ado, let’s get into it:
Asset dominance and correlation
The sixth dimension of our Forex vs. Crypto comparison is the asset dominance and correlation.
Looking at the trading volume, it becomes clear that the US dollar is by far the most traded currency in the Forex market with roughly 44% market share, followed by the EUR with roughly 16%. In the Crypto market, and excluding the dollar-pegged coins such as Tether, USDC, and BUSD, Bitcoin is by far the most traded coin, followed by Ethereum. In both markets, the top2 assets hold a very large share of the trading volume of 60% and more. What is a big difference in Crypto though is that the majority of coins is following the Bitcoin movement to a large extent. So if Bitcoin shows a sharp increase for the day, the likelihood that Ethereum and other coins also show a sharp increase for the day is high.
Having a look at the correlations matrix for the last year, we can see that especially Ethereum and Cardano show very high correlations with Bitcoin. Therefore, if trading Crypto, you need to be aware of the Bitcoin movement in order to fully understand the price movements of many other coins. In Forex trading, you always trade one currency against another, hence the relative strength or weakness of a currency is important.
You also need to be aware of the correlations in Forex trading, however mostly in a way that the USD or any other currency might be the same quote or base currency in another pair you are trading. For example, when being long in both the EUR/USD and USD/JPY, a strengthening US Dollar will have a long effect on your first position while having a short effect on your second position.
As you can see in the Forex correlation matrix, the EURUSD vs USDJPY has a strong negative correlation.
Both in Forex and Crypto, retail traders need to be aware of the underlying correlations of the assets they are trading. In Crypto, the correlation to the Bitcoin movement is especially important, while in the Forex market you’ll have to watch out for the correlations of your base and quote currencies you are trading. Personally, I tend to think in macro and micro environments of a coin when trading Crypto.
Macro environment is the general market development, with Bitcoin as the proxy, while the micro environment are project specific things, such as new developments, revenue generation, news, and so on. The variety of assets is especially attractive in crypto, with so many coins and so many different micro environments possible to trade, which is less possible in the Forex market.
Broker & exchange availability
In the seventh dimension, we are having a closer look at the broker and exchange availability and dominance in the crypto and forex market.
As said in the previous article, the Forex market is a very mature market which has been around for a long time. The Forex brokers are mostly well regulated in the different jurisdictive areas. Different to the Crypto market, there is a very large number of Forex brokers around without any 1 or 2 very much dominating the market. There are plenty of brokers with like 1,2,3,4% market share, and overall, Forex traders can choose from hundreds of brokers, with probably 20–30 pretty large and well-regulated ones. Similar to the Crypto market, the United States is a little different as not many brokers are regulated there. Both for Forex and Crypto, there are only a couple of brokers and exchanges available for traders to trade at in the States.
In Crypto trading, in general there are much less exchanges a trader can pick that have sufficient liquidity, provide futures trading, and have a decent product offering for the user. Binance holds the very dominant position for crypto traders, especially after the FTX meltdown. The FTX meltdown showcases the risk of the Crypto market very well, as the market is much newer and less regulated so far. There are a couple of exchanges lined up in the follower positions challenging the dominance of Binance though, and it will be interesting to see how the market shares develop in the future, especially also with the rise of decentralized crypto futures trading exchanges. The exchange landscape might align to the Forex broker market structure with a maturing industry, however as of right now traders still have a much wider variety of suitable brokers in Forex trading compared to Crypto.
Available leverage
The eights dimension of our Forex vs. Crypto comparison is available leverage. Leverage again is a double edged sword. While it can significantly push the profit of your trades, it also amplifies your losses and risk of being liquidated.
While the available leverage in the Forex market is higher, in some cases leverage of 300, 500, or even more is available, the Forex market is also more regulated as said earlier. The available leverage differs by jurisdiction you are in and your level of experience in trading. For example, in Europe, the leverage to retail traders is limited in Forex trading, while some countries do not regulate the use of leverage. Overall, the leverage available in crypto trading is lower, most crypto exchanges allow leverage of 100x or less, oftentimes also depending on your position size as in the case of Binance. Moreover, Crypto holds another difference to Forex trading, which Forex traders usually are not aware of. Most crypto exchanges differentiate between cross-margin and isolated margin trading. Simply put, for cross-margin, all your coin holdings serve as available collateral, while in isolated margin trading, only the coins held in a specified wallet in a specific coin are regarded as margin for your trade. Many traders use the isolated margin as an additional risk management tool, so that your position might not affect other holdings in another wallet. For Forex trading, such differentiation is not common.
So is the Forex market more attractive for traders as the available leverage is higher in many case? Well, there are 2 factors to consider: First, the volatility in crypto trading is much higher in compared to forex trading. So while your leverage might be lower, the strength of market movements can well make up for the lower leverage.
Second, leverage is just a tool for a trader that has an impact on the margin you will have to hold for your trade. If you are trading and not gambling, hence have a sound risk and money management, the available leverage at crypto exchanges should be more than sufficient.
Let’s take a rather aggressive example: You have 100 USD balance, and don’t risk more than 2% of your balance per trade. You have 5 trades open at the same time, so your total risk to your account is 10% based on your open positions.
A 0.5% movement in the underlying assets you trade should equate your maximum risk of 2% per trade. Remember, for highly volatile assets such as crypto a 0.5% move is really not much. Therefore, in order for 0.5% move of the asset to lose 2% or 2 USD of your total balance, you need to buy the asset for 400 USD each. With 5 positions, you will hold assets of 2.000 USD in total, while your account balance is only 100 USD. If your exchange allows you a 50x leverage, you need to hold 40 USD as margin to open those 5 positions, still giving you another 60 USD of free capital. Even if all the positions are loss trades, so you’ll lose 10 USD in total, you still have 50 USD or 50% of your overall balance as free margin, and your positions would have been normally stopped out and not forcefully liquidated due to missing margin. As you can see, even in this quite aggressive scenario and with leverage of 50x, the available leverage would have still been more than enough, even though 50x and much less compared to many Forex brokers. So yes, in Crypto the available leverage is less, however it should not really affect a trader with a sound risk and money management system in place.
Available trading software
The 9th dimension of our Forex vs. Crypto trading comparison is the available trading software.
The Forex market shows quite a strong concentration of the Metatrader trading software, which in its two models, Metatrader 4 and 5, makes up the majority of trading software used in Forex trading. Nearly all large brokers enable traders to use Metatrader. Many brokers also offer cTrader or their own proprietary trading software, however the vast majority uses Metatrader. No matter which exchange you use, a trader will be mostly able to use their familiar trading software, have their saved chart types and indicator setups. In the Crypto market though, such a common trading software tool does not exist yet. Every exchange has their own proprietary trading software in place, making a switch among exchanges more difficult for traders, as they have to get used to a new software. While the trading softwares of course enable all the necessary functionalities, the details are different, and when actively trading, one doesn’t want to search for certain information or buttons.
Available trading hours
The 10th and last dimension we are looking at in today’s Forex vs. Crypto trading comparison is the available trading hours.
The Forex market operates 24 hours, 5 days a week, while the Crypto market is open 24 hours, seven days a week. Both markets enable trading during the American, European, and Asian session with their very specific market characteristics. While taking breaks and relaxing is very important as a trader, being able to trade on the weekend in the Crypto market might hold some additional upsides for traders. Depending on the trading strategy, traders may like those times with lower volatility and less institutional market participants active in the market. On the other hand, as the market is 24/7, there is no gap trading possible as the market never closes in the crypto market. Overall, the available trading hours in both markets are plenty, with some more availability for Crypto trading due to the possible weekend trading with slightly different market characteristics, but the risk of never being able to fully rest. Here again, strict time management trading rules are required for traders.
Summary: Which market is better for Daytraders?
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So, what is especially attractive about trading crypto for active retail traders?
Crypto assets show on average a much higher volatility, giving opportunity to grasp those movements in either short or long term trades. Crypto traders also benefit from a much larger variety of assets, which have their very own micro environments leading to price movements. The available leverage is lower in crypto trading compared to Forex, however it should be more than enough for traders with a sound risk and money management system in place. Moreover, the 24/7 availability of Crypto trading enables additional strategies for weekend trading with much less institutional market participants active and if rising in the exchange tiers, crypto traders can significantly reduce their fees. On the other hand, crypto trading also has its downsides for traders, which favor Forex trading. Most significantly, for very large traders the market liquidity in much deeper, allowing for larger position sizes. The fee levels in Forex trading are significantly lower, which can well make up thousands of US Dollar which Crypto traders have to gain on top if wanting to keep up with Forex traders. Additionally, Forex traders benefit from a much more mature market with plenty of trustworthy and competitive brokers enabling good trading conditions and do not have to adjust to new trading software every time they want to change their broker or trade at multiple brokers at the same time. Overall, both markets have their upsides and downsides, but your needs as a trader may well give the edge of the one over the other.
I hope you enjoyed our Forex vs. Crypto analysis. Have good trades, stay humble and be safe! Cheers
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All information in this article may not be up-to-date anymore while reading and should not considered to be financial advice!
