FOREX vs. CRYPTO Trading: Everything you need to know (part 1)
Both Forex and Crypto are attractive trading markets, but which one is better?
After reading this article, you will know exactly how the Forex and Crypto market differ. Both Forex and Crypto are two very well-established markets for retail traders, however the respective market differs in many ways, so today we are going to have a look at 10 different dimensions of these two markets. As we will cover a wide array of topics, we split the content into two articles. By the way, this article also exists as Video on YouTube here:
We will compare the Forex and Crypto market and judge the attractiveness especially for retail traders based on the following criteria:
We will compare the Forex and Crypto market and judge the attractiveness especially for retail traders based on the following criteria: volatility, liquidity & market volume, fee levels, pricing mechanisms, and asset variety will be covered in the first video, while asset dominance & correlation, exchange and broker availability, available leverage, trading software, and last but not least, available trading hours will be covered in the second video. The link to the second part of the video you find up here and also down below in the description.
Without further ado, let’s get right into it:
- Market volatility:
The first dimension we have a look at is volatility. Market volatility is a double-edged sword. On the one hand, traders need volatility to trade, and some traders, especially experienced traders thrive during high market volatility. However, on the other hand, very large volatility can also be dangerous for retail traders, as it gives very little space for mistakes. You can think of volatility as the wind for a wind surfer. Without wind, no one can surf, a little wind is great for beginners, and strong winds are the time experienced surfers go out there and have a lot of fun.
Let’s have a look at the monthly volatility on the two most dominant assets of both the crypto and forex market, Bitcoin for Crypto and EUR/USD for Forex. As you can see, the volatility of Bitcoin is much higher compared to EUR/USD. There are more volatile currency pairs in Forex than EUR/USD, however there are also much more volatile assets in Crypto than Bitcoin. In general, the Crypto market is significantly more volatile compared to the Forex market, which can, as described earlier, be very attractive to experienced retail traders and it is probably one of the reasons why so many retail traders started to trade Crypto. Given you have a sound risk and money management system in place, the Crypto market can hold very attractive trading opportunities for retail traders.
At hoc-trade, we are developing an analysis in which you can directly see how well you perform during high vs low market volatility. You just connect your trading account, and can see your output of 40+ analyses, one of which is your average performance per trade in case you traded during low or high market volatility. We are in the last steps to finalize the tool, so if you are interested, just join our Discord server (LINK) and you can get an early & free access to the tool once live.
2. Market depth & volume
The second dimension we are looking at is the market liquidity & volume. Market liquidity is required in order to perform trades. The higher the liquidity in the market, the less price effect or slippage there is on your trades.
You can think of market liquidity as the available offers in the market. Let’s make a quick example: you might want to buy a used car at a car dealer. You might either buy a very common car of which many are available, or an exotic car which very very few exist in your market. In case you only buy one car, as most of you would probably do, you will get a price quote which you can eventually buy the car for. This holds true for the common as well as the exotic car. If you now suddenly want to buy 10 or even 100 of the same cars though, the likelihood is still quite high that you can get all of them for a similar price as the price quote for the common car, because there are many of them available at the car dealers However, If you want to buy 10 of the exotic cars, you’ll probably pay a significantly higher price compared to the quote for the single car because not many of them are for sale in your city, and only at much higher prices a few people are willing to sell their exotic car.
The very same concept holds true for market liquidity in trading. To execute small transactions, the market liquidity doesn’t need to be that deep, however, for large transaction, you need deep liquidity to not face a much higher price than the current market price. In general, the Forex market has deeper liquidity than the crypto market.
As a proxy, let’s have a look at the average daily market volume. The crypto market has an average daily volume of around 100 billion USD a day, while the Forex market has a daily volume of more than 7 trillion USD, so like 70 times as much. While volume doesn’t equal market liquidity or depth, this clearly shows how much more liquid the Forex market is over the Crypto market. The Forex market is much more older and has much more institutional market participants. The Crypto market is much younger, and the liquidity might especially become a concern if trading larger volumes in less liquid tokens or at exchanges with lower liquidity. If you are an average retail crypto trader and trade only the major tokens at a large exchange (so you are pretty buying one common car), you will most likely not feel an effect, however very large traders may run into slippage issues in the Crypto market. The Forex market simply holds much more market liquidity and hence caters better in this dimension to very large traders.
3. Trading Fee levels
The third dimension we have a look at is fee levels. For fees, we have a look at the spread and the commission the broker or exchange charges. Fees are oftentimes very much underestimated by traders, however, in reality, have a huge effect on the trading performance. We did a dedicated article on the effect of fees for traders, I’ll link it up HERE.
For Forex fees, brokers typically charge only a spread or spread & commission. Don’t be mistaken, if your broker only charges a spread, the spread includes the commission and is significantly higher in case you don’t get charged a commission. For crypto, the exchange charges a spread and a commission as well. Let’s have a typical trade of 1 lot, so 100,000 USD roundturn, so entry and exit in the most common asset. For Forex, this is EUR/USD and for crypto it’s Bitcoin. At the large Forex brokers, a EUR/USD trade usually has a spread of 0.1 pips and a commission of roughly 6 USD for 1 lot roundturn, so in total a trader pays 7 USD for standard lot roundturn in fees.
How about in crypto though? Trading futures at Binance, the largest exchange, you’ll be having a spread of roughly 0.1 USD per BTC, or 0.4 USD for the 100.000 USD roundturn. The commission is 0.04% per side for taker trades, or 80 USD for the roundturn. In total, you’ll be paying fees of 80.4 USD. As you can see, the fees are much higher in Crypto compared to trading Forex, actually in this example more than 10 times at much. As a fairly active retail trader with 5 of those 100,000 USD trades a day, 20 trading days a month, your monthly fees in Crypto are 8,040 USD, while your fees in Forex would only be 700 USD. That means, if you are trading in the Crypto market, you must make an additional profit of more than 7,000 USD per month just to recover the additional fees you pay in this example. There are ways to reduce your fees in crypto, and we get to this in the next dimension we look at, but nonetheless the fees in Forex are much cheaper compared to Crypto, which is definitely one of the strongest arguments of trading in the Forex market compared to the crypto market!
4. Pricing mechanism
Next, in the fourth dimension let’s have a look at the differences in the fee pricing mechanisms between Forex and Crypto trading.
There are three big differences worth noting: first, crypto exchanges differentiate between maker and taker fees, while Forex brokers usually do not. Maker fees, so trades executed as a limit order, have much lower fees in crypto trading, while taker fees are more expensive. We did a dedicated video explaining the difference, why it is structured this way, and how to save on fees. Again, I’ll link the video up here and also down below in the description. In many cases, the maker fees are only one fifth or even 10% of the taker trades in crypto futures trading.
The second difference is the tier structure of Crypto exchanges vs. Forex brokers. Crypto exchanges have many more tier levels a trader can achieve and thereby lower the fee levels. Most exchanges have 10 or more tiers levels, with each tier level giving you a lower fee. The tiers can be reached through trading volume, but some exchanges also offer to reach the tiers through having a certain amount of balance or holding a certain token. The fee levels in the tiers vary a lot, and reaching higher tier levels can save you a lot in fees, oftentimes 50% or more when reaching higher tier levels. With so many crypto exchanges, plenty of tiers and requirements, a manual comparison which exchange suits you best is pretty much impossible, that’s why the easiest is to use an automated comparison tool such as dr-fee (LINK). You can either connect your trading account or enter your spot & futures trading volume, your share of maker and taker trades, your account balance, and native exchange token and within seconds see how much fees you would actually pay at any of the large exchanges. The differences are very very big. We have seen in the previous example that fees in crypto are very high, but they significantly differ depending on your trading style and the exchange you use. A comparison can save you many thousand USD in fees.
The third difference among Forex and Crypto is that Forex brokers oftentimes combine all their fees in the spread and advertise their product as zero commission. Crypto exchanges usually charge their commission separately. However, if you see a zero commission Forex broker, that usually only means that the commission is included in the spread. Just have a look at the spread levels, mostly spreads of 1,2, or 3 and more pips are charged, while spread and commission brokers have much lower spreads but charge the commission separately.
5. Asset variety
In the fifth dimension we look at the asset variety in the crypto vs. Forex market.
In crypto, a retail trader can trade hundreds of different tokens. While the market depth might not always be great, it still gives a huge variety to the trader. In the Forex market, there are only that many currencies, hence the variety is much lower. In the Forex market, you always trade one currency against another currency, so the relative strength of one currency to another is important for price movements. In the crypto market, especially when trading futures, a trader usually trades the price of a token against the US Dollar. We will have a look at the correlation of the different assets in the next dimension, but it can be noted that the crypto market offers a much larger variety of assets to trade compared to the Forex market. Outside the major currencies such as Euro, US Dollar, British Pounds, Japanese Yen, Swiss Franc, and so on, the spreads get significantly larger at Forex brokers. The commission in Crypto always stays the same with the spreads widening at a lower pace in Crypto. Many Forex brokers offer additional trading products besides Forex though, which makes up a bit for the lower asset variety. Most of the brokers also offer commodities, stocks, metals, and so on.
Summary:
This was the first part of the article. Before outlining what will be covered in part two of the article, if you are, or if you are thinking of becoming an active trader and you liked the content of this video, please leave us a clap and subscribe to our channel. We develop lots of content for traders and soon our behavioral analytics software will go live, which enables traders to understand their very personal profit and loss making patterns. When subscribed, you will directly know once we upload all the new content for traders.
In part two, we will cover the following topics: Asset dominance & correlation, exchange and broker availability, available leverage, trading software, and available trading hours. Moreover, we will summarize part 1 and 2 of our analysis by listing all the benefits and drawbacks of trading in the crypto vs. the forex market.
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Thanks for reading, happy trades, and see you in the second part!
All information in this article may not be up-to-date anymore while reading and should not considered to be financial advice!
