Both the forex and cryptocurrency markets are vast global behemoths, with total market cap values of $2.409 quadrillion and $1.95 trillion respectively.
Interestingly, there are other similarities that bind these markets too, as both are driven by forms of currency trading and renowned for showcasing significant levels of volatility (we’ll touch more on this later in the piece).
But what are the key risks associated with cryptocurrency and forex trading? Here are some considerations to keep in mind.
1. Market Volatility
Let’s start with the basics; as both the forex and cryptocurrency markets are inherently volatile and subject to sizable price shifts in relatively short periods of time.
However, it’s interesting to note that the volatility in each market is caused by different factors, which reflect the variable nature of fiat currencies and crypto assets currently available.
In the case of forex, for example, fiat currencies are derivative assets that enable traders to operate without assuming ownership of the underlying instrument. This means that they can speculate on price movements and profit even in a depreciating market, which is ideal from the perspective of short-term traders.
Major currency pairs are also highly liquid, which means that they can be bought and sold with ease and contribute heavily to increased volatility.
While some established crypto tokens like Bitcoin (BTC) are relatively liquid, most assets of this type can’t be exchanged with such ease.
However, crypto assets boast immense volatility, with this largely triggered by sudden or unexpected changes in market sentiment. This is due to the relatively fledgling and intangible nature of cryptocurrency, which makes assets vulnerable to negative comments from experts and significant regulatory shifts.
2. They Are Susceptible to Manipulation
While the forex market is considerably more regulated than the crypto space, it’s fair to say that both entities remain susceptible to trader manipulation and fraud.
In the case of the forex market, for example, we’ve seen multiple instances of manipulation and ‘rigging’ during the 20 years, including an incident in 2013 when currency dealers were accused of front-running client orders and rigging foreign exchange benchmarks over the course of 10 years or more.
Of course, this type of instance has prompted significant regulatory changes since 2014, but the fast-paced and volatile nature of the forex market means that retail traders in particular remain at the mercy of potential manipulation (especially in an age of automated high-frequency trading).
The crypto market is arguably at the beginning of its regulatory curve, with banks and governments yet to intervene definitively within this space.
Similarly, the core selling point of cryptocurrency is that it’s completely decentralised and separated from third-party controls, making any kind of uniform regulation particularly difficult.
This means that so-called “crypto whales” (who own a disproportionate amount of assets and tokens) have an opportunity to artificially inflate real-time prices by submitting huge orders and turning the market in their favour.
On a fundamental level, crypto assets are also susceptible to error and hacking, meaning that potentially huge capital holdings could be lost or stolen in the blink of an eye.
The Last Word
There are other risks that are inherent to each market too.
In the case of forex trading, for example, investors can access inflated leverage of up to 200:1 in some cases. This expresses the multiple of exposure to account equity when trading, while margin refers to the amount of money required to open a position.
Leverage enables investors to control disproportionately large trading positions, which can in turn result in huge gains and losses depending on how the market moves.
As for cryptocurrency trading, increased volatility can see billions wiped off the market in a matter of hours in some cases, while this market may also see certain assets discontinued or marginalised with little or no warning.