Foreign exchange trading (commonly known as Forex or FX) is the exchange of one currency for another in the hope that the value of the traded currency will appreciate in the near future. The forex market is the world’s largest financial market, with an average global turnover of 5 trillion US dollars. Combined with the liquidity it offers, the forex market is one of the best ways to earn a quick buck. Bitcoin is, however, a cryptocurrency that is decentralised: meaning that it is not regulated by any bank or financial institution. Since it is a unit of currency, bitcoins can also be traded: hence its relevance in the forex market. However, there are similarities and differences in the forex and bitcoin market, which will be described below.
The first and foremost similarity is that they both deal with a volatile market involving currency, and both depend on modern communication technologies to operate smoothly. Trading in currency means that they are not trading in a tangible commodity. Even though a commodity such as currency cannot actually be granted the title of a ‘digital asset’, it is what Bitcoin and similar financial institutions seek to emulate. Similarly, both the forex and bitcoin market are made up of traders ranging from individuals to multimillion dollar financial institutions, all of whom are trying to make a profit from the volatility offered by the market.
Another big similarity between the two markets is that they require computers and internet for the operation of the market. Even though the forex trade pre-dates the IT age, it would never have been the world’s largest financial market without it. It has become the primary way of exchange in the forex market, while it has always been that way in the case of bitcoin.
One of the most noticeable differences between the bitcoin and forex market is the nature of exchanges versus over the counter (OTC) trade. OTC trading offers a lot more liquidity than an exchange, but it should be regulated by a broker to avoid foul play. Direct access to the market is possible with an account, but is highly regulated, which is not so in the case of having a broker. This is usually done in the forex market. On the other hand, bitcoin is bought on exchanges, whose rates are fixed.
Another difference is the nature of the currencies itself. Global currencies and cryptocurrencies are very different. The systems in the world that regulate and define the interactions of each currency are well established and have fixed procedures. Cryptocurrencies have almost no such established protocols. Since most cryptocurrencies are decentralised, there is no regulatory body that controls the exchange. This has both advantages and disadvantages in their own way.