Crypto vs. Forex: 7 Differences Risk and Return

Dear Happy Investor, crypto and forex are both speculative "investments" with high risk/return profiles. Yet there are major differences between crypto vs. forex. In this article, we take a look at these differences in risk and return. Read carefully, as it is important to understand all the differences. Moreover, we would like to remind you that you should also read our article on investing in stocks. As an investor, you can only start well once. In our opinion, stocks are 100% a better long-term investment than forex or crypto. Know what you're getting into!

And now: crypto vs. forex, these are the differences.

Crypto vs. Forex Difference 1. Number of Assets

The amount of available coins/assets differs significantly between the FX and crypto markets. The forex market has a restricted number of trading currencies, including the Euro, Chinese Yuan, US Dollar, Japanese Yen, Pound Sterling (GBP), and others.

According to CoinMarketCap, there are presently over fourteen thousand cryptocurrencies available. Among these currencies are USDT, LTC, DOT, ETH, BCH, LINK, and XMR, which are notable. However, Bitcoin is the most dominant cryptocurrency in terms of market domination, popularity, userbase, and market value. Similarly, in addition to Bitcoin and Ethereum, the most frequently traded cryptocurrencies in the market are Binance Coin, Solana, and Cardano.

There is more choice in crypto vs. forex investing. This can also create choice stress and therefore wrong decisions. The higher the supply, the more important researching the best crypto. 

Read more about how to find the best crypto coins.

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Crypto vs. Forex Difference 2. Liquidity

The forex market is very liquid, with more than $6.6 trillion in currency trading volume in 2019. You will be able to easily buy or sell your chosen instrument, regardless of size, without substantial slippage. This is a huge advantage since you will always be able to close the transaction at a price that is similar to or very close to the price shown on the screen.

This is not the case with the vast majority of cryptocurrencies. The total value of the crypto market is less than $2 trillion, with Bitcoin accounting for more than 45 percent of this total. Because most cryptocurrencies are not nearly as active as Bitcoin, traders may have problems leaving the transaction at the desired price.

Read about how to start forex trading here.

And read all about crypto day trading tips for beginners here.

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Crypto vs. Forex Difference 3. Market Volatility

Cryptocurrencies are volatile, while FX markets are stable. Bitcoin, the world's top cryptocurrency, began the year 2021 at $29,000 and rose to $65,000 before falling down to $30,000 and recovering to $45,000. Smaller coins may make large swings in a short period of time.

Such fluctuations are uncommon in the forex, and they usually occur in pairings. In this sense, forex is easy to limit risk than crypto markets. On contrary, the profit potential is greater in crypto markets so does the risk.

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Crypto vs. Forex Difference 4. Profit Opportunities

Crypto markets have grown in popularity because they provide chances for large gains. Risk rises in tandem with profit possibilities in trading, therefore traders should be ready to take on more risks when dealing with cryptocurrency. Practically, the value of many currencies may eventually fall to null if the projects fail or money moves into more established coins, as is common in more mature phases of growing markets.

It should be mentioned that traders may always use leverage to boost their gains in forex trading. Leverage is a two-edged sword in that it increases risks, but traders may minimize risks by selecting the optimum level of leverage for their transactions.

In crypto investing, it is also possible to work with leverage (CFDs). However, this is highly inadvisable given the extremely high risk. With levers, you can literally lose 100% of your deposit within one day. Don't start!

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Crypto vs. Forex Difference 5. Risk Factor

Crypto markets are still in their survival phases, while relevant rules are being implemented in a number of nations. Crypto traders must cope with counterparty risks (scams are unavoidable in rising markets) as well as hacker concerns. In the last year, hackers stole $600 million from Poly Network.

Forex market, on the other hand, is carefully regulated, therefore forex traders face less dangers. Forex traders should still investigate their broker's history as well as the relevant rules in the nation where the broker is registered. Scams have mostly been eradicated in the forex trading business due to its maturity. That's good, but nevertheless, be careful with your choice. 

Check out the best forex brokers here.

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Crypto vs. Forex Difference 6. Regulation

The forex market is strictly controlled. This asset class has existed for as long as there have been trading markets, and because of its volatility and worldwide consequences, governments have a keen interest in currency traders.

Cryptocurrency, on the other hand, is still a bit of a wild west. While concurrently touting the advantages of investing in their cryptocurrency marketplaces, crypto markets continue to argue that they are producing technological products that are no more susceptible to SEC scrutiny than a Word document. Government authorities haven't decided on any aspect of crypto legislation, and progress has slowed as the industry has become bigger.

This implies that investors may more readily join the cryptocurrency industry since there are fewer regulatory barriers to entry. However, it also implies that there is a lot more long-term uncertainty around cryptocurrency. The SEC, the IRS, the UST, and other appropriate authorities will ultimately regulate the cryptocurrency market in the same way that they handle all other securities exchanges. As a consequence, investors should trade with the understanding that the only uncertainty is what those rules will be, rather than if they will occur.

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Crypto vs. Forex Difference 7. Taxation Mechanism

In the United States, IRS laws regard forex profits and losses differently from crypto gains and losses. To begin with, FX is classified as a Section 1256 contract under the IRS tax rules. This indicates that 60 percent of the profits or losses are long-term, while the remaining 40 percent are short-term, regardless of how long the transaction has been open.

Spot forex traders may elect to be taxed under Section 988, which regards profits and losses as ordinary income. A prosperous trader will likely gain more from following the Section 1256 contract method, but a losing trader may benefit more from using the Section 988 contract approach. Forex traders must pick which path they want to take before they begin trading, since they cannot alter their minds afterward.

In the case of cryptocurrency, though, there is no option. Cryptocurrency is considered property and is taxed similarly to stocks. The tax is calculated when you sell the cryptocurrency and is based on how long you had the position open. A short-term loss or gain is defined as a transaction held for 365 days or less. This short-term loss or gain is taxed at the same rate as your regular income.

If the cryptocurrency has been held for 366 days or longer, it is considered a long-term gain or loss. Because the rates are normally lower, you will pay less tax on a long-term gain than on a short-term gain.

When it comes to taxes, the main difference between forex and crypto is that forex traders must pick how they want their earnings and losses to be taxed ahead of time, but all crypto trades are treated the same.

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Forex trading is the winner versus crypto trading in comparison to risk and return. The differences lie mainly in the higher risks of crypto trading vs. forex trading. A skilled trader could profit more from forex trading with less risk, in our opinion. 

What do you favor: crypto or forex trading?