Both fiat money and digital tokens are called currency, but comparing forex trading to crypto trading is like comparing apples with freight trains. In the brief history of the crypto market, which extends back to only 2009, it has become clear that a very unique blend of factors drives the prices of digital assets, and that these interact in different ways to the forces that move exchange rates.
Forex trading has been studied for decades by technical analysts who trawl through pages and pages of data to identify price trends. As the fruits of their research, we have rulebooks of price patterns that translate into actionable trading signals. Their basis lies in the historical reactions of forex traders to various situations, which are never precisely the ones we encounter in live trading action. As a result, they only offer us hints of how trader sentiment may be developing, which the skilled forex trader takes and melds together with the unique influences of the moment, ultimately coming to a decision as to which direction prices may head. It’s never straightforward, involving a web of interacting factors like interest rates, inflation, economic reports, and geopolitical developments.
Online trading in crypto has nothing to do with predicting the relative strength of one currency over another. More properly, it should be compared with trading high-risk assets like growth stocks, whose value is intensely sensitive to the vagaries of trader sentiment. This is not to say that it’s simpler than forex trading, but it’s certainly a whole new kettle of fish that requires familiarizing yourself with a different set of price determiners. Stick with us for a couple of minutes while we explain further.
The Media
When it comes to crypto, we must take into account the enormous influence that the media exerts on price movements. This means that news reports of crypto thefts or regulatory actions against crypto platforms impact prices directly and powerfully. Beyond this, the discussions and trends on social media platforms are not to be minimized. A research paper published in 2022 found that “social media sentiment is an important predictor in determining Bitcoin’s valuation”.
It’s not only the informational content of media reports, or their number, that tends to nudge prices one way or the other. It’s also the way the reports are phrased and framed. Unlike fiat currencies, which are backed and monitored by governments, cryptocurrencies are held up by nothing more than communal belief. If everybody decided they were worthless, they would indeed be worthless at that moment. This is a reason for the exaggerated sensitivity of crypto prices to waves of sentiment. Heightening that sensitivity is another factor: the tendency of the public to overreact to news events through panicked selling or frenzied buying.
Therefore, anyone who engages in online trading with cryptocurrencies should be well versed in the ways Bitcoin has historically reacted to various news events. He should also be informed about SEC regulatory actions in the works, national bans on crypto, and even celebrity tweets on specific tokens. Media items affect forex pairs too, but not with the same clout.
Control
Crypto enthusiasts have spilled much ink in praising the potential of the blockchain to decentralize finance, eliminating the need for banks and middlemen. In their envisioned future, each individual personally holds the reigns of their finances, transferring and trading at will, without any outside interference. This sounds very nice, but it’s still a dream and shows no signs of crystalizing into reality.
Time has told that wealthy individuals and businesses are gaining possession of a greater and greater share of the digital tokens, which implies there is an increasing centralization of control over the market. When a bitcoin whale (an entity owning over 1,000 tokens) unloads some his stock, the effect on prices is a marked one. What really gets prices moving, though, is when traders follow the whale’s lead and sell off their own crypto too. This can spark off panic and, with it, precipitous drops in prices.
By contrast, the forex market is no more in the hands of the wealthy than the poor. Rather, it’s a dynamic meeting place of various kinds of forces, which continually vie for the leading role. Although things like geopolitics can trigger considerable volatility in exchange rates, the nature of forex trading essentially remains the same. The trick is, through studying and experience, to get a feel for the way currencies react to specific stimuli. Forex traders don’t have to worry that some deep-pocketed individual is going to step in and override all the other price determiners in one foul swoop. Instead of that, they would do well to get inside the minds of large financial institutions whose forex trades affect the market in quite a significant way.
Wrapping Things Up
Looking ahead, there’s no way of knowing whether or not Bitcoin will settle down and behave like a normal asset. Regulatory precedents are still being set, and no one knows how the market will react to authorities’ final decisions. In the meantime, crypto is still subject to the cycles of nervousness and exuberance generated by the media. There are other obstacles too: Developers have been unable to protect platforms from the ceaseless efforts of hackers, who continually make off with millions of dollars in digital currency. All this erodes people’s confidence in the asset, and this too keeps its volatility at high levels.
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iFOREX Europe is the trading name of iCFD Limited, licensed and regulated by the Cyprus Securities and Exchange Commission (CySEC) under license # 143/11. The materials contained on this document have been created in cooperation with iFOREX Europe and should not in any way be construed, either explicitly or implicitly, directly or indirectly, as investment advice, recommendation or suggestion of an investment strategy with respect to a financial instrument, in any manner whatsoever. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73.2% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Please note: Calculations of past performance movements may represent the futures and not the underlying asset. Full disclaimer: https://www.iforex.eu/legal/analysis-disclaimer.html