The difference between cryptocurrency and forex trading

cryptocurrency

Cryptocurrencies is the theme of recent months. These digital coins such as Bitcoin, Ethereum and Ripple are based on blockchain technology. Due to the rapid price rise, cryptocurrencies have attracted many new investors to active trading. And many forex traders have started trading crypto currencies in addition to traditional currencies.

Anyone who studies the market daily will soon see that the two products, forex and cryptocurrencies, behave very differently. That means that as an active trader you also have to make other decisions. In this article we discuss the differences between ‘normal’ currency trading and cryptocurrency trading.

Background


All normal currencies are issued by the central bank of a country (or group of countries). Goods and people that that country produces are paid in the local currency. If the economy of that country performs well, the demand for the currency increases, and increases in value relative to other currencies. The central bank can influence this by changing the interest rate and by putting more or less money into circulation. The market responds to this with supply and demand. As a forex trader, you try to predict this and earn from it.
Cryptocurrencies do not belong to a specific country. Coins such as Bitcoin, Ethereum, and Ripple only exist on the blockchain. The blockchain is maintained decentrally and goes beyond national borders. You can pay with cryptocurrencies at any store or service provider that accepts them, but no one can be forced to accept a payment in crypto. As a result, the value (in the long term) depends on how many retailers and service providers accept a cryptocurrency.

With cryptocurrencies there is also no central bank that determines the interest or the money supply. Inflation or deflation is embedded in the code of the cryptocurrency. This differs per currency. For example, the number of bitcoins in circulation is increasing less rapidly, until it ultimately remains the same at 21 million BTC. The number of ether in circulation is growing faster than the number of bitcoins, so ETH has more inflation. Ripple has a fixed number of XRP that can never increase. Because the supply of a cryptocurrency is fixed in the computer code, the value mainly depends on the demand.

Acting based on the news


If we look around, we have to conclude that we can hardly pay with cryptocurrencies. Two years ago, there were small retailers and cafés that accepted payments in BTC, but the transaction costs became too high for small payments at the end of last year. This can change with the recently introduced lightning network. Ethereum is used for all programs that run on the Ethereum blockchain, but those programs are hardly ever used. You can’t do anything with other cryptocurrencies.

As a result, the demand for cryptocurrencies is almost entirely speculative. Traders buy cryptos based on the expectation that they will be used in the future. That expectation is not unjustified, because the blockchain is a promising technology. But nobody knows for sure which cryptocoin has the future.
What we see as a result is that the market is extremely responsive to news. For example, if a large company such as IBM or Microsoft announces that it is cooperating with a cryptocurrency, the price could rise 10-30% within a few days. And if a financial regulator from China, for example, says to regulate trade in cryptos more strictly, the rate can fall just as much in a short time. Often such a reaction is exaggerated, and the rate corrects again within a few days. As a trader you can benefit from this.

Volatility


This creates a lot of volatility. A currency pair such as the EUR / USD will not go up or down 10% quickly in one day. That’s because everyone has a rough idea of ​​how well the European and American economy are doing. That doesn’t suddenly change with 10%. But because cryptocurrency rates are purely based on future expectations, they can easily fluctuate by 10% per day or more.

As a result, you must trade with a smaller leverage factor. For traditional currency pairs, use the lever to increase your winnings. With a lever of 50x, a price increase of 25 pips (around 0.25%) changes into a profit of around 12.5%. But if you trade with cryptocurrencies with a 10x lever, a decrease of 10% may mean that you have lost your stake, even if the rate subsequently rises again. A leverage factor of more than 2-5 is not recommended.

If you want to actively trade in cryptocurrencies, it is advisable to first develop a feeling for the market. Even if you already have experience with forex. You can do that well with a demo account. This works just like a real trading account, except that you don’t risk any real money. At broker Markets.com you can trade in various cryptocurrency CFDs with advanced software. Use this link to open a free demo account at Markets.com to experience the volatility of the market itself.

Technical analysis


Because the rates of cryptocurrencies are mainly based on speculative expectations, technical analysis is more important. After all, there is no real crypto-economy with a clearly determined value. The value of crypto coins depends on market sentiment. And technical analysis is precisely suited to predict market sentiment. You should also bear in mind that not all technical indicators are suitable for cryptocurrency.

Cryptocurrencies are a new phenomenon. The first crypto coin, Bitcoin, is less than ten years old. Most cryptos are less than two years old. Moreover, many cryptocurrencies were of little value for a long time, and did not rise sharply until 2017. As a result, some technical analysis tools do not work well with cryptocurrencies.

Take support and resistance levels, for example. For many currency pairs, the rates at which support or resistance is encountered can be determined historically. By going back in the graph, we find price levels that the price does not easily break through. Because cryptocurrencies do not have a long history, it is difficult to find support and resistance on the basis of the historical price chart.

The one-day Ripple price chart
The one-day Ripple price chart. No support or resistance to be found (Fibonacci levels though).


Or another important indicator: moving averages. An indicator such as the 200-week SMA (simple moving average) does not exist for many digital coins (because they are less than 200 weeks old). In the shorter term we can calculate SMAs and EMAs (exponential moving average). But those averages give a distorted picture if the rate has risen enormously in a short time.

The most useful indicators for cryptos are pivot points, Fibonacci levels and Elliot waves. For example, the Bitcoin price chart often shows an increase in five waves and a decrease in three waves. Price corrections are often 38%, 50%, or 62% of the peak. And if the price starts to rise again, the new top is often 62% higher than the previous peak. These levels help you determine your target price and your stop loss for your crypto trades.

Conclusion


Cryptocurrencies are still very young. They are not linked to the economy of a country, and there is no central bank that determines the offer. Because there are few real applications for cryptocurrency, most demand is speculative. That means that technical analysis is more important than normal. But not all technical indicators apply to crypto.

Cryptocurrencies are extremely volatile. The market often reacts too excessively to news, so that you can act on the expected correction. This makes cryptocurrency particularly attractive for active investors, but there are also risks involved. Protect yourself by not acting with excessive leverage. And remember: the blockchain technology will experience a lot of growth in the coming years.

By S.van der Tap Pd.Internet Marketer Founder Of digitalstico.com

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One Thought to “The difference between cryptocurrency and forex trading”

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