The following article was written by Luis Aureliano, a business writer and financial analyst. With over 15 years of experience in global finance and an MBA in economics and management, Luis’s areas of expertise include business, marketing, communications, personal finance, macro economics, stocks and emerging markets.
The forex market is the largest market in the world—it is global, always open round the clock, and liquid. However, the cryptocurrency market is starting to gain prominence in trading circles because Bitcoin, Ethereum and other alt-coins have shown decent potential to deliver impressive trading gains.
The Forex market is the global market where people exchange currencies in the hopes of making profit from the volatility in the exchange rates of different currencies. Cryptocurrency trading is essentially similar to forex trading because traders try to make profit on the volatility in the price of different cryptocurrencies AND in relation to the price of fiat currencies.
In the year-to-date period, Bitcoin has gained around 356% and Ethereum has gained about 2,500% in the same period. No forex trade can deliver such astronomical gains unless there’s catastrophic chaos in the global economic landscape; hence, it is understandable that some traders might be interested in exploring possibilities in cryptocurrency trading. This piece explores some key fundamentals that a forex trader should consider before making the switch to trading cryptocurrencies.
Trading standards
Traders also need to understand that both forex trading and cryptocurrency trading happens on multiple exchanges and platforms. Forex trading platforms offer a wide range of major currencies pairs and the opportunity to set up trades between lesser-known currency pairs. In contrast, cryptocurrency exchanges usually restrict their available cryptocurrency pairs to a few coins such as Bitcoin, Ethereum, Ripple, and Monero.
Most forex trading platforms have a measure of deposit insurance that protects the money in your trading account. However, cryptocurrency exchanges lack such guarantees and any hack, data breach, or data loss often results in the disappearance of millions of dollars worth of investor cryptocurrencies.
Thankfully, a new cryptocurrency exchange, Legolas Exchange is setting up shop to provide cryptocurrency traders and investors cryptocurrency trading platform that incorporates the very best features that forex exchanges have to offer. To begin with, trading deposits on Legolas are held securely by a real-life banking partner.
Apart from the deposit guarantee, Legolas is designed to bridge the gap between cryptocurrencies and fiat currencies by providing a reliable, secure, and fast process for making large fiat deposits or withdrawals from the exchange. Cryptocurrency investors will also be pleased to know that Legolas provides an opportunity to get a first-mover advantage through the pre-sale of the LGO token in an upcoming Initial Coin Offering (ICO).
The LGO token will be used to facilitate transaction, pay fee orders, and to fund other services offered by Legolas. The LGO token will be used on Legolas in much the same way that Ether (ETH) is being used on the Ethereum platform. The ICO of the LGO toke will open up about 40% of the LGO supply to investors. Interestingly, the Round 1 of the token sale will most likely be exclusive by invitations. Hence, most regular investors are not likely to get in unless they get invites from partners, advisors, or partners.
However, potential cryptocurrency traders need to understand that the development of the exchange is progressing and the Beta version release is planned this year. However, the full market version of the exchange is not likely to debut until the first trimester 2018. If you want to be a part of the exciting new opportunity that Legolas provides to cryptocurrency investors, you should definitely try to buy as many LGO tokens as you can afford to buy once the ICO is open.
Inflationary headwinds and tailwinds
One of the main distinctions between cryptocurrency and fiat currencies is that cryptocurrencies are designed to be fundamentally immune from monetary inflation. Most fiat currencies are suffering from a degree of fiscal irresponsibility on the part of governments who print out money haphazardly without recourse to its implication for the economy. However, such indiscriminate money printing dilutes the currency and waters down its purchasing power.
Cryptocurrencies are built to be immune from such inflationary trends because they do not have a centralized monetary authority to make fiscal policies. For instance, the maximum limit of Bitcoin that can be mined stands at 21 million. Nobody can dilute the volume of Bitcoin in circulation once the 21 million Bitcoin is mined. There’s no hard data on the number of Ether that can be mined but Ethereum enthusiast seem to agree that the supply won’t exceed 100 million.
However, investors need to pay attention to the fact that cryptocurrencies are immune from monetary inflation but they are not necessarily immune from price-level inflation. The fact that cryptocurrencies are subject to a high volume of speculative trades further increases the odds of price-level inflationary pressures.
Inherent volatility
An important factor traders must understand is that there’s a marked difference between the inherent volatility of fiat currencies and the volatility of cryptocurrencies. The volatility of fiat currencies is mostly influenced by news on geopolitical stability, economic health, public debt, natural disasters, and prevailing market sentiment. The volatility of cryptocurrencies is often influenced by criticism, cynicism, skepticism, media hype, media attacks, and exaggerated market news.
Most cryptocurrencies have volatility of about 0.5% or less – very few currency pairs have volatility around 1%. However, the volatile nature of cryptocurrencies is more pronounced. Bitcoin for instance has a volatility average around 10% with rates dropping 5% or rising 15% in a single session. Cryptocurrencies seem to operate one order of magnitude higher than fiat currencies in terms of volatility.
Market supply and market demand
Trader should also pay extra attention to the stark differences in the demand and supply dynamics of fiat currencies in relation to the demand and supply of cryptocurrencies. The central banks of different countries are saddled with the responsibility of their currency in circulation – supply. The supply of different cryptocurrencies is however determined by algorithms. The algorithms are coded to increase the volume of coins in circulation until a level, after which it decreases the supply unpredictably.
Fait currencies enjoy the support of governments and they are considered legal tenders. Hence, the demand for cryptocurrency has a predictable demand backed by trust in a government’s ability to repay its debts. Conversely, the demand for cryptocurrencies is widely dependent on public opinion. Hence, cryptocurrencies are unlikely to hold a commensurate demand with fiat currencies until there’s a mass-market adoption of blockchain technology.