Differences between Bitcoin and the FOREX market

The most important difference between Bitcoin and the forex market is that Bitcoin is a digital currency, independent of any government or institution (decentralization), while the major players in the forex market are central and commercial banks.

Forex, also known as foreign exchange, FX or currency trading, is a decentralized global market where all the world's currencies trade. The forex market is the largest, most liquid market in the world with an average daily trading volume exceeding $5 trillion. 

The Foreign Exchange market (Forex) is the world’s center for exchanging currencies. Traders gauge currencies’ health and attempt to exploit its volatility in exchange rates with other currencies to make a profit.  The more a currency varies, the bigger the profit (and risk).

Bitcoin trading is similar as traders are essentially exchanging a cryptocurrency for another currency, which is the principle Forex is built on. However Bitcoin’s more unpredictable volatility and influential price-driving factors are divergent from Forex.

Liquidity factors

The major difference between Bitcoin and the forex market are actually the liquidity factors. Forex is the largest and most liquid market in the world, where the average daily turnover can be in the trillion dollars. Bitcoin is a smaller market worth about $137 billion (data from August 2017).

Liquidity is the degree to which the market allows you to buy and sell assets at stable prices. The greater the liquidity, the more stable the market is, and the prices do not hesitate significantly. 

If there is a $1 million transaction in the day, the market is able to absorb this transaction easily, without much change in the dollar value. 

In the case of Bitcoin, the same transaction may have a much greater effect on the value of the digital currency due to the relatively small trade volume. For the prices stability, the demand for Bitcoin has to be compatible with inflation.

Demand

One of the advantages of having a centralized currency is uniform demand.  Since the government controls the currency, its application within the economy is indisputable.  

Bitcoin does not have this convenience; Bitcoin’s demand is determined through numerous factors including public adoption, marketplace emergence, and the public’s confidence in Bitcoin holding value.

As public adoption expands so will the demand for Bitcoins; coupled with emerging marketplaces that accept Bitcoins, the prevalence of Bitcoin will widen.   

Bitcoin’s public opinion has been negatively impacted by news stories, such as Mt. Gox declaring bankruptcy and Bitcoin’s heavy use within the deep web.  

However, the involvement of the New York Stock Exchange and NASDAQ in the blockchain has boosted the general population’s opinion of Bitcoin’s ability to retain value. 

Even with the negative elements, such as the media’s criticism, Bitcoin’s demand has and continues to rise steadily.

Bitcoin exchange vs forex market activity

Bitcoin works for 7 days a week, for 24 hours. The forex market is open 24 hours a day, Monday to Friday. During the weekend, as well as during important holidays, the market is resting. 

This is important information for investors, because the market at such moments can be irrational and difficult to deal speculative transactions.

Opening the forex market 24 hours a day, for 5 days a week is both an advantage and a big challenge for investors due to the inability to participate in the market live all the time. 

That's why special tools that work 24 hours a day have been created, to ensure that participants do not have to monitor their open positions independently. The biggest moves are noticeable on this market in the middle of the week, on Tuesdays and Wednesdays.

In the case of Bitcoin, its strong advantage is the 24/7 opening, due to the decentralization and lack of regulation of the digital currency, which means that we do not need financial institutions such as banks to exchange them. Stock exchanges automatically connect traders to investors at any time of the day or night.

Volatility

Forex’s volatility is around 1% for the extreme foreign currency couples and 0.5% for less.  On the contrary, Bitcoin has a volatility around 5% to 15% with a 10% volatility average.  For this sole reason, Bitcoin attracts high-risk traders.

Inflation
Many Bitcoin enthusiasts believe that Bitcoin is immune to inflation; this may be true for monetary inflation, but not for price-level inflation.

As emphasized in the Supply graph above, Bitcoin’s algorithm has a maximum limit of 21 million Bitcoins that can be mined, shown as a horizontal asymptote.  

Due to the fact that once all 21 million Bitcoins are distributed, and no more can be found, Bitcoin will be immune to monetary inflation or debasement.  

This is not the case with foreign currencies that are government regulated since they can produce fiat currency at anytime resulting in monetary inflation.

While (the reason for fiat) debasement has a more apparent answer, Bitcoin’s and Forex’s price-level inflation simply does not.  Multiple factors that affect Forex include the involving nation’s public debt, interest rates, political stability, and economic health. 

These factors cause steep derivatives; impacting foreign currency inflation.  Bitcoin is even more complicated with only speculation theories on what causes price-level inflation.

Liquidity factors

The major difference between Bitcoin and the forex market are actually the liquidity factors. Forex is the largest and most liquid market in the world, where the average daily turnover can be in the trillion dollars. Bitcoin is a smaller market worth about $137 billion (data from August 2017).

Liquidity is the degree to which the market allows you to buy and sell assets at stable prices. The greater the liquidity, the more stable the market is, and the prices do not hesitate significantly. 

If there is a $1 million transaction in the day, the market is able to absorb this transaction easily, without much change in the dollar value. 

In the case of Bitcoin, the same transaction may have a much greater effect on the value of the digital currency due to the relatively small trade volume. For the prices stability, the demand for Bitcoin has to be compatible with inflation.

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