Selasa, 09 Maret 2021

Is Forex Trading Safer Than Cryptocurrency Trading?

Is Forex Trading Safer Than Cryptocurrency Trading?

Bitcoin was all over the news in January 2021. Reaching an all time high at $19,783.06 per bitcoin, it was marked with mania that preceded panic selling. Of course, this is not the first time, as the first major bitcoin bubble was burst in 2017.

It is this kind of news that is often highlighted by certain groups of people who are against cryptocurrency trading. Of course, it is ignorant to solely focus on bubbles when analyzing the risk factor of cryptocurrencies. Bubbles have even occurred within the most established financial markets on Earth, such as mortgage-backed securities (securities backed by banks!).

How can financial instruments experience bubbles?

Not many people are aware of their risk tolerance. Many of them look for ways to make money quickly and effortlessly. Still many more do not understand the fundamental causes of price changes. Technical analysis tends to be easier to learn than fundamental analysis. Day traders and scalpers become the inaccurate embodiment of professions that make money off the financial markets.

All these factors combine to create dangerous misunderstandings of how the market works. Unusual price surges are usually the result of a sudden and illogical demand for a particular asset.

Is the forex market safe from financial bubbles or crashes?  

It depends on which currency you are referring to.

People who hold a currency are in some way holding the country’s share in the economy — if a country can be viewed as a company. If the country is experiencing rapid economic growth, then the value of the currency against another country would increase.

Central banks make a great effort to maintain the money supply of the currency, preventing hyperinflation throughout difficult economic times. In some way, the forex traders have to fully trust governments to ensure that the value of currency doesn’t crash.

While the forex market is safe from extreme speculation and hoarding, the stability of the currency heavily depends on the country’s political and economic conditions — in nearly similar ways as stock prices are dependent on the national financial situation. 

Summary

The strength of cryptocurrency comes from its decentralized nature and independence of influence from world leaders and policymakers. However, this opens up to weakness such as frequent economic bubbles. On the other hand, changes in a currency’s value is highly regulated, and it rarely experiences extreme price surges. 

Learn more about safe trading and basic economics at FBS.