The foreign exchange (forex) market has long been dominated by government-backed fiat currencies like the U.S. dollar, Euro, and Japanese yen. However, the emergence of decentralized digital currencies known as cryptocurrencies over the past decade has begun to exert influence on traditional forex trading. Cryptocurrency trading is becoming an increasingly popular alternative for forex traders, drawn by factors like 24/7 markets, volatility, and decentralization.
Growth of the Cryptocurrency Market
The total market capitalization of cryptocurrencies has exploded from just a few billion dollars in 2013 to over $2 trillion today. Bitcoin remains the most widely used and valuable cryptocurrency, but there are now thousands of altcoins providing additional diversity. Massive amounts of capital have flowed into the crypto space amid rising mainstream adoption. All this growth means cryptocurrencies can no longer be ignored by traditional forex brokers and traders.
Accessibility and Trading Options
One reason for the growing influence of cryptocurrencies is their increased accessibility for retail and institutional traders. Many forex brokers now offer cryptocurrency pairs alongside traditional fiat money pairs. This allows traders to diversify into crypto without needing multiple accounts. Crypto exchanges also provide direct market access. And with futures and ETFs, cryptocurrencies are now available in trading accounts that do not permit virtual currencies. More routes than ever exist for forex traders to get crypto exposure.
24/7 Trading and High Volatility
The forex market is open 24 hours a day from Monday to Friday, but trading volumes and liquidity tend to peak during Asian, European, and North American business hours. In contrast, cryptocurrency markets are open 24/7 every day of the year. This gives active crypto traders more flexibility and potential trading opportunities. Cryptocurrencies also tend to be much more volatile than major currency pairs. Large price swings provide ideal conditions for short-term traders seeking to profit from momentum and volatility.
Decentralization and Independence from Governments
Unlike fiat currencies, cryptocurrencies are not issued or controlled by governments or central banks. Instead, they are managed by decentralized global networks and communities. This appeals to forex traders who may be losing faith in governments’ economic policies. Holding cryptocurrencies can provide a hedge against inflation and monetary debasement. Their decentralized nature also makes cryptocurrencies mostly independent of geopolitical risks. However, regulatory crackdowns remain a threat.
Portfolio Diversification Benefits
Adding some cryptocurrency exposure can help forex traders diversify their portfolios beyond fiat currency pairs. Crypto returns have historically had low correlations with other assets like stocks and commodities. This means they can improve a portfolio’s risk-adjusted returns. Many top traders now allocate a small portion of their capital to cryptocurrencies alongside fiat currencies. Holding crypto can balance fiat currency risks and hedge against extreme market events.
While fiat currencies still dominate the forex markets, cryptocurrencies are increasingly demonstrating their influence and utility. Their growth, trading accessibility, 24/7 nature, volatility, decentralization, and diversification benefits are appealing to forex traders. Integrating cryptocurrencies into a trading portfolio can provide advantages for those seeking alternative assets, new opportunities, and resilience against fiat currency devaluation.