The foreign exchange (forex) market has been around for hundreds of years. Currently, 75% of daily foreign exchange trade goes through Sydney, Tokyo, London and New York. You will no doubt have come across the forex markets when converting your holiday currency. In more recent times, we have seen the emergence of cryptocurrencies, with the likes of Bitcoin leading the way. Often referred to as "digital currencies", they have not been without controversy, prompting a constant battle with regulators.
Dealing in forex markets is perfectly legal, and while cryptocurrencies have not been made illegal, regulators are doing their best to side-line this growing market. Nevertheless, the reality is that cryptocurrencies are here to stay, in some shape or form, although regulations will no doubt emerge.
When dealing in forex and cryptocurrency markets, this involves the simultaneous selling of one currency and purchasing another. This is known as "pairing" with each currency given a unique three-letter code and an exchange rate. Forex markets tend to deal in traditional currencies such as Sterling, US Dollar, Yen, etc. Crypto markets deal in digital currencies such as Bitcoin which can be acquired using traditional currencies or other cryptocurrencies.
The cryptocurrency market has also seen the emergence of altcoins which are proving extremely popular. This is a shortened version of the term "alternative coins", which are used to acquire specific services and products. Altcoins tend to be more volatile, although many are incredibly liquid and easy to deal in. When looking at forex, and in particular cryptocurrencies, it is crucial to take professional advice.
Traditional forex markets are dominated by worldwide economies, monetary policy and interest rates. While many people believe that forex markets are relatively steady, this is not always the case. In light of Brexit, we saw massive volatility in the pound, which now stands at $1.40. As recently as December 2007, the exchange rate was just over two dollars to the pound. While not all currencies are this volatile, do not automatically assume there is no risk.
Cryptocurrencies are traded online with an array of new platforms emerging, such as Binance and Coinbase, to name just two. It is possible to deal in hundreds of cryptocurrencies and thousands of altcoins. At this moment in time, the markets depend significantly on the Bitcoin exchange rate. To give you a flavour, on 1 January 2016, one Bitcoin was worth the equivalent of $435. Fast forward to March 2021, and one Bitcoin was worth more than $61,000.
The Bitcoin exchange rate recently fell to just over $31,000 but recovered to over $47,000. Of course, supply and demand will always impact cryptocurrencies and altcoins, but at the moment, it is the political and regulatory manoeuvres that are causing significant volatility.
Cryptocurrencies use what is known as a blockchain to file and validate every transaction. As there is no central ledger as such, and the authorities have no control, this is where the controversy comes in. Government regulators worldwide have expressed concern that cryptocurrencies could be used by criminal gangs and attract money laundering. Is this the case?
In February 2021, electric car manufacturer Tesla, the brainchild of billionaire Elon Musk, announced it had invested $1.5 billion into Bitcoins. At the same time, the company announced plans to accept Bitcoins as payment for their vehicles. Unfortunately, this strategy was briefly halted in light of regulatory concerns. However, the company expects to recommence the cryptocurrency purchase option reasonably soon.
The Financial Conduct Authority (FCA) in the UK recently blocked investors from acquiring cryptocurrencies through the Binance platform. They did this by instructing UK banks not to honour transfers to Binance. This has caused huge controversy, although there is an understanding that regulations will at some point emerge. However, there is one major problem. As more governments and regulators around the world become involved, the vital element of anonymity will fade. Interesting times!
In reality, the cryptocurrency markets have come too far to disappear overnight. Regular daily trade across the whole range of cryptocurrencies and altcoins is well into the tens of billions of dollars. Moreover, many companies already accept cryptocurrencies as payment for their products and services. In hindsight, the regulator should have clamped down on cryptocurrencies before they hit the mainstream markets if they had concerns. They can huff, they can puff, but ultimately, there's far too much invested in cryptocurrencies to remove them from the investment arena.
Forex markets can be relatively volatile, but the tremendous volatility of cryptocurrencies and altcoins has very much put them in the shade. Each of these markets involves the selling of one currency to acquire another. There are many factors to take into consideration, both with traditional forex markets and especially cryptocurrencies. Consequently, it would be best if you take professional financial advice before proceeding.
A stockbroker for 15 years and a keen follower of stock markets and financial news. Mark Benson has extensive knowledge about the national and international financial market. He has written for many popular websites in the past.