The forex market is one of the largest and most liquid entities of its type in the world, with more than $6.6 trillion traded globally every single day.
As for the increasingly mature cryptocurrency market, this has a cumulative market cap value of just under $1 trillion. While this is significantly lower than the peak value of $3 trillion in October 2021, crypto remains a lucrative and increasingly diverse market that’s continuing to catch the attention of investors.
But if you’re new to the financial market, should you prioritize investments in forex or crypto in 2023? Here are some considerations to keep in mind:
What do Forex and Crypto Have in Common?
We’re going to explore the differences between these two asset classes below, but let’s start by considering their similarities.
Both the FX and crypto markets involve the buying, selling, and exchanging of currencies, from fiat currencies such as the US dollar to first-generation cryptocurrencies like Bitcoin (BTC). Prices are relatively volatile in both markets, thanks largely to universal factors such as supply and demand and broader macroeconomic metrics.
Arguably, cryptocurrencies have become increasingly vulnerable to such factors over the course of the last 12 months. This is a natural consequence given how crypto has become increasingly immersed in the consumer mainstream, while it has impacted the demand for BTC and similar tokens as the global economy has continued to contract.
However, the figures suggest that BTC and other tokens continue to enjoy a short-term inverse correlation with inflation news. So, as inflation has continued to peak in developed economies around the world (it hit 10.7% in the UK at the end of 2022), it stands to reason that the price of BTC should have fallen accordingly.
Both forex and crypto can also be traded in real-time and in OTC markets, making them accessible assets that are ideal for investors with a short-term outlook.
The Differences Between Forex and Crypto
While the fiat currencies traded through the FX market are issued and controlled by central banks across the globe, cryptocurrencies are completely decentralized and underpinned by so-called “blockchain” technology.
This is a distributed ledger technology that allows transactions to be recorded and maintained efficiently without the need for third-party management. This means that all transactions are completely immutable and transparent and not at risk of manipulation by a third-party authority.
Conversely, fiat currencies can be directly impacted and manipulated by monetary policy, with this having been borne out through Covid and the subsequent economic contraction.
In the UK, for example, the Bank of England (BoE) deliberately slashed the base interest rate to just 0.10% during the coronavirus pandemic. This type of quantitative easing measure made the British pound (GBP) far less appealing in the eyes of overseas investors, reducing capital inflows and the value of the GBP in the process.
More recently, we’ve seen interest rates hiked as a way of combating rampant inflation. This has the incremental effect of increasing currency valuations, although such gains are being undermined by inflation and its ability to erode the purchasing power of affected currencies.
It should also be noted that there’s an endless supply of fiat currencies, as governments can continue to print and create money as and when they like. This is not the case with crypto tokens, which are bound by a finite supply that impacts their value in accordance with supply.
If we look at BTC, for example, the asset currently has a circulating supply of 19,265,481 coins and a maximum supply of 21,000,000. So, the overwhelming majority of tokens have already been mined and sourced, with a relative scarcity likely to send prices higher in the future so long as demand remains high.
Finally, fiat currencies boast a tangible and secure store of wealth with a minimum value.
This is not the case for cryptocurrencies, which are entirely digital and have their value governed by factors like supply and demand and market sentiment. This leads to much greater levels of volatility and lower liquidity, making cryptocurrency a far riskier option regardless of the prevailing market conditions.
The Last Word – Which Asset Should You Trade in 2023?
If you’re a more experienced investor with an existing portfolio, you may want to diversify this by trading both forex and cryptocurrencies in 2023.
This is particularly suitable for risk-hungry traders who want to trade market volatility to leverage a short-term advantage, while both offer an effective way of diversifying a portfolio that’s packed with stocks and bond options.
However, if we accept that crypto and assets like BTC retain an inverse relationship with inflation in the short term, we should expect them to record incremental gains through 2023. According to UK PM Rishi Sunak, inflation in the UK could be halved to 5% by the end of the year (it has already started to fall incrementally), creating a scenario where BTC’s value may rise noticeably through the year.
This makes crypto particularly appealing in the short and medium term, both for inexperienced investors and those with significant knowledge of the marketplace.
If you’re still unsure, we will urge you to check out this trading quiz to determine your current trading level and most suitable assets.
This can provide a foundation that informs your decisions through 2023 and beyond as you look to make the best investments in line with the wider economic climate and market conditions.