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The volatile nature of the cryptocurrency market has led many crypto traders to investigate how to diversify their portfolios. One appealing option is to venture into the forex (foreign exchange) market, which is the world’s largest financial market. But can crypto traders benefit from diversifying into forex? There are pros and cons to consider.

 

The Size and Stability of the Forex Market

 

One of the main potential benefits of diversifying into forex for crypto traders is gaining exposure to a much larger and more stable market. The average daily trading volume in the forex market is over $6.6 trillion, dwarfing the cryptocurrency market cap of around $2.66 trillion. The increased liquidity and depth of the forex market can make it easier for traders to enter and exit positions with less slippage.

The forex market also tends to be less volatile than crypto on a day-to-day basis due to its massive size and high participation of institutional investors and multinational corporations. This makes risk management simpler for forex traders, especially those working with regulated FX brokers for US traders who adhere to strict compliance standards. Of course, major world events can still trigger volatility, but generally, forex price swings are smaller per trading session. Crypto, on the other hand, can easily gain or lose double-digit percentages daily.


More Trading Pairs to Explore


Another advantage of diversifying into forex for crypto traders is getting access to many more trading instruments and currency pairs to explore opportunities. While the crypto market is expanding, there are still fewer than 10,000 cryptocurrencies. Forex, on the other hand, offers hundreds of possible currency pairs.

Popular majors like EUR/USD or USD/JPY see trillions in volume daily. But traders also can focus on more exotic pairs like USD/HKD or EUR/TRY, which can sometimes have more predictable price movements. Having more trading pairs at their disposal gives traders a better chance of finding optimal risk-reward setups.


Lower Barriers to Entry in Forex


For crypto traders with limited capital, the lower barriers to entry in forex trading can also be appealing. Cryptocurrency brokers often require higher minimum deposits to fund accounts compared to forex brokers. Forex allows traders to enter certain markets with just a few hundred dollars in their accounts.

The ability to trade forex with leverage also means less upfront funding is required. Traders can get 50:1 leverage for major forex pairs, allowing them to take larger positions. Crypto margin trading options, on the other hand, typically max out at 3-5x leverage. So, for traders with less capital, forex provides more accessibility.


Potential Cons of Diversifying from Crypto into Forex


Of course, diversifying into forex isn’t guaranteed to produce positive results. Depending on their trading styles, some crypto traders may achieve worse performance trading forex.


Less Potential for Explosiveness


While the volatility of the crypto market poses challenges, experienced crypto traders are often attracted to the ability to find coins that could deliver exponential returns. Massive surges are not uncommon in crypto; Bitcoin itself has had several 10-20x growth years. Returns of that magnitude are very rare in forex markets. Even the most successful forex traders typically aim for annual returns in the 20-50% range.

So crypto traders who enjoy hunting for “moonshot” coins may end up disappointed with the more gradual forex trading environment. The rush of catching a major cryptocurrency spike can be addictive. Forex is unlikely to provide comparable quick thrills.


Technical Analysis Works Differently


The nature of the forex and crypto markets means that technical analysis can work quite differently between the two. Crypto markets, like stock markets, have significant retail trader participation. These less sophisticated traders are more likely to put faith in basic technical analysis signals. This can lead to more predictable chart patterns and support/resistance levels holding in crypto and stocks.

Professional forex traders, on the other hand, are generally smarter about placing stop orders to trigger technical levels. This makes major forex pairs less likely to adhere to technical signals. Sophisticated algorithms are also constantly scanning for liquidity on both sides of key technical levels. Therefore, crypto traders who rely primarily on technical analysis might face challenges in adapting.


Fundamental Analysis is More Important in Forex


Unlike the emerging cryptocurrency market, there are decades of historical data for analyzing the macroeconomic fundamentals that drive forex price trends. Government reports like GDP, jobs data, manufacturing surveys, and interest rate changes can all significantly impact currency valuations. Crypto fundamentals beyond basic supply and demand dynamics are still very much in development.

So crypto traders who have never had to pay much attention to fundamental factors may not feel comfortable diving into forex trading. Without an understanding of how monetary policies, inflation, economic growth, political climates, and global trade impact fiat currencies, it is hard to identify sustainable forex trends.


Should Crypto Traders Consider Diversifying into Forex?


Whether or not venturing into the forex market makes sense for cryptocurrency traders depends greatly on their skill sets, preferences, and portfolios. Finding a balance between the two markets is likely ideal to avoid having all one’s eggs in the crypto basket while still benefiting from the growth potential of blockchain technology.

For shorter-term, technically focused crypto traders who thrive on volatility and deep dives into blockchain projects, forex may not offer an optimal environment. They are better off sticking to what they know best in the crypto ecosystem.

If you’re a crypto investor thinking in the long term and of your portfolio, there is a chance that forex diversification may be on the cards for you. It could offer a means of ramping up risk-adjusted returns by exposure to assets that have a negative correlation to cryptocurrencies. This also helps to mitigate, to some extent, performance drawdowns when there is a downturn in the price of crypto.

Some key tips for crypto traders entering the forex market:

 

•    Start small with micro or mini accounts to test different strategies and get a feel for the market without overcommitting capital. Adjusting to the mechanics differs from crypto.
•    Be patient studying fundamentals and monitoring the market before actively trading. Jumping right in often ends poorly.
•    Focus on the most liquid major and minor pairs first. Exotics can wait until achieving consistency.
•    Pay attention to macro market drivers like central bank policies and global growth metrics that impact forex.
•    Accept that 10-30% annual returns through swing trading or positional strategies is a viable goal - big homeruns are rare.

Final Thoughts


For crypto traders looking at diversifying their capital into forex, forex tends to be able to provide a more stable market, a deeper market, and some protection from crypto bear trends. However, there is a significant learning curve involved. Getting used to a less volatile forex environment, the need for macroeconomic analysis and the abundance of trading instruments are all required.

However, with the right strategies, it is possible to allocate some capital to forex trading, which will help to smooth out long-term performance swings compared to staying 100 percent invested in crypto assets. Diversification is always an immoderate move. Traders can maximize the two markets by balancing and understanding their differences.