To begin with, there’s no significant or credible metrics for measuring the interdependencies between crypto and forex that significantly impact the dynamics of profit margins, revenue or trading volume whatsoever. Still, there’s something to debate on this ‘not so significant’ topic, which somewhat stays out of contention in the overall domain of cryptocurrency investments and foreign exchange buying & selling. All things said, the correlation between crypto and fiat currencies are practically zero, which means, it (cryptocurrencies) act as diversifiers for foreign exchange investors.
Cryptocurrencies and their Relation to Forex
Crypto has been around for more than a decade now, starting with Bitcoin (BTC), which was introduced in the year 2008 by a Japanese financial geek. Since then, it is the most popular cryptocurrency in the world, along with Ethereum (ETC), Litecoin (LTC) and Dogecoin. In fact, these are digital currencies that can be used to buy goods and services in exchange for other cryptocurrencies. All of these are done through a Blockchain payment system.
Now coming to the correlation part, crypto can be paired with or against fiat currencies like USD, GBP, EUR, etc. making a ‘viable’ Forex-Crypto pair. But, a majority of investors, merchants and forex traders prefer trading with fiat currency pairs like USD-EUR, GBP-USD, EUR-GBP, etc. for avoiding risks and playing it safe, due to the high volatility associated with crypto-forex pairing. Moreover, it is a relatively new concept, which is not yet tested and proven to the fullest.
Statistical Correlation
As cryptocurrencies are a new class of virtual/digital assets, with some being present for only 2-3 years, a comprehensive study is yet to be done on this ‘less debated’ topic. Of late, some notable financial researchers and think-tanks have recently come up with fiat/crypto correlation studies. The researchers created a ‘correlation matrix’ and ran the numbers and statistical figures through correlation calculations, with fiat currency pairs and crypto assets.
The study found that the rate of correlation between the Euro (EUR) and Swiss Franc was the highest at 83%, which actually makes sense, as Switzerland’s biggest trading partner is the European Union. In case of the slightest of movement or fluctuations in the European economy, there’s a far reaching impact in the upward or downward trend of the Swiss currency.
However, the most interesting result which came out of this crypto-forex correlation study is that there is very little or insignificant relation between traditional fiat currencies and crypto currency pairs. The results of one such study show that there’s a minor inverse relationship GBP/CAD and BTC. This is obviously considered a ‘weak’ statistical correlation.
On the contrary, there’s a relatively strong correlation between crypto pairs. One of the highest correlations was pegged at almost 54% between Stellar Lumens (XLM) and Ripple (XRP). This is basically due to the similarities between both these coins. Even though they cater to different end-users, they both desire to be a popular payment solution. Some independent studies also show that almost all cryptocurrencies are typically better correlated with Bitcoin (BTC).
Crypto and Forex Trading
When you trade in cryptocurrencies, there are certain aspects that must be kept in mind. As there are a few prominent cryptocurrencies like Bitcoin (BTC), Litecoin (LTC) and Ethereum (ETH), so also there are traditional fiat currencies like USD, EUR, GBP, CAD & AUD, which are extensively traded and popular among forex investors. In fact, all the above mentioned cryptocurrencies have the highest trading volumes, and are also used as conventional currencies against fiat and cryptocurrencies. FYI, a majority of big drop-shipping companies and eCommerce giants accept crypto payments on Shopify, along with some standard fiat currencies.
On the other hand, it is to be noted that CFD trading on forex and cryptocurrency assets is quite straightforward, when done on the Plus500 CFD platform. Here, the trader or investor clearly gets to see the actual bidding and asking price. Therefore, as an investor, one can speculate on the upward or downward trend of prices, and thereby place relevant orders for buying or selling cryptocurrencies, forex and other assets. One of the major differences between cryptocurrency and foreign exchange is that the former is highly volatile in nature, experiencing significant ups & downs in a single day.
Key Facts about Crypto Trading in Relation to Forex
Well, even though there are ‘clinical’ linkages between forex and cryptocurrencies, there are a few glaring and significant differences, every trader or investor must be wary of. As cryptocurrencies are more volatile than fiat currencies, the price of cryptos can fluctuate tremendously on a daily basis. For example, the price of Bitcoin (BTC) is known to fluctuate to the tune of 10% or even more on a single trading day. And, since the rates of other crypto currencies are somewhat correlated to Bitcoin, when BTC rallies well, the crypto market treads the same trajectory path, and vice-versa. On the contrary, investors should be mindful that while crypto trading can be profitable, the high volatility can also result in significant losses.
Popular Cryptocurrency & Forex Trading Pairs
- USD/BTC
- USD/ETH
- USD/LTC
- USD/Cardano
- USD/Solana
In fact, a platform like “Plus500” offers CFDs on the above-mentioned instruments, apart from the services of a unique ‘Crypto 10 Index’, which follows the metrics of performance of the best performing cryptos in the market, such as Bitcoin, Litecoin, Ethereum, Cardano, Solano, and more such digital currencies.
Conclusion
Given the present scenario, dynamics of the market and overall trading statistics globally, trading in cryptocurrency is still not as popular as FOREX trading, simply due the aspect of immense volatility and risks associated with it. But some studies indicate that the interest in cryptocurrency is steadily increasing among the new generation of investors, especially in the US and Europe. Whereas, forex still remains the most popular choice among old school investors, brokers and traders that want to avoid the risks, by trespassing the volatility wall, which is an aspect about crypto. It is to be assumed that even though the price of cryptocurrencies are usually based on the US Dollar rate, there’s no significant correlation with forex, as they are different on several counts. The crypto price in USD will see an increase, when investors start distress-selling of cryptocurrency.