By David Webb, Business Consultant, Sydney, and Contributor to BizzmarkBlog.com.
Over the past few years, investing in forex and crypto-currencies has become a lucrative opportunity for people with a limited budget. Unlike some traditional trading methods, these practices allow you to invest a small amount of money and yet generate an outstanding return on investment (ROI).
However, before you start investing in forex or bitcoin, you need to be familiar with their major advantages and disadvantages. Let’s check them out.
Investing in bitcoin
With the rise of economic instability, the importance of crypto-currencies has grown significantly over the past few years. Let’s take an example of the 2013 Cyprus economic crisis. Freezing people’s funds caused serious disruptions, motivating them to move their money to a place safer than a bank. That’s exactly when crypto-currencies shined. Namely, they were one of the most popular ways to reinvest the money and prevent any further losses.
What makes us trust bitcoin and similar crypto-currencies?
First, they represent a fully decentralised, peer-to-peer form of money. Simply put, they don’t require any central authority or a middleman to be involved in the investment process. This way, you can send money to anyone and anywhere in the world without having to pay huge taxes or waiting days for the money to arrive.
Second, bitcoin is not a fiat currency, therefore its price is not affected by inflation or directly related to the economy of the country you live in.
Third, all the investments made are recorded in the public ledger, which minimises the risks of cheating. Based on the blockchain technology, it allows any member of the bitcoin network to access the records and see every user’s transaction history.
Finally, bitcoin is believed to be commodity money. This means that, when you have bitcoins, you can invest them like you invest in a business with the fiat money. Similarly to any fiat currency, it will generate interest on the investment and help you generate a notable ROI.
The disadvantages of bitcoin
One of the major problems bitcoin investors face is the market’s volatility. Namely, when compared to forex, the bitcoin market is still pretty small so that its prices tend to fluctuate fast and easily, sometimes even throughout a day.
Another drawback of bitcoin is its unpredictability. Investing in bitcoin is a long-term endeavour and, if you get lucky, you may buy it when prices are super-low and sell it when they’re extremely high. For instance, a few years ago, one bitcoin was worth around $1,000. On December 7, 2017, it crossed the $15,000 mark, and today it’s worth less than $7,000. No one knows how it will behave in the future.
What’s the difference between trading and investing in bitcoin?
In real life, trading something and investing in something are two completely different concepts. The same goes with crypto-currencies.
Trading bitcoin usually means entering the market, staying in trade for a few months and moving on once the price jumps. Unlike bitcoin investors, traders are extremely price-sensitive and are known to be ditching the market as soon as it becomes unprofitable. Many define bitcoin trading as the Wild West, a game with no rules and predictable end results. So, if you don’t like surprises or you’re afraid of losing money, trading bitcoin is not for you.
Investing in bitcoin, on the other hand, is a long-term undertaking and it gives you an opportunity to start from small amounts of money and grow them over time. This is why bitcoin investors don’t give up on the investment that easily. They hold to a crypto-currency and wait for a perfect moment to sell it (sometimes, it takes them years to do so). Most importantly, as you will enter the market prepared to wait, you will be able to minimise the risks a highly volatile crypto-currency market brings to the table.
Investing in forex
Just like the bitcoin market, forex is a decentralised global market where users can sell, buy or exchange currencies. Most importantly, today you don’t have to be a big fish to invest in it. On the contrary, with numerous forex trading platforms, everyone interested in this form of investment can enter the industry.
The advantages of forex trading
For starters, with the largest proportion of participants and $5.1 trillion in average daily turnover in 2016, forex is the largest and definitely the most fluid financial market. This means that there is usually high liquidity for trading, especially when it comes to major currencies. And, this is immensely important, given the fact that ample liquidity eliminates the price manipulation.
Another important benefit of investing in forex is its accessibility. Namely, you can start by investing a relatively small sum of money. For example, when trading stocks, you are required to provide a deposit of over $10,000. However, to invest in a foreign currency, you can start with a deposit of $100. For newbies and small-size traders, this is probably the most important feature of forex.
What also adds value to forex is diversification. Namely, currencies change and move relative to each other. Simply put, when one currency is rising, another one is falling. And, when investing in currencies, you need to have this in mind. For example, if you know that the US dollar will drop in the next period, you can buy one or more currencies you believe will rise.
The drawbacks of forex
Forex heavily depends on geopolitical and macroeconomic developments. So, in this highly volatile market, you may suffer huge losses and not be able to do anything about it.
Also, forex trading in available on high leverage. Your potential profit or loss is multiplied by the leverage ratio, which can be up to 100:1. This opens the door to gaining an amazing ROI if everything goes in your favour. However, note that things could easily turn upside down and, in this case, your losses will be multiplied.
Comparing forex and crypto-currencies is similar to comparing apples and oranges. They’re two completely different notions and need to be treated this way. Since both of them give you an opportunity to boost your revenue, you need to choose the one that works for you. Most importantly, to mitigate the risk of losing your investments, you need to familiarise yourself with the basics of these markets, keep an eye out for the latest trends, be patient, and make data-oriented decisions.