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Trading Lessons

Digital Currencies Are Reshaping Forex Markets

Currencies / BlockChain Apr 24, 2018 - 07:57 AM GMT

By: Submissions

Currencies

Peter Lloyd writes: For many traders and investors, the forex market has always been a shining example of what a financial exchange should be: a truly global, highly liquid and decentralized platform where the diversity of participants ranges from sovereign central banks to institutional investors and from investment banking firms to day traders.

It so happens that this view of an ideal market is being augmented by the growing interest in cryptocurrency exchange platforms, which more closely resemble a "perfect market."


Searching for the Elusive Perfect Market
Contrary to what many people believe, the forex markets are not active every single day and hour of the week. For most individual traders in the United States, forex activity ceases from Friday afternoon until Sunday evening; this is due to the central banks being closed and potential transaction volumes being negligible.

When trading Bitcoin, Ethereum and other digital currencies, hours of operation are not an issue since there are no central banks to worry about; as long as exchange platforms can connect to the internet and access the blockchain, trades can be executed at any given time.

It should be noted that some retail forex brokers in the United Kingdom have added Bitcoin as a contract for difference (CFD) option; based on this development, we may see BTC/USD as a forex currency pair in the future, and traders will probably push for trading hours to be extended around the clock.

The lack of central bank influence also means that the cryptocurrency markets are even more decentralized than their forex counterparts. EUR/USD traders, for example, are practically at the mercy of the monetary policies respectively undertaken by the European Central Bank and the U.S. Federal Reserve; this is not the case with cryptocurrencies.

Liquidity and Volatility
Nothing in the world can compare to the sheer liquidity of the forex market; after all, more than $4 trillion in forex transactions are executed on a daily basis. For the cryptocurrency market to approximate this level, more sovereign central banks would have to adopt digital currencies, and thus far only Russia and Singapore have moved towards doing so on an exploratory basis.

With the above in mind, if we look at the current list of cryptocurrencies by market cap, we can see that Bitcoin has already surpassed Goldman Sachs, the world's largest investment banking firm, in terms of total value.

With regard to volatility, the cryptocurrency market is certainly going through some growing pains; however, this is something that the forex markets are familiar with. If we look back to the days of the Latin American debt crisis in the 1980s, we can observe wild volatility as the USD wildly increased its value against numerous foreign currencies.

Financial markets are no stranger to speculation; even the Dojima rice market in Japan suffered spectacular crashes centuries ago, and we all know too well about what happened to Wall Street when the Dot-Com and housing market bubbles burst.

The Future of Forex As We Know It
At this time, cryptocurrency markets are as pure as they can be; they are very similar to money changers on the street corners of Latin American capitals when the greenback was obliterating all other currencies. In fact, the dire economic situation in Venezuela and Zimbabwe has turned Bitcoin into a de facto currency, much to the dismay of central banks in those nations.

Digital currencies are clearly the future of forex markets due to the high level of innovation they bring to the table. Retail forex brokers will love to use the blockchain as their trading ledgers, and thus we can expect to see cryptocurrency traders evaluating bid and ask quotes, applying trailing stops, taking opposites sides of trades, and even shorting cryptocurrencies in the near future.

By Peter Lloyd

© 2018 Copyright Peter Lloyd - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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