The Forex market emerged in the mid-1970s after the economic model of the 1944 Bretton Woods Agreement apparently stopped handling modern challenges…
The story of emerging of the Forex market
Bretton Wood consolidated the dominance of the dollar in the global economy. The dollar received gold backing, the IMF and World Bank were created, but the problem was soon revealed. After all, if the dollar is backed with gold, then it cannot be emitted in excess of gold reserves. To restore the economies destroyed by the world war and to finance their further rapid growth, it was necessary to have many dollar loans that FRS could not provide. The world began to suffocate from lack of currency, and the decision was found in the rejection of the gold standard and switching to a system of floating exchange rates.
These changes were recorded in January 1976 and were called the Jamaican agreements. So, that’s how the Forex market appeared.
Many people mistakenly believe that the main function of Forex is executing the speculative operations with currencies, and also converting currencies in export-import transactions. But this is only a shown part of this world. The main profits are made on hedging risks. E.g. a manufacturer with production capacities and sales markets in different currency areas needs to compensate for risks, literally, insure against possible losses due to changes in exchange rates. Serving this sector of the economy by banks and financial companies (for instance, selling futures and options to change exchange rates) is their main source of revenue.
Thus, the system of floating exchange rates is a mechanism for redistributing part of the profits from the industrial and trade sectors of the economy in favor of financial ones. That is the way how money is made, and therefore the Forex market will work effectively as long as the fiat currencies will remain the main means of settlement.
The Ugly Truth
What is called ‘Forex’ in the trading environment, has nothing to do with the mechanism described above. Forex for an ordinary trader using the MetaTrader platform in one of the many brokerage (in fact, dealership) centers is a gaming mechanism. Money mainly does not leave the server of the dealer company, the absolute majority of transactions are blocked by the internal positions of traders, and in fact the Forex turns into an exciting game, and traders into players – sometimes lucky, but more often – not very lucky.
At Forex, traders, in fact, do not trade in currency. They are always betting among themselves – who will better predict the future exchange rate. Forex is a kind of a game club. The trader opens a deposit denominated in some currency, usually in US dollars. Whatever position he opened, he still owns only US dollars. For example, if a trader buys eur-usd, it does not mean that he becomes the owner of the euro, it means only that he made a bet with other players in the game that he counts on the growth of the euro. If the eur-usd rate increases, the trader increases his position in dollars, if it decreases – his US dollar position decreases too. Physically, a trader does not own a single euro, even if he buys eur-usd for his entire deposit.
World of Crypto-Currency – the world of real trading
The world of cryptocurrency is arranged in a completely different way. Crypto-currencies trading on exchanges is carried out (unlike Forex) strictly in those coins that are used. Each trader has the coins that are in his portfolio, and not their equivalent, expressed in the deposit currency. He does not make a bet, he actually exchanges one coin for another and any time can take them to his wallet. Trading is carried out not through imitation but through real exchange transactions. This is the most important difference between the world of forex and the world of cryptocurrency.
There are other differences, no less important. Exchange rates are the reflection of the real economy state of the countries issuing these currencies. Exchange rates are in a balanced state, the changes are fixed at the fourth to fifth decimal places.
In the case of cryptocurrency, the trade amplitude is higher by hundreds and thousands of times and taking into account the market’s saturation, this factor turns into an indisputable advantage – anyone who bought a cryptocurrency even at the peak of growth can only wait for a pullback and still get a profit.
Strong fluctuation amplitude of Crypto-currency rates allows making a profit from exchange transactions without using a margin lever, which excludes the possibility of losing the deposit due to the margin call. In fact, this means a much higher security of the trader at the crypto-currency market comparing to the Forex trader.
The Future Is For…?
Of course, Forex still has quite a lot of advantages. This is margin trading, and detailed trading platforms such as MT4 or MT5, which enable the creation and use of hundreds and thousands of indicators and trading robots. At Forex, technical analysis works well, which, as is known, is adequate just in balanced markets.
Traders, trading on Forex, are used to these small facilities. For them, brokerage firms began to offer an imitation of trade in crypto-currencies – in fact, an analog of trade in currency pairs. But this does not mean that if you buy bitcoin in such a company, you will indeed become the owner of bitcoin. No, you are still the owner of the currency that you used when opening and replenishing the deposit. You don’t own bitcoins, because you do not buy them, you just bet on changing its value. You do not buy coins, you play against a broker or against other traders. You do not own the coins.
Thus, a comparison of Forex and cryptocurrencies markets shows that even if they seem to be similar, these are completely different markets. For whom is the future? The answer is obvious – it’s for the market that integrates into the real economy, and where you can be both a player and an investor. Your cryptocurrency portfolio is your real asset. At Forex you will remain a player, even if you consider yourself a trader.
Welcome to the world of the future!