Understanding how to identify a strong forex pair and a strong cryptocurrency are two very different processes. The major difference lies in the unique nature of each market. Although both require you to analyze factors such as their potential for returns and market trends, the dynamics that lie behind the strength of assets in these two markets differ significantly.
To find a strong forex pair, you need to identify the strengths of two currencies based on economic factors, central bank policies, and political conditions. The process of identifying a strong cryptocurrency, on the other hand, involves looking for the most promising crypto based on the asset’s technology, its use case, its long-term potential, and how well it is adopted in the market.
Understanding the Basics of Crypto
Crypto’s strength is determined by several factors, including its use case, underlying technology, and its level of adoption by users. Cryptocurrencies are not traded in pairs or in the same way in which forex is. Instead, they are often analyzed and treated as independent assets. Although some trading pairs exist, such as the BTC/ETH pair, the focus is usually on the growth potential of individual cryptocurrencies and not on the pair.
Use Case and Technology
Crypto’s technology and its primary purpose or its practical use in the real world are the major determinants of its strength. For example, Ethereum’s strength lies in its ability to support smart contracts, while for Bitcoin it is in its immutable role as a store of value. The technology behind cryptocurrency is not just about looking at how it powers the crypto itself but also considering whether it solves a particular problem or addresses an issue within the digital economy.
Support and Backing
The strength of a cryptocurrency is also determined by the forces behind its endorsement or the companies it is associated with. Cryptocurrencies with influential figures behind them tend to be widely accepted and increase in value more quickly than those without. An example is the meme coin DOGE, which Elon Musk has been supporting. Its price is currently on the rise and is expected to rally to $2.4.
Market Size and Competition
A crypto’s future growth depends on its market size, the competition, and how it is better than its competition in terms of its offerings. There is a lot of competition in the crypto industry, so a token has to prove its worth compared to other established tokens already circulating in the market.
Market Adoption
The level of a crypto’s adoption is an indicator of its strength. Cryptocurrencies that have many uses, such as payment systems, DeFi (Decentralized Finance), gaming, or NFTs (Non-Fungible Tokens), can lead to greater demand than those with limited use cases.
Understanding the Basics of Forex
Forex, also referred to as FX, is short for foreign exchange. Foreign exchange is a global marketplace for trading national currencies, which is only available 24 hours a day except on weekends. Organizations, banks, and traders use forex to exchange one currency for another. Forex traders take advantage of the exchange rate of currencies and buy when they are low to sell when the prices increase. The day-to-day value of currencies can either rise or fall, leaving traders to use market indicators and forex historical data to estimate when it might be a good time to sell.
Economic Indicators
Economic data plays an important role in helping to identify strong currency pairs. A country’s employment statistics, Gross Domestic Product (GDP), and inflation rates determine how weak or strong a currency is. This information is used by traders to predict a currency’s movement.
If a country’s GDP growth is strong, the currency of that country may also become strong. This makes any pair that will have that particular currency attractive. Inflation can be likened to the weakening of a currency’s buying power, so countries that have high inflation rates have weaker currencies. If a country faces high unemployment rates, it shows that it is economically distressed. This in turn will negatively affect its currency.
Interest Rates
Central banks set interest rates, which affect currency demand. If the interest rates are higher, they give lenders a better return as compared to other countries. This attracts foreign capital and causes the currency demand and value to rise. Forex traders often prefer pairs with currencies from countries that have rising interest rates.
Cryptocurrencies were negatively affected when the Federal Reserve introduced monetary policies that increased interest rates in 2022. The Fed introduced these restrictive monetary policies after crypto value peaked in November 2021. Cryptocurrencies seemed to struggle whenever interest rates showed any signs of rising until 2023 when the Bitcoin price was boosted by Bitcoin EFTs.
Liquidity
A forex pair’s liquidity refers to how easily a currency pair can be bought or sold without affecting its price. There are major forex pairs like EUR/USD and GBP/USD, which are highly liquid. This means that traders can quickly enter and exit positions at the price they want and incur low transaction costs. The EUR/USD pair is the most liquid of all currency pairs, making up nearly 30% of the forex market.
Crypto liquidity varies widely between major coins like Bitcoin and smaller altcoins. Traders will need to assess market depth, which shows the quantity to be sold against the price per unit, before investing.
Volatility
The shrinking or growing of world economies coupled with other events like the central bank policy can lead to forex volatility. Volatility measures the variation in a currency pair’s trading price. Highly volatile currency pairs can offer more trading opportunities and profitability, but they come with more risk and higher transaction costs. Traders choose pairs based on their risk tolerance and their trading strategies.
The cryptocurrency market is very volatile and therefore lacks the stability of the forex market. It is very common to find daily price swings of 5-10% in the cryptocurrency market. Of course, technical analysis is important in the crypto market, but it is less reliable than in the forex market. The crypto market is highly influenced by sentiment analysis, which is often driven by social media trends and public perception.
Political Stability and Economic Performance
If there is an imbalance in political factors such as elections and policy changes, the market will be filled with uncertainty, which affects currency values and may even cause volatility. Political stability and instability affect exchange rates differently. Traders often prefer currency pairs from countries with stable political environments and strong economic performance to reduce risk. Traders need to be well-informed about political events to make the right market decisions.
Conclusion
Although both forex and cryptocurrencies offer investors and traders an opportunity to make profits, the methods that are used to identify the assets’ strengths are very different. Forex pairs are more stable and predictable because they depend on assessing economic conditions and relative currency performance, unlike cryptocurrencies, which are assessed based on their individual attributes and adoption trends.
