Why Trading FX is better than Cryptocurrencies
It’s irrelevant that national currencies issued by sovereigns are without any intrinsic value—no currency has been backed by gold or silver for decades. It doesn’t matter. We need money to serve as a medium of exchange, meaning to pay for bread and milk, rent, and new shoes. As a medium of exchange, what we call money is a necessity.
Money is also how we keep score. Literally. A company that makes a product for $3 and sells it for $2 has a lousy income statement and will go out of business. If your income is $1000 but your rent is $2000, you will get evicted for non-payment. We need money for basic bookkeeping.
The third function of money is “store of value.” As noted, that went out the window a long time ago when Nixon took the dollar off the gold standard in the 1970’s. Those little scraps of dirty paper obviously have no intrinsic value. But they do have purchasing power as long as other people, including car dealers, hairdressers and landlords, accept them as payment for goods and services.
And who manages the supply of money? The government of every country. In the US, it’s the Treasury. Who determines how much interest should be paid for saving instead of spending? The Federal Reserve. We may have a thousand criticisms of how they perform that job, but the fact remains that they are the government and we have no choice but to trust in their output, that is, the supply of money. Unless there is a catastrophe of unprecedented scale, the Treasury can be counted on to run the printing presses and the Fed can be counted on to set interest rates, which is the reward we get for deferred spending.
Now enter cryptocurrencies. Talk of bringing about the downfall of established currencies is mostly foolish blather. As long as there are governments, government will produce money. Even if 99% of the citizens of a country were to stop using government money, governments would still produce it. It’s their job.
No, the real appeal of crypto is not to challenge the legitimacy of governments, but to give the middle finger to The Man. It’s an act of civil disobedience, and far more clever than marching around with placards or staging a sit-in. Cryptocurrencies are an assault on one of the government’s core functions, the issuance of money, but can overwhelm official government money only if it performs the three functions of money—medium of exchange (buying and selling stuff), keeping score (bookkeeping), and store of value. So far, crypto has only the store of value function.
Here’s the real problem: those who issue crypto (or allow it to be acquired) are out to get The Man, which means by definition they wish to operate outside the conventional boundaries of The Man, including things like legal contracts. The government has no choice but to issue money and keep the books using money as the measuring rod, but crypto issuers can choose and change their own rules, suspend issuance, get hacked, die without leaving any notice of the key to the printing press, and other actions not in the best interests of the holders. We can argue that the government doesn’t care about the best interests of any individual person, but it cannot operate (collect taxes and spend on roads and armies) with money. The crypto issuer has no obligation whatever to the crypto user, including going out of business with no advance notice.
When it comes to comparing FX to crypto, FX has a clear advantage—it’s government money. When you are trading UK pounds for US dollars, everyone in the world can discover the exchange rate at any moment in time. If you were to take delivery of UK pounds, you can be assured that the London bank into which your money is deposited will honor your deposit and it will still be there tomorrow and next week and next year. That’s because the banks are regulated by the very government that issued the money in the first place, everywhere in the world. If your London bank goes bankrupt, the UK government has insured your deposit and will notify you—is required by law to notify you–that your money was transferred to a different bank.
You don’t get any such clear and universal price discovery, transfer efficiency or insurance in crypto.
Now on to brokers. Brokers are regulated in the best counties, but not all countries and not with the same degree of oversight as banks in any country. Crooked and incompetent brokers do exist. There are fewer in the US and UK than in earlier years, but your deposit on initial funds and subsequent gains in a brokerage account are not anywhere near as safe as in a bank. Still, they are not safe at all in a crypto account, and if you choose a decent broker, the risk you are taking of losing your entire stake is considerably lower.
Going back to clear and universal price discovery, you can easily find out the exchange rate of any currency pair at any moment. You can check online newspapers and websites like Bloomberg and Reuters, which report with a 10-minute (or more) time delay. If your broker is hosing you on exchange rates with prices consistently off the universal quotes, you can withdraw your money and move to a better broker. You can’t switch crypto easily at all. There is no transfer efficiency because each crypto is its own governing currency and there is no exchange. You must exit entirely and start over.
That’s the institutional side of things. Now consider how prices get determined, or “price discovery” in economics terms. In the FX market, big banks and other participants deal billions of dollars per day, establishing a large foundation. The retail market, which is you and I, get a free ride on all the liquidity. Any spike or gap is quickly filled. The price setting process is transparent and the determinants well known. Fundamentals and news about fundamentals drive new positions, as well as technical indicators and patterns. FX was the first market to adopt technical analysis in part because the vast number of players means the indicators really are measuring “market sentiment.”
What drives prices in crypto? Technical indicators based on the supply and demand of a limited number of players, most of whom do not have deep pockets and can’t defend a position for long. As for fundamentals, what are they? Does economic data drive crypto prices? Not so you’d notice.
This is not to dismiss crypto. Fortunes have been made and lost. It has the innate appeal of sticking it to The Man, or at least annoying governments. But as a trading instrument, it has big drawbacks. You can make or lose just as much money in FX as in crypto, but at least in FX you have a fighting chance.
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