The unset of the cryptocurrency market has impacted the forex markets in several ways. From an investing thesis, traders need forex to initially purchase digital coins. The popularity of the cryptocurrency markets has helped drive investors to space, increasing the need for fiat currencies and creating a new trading environment. Additionally, the cryptocurrency market provides a hiding place in many instances beyond the watchful eye of regulators. This lack of transparency can provide a tax haven or a hiding place for illicit activities.
How Big is the Cryptocurrency Market?
The cryptocurrency market is growing but still pales relative to the trading involved in the forex markets. Between 2019 and 2020, the notional value of trades in the cryptocurrency market increased three-fold, rising to $758 billion. The size of the forex market dwarfs the size of the cryptocurrency market. As of 2019, the forex market saw $6.6 trillion in notional transactions.
Are There Cryptocurrencies that Move with the Forex Markets?
Several different digital coins have been created that move in tandem with specific fiat currencies. One such coin is called Tether. Tether is a blockchain-based cryptocurrency that is backed by equivalent traditional fiat currencies, such as the dollar. Tether tokens are traded on the Tether network.
Tether was designed to build the bridge between fiat currencies and cryptocurrencies and offer stability. It is pegged against the U.S. dollar and maintains a 1-to-1 ratio with the U.S. dollar in terms of value. One difference is that Tether Ltd. provides no guarantee for any right of redemption or exchange of Tethers which differ from the U.S. dollar, which is backed by the U.S. government.
What is the Appeal of Crypto currencies?
Cryptocurrencies have several appealing qualities. They are created by a decentralized mechanism and not controlled by a government or a central bank. The price of a cryptocurrency is driven by supply and demand. A central bank cannot lower interest rates to make the currency less attractive. This scenario happens all the time in the forex markets as governments attempt to increase exports by reducing the currency’s value and making their products more attractive to other countries.
Additional countries have capital controls and tax policies to control the flow of money and levy taxes. There is concern that cryptocurrencies can be used to circumvent taxes and capital movement, leading to increased demand.
Cryptocurrency exchanges are now more vigilant. When you open an account, you need to provide them with documentation that shows your identification and your national or social security number. Initially, this was not the case, and it allowed many individuals to move money around the globe without recognition.
The Bottom Line
The upshot is that the cryptocurrency markets are becoming more popular. On Wednesday, 4/14/21, Coinbase, the largest cryptocurrency exchange, started trading on the Nasdaq Exchange. This initial public offering culminated in cryptocurrency trading coincided with the highest level of Bitcoin and Ether prices in history.
While the cryptocurrency market might be able to take some market share from the forex markets, the increase in the volume of digital coins will increase the notional value of trades in the forex markets. As traders exit or take profits, they will be monetizing their cryptocurrency trading in sovereign currency. The illicit activities that took place in the cryptocurrency markets will slowly be fazed out. Regulators like the IRS continue to crack down on tax issues relative to digital coins.