Technological innovations have been rapidly changing the world over the past century. First, the first personal computer appeared, which simplified calculations, documentation, and financial reporting. Then the Internet appeared, which made the world more global and closer. The next step was blockchain, a distributed ledger technology that gave birth to decentralized and anonymous digital money called cryptocurrencies. Although there are still few settlements in cryptocurrency, as a tool of speculation, bitcoin and other cryptocurrencies with high volatility have become a popular subject of trading in order to capitalize on rate changes.
Its specialists compare cryptocurrency trading solutions offered by forex brokers with those offered by cryptocurrency exchanges. Are these two sectors competing or interacting, and which is better for the user?
The cryptocurrency exchange industry has a large pool of users and fans around the world, mainly cryptocurrency investors and traders – active members of the global crypto community. However, this area still has many problems:
- Tension in interaction with banks, regular bans, account closings, problems with the withdrawal of money in fiat equivalent;
- Errors regularly occurring even on large exchanges, hacker hacks leading to loss of funds;
- Insufficiently good software with many vulnerabilities, leading to difficulties in work and loss of funds;
- Problems with government regulation in a number of countries;
- Lack of regional focus in advertising campaigns, infrastructure preparation, technical support, which creates problems with reaching the audience of the regions of Eastern Europe and South America.
The international forex market appeared in 1976, not only before the hype around crypto tokens, but even before the advent of the Internet. Its formation as we know it now (retail forex) began with the advent of the Internet, about 20 years ago. The advent of the Internet marked the beginning of the Internet trading of currencies. Many companies and forex brokers have sprung up. It became possible to open an account, fund it and trade online.
Over the 20 years of the industry’s existence, all business processes have been sufficiently standardized and transparent: registration and verification of users, obtaining a regulation license, resolving disputes, submitting reports to regulators, etc.
For 20 years of work, forex has developed high market standards for software for brokers. Now there are many quality programs, both paid and free, for trading and tracking the progress of trades. Their security is ensured by encryption, SMS confirmation, transaction history, and a data backup system.
Interaction of Crypto Exchanges and Forex Brokers
The intensity of the cryptocurrency market development has caused a demand for investments in cryptocurrencies. Forex brokers have come into play. Seeing the emergence of new tools and the demand for them, they began to quickly adapt to new realities and try to get their place in the hype. Moreover, they already had a lot from a technical point of view and it was not so difficult to add a few more trading instruments.
The situation with the regulation of services in the forex market causes a lot of controversy. In some countries, the regulation is so strict and places such restrictions on brokers that it does not allow them to meet the needs of traders, limiting the range of trading instruments, the amount of leverage and prohibiting popular types of affiliate programs. In some countries, it simply does not exist.
The main task of all these regulations is to protect traders from unscrupulous companies, and for companies – to create a comfortable environment for business development. However, over the years, practice has shown that it is quite difficult for regulators to find this balance. For example, any experienced trader understands that a broker’s license does not guarantee anything. Licenses, as a rule, protect only citizens of the country whose regulator issued the license. And the tightening of trading conditions makes trading through such an intermediary not very attractive. And it turns out that the system becomes more complicated, but does not bring relief to the industry, and the required effect is not achieved.
CFDs on cryptocurrencies give people the opportunity to test work with digital currencies, and regulators – to check investments in cryptocurrencies in conditions where their legal status is not fully determined.
The ability to work with CFDs on cryptocurrencies under the supervision of a regulator would create exactly the effect of the very “regulatory sandbox” that is used today by many regulators of the world to determine approaches to regulation of modern, often quite ambiguous in their legal nature, innovative financial instruments.
Another promising area of interaction is crypto forex. It’s not just about trading CFDs in cryptocurrencies on a broker’s site or buying an investment portfolio that many companies offer. This concept includes the process of trading or investing, which is completely based on blockchain and other crypto technologies. At the same time, the cryptocurrency issued to brokers is simultaneously a trading instrument on the exchange and a means of payment for mutual settlements with clients.
One of the advantages of crypto forex is the opening of accounts in cryptocurrency and making settlements between brokers and clients with their help. This significantly reduces costs compared to financial transactions in fiat currencies.
The advantage of crypto forex is that the technology will allow working in countries with tough financial regulation, where it is very difficult or impossible for companies to enter the market. This is, for example, in China, Thailand, India, Arab countries, Malaysia and other countries. Crypto forex can be represented in these markets, even without opening a real office and work with clients from all over the world. Cryptocurrencies have no borders – you can fund your account, trade or invest from anywhere in the world.
Do forex brokers and crypto exchanges compete? Certainly. There is a struggle for clients who want to trade cryptoassets, and, in this case, forex brokers are entering “the wrong territory”. But an interesting fact is that forex brokers for crypto trading are forced to cooperate with crypto exchanges. To provide cryptocurrency trading to their clients, brokers need quotes and hedging capabilities to minimize risk. For this, at the moment, it is more convenient and logical to use large cryptocurrency exchanges.
With such cooperation, the crypto exchange receives large clients in the form of forex brokers, thereby making additional profits. Also, a large pool of forex traders is a good primary base for crypto exchanges. In turn, the broker gets the opportunity to add new trading instruments, which makes it possible to get new clients and expand the toolkit for the current ones.
At the same time, there is direct competition – the exchange, giving its liquidity to the forex broker, helps an indirect competitor and loses some of the clients who will trade through the broker. And the broker loses some of its clients who leave to trade on exchanges (if the broker did not manage to add cryptocurrencies, or the client wants to be closer to real assets and be able to withdraw them). Also, the forex broker will receive less new clients focused on gambling, because they will react to advertising “bitcoin trading” and will pass by forex in principle.
How Cooperation Between Brokers and Exchanges Affects Clients and the Market
If we talk about the impact of such interaction, then although both exchanges and brokers receive both pros and cons, cooperation remains beneficial. Trading volumes, number of clients and liquidity are growing both for brokers and exchanges. Without each other, brokers and exchanges would simply receive less clients, and so, although they share the profit with each other, they still get it. At the same time, the cryptocurrency market, the number of investors and traders, and investments in the sphere are growing, which has a positive effect on the industry as a whole.
Users get a choice of how and where to trade: they can go to the exchange, or they can contact a broker and trade through it. In the first case, the set of tools and the ability to withdraw cryptoassets is wider. In the second case, there is an opportunity to get a higher service, while the choice of coins is less and there is no possibility of a real purchase.
Competition generates an increase in the quality of services provided. The number of speculative instruments is growing, the possibility of trading with leverage appears on exchanges, brokers are increasing the number of traded cryptocurrencies.
Now we are witnessing another technological revolution, which was marked by blockchain and cryptocurrencies. We also observe how forex brokers are actively involved in the fight for new crypto clients. The two industries, crypto exchanges and the forex market, began to interact.
Chances are good that the industries will continue to exist separately, intersecting only in the issue of liquidity. But it is also likely that in the near future the line will be blurred, and a “financial multi-purpose machine” will appear on the market, making it possible to trade cryptocurrencies with real purchase of assets, and provide trading in currency pairs without delivery.