How Do Cryptocurrencies Correlate With Traditional Forex Pairs?

Cryptocurrencies do not have a high correlation with forex pairs. However, for investors, in some special cases, they may be linked to market volatility or certain geopolitical events.

For example, a large fluctuation in the price of a particular cryptocurrency may cause investors to seek safe havens such as fiat currencies, which can profoundly affect the demand-supply balances of certain forex pairs. However, I cannot claim that cryptocurrencies and traditional currency pairs are directly related to each other.

To put it soberly, a cryptocurrency is an asset that can be traded. Not everyone likes the linguistic proximity to money and currency.

You probably automatically have images of Bitcoin or Ether coins in your head because many articles or films are illustrated with such symbolic images. Cryptocurrencies only exist in digital form and not as cash. 

Every cryptocurrency has a blueprint or a kind of rules of procedure that defines its purpose and functioning and clarifies such questions as “How do cryptocurrencies correlate with traditional forex pairs?”

“How are new units of cryptocurrency created?” “How are transfers checked, processed, and documented?” “How can the rules of operation of cryptocurrency be changed?” etc.

These aspects are also regulated for traditional currencies. However, their rules of procedure are not summarized in one document or a program code, but rather result from a variety of laws or simply from general customs.

For example, only the European Central Bank is allowed to issue the euro as new cash. It received its mandate from the parliaments of the euro countries, which could also change or theoretically withdraw it, or, as is currently being discussed, expand it to a digital euro. Individual commercial banks can create new books or bank money when they issue loans.

What Is The Relationship Between Cryptocurrencies And Forex Currencies?

Although there is no direct financial interaction between cryptocurrencies and forex pairs in today’s financial ecosystems, they are two different investment models that are indirectly affected by each other. First of all, the main difference between them is that they are traded on different markets and stock exchanges. 

While cryptocurrencies are digital asset classes that can be bought and sold with digital wallets on exchanges offered by digital banking platforms, forex pairs are fiat asset classes that are generally recognized by official and traditional banks. One of the most important factors for the relationship between them is their volatility differences. 

While both investment models are volatile, I can easily argue that cryptocurrency markets have higher volatility. If I had to explain this with a simple example, the Dollar will never appreciate or decrease in value 100 times overnight, but this and more price fluctuations can be seen in many cryptocurrencies.

This may cause investors seeking a more stable market to shift to forex markets. However, I should remind you that in addition to these, there are some similar elements between forex pairs and cryptocurrencies. Speculation initiatives in the markets, investment and trading models are similar models in terms of risk management strategies.

How Do Crypto-Fiat Pairs Impact Currency Trading In Forex Markets?

Crypto trading initially describes the process of buying, selling, and trading cryptocurrencies on a trading platform (broker) or cryptocurrency exchange. Traders use market data, technical analysis, and various trading strategies to decide when and how to trade.

Essentially, crypto trading is based on speculation about changes in the price of cryptocurrencies. The goal is to buy a cryptocurrency at a lower price and sell it at a higher price to make a profit.

However, there are also more advanced trading methods such as margin trading, where traders use borrowed money to take larger positions and potentially make larger profits. Here you move into the area of ​​day trading.

What Factors Drive Correlations Between Cryptos And Traditional Forex?

Cryptos and traditional forex have a low correlation in terms of the volatility of markets. Cryptocurrencies, which are digital asset classes of blockchain technology, and forex trading, where profits are made through trading different exchange rates and depending on price fluctuations, do not have a direct correlation with each other. 

However, there is an interaction between these two investment models, albeit low. Factors affecting the correlation between cryptocurrencies and traditional forex pairs may be volatility in cryptocurrencies, volatility issues, liquidity risks, geopolitical developments, and non-compliance with legal banking regulations.

Although cryptocurrencies are more advantageous compared to forex trading or other investment models in terms of speed and transaction fees, they can be risky for long-term investments with liquidity risks and sudden price fluctuations. Investors who care about this feature are interested in forex trading pairs instead of crypto trading.

Can Traders Use Cryptocurrency Data For Forex Market Analysis?

Different investment models can be managed with cryptocurrencies. These investment types include common forex trading tools such as technical analysis and fundamental analysis, many of which are utilized in forex trading.

However, since the two investment models have different market dynamics, it will not be profitable to evaluate cryptocurrency data in forex market analysis. However, the process of making profits through price fluctuations in the trading project with cryptocurrencies is not much different from forex trading.

The main difference between them is that while price fluctuations may be more frequent and sudden in investment projects managed with cryptocurrencies and digital wallets offered by the crypto exchange platforms, liquidity and volatility turn into a safer haven in forex trading pairs.

Are There Trading Strategies That Leverage Crypto-Forex Correlations?

Today, it is possible to manage profitable investment projects and benefit from strategies on the financial correlations between cryptocurrencies and forex trading. To benefit from such strategies, it is necessary to follow both the current values of cryptocurrencies and the forex markets currently.

Supply-demand balances, sudden price fluctuations, and price movements in cryptocurrencies may cause investors investing using cryptocurrencies to become interested in forex trading.

Or, conversely, forex traders who value earning income in the short term may show interest in cryptocurrencies in a way that affects the supply-demand balances. In such cases, it is possible to develop the right investment portfolios according to supply-demand dynamics by creating the correct future perspective.

See you in the next post,

Anil UZUN