THE CURRENCY MARKETS...
What is Foreign Exchange (FOREX)?
The Foreign exchange market - also known as FOREX or the FX market - is the world's most traded market, with turnover of $5.1 trillion per day.
To put this into perspective, the U.S. stock market trades around $257 billion a day; quite a large sum, but only a fraction of what forex trades.
Forex is traded 24 hours a day, 5 days a week across by banks, institutions and individual traders worldwide. Unlike other financial markets, there is no centralized marketplace for forex, currencies trade over the counter in whatever market is open at that time.
How FX Trading works
Trading forex involves the buying of one currency and simultaneous selling of another. In forex, traders attempt to profit by buying and selling currencies by actively speculating on the direction currencies are likely to take in the future.
The foreign exchange market is unique because of the following characteristics:
its huge trading volume, representing the largest asset class in the world leading to high liquidity;
its geographical dispersion;
its continuous operation: 24 hours a day except weekends, i.e., trading from 22:00 GMT on Sunday (Sydney) until 22:00 GMT Friday (New York);
the variety of factors that affect exchange rates;
the low margins of relative profit compared with other markets of fixed income; and
the use of leverage to enhance profit and loss margins and with respect to account size.
As such, it has been referred to as the market closest to the ideal of perfect competition, notwithstanding currency intervention by central banks.
According to the Bank for International Settlements, the preliminary global results from the 2016 Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Markets Activity show that trading in foreign exchange markets averaged $5.09 trillion per day in April 2016. This is down from $5.4 trillion in April 2013 but up from $4.0 trillion in April 2010. Measured by value, foreign exchange swaps were traded more than any other instrument in April 2016, at $2.4 trillion per day, followed by spot trading at $1.7 trillion.
The $5.09 trillion break-down is as follows:
$1.654 trillion in spot transactions
$700 billion in outright forwards
$2.383 trillion in foreign exchange swaps
$96 billion currency swaps
$254 billion in options and other products
What is CRYPTOCURRENCY?
A CRYPTOCURRENCY is a digital or virtual currency designed to work as a medium of exchange. It uses cryptography to secure and verify transactions as well as to control the creation of new units of a particular cryptocurrency. Essentially, cryptocurrencies are limited entries in a database that no one can change unless specific conditions are fulfilled.
The above concepts are hard for many people to grasp but the other bewildering fact is that there are over 1,300 cryptocurrencies in existence. Each has subtle differences, but the largest by market cap and therefore the most commonly used are Bitcoin, Ethereum, Ripple and Litecoin. Let's take a very quick look at each:
Bitcoin is the big daddy of cryptos and the one that most people are aware of. It was created in 2009by the still mysterious and pseudonymous Satoshi Nakamoto. There are actually now two types of Bitcoin, the original and Bitcoin Cash which came about as a way of solving the high transaction times on the Bitcoin network.
Ethereum, also known by the name of its token, Ether, is similar in that it uses a blockchain, but was created more with an eye to what are known as "smart contracts," rather than use by everyday consumers. Smart contracts replace the need for paper contracts between parties to an agreement and remove the need for signing and amending contracts written on paper.
Ripple is aimed at payments made between financial institutions. These payments have until now typically taken days to process and have been expensive, particularly when they involve low-value, high volume payments. The blockchain makes those transactions faster and cheaper.
Litecoin is probably the closest to Bitcoin in that it is designed as a general use currency. Adherents will tell you that it is an improved version, as it allows for a greater volume of transactions and performs them faster.
As we've seen, the price of all cryptocurrencies will fluctuate, often violently. Some, no doubt, will not survive, but with big companies and Wall Street institutions getting involved, it is clear that cryptos are here to stay.