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Having fallen from a high of almost 20,000 USD per Bitcoin, Bitcoin’s value has fallen to almost half that value already in the first quarter of 2018.

Trading volumes of Bitcoin against fiat currencies USD and JPY continue to set new records. At the end of January, 2018, the USD value of BTC/USD was 1.1 billion USD, or 33.4% of the market. This sits in second place to the BTC/YEN pair at 139.2 trillion Yen, or 37.2% of the market. The balance of all other BTC currency pairs make up the remaining third of market trading volume.

The foreign exchange (FX) market is the largest and most liquid market in the world. But the one everlasting feature of markets is their fluidity and fickleness, and many FX traders are now keeping one eye on their own traditional market and the other on the new kid on the block””cryptocurrencies.

Cryptocurrencies””so named due to the cryptography technology used to secure individual transactions on the blockchain, or Internet ledger, have attracted huge attention from individual investors and speculators, and increasingly from institutional investment professionals.

FX exists due to the perceived change in value between currency pairs that reflects anticipated fluctuations in future interest rates. Cryptocurrencies operate more like commodities in respect to their relation to other individual, or “fiat” currencies. As such, they are less like pure currencies themselves and more like assets such as interest rate futures.

Interest in cryptocurrencies, or “alt” (alternative) currencies, as they are sometimes called, has skyrocketed due to the unprecedented volumes seen on international cryptocurrency exchanges. Recently, the volume of the benchmark BTC/USD pair exceeded that of EUR/USD, the most popular of the major fiat currencies traded in 2017.

Volume of BTC/USD vs Fiat Currency Trading in 2017

Such massive capital movements cannot solely be attributed to speculator action but must reflect significant involvement by large institutional investors such as insurance and investment companies. The fascinating aspect of cryptocurrency trading is not only the element of volatility associated with the instruments themselves, but also the relationship of alt currencies with the range of extant fiat currencies. With dramatic levels of volatility, totally eclipsing those of the established, somewhat sedate FX market, alt currencies are set to continue to generate interest within the financial community. Whereas FX volatility is largely influenced by interest rate movements and geopolitics, volatility in the cryptocurrency market is mainly fueled by rumor, speculation, and media hype.

The key challenge facing the alt currency market is to expand volume trading outside of the main, well-known coins such as Bitcoin and Ethereum. With over 1,000 individual cryptocurrencies on the market, and that number growing steadily, the one factor that might encourage liquidity is ironically, regulation. However, with the lack of regulation being one of the key attractions to this recent financial phenomenon, such a move to control the market is likely to meet some resistance.

Security is also likely to hold back future development in the cryptocurrency arena. With scandals and horror stories of lost cryptocurrency millions appearing daily in the financial press, some measure of policing is likely to be required. This is in stark contrast to the FX market where deposit insurance provides a measure of security against any fraudulent activity. Fortunately, this situation is likely to change. For example, a new alt currency exchange called Legolas is being set up with the objective of providing cryptocurrency investors with a similar level of protection offered to FX investors.

It is too early to speculate whether cryptocurrency activity is likely to permanently overtake that of FX, but it remains a distinct possibility. However, with the increased adoption of the blockchain in industries other than financial, it is probably a good, one-way bet.