This article is written by Isonex Capital to bring a little perspective on the basics of trading digital currencies. We human beings are a strange and fascinating lot. There is no escaping the fact that we are a species of traders — for many of us, it’s second nature, from early childhood swapping lunch snacks in the playground to the way we instinctively haggle like our lives depend on it in any marketplace in the world, usually to the amusement of the locals. Trading has been an integral mechanism that historically enabled our nomadic ancestors to interact and flourish into the societies we live within today. Trading may not always be profit-based, but everyone has something the other wants, and trading is the way we go about attaining it.
In the global digital currency markets, the principle remains the same. When someone trades digital currencies, all they are actually doing is buying or selling, hopefully for a profit. But what drives the value of digital currencies ? The answer is the same as with any other commodity, and that is supply and demand. The greater the demand, the higher the value, and scarcity will drive that value even further. If something has an endless supply, then this will lead to a devaluation. The price at which demand matches supply is called the market price. This is the price level at which both the buyer and seller agree on both price and volume. An important element of the digital currency markets is understanding bid and ask prices and the two most important types of orders, market and limit orders.
When trading in digital currency, most of us use the services of an exchange. Buyers and sellers are matched within an exchange, so you need to understand the bid and ask prices. Unlike most things you buy in a store where the price is set by the owner, in an exchange both the buyer and seller set the price. The buyer states what price they are willing to pay — this is the bid price. The seller states the price they are willing to sell — the asking price. There are other factors to consider when trading, and it takes knowledge of the market and experience to make money in what is still a volatile marketplace. Like anything in life, this comes with experience. Many will just want to buy certain digital currencies and hold them for the long term, so this article should serve to give you an understanding or the process. Trading within the digital currency sphere is not for the faint-hearted, and you should only put up what you can afford to lose. With that being said, the allure of this market, where it is not uncommon to read of substantial gains, is certainly worth the entrance fee.
Digital currency exchanges are a crypto version of a stock exchange. They are a platform for buyers and sellers to trade digital currencies with their value being based on current market prices. There are currently over 200 exchanges globally, and they range in fees, services and legitimacy, so find a well-respected exchange with a proven track record before you begin trading. Customer feedback through blogs and social-media sites are a good point of reference as to which exchanges are legitimate. It pays to do your homework before signing up and using the services of one. This is where the Blockchain Transparency Institute (BTI) can prove helpful. BTI has launched a cryptocurrency exchange verification service as a self-regulatory initiative to clean up the crypto space. The following nine exchanges listed below are BTI verified.
Some exchanges have been exposed for fabricating transaction volume that cancel or wash each other out — this is known as wash trading. The perceived value of exchanges is highly dependent on the number of transactions on the exchange. The amount of these transactions ends up pumping the trading volume, and is caused when either traders, brokers or even the exchange itself conducts buys and sells for the sole purpose of manipulating the market. If you study the volume on an exchange, you might see repeated buys and sells that look automated, i.e., they appear to be matched in amount, essentially washing each other out. According to various sources, between 67% and 95% of bitcoin exchange volume is faked through wash trading. The BTI verification is awarded to exchanges with less than 10% total wash traded volume as discovered by BTIs wash trade algorithms. Until such time that these exchange volumes can be trusted across the board, we highly recommend employing the services of one of the BTI verified exchanges.
Trading on cryptocurrency exchanges offer the investor opportunities for making good returns on your portfolio, but, due to the sheer number of cryptocurrencies available, and various trading techniques and terminology, you will need to gain an understanding in order to analyze and play the market. This is where market and limit orders come into play. We have evaluated these types of orders and their functions so that you can utilize them depending on your needs.
The most straightforward of all existing orders is the market order, which is considered to be the best way to start trading, as you can quickly get in and out of a trade. A market order is an order to buy or sell at the best available price and is normally executed immediately.
Unlike the market order, a limit order does specify the price at which an asset can be bought or sold, but the trade will only be initiated when the price breaches the specified level. A buy limit order can therefore only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher.
Limit order to buy = at or below the market
Limit order to sell = at or above the market
Use a buy limit order when it appears that an asset is initially reduced in price and after reaching the set level will increase. Use a sell limit order when you think it will first go up in price and after reaching the set level will go down again.
The biggest advantage of this order type is that you can determine the price. Though it is not guaranteed that it will be executed, as it depends on the market price.
A stop-limit order is a combination of a stop order and a limit order. It comes into play once a stop price is reached. After this condition is fulfilled, a stop-limit order becomes a limit order. So a stop-limit order requires setting two price points that may be the same or different. While the stop price may be reached, there’s always a risk that the market price will not reach the limit price so the limit order may never be executed. This type of order may be more resulting due to a price guarantee if an asset is highly volatile.
In order to operate, a cryptocurrency exchange must adhere to the laws of the country it is based in. There isn’t yet international regulatory compliance, but this is expected to change in the near future. What this currently means is that laws differ from country to country but most exchanges must follow regulations related to the protection of the customer (well, that’s what’s claimed). These are anti-money laundering laws (AML), and know your customer laws (KYC).
AML laws exist to prevent any funds generated from illegal activities to be spent. KYC laws ensure that a platform such as an exchange know who they are dealing with; to protect existing customers, the business and the integrity of a business transaction. In order to enforce these laws, compliant exchanges require that all customers link their account on the platform to their personal bank accounts. This helps create a place from which fiat currency can be sent and received and serves as verification of the customers’ identity and credibility. Without completing verification, you can create a basic account but will not be able to trade.
Choosing an exchange that suits your needs will make your purchasing of digital assets a smooth experience. There are three types of cryptocurrency exchanges, and they all operate in different ways. It’s not that one is necessarily better than the other, and even exchanges of the same type are not all equal. It all comes down to which one best serves your needs. While this year it is expected that some of the big players from the institutional financial services sector will launch their own trading platforms, they will by design be tailored for their high net worth clients, who are demanding entry to digital assets and will no doubt require minimum buy-ins in the tens of thousands, which rules them out for many retail investors. This article focuses on the exchanges available to everyone. The three types are Centralized exchanges, decentralized exchanges and hybrids.
Also known as CEX, centralized exchanges are similar to traditional stock exchanges. The buyer and seller are matched by the exchange, which takes the role of the middle man. Centralized simply means a third party handles the transaction, a service for which of course it takes a fee. Centralized exchanges are currently the most common type that investors use to buy and sell digital currency holdings. Centralized exchanges serve as the mediator of the transaction as they provide the network on which buyers and sellers can easily find trading partners. But the downside is their vulnerability to hackers, which has resulted in substantial loses, although some are better than others and many have made significant improvements including more sophisticated storage solutions and insurance against loss. The other is that as most centralized exchanges hold your assets in a hosted wallet or pool, you do not have the private key and in the case of the exchange going under, you may not ever gain access to your assets. It is not unheard of for a government to shut down an exchange or for the exchange to simply cease trading for various reasons. This is why one of the first things to do when buying into the market is to create your own wallet off-exchange where you keep the majority of your holdings. For wallet information please read our guide.
Also known as DEX, decentralized exchanges stay true to the original philosophy of cryptocurrencies, which is complete decentralization through peer-to-peer transactions without a middle man. A DEX is a platform where buyers and sellers come together to transact directly — this is the meaning of peer-to-peer trades. Decentralized exchanges are extremely difficult to hack as the host blockchain would need to be compromised. All transactions are conducted through the use of smart contracts, which keep trading fees very low. But be aware that as you have complete control of your own assets, you must be extremely diligent in securing them through the use of a good secure wallet, and not losing your private keys, etc. This goes for all ownership of digital assets and the only reason I raise it again here is that there is no centralized wallet held by the exchange, but that is a positive. Some DEXs do have issues such as low volume and liquidity, but with gaining popularity, this is changing. So, decentralized exchanges are designed to ensure a high level of security for peer-to-peer digital currency transactions.
This brings us onto the hybrid exchange, How can we merge the concept of a CEX with a DEX? it sounds conflicting, but there is growing opinion that hybrid exchanges have the potential to merge the best of both exchange types. Could they possibly provide the liquidity and functionality of centralized exchanges with the security and privacy of a decentralized exchange? Just like a DEX, a hybrid would make use of smart contracts to ensure no centralized figure can compromise the integrity of the trade, by keeping the traders assets on the blockchain and not on the books of a company. If that can be successfully married to the functionality of a CEX and provide liquidity, then we could be looking at the future of digital asset exchanges. There are a growing number of hybrid exchanges operating on the market, and with increasing regulations becoming an issue through which we have recently seen a number of exchanges being outlawed in certain jurisdictions, it makes sense that startups would place regulatory compliance high on their agenda.
There is no one-size-fits-all type of exchange. It all comes down to the individual needs and requirements. Some exchanges have the functionality to buy digital assets with a credit or debit card using traditional fiat currencies, whereas others only allow Bitcoin, Ethereum or other digital currencies as a base trading currency. This means you will first have to buy either of them and deposit it across exchanges if the asset you want is not listed on a fiat buy-in exchange. There may be times when this becomes a necessity as some exchanges do not hold the asset that interests you. It can be complicated particularly when just starting out, so remember to take your time and make sure you follow all steps with care and mindfulness, as mistakes are often irreversible. Double check those wallet addresses when making transactions, and if sending larger amounts, do a test first with a smaller amount to make sure it is received. As things currently stand, hybrid exchanges have a promising future. They have the advantages of a centralized exchange, such as the liquidity that the cooperation of larger investors bring without a centralized authority that could undermine the integrity of operations. Whichever exchange you decide to use, I would always recommend that the majority of your holdings be under your own secure custody. Happy trading!
**Isonex Capital is dedicated to the growth of digital currencies within the global marketplace and in facilitating investment into the blockchain ecosystem. We strongly believe in investor protection through security and transparency. We are committed to helping newcomers gain an understanding of the risks involved in this new asset class. If you would like to find out more about us, visit https://isonex.io