Cryptocurrency is fast becoming one of the top global financial markets. But the market could be challenging to understand at first glance. However, when compared to the forex and stock markets, the cryptocurrency market is much easier to understand. Yet, as with anything that has to do with economics and finance, you cannot afford to enter it without at least some understanding; there are certain basics we must have a grasp of to understand how the crypto market works.
What is Traded in the Cryptocurrency Market?
A market is a location where goods and services are exchanged, either for one another or for a store of value–like money. With the advent of digitalization and the internet, markets can now exist in nonphysical locations. Indeed, the cryptocurrency market exists almost entirely in the cloud, built on blockchain ledgers and the internet. What is bought and sold there then, you may ask?
Cryptocurrencies are encrypted and tokenized data stored on blockchain ledgers. They are securely stored on these ledgers, which in turn are usually public. Bitcoin is the most popular cryptocurrency and is fast gaining acceptance globally. Other coins like Ethereum, Dogecoin, and Binance Coin, alternatives to Bitcoin, are known as altcoins (ALT). Cryptocurrencies are bought and sold in the cryptocurrency market. You need a crypto wallet to be able to interact with the cryptocurrency market.
Now that we know the commodity traded on the crypto market, this begs the following question.
How are Cryptocurrencies Traded?
People trade cryptocurrencies in pairs. One coin is paired against the other and bought or sold at the exchange rate between the pair. You can also pair a coin with a fiat currency, and exchange fiat directly to cryptocurrency.
Most people prefer to pair with stablecoins, but pairing means exchanging one coin for the other. For instance, when Bitcoin is exchanged for Tether USDT, the pair created is BTC/USDT.
Where does Trading take place in the Cryptocurrency Market?
There are markets all over the world. Yet, you can’t interact with a market without either being physically present or through a medium. Generally, if you exchange one cryptocurrency for another or regular money, you have just participated in the cryptocurrency market. But, you don’t just walk down the road trying to find someone to buy your crypto or someone to sell to you. Security risks aside, you may never find someone to deal with. At this point, exchanges come into the picture.
Cryptocurrency exchanges are platforms where cryptocurrency trading is done seamlessly in an organized setting. You can place orders to buy or sell, and they will be filled almost instantly. Millions of traders congregate on crypto exchanges, so there will always be someone to buy from you or sell to you. Binance, Coinbase, and Uniswap are well-known exchanges through which you can interact with the cryptocurrency market. However, exchanges are of different types.
Types of Cryptocurrency Exchanges
There is a need for order in this world, even in decentralized economies like the cryptocurrency market. Centralized exchanges are platforms that are entirely governed by corporations or firms. To use a centralized exchange, you would have to open an account, complete the ‘know your customer’ (KYC) verification and make a deposit. They have in-built crypto wallets, so there is no need to connect a wallet before transacting. They offer services ranging from spot trading to futures trading and margin trading. Coinbase, Binance, and KuCoin are some of the popular centralized exchanges in the crypto world.
As the word ‘decentralized’ implies, these exchanges are not governed by a central body and do not have many rules and regulations or KYC requirements. You only need to connect a crypto wallet to these exchanges to trade. Smart contracts — pre-written codes — run most decentralized exchanges, and buying and selling are activated through Automated Market Makers. Pancakeswap, Uniswap, and dYdX are some popular decentralized exchanges in crypto today.
Peer-to-peer exchanges are centralized but operate differently compared to regular centralized exchanges. These platforms are strictly for cryptocurrency trading between individuals. They offer a quick method of converting crypto to fiat and vice versa, especially in countries where directly exchanging fiat for cryptocurrencies is illegal. Paxful, Localbitcoins, and WazirX are some popular P2P exchanges in the crypto space.
What are the Factors that Drive the Cryptocurrency Market?
Several factors create moves of varying degrees in the crypto market. Like any other financial market, the news from the world’s largest economies affects the crypto market. Political decisions and a government clampdown on cryptocurrencies can create fear, uncertainty, and doubt, which is known in the crypto world as FUD.
FUD generally leads to a fall in crypto prices, while positive news from top global economies and institutions can push prices to new highs, creating a state of greed in the market.
Additionally, when Bitcoin prices shoot up, most altcoins experience gains as well. Since Bitcoin has the largest market share, a fall in Bitcoin price will hurt other cryptocurrencies.
Cryptocurrency Market Terminologies
When you interact with the cryptocurrency market as a newbie, there are some words that you’re likely to come across. We have rounded up a few of them below:
Price volatility means there will always be uncertainties around the prices of cryptocurrencies. Prices can rise or fall quickly, depending on several factors. Hence, the crypto market is highly volatile. You should only invest money you can afford to lose when entering the crypto market.
Cryptocurrencies are highly liquid assets, as there is always supply and demand available for exchange. This state of availability of supply of a coin in exchanges is known as liquidity.
Bearish and Bullish:
When the market sentiment is favourable, i.e., prices are likely to rise, we say the market is bullish. When prices are more likely to fall, we say the market is bearish.
Understanding the cryptocurrency market is essential in order to be profitable in the crypto space.
The crypto market is destined to reach the moon and beyond!