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Web3  · 05/17/22

Start Here: Beginner's Primer to the Crypto Trading Industry

04/08/22 · Reports
Altcoin Trading Blog

Note: This report was written in 2021 and remains published for reference purposes.


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Key points
  • Initial quote for 1 BTC was based off energy costs
  • Speculative trading has taken hold of the markets
  • The equivalent of passive investing only emerged in 2021
  • Uses shrimpy  ( + more posts) 
  • Uses trezor  ( + more posts) 
 
Localcryptos non-custodial p2p market

On October 5, 2009, a historic event took place. It was on that day that the first bitcoin rate against the US dollar was published on the New Liberty Standard website, $ 1 = 1,309.03 BTC.

Yes, yes, for one dollar you could buy more than a thousand bitcoins, and not vice versa.

The cost of bitcoin at that time was determined based on the average power consumed by the computer miner, multiplied by the cost of electricity, and divided by the number of generated bitcoins.

In the beginning, the price of 1 BTC was determined by the cost of mining alone.

This is how the fair price of bitcoin was worked out in the early days: Derived strictly from the network fundamentals, namely the energy consumption of the Proof of Work algorithm.

The price discovery done via speculative trading has shifted the price per coin a whole lot - to more than $ 57,000 as of the time of writing.

Speculative trading of cryptos started at scale in 2010.

On July 17, 2010, the MtGox exchange was founded, which quoted the main national currencies against bitcoin. MtGox was the first international bitcoin exchange where speculative trading became possible at scale.

Eventually, Bitcoin's growing popularity has spurred the emergence of other cryptocurrencies, with a total market capitalization $2.39T as per coinmarketcap.com at the time of writing.

Dozens of different cryptocurrency exchanges have emerged, and considering the active growth of the blockchain industry, many more are yet to come.

The state of the cryptocurrency market in 2022

As time passes and the crypto markets become more mature, the global cryptocurrency markets show increasingly more stability.

It is certainly worth pointing out that this trend of maturing towards stability is occurring in spite of the lack of legislative regulation.

The main characteristics of crypto markets remain their transnational nature, the chaotic emergence and sometimes disappearance of new cryptocurrencies as well as of exchanges.

As per coinmarketcap.com, the global market is dominated by Bitcoin, Ethereum, Litecoin and other currencies that happen to be trending at the moment, such as Cardano, AVA or Kusama.

Go here to exchange AVA to Kusama.

Legacy brokers adopting cryptocurrency derivatives

The Chicago Mercantile Exchange, or CME for short, is a major US platform for trading futures contracts for energy, currency pairs, metals, and agricultural products. In December 2017, the CME launched futures contracts for the BTC rate against the US dollar. That was the first instance of a legacy financial institution launching a cryptocurrency product.

It is only logical that legacy brokers would start with derivatives. The decentralized nature of blockchains requires for cryptocurrencies to be stored in a specific way.

To hold actual cryptocurrency, legacy brokers would need to hire a provider of crypto custody and connect that custody to the brokerage’s current trading engines. That is expensive and technically so cutting-edge a solution that it is not yet very well established.

Launching a derivative market on the other hand is much simpler. The items that are moved through the order book operations are just contracts, not the actual cryptocurrency. All the broker needs to make sure of is that they have a cold storage with enough cryptocurrency to fully back the volumes that are traded in contracts on their platform. The cold storage is separated from the trading platform, which makes everything easier and most importantly cheaper.

Traders like leveraged derivatives for their volatility

One of the reasons why cryptocurrency trading gained in popularity is the volatility of cryptocurrencies.

Fluctuations in the Bitcoin dollar rate per day often reach 10%, and Bitcoin is the most stable cryptocurrency at that. Intraday price changes in ratio markets between bitcoin and alt cryptocurrencies can exceed 100% per trading session.

Sweeping fluctuations of this size mean that there are opportunities for earning more money per day trading cryptocurrency markets than you could possibly earn with comparable skill and capital on legacy markets in the same time period. For comparison, the S&P 500 index usually moves by less than 1.5% per day.

However, the high volatility is also the reason why you get risk warnings everywhere: Do your own research, do not invest more than you can afford to lose, be careful with leverage.

Read about the worst margin trading mistakes that new crypto traders make.

Passive Investing Enters The Crypto Space

As explained in the beginning of the article, the cryptocurrency space is not regulated and neither are the crypto trading platforms. Those of you coming from simple legacy investing like IRA, you will need to get used to a bit more due diligence before you send money anywhere on the crypto markets.

Good news is that you do not actually need to trade anymore to make regular profit in crypto.

For those of you used to the idea of investing as putting money into index funds and waiting, there is now an equivalent in crypto. It is increasingly more common for alt coin wallets to let you stake your coins and earn interest just for holding crypto. This is the closest analog to the old-school passive investing of 1980s.

What if you do actually want to take up active trading?

Then you will first need to decide on the exchange. The best way to go about that is the systematic one: Make a list of criteria.

We suggest focusing on the following:

  • exchange turnover (traded volumes)
  • variety of products (spot, futures, big and small currencies)
  • trading with borrowed funds (AKA margin trading or leveraged trading)
  • deposit requirements
  • registration requirements (do you need to pass KYC/AML?)
  • supported order types and their reliability (can you set a stop loss?)
  • the stability of the exchange to hacker attacks
  • fees charged for trading, deposit, and withdrawal of funds

You will find most of this data on aggregator platforms such as coinmarketcap.com or its smaller equivalents that we list at our Tools page.

Final words

The crypto markets of 2022 are stabilizing and calming down in spite of the lack of top-down regulation. The crypto trading industry now has products for the risk loving derivatives traders as well as for the passive investing types who until now had to stick to legacy index funds.

As always though, do your own research before you put your money at risk. And also: Not your keys, not your coin.

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