Key roles in crypto
Market makers. They are professional players in quote-based trading - both in traditional markets and in the cryptocurrency markets. They act as moderators of price movements between buyers and sellers, quoting both sides of the order book for a certain pair of assets, and maintain liquidness on the exchange.
Liquidity providers. Liquidity providers act as intermediaries between brokers and market makers. Brokerage companies try to provide traders with more liquidness, as low liquidity leads to price slippage (slippage), at which orders are executed at the worst price. Liquidity providers connect brokers with large financial players to fill the order book, which allows trading with a low spread.
Market makers and liquidness providers are just some of the institutional investors that exist in both traditional trading and the cryptocurrency world. Professional traders, banks, funds and brokers are also important institutions and play an outstanding role in the development of monetary markets.
Retail Investors. All retail investors can be divided into two types - investors and traders / speculators. If investors generally
invest for a long time and rely on the growth of crypto assets and passive income in the future, then speculators earn on the difference in the cost of cryptocurrencies and tokens at the moment. In both cases, retail investors are individuals, but this does not mean that they are necessarily newcomers.
Brokers/exchanges. Although the fact that in traditional finance these are two different roles, in crypto trading, operators of centralized exchanges usually act as brokers. In the case of decentralized exchanges, there is no operator, since transactions are carried out on the blockchain, and not in trading software. This affects the speed of transactions (lower in the blockchain), their cost (higher commissions in the blockchain), the availability of monetary instruments and cryptocurrencies for trading, as well as the ability to deposit/withdraw fiat currencies to a bank account.
How blockchain and crypto trading are related
Blockchain is the technology behind cryptocurrencies. These are (generally) public ledgers of any cryptocurrency, constantly recording consensus-based transactions anywhere in the world at any time. In layman's terms, these are open databases.
In the crypto industry, blockchain is used as a database of completed transactions. Nevertheless, this only applies to decentralized exchanges. In the case of centralized exchanges, as well as over-the-counter trading (OTC markets and peer-2-peer exchanges), trading operations are stored in the exchange trading software database, interacting with blockchain technologies only at the stages of replenishing accounts and withdrawing tokens and coins from them.
How to "enter" the crypto industry
There are several ways.
Invest in cryptocurrencies directly. One of the most common strategies for interacting with cryptocurrencies involves the purchase and holding of spot crypto assets. To do this, users can use centralized or decentralized exchanges, but in any case, they will have to deal with the exchange of crypto for fiat money and vice versa. Therefore, it is significant for investors to follow the current regulation.
Invest in companies with cryptocurrency assets. Alternatively, users can use indirect investment strategies. Since some publicly traded companies have crypto-currency assets (eg MicroStrategy, SquareInc, etc.), it is possible to buy publicly traded shares of these companies, thereby enjoying the benefits of crypto-currency without having to own it.
Invest in cryptocurrency infrastructure. Mark Twain said it best: "During the gold rush, it's time to get into the pick and shovel business." In this case, indirect and direct investment is similarly possible.
Direct investment in infrastructure is mining :-), an investment in the creation of trading platforms (crypto exchanges), as well as services and technologies around them. Such investments should be considered as long-term, strategic investments.
Investing in publicly traded shares of the underlying technology needed to produce a crypto service is also a way to enter the industry, especially if you don't want to worry about specific tokens. For instance, Coinbase, a platform where investors can buy and sell cryptocurrencies, had an IPO in 2021 and its COIN shares are publicly traded on the NASDAQ exchange.
Invest in a cryptocurrency ETF. Cryptocurrency ETFs are gradually being introduced, providing ETF shareholders with the opportunity to indirectly invest in cryptocurrencies. For instance, ProShares launched the Bitcoin ETF BITO, which does not invest directly in Bitcoin. Instead, it is based on futures contracts linked to the asset. BITO ETF allows users to directly invest from their brokerage accounts instead of opening a wallet.
Differences between classic trading and crypto trading, as well as risks associated with crypto
1. Market maturity
Stocks have been around for much longer than cryptocurrencies. Hundreds of years compared to a decade make stock markets more mature. Stock exchanges and ecosystem participants backed by governments and regulated must comply with a pool of rules to even set foot on the market.
Listed companies are required to present financial statements on a regular basis so that investors can make informed decisions. The maturity of the stock market allows exchanges to have large volumes, low fees, variety of instruments, low risks, and much more.
In this regard, crypto markets are still young and exposed to many risks generated by low (non-organic) volume, and are years behind the equity markets.
2. Market volatility
Due to their immaturity, cryptocurrency markets are more volatile than their equity counterparts. Nevertheless, volatility can be seen as two sides of the same coin. Stable markets limit downside risk, but they also limit potential gains. Thus, the high profitability of cryptocurrency markets is comparable to the potential risks. These risks may be exacerbated by the user's vulnerability to the large "whales" that control the market.
Nevertheless, there are alternatives to potentially protect the user's assets. For instance, hedging, a risk-reducing strategy most commonly used with derivatives, and stop orders, instruments designed to limit falls in the event of adverse asset price movements.
Arbitrage is the elimination of market inefficiency, when the same asset costs differently (for instance, on different exchanges), that is, there is the possibility of guaranteed profit without risk. Arbitrage opportunities are a direct result of the number of markets. As the number of markets for any asset, say BTC, increases, so do the opportunities for arbitrage.
Traditional stocks are heavily regulated, so markets are inherently limited. In the case of cryptocurrencies, country-level laws are still in their infancy, so there are fewer requirements to create a crypto exchange/market than for a stock market. This allowed the creation of thousands of crypto-exchanges around the world, which makes the cryptocurrency attractive to arbitrageurs.
Since crypto assets are still floating in a sea of unregulated waters, there are no specific legal requirements for exchanges requiring "rainy day" systems to protect users from losses caused by hаcks. Nevertheless, this does not mean that exchanges do nothing. The main technologies for protecting user assets include:
Hardware Security Modules (HSMs)
Protocols for confidential computing (MPC)
Know-Your-Customer and Anti Money Laundering Policies
Separately, we can single out liquidation and insurance funds that crypto-exchanges form from their profits in cases of covering losses during periods of high volatility and protecting traders from liquidation with automatic deleveraging (ADL).
Institutional investors in the crypto industry
Despite justified skepticism, the global trend towards the legalization of crypto is obvious. Blockchain technologies in trading are able to surpass traditional fiat currency both in terms of utility and as a store of value. Below the activity of some large investors, which can be used to assess the trend.
Silicon Valley venture capital firm Andreessen Horowitz has announced a $4.5 billion funding round. The round will surpass the crypto fund's already record $2.2 billion status set in June for Crypto Fund III, which aims to continue financing
in crypto networks and crypto companies.
Like Andreessen Horowitz, Sequoia Capital's investment fund manager is becoming a registered investment advisor in an effort to ease restrictions on venture capital investment. This transformation could mean an expanded opportunity to invest in IPOs and potentially enter the cryptocurrency market, thereby operating across the full spectrum of technologies.
In 2021, Crypto VC Paradigm announced the creation of a $2.5 billion venture capital fund, surpassing Andressen Horowitz's fund.
Together, Sequoia Capital and Paradigm also funded Citadel Securities through an initial investment of $1.17 billion. With this, Citadel demonstrates its commitment to a more public role by implicitly announcing its expansion into cryptocurrencies.
In the telegram channel Scalable Insights, we share regular digests with fresh venture deals and M&A, current global regulators, and also post crypto-influencers that we read ourselves.
Crypto loyalty of countries
The last but not the least significant participant in the crypto industry is the state. Although the relative immaturity of the industry, the speed of its development is forcing regulators around the world to take a stand on digital assets – accept them, ban them, or look for a middle ground.
Below is a list of the countries most loyal to the crypt with some comments.
Salvador. On September, the President of the country declared bitcoin legal tender and obliged sellers to accept bitcoins.
Venezuela. Even though the country did not follow El Salvador in recognizing BTC as legal tender, Venezuela introduced a digital version of the existing currency.
Brazil. The House of Representatives approved the bitcoin bill (2.303/15) on September, which is currently being debated in the plenary session of the Chambers of Deputies, the lower house of the National Congress of Brazil.
Cuba followed the example of El Salvador, and on September, the corresponding law came into force. It regulates "the use of certain virtual assets in commercial transactions, as well as the licensing of providers" of these services in "transactions related to monetary, exchange and collection or payment activities."
Germany. In early July, Germany passed a law allowing special funds to place 20% of their capital in crypto assets. Tokens are taxed depending on where transactions are made, how the tokens are used, and by whom.
USA. The US has an ambiguous stance on digital assets. Companies like Microsoft, Subway and Dish Network are already accepting Bitcoin payments. It is also traded on the US derivatives markets. Nevertheless, Bitcoin is defined in the US as a financial service, not a currency.
Australia and Canada are friendly towards cryptocurrencies. They treat bitcoin and other assets as commodities for tax purposes.
Finland follows a regime similar to Canada.
The UK is taking a pro-crypto position and creating an environment that supports bitcoin.
The European Union considers a collective approach, while the member states set their own framework. The draft Crypto Asset Markets Regulation (MiCA) 2020, published by the European Commission, states that legislation will treat cryptocurrencies as regulated monetary instruments, which will require regulatory confirmation.
You can read more about the specifics of crypto regulation in individual countries in the Crypto Industry Regulatory Risks report.
That is all for now. I tried to collect in the topic a "picture" of the crypto world, the prospects for the industry in terms of risk-based investment, as well as some technical points that generally raise the most questions. I hope it was useful.
Low risks only from a little standard list - for instance, the exchange will not take shares in bankruptcy and will not lose them due to a technical error.
However, you cannot be sure that trading will not be stopped, that your shares will not be frozen (euroclear), that Ponzi companies are not traded on the stock exchange (Madoff), that the companies' reporting is not fake (Enron).
On average, surely, companies on the exchange filter better than projects on crypto exchanges, but there are many various risks.
Telegram bots are gaining popularity, with the help of which you can purchase the most popular cryptocurrencies: Bitcoin, Ethereum, etc. The course may be more profitable than on the sites presented at Bestchange, but it is worth carefully studying each bot for honesty.
A lot is created only with an imitation of the exchange process, and the main goal is to lure the crypt from inattentive users. The main indicator is the exchange rate, which is very different from the market average in favor of the buyer. Z. Another way is to make money on an exchange that accepts fiat. Next — trading cryptocurrency on this exchange or transferring the deposit to others.
One of the options is EXMO, where in addition to listing cryptocurrencies there is also a ruble wallet with replenishment through the Raueeg, OK PAY, adv cash, mopeu polo systems. This option is suitable for those who plan to work with this particular site. It is important to note that the Raueyeg wallet is quite widely integrated with a variety of cryptocurrency projects.
Taking into account the relatively small transfer fees, it makes sense to look at this wallet in further work. Important! When buying bitcoin, it may take 10-20 minutes to complete the transaction. This is due to the specifics of how the blockchain works, algorithms and its bandwidth. Therefore, immediately after making a purchase of "digital gold", do not panic, update your wallet to view information about crediting funds.