Crypto markets
Crypto markets use many of the same ideas as the markets in earlier lessons, including order books, spreads, leverage and futures, but they are organised differently. They never close, much of the trading happens on lightly regulated platforms, and holding the asset itself raises risks that don't exist with a brokerage account. This lesson covers the differences that matter most.
Where crypto trades
Most crypto trading happens on crypto exchanges: companies that run order books, hold customers' funds and often offer leveraged products too. In traditional markets those jobs are split between an exchange, a broker and a separate clearing house. Rules and investor protections differ a great deal between countries and between platforms. Some crypto products also trade on regulated venues, such as Bitcoin and Ether futures at CME and, in some countries, exchange-traded funds that hold crypto.
Because the same coin trades on many exchanges at once, there is no single official price. Prices on different platforms are usually close, because traders profit from any gap, but they are not identical.
24/7 trading
Crypto markets trade around the clock, every day, including weekends and holidays. There is no opening bell, no official close and no overnight gap in the usual sense. That changes a few things:
- Big moves can happen at any hour, including when you are asleep or when liquidity is thin, such as weekends.
- "Daily" figures depend on which time a platform uses to start the day. Many use midnight UTC; others differ.
- A position with no stop, left open, is exposed every hour of every day.
Spot
A spot trade is the simplest: you buy the actual coin at today's price and it is credited to your account, or to a wallet you control. If the price doubles, your holding doubles in value. If it falls 80%, you lose 80%, but on an unleveraged spot position you can't lose more than you paid.
Perpetual futures
The most traded crypto product on many platforms is the perpetual futures contract, or "perp". Like the futures in Lesson 5, it lets you take a long or short position on margin without owning the coin. Unlike them, it has no expiry date: you can hold it indefinitely.
Without an expiry, nothing would naturally pull a perp's price back to the spot price. Exchanges solve this with a funding rate: a periodic payment exchanged directly between traders holding long and short positions.
- When the perp trades above the spot price, funding is usually positive: longs pay shorts. That makes holding a long position more expensive and encourages traders to sell the perp, pulling it back toward spot.
- When the perp trades below spot, funding is usually negative: shorts pay longs.
Funding is typically charged every few hours; many platforms use eight-hour intervals, but it varies. It is paid on the full position size, not on your margin. Suppose you hold a long position worth $10,000 and the funding rate for an interval is 0.01%. You pay $1 for that interval. That sounds small, but it is charged repeatedly, and in excited markets rates can be many times higher. Funding is a real cost of holding a leveraged perp position.
Leverage and liquidation
Crypto platforms often offer high leverage, much higher than is typical for regulated stock or futures brokers for retail customers. With high leverage, a small price move can wipe out your margin. When that happens the platform automatically closes your position, which is called liquidation. Suppose you open a long position worth $10,000 with $1,000 of margin, which is 10 times leverage. A fall of about 10% would erase the margin, and the platform would liquidate the position before or around that point, often with an extra fee. Because crypto prices can move several percent in an hour, highly leveraged positions can be liquidated very quickly.
Custody risk
Custody means who actually holds your assets. This is where crypto differs most from traditional markets.
- On an exchange, the platform holds the coins and you hold a claim on it. If the platform is hacked, freezes withdrawals or fails, you may lose access to your funds. Protections such as deposit insurance or investor compensation schemes that cover bank and brokerage accounts in many countries generally do not cover crypto held on an exchange.
- Self-custody means holding coins in your own wallet, controlled by a private key, often backed up as a list of words called a seed phrase. Whoever has the key controls the coins. If you lose it, the coins are usually gone for good; if someone else gets it, they can take them.
Crypto transactions are generally irreversible. A payment sent to the wrong address, or to a scammer, normally cannot be recalled. No legitimate service needs your seed phrase.
Volatility
Crypto prices have historically been far more volatile than major stock indexes. PYE Markets shows Deribit's DVOL, an implied-volatility index for Bitcoin options that works much like the VIX in Lesson 6, on the Markets page with its source and time.
Key terms
- Spot
- Buying or selling the actual asset for immediate delivery.
- Perpetual futures
- A futures contract with no expiry, kept near spot by funding payments.
- Funding rate
- A periodic payment between longs and shorts on a perpetual contract, charged on full position size.
- Liquidation
- The automatic closing of a leveraged position when margin runs out.
- Custody
- Who holds and controls an asset; on an exchange or in your own wallet.
- Private key
- The secret that controls a crypto wallet; losing it usually means losing the funds.
Next lesson: Lesson 8: Risk first: sizing, stops and R multiples
General education, not investment advice.