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In finance, an exchange is a forum or platform for trading commodities, derivatives, securities or other financial instruments. The principle concern of an exchange is to allow trading between parties to take place in a fair and legally compliant manner, as well as to ensure that pricing information for any instrument traded on the exchange is reliable and coherently delivered to exchange participants. In the cryptocurrency space exchanges are online platforms that allow users to trade cryptocurrencies or digital currencies for fiat money or other cryptocurrencies. They can be centralized exchanges such a Binance, or decentralized exchanges such as IDEX. Most cryptocurrency exchanges allow users to trade different crypto assets with BTC or ETH after having already exchanged fiat currency for one of those cryptocurrencies. Coinbase and Kraken are the main avenue for fiat money to enter into the cryptocurrency ecosystem.
Function and History
Crypto exchanges can be market-makers that take bid/ask spreads as a commission on the transaction for facilitating the trade, or more often charge a small percentage fee for operating the forum in which the trade was made. Most crypto exchanges operate outside of Western countries, enabling them to avoid stringent financial regulations and the potential for costly and lengthy legal proceedings. These entities will often maintain bank accounts in multiple jurisdictions, allowing the exchange to accept fiat currency and process transactions from customers all over the globe.
The concept of a digital asset exchange has been around since the late 2000s and the following initial attempts at running digital asset exchanges foreshadows the trouble involved in attempting to disrupt the operation of the fiat currency baking system. The trading of digital or electronic assets predate Bitcoin’s creation by several years, with the first electronic trading entities running afoul of the Australian Securities and Investments Commission (ASIC) in late 2004. Companies such as Goldex, SydneyGoldSales, and Ozzigold, shut down voluntarily after ASIC found that they were operating without an Australian Financial Services License. E-Gold, which exchanged fiat USD for grams of precious metals in digital form, was possibly the first digital currency exchange as we know it, allowing users to make instant transfers to the accounts of other E-Gold members. At its peak in 2006 E-Gold processed $2 billion worth of transactions and boasted a user base of over 5 million people.
Here we will give a brief overview of the features and operational history of the more popular and higher volume exchanges because these are the platforms to which newer traders will be exposed. These exchanges are recommended to use because they are the industry standard and they inspire the most confidence.
Owned and operated by iFinex Inc, the cryptocurrency trading platform Bitfinex was the largest Bitcoin exchange on the planet until late 2017. Headquartered in Hong Kong and based in the US Virgin Island, Bitfinex was one of the first exchanges to offer leveraged trading (“Margin trading allows a trader to open a position with leverage. For example — we opened a margin position with 2X leverage. Our base assets had increased by 10%. Our position yielded 20% because of the 2X leverage. Standard trades are traded with leverage of 1:1”) and also pioneered the use of the somewhat controversial, so-called “stable coin” Tether (USDT).
Binance is an international multi-language cryptocurrency exchange that rose from the mid-rank of cryptocurrency exchanges to become the market dominating behemoth we see today. At the height of the late 2017/early 2018 bull run, Binance was adding around 2 million new users per week! The exchange had to temporarily disallow new registrations because its servers simply could not keep up with that volume of business. After the temporary ban on new users was lifted the exchange added 240,000 new accounts within two hours.
Have you ever thought whats the role of the cypto exchanges? The answer is simple! There are several different types of exchanges that cater to different needs within the ecosystem, but their functions can be described by one or more of the following: To allow users to convert fiat currency into cryptocurrency. To trade BTC or ETH for alt coins. To facilitate the setting of prices for all crypto assets through an auction market mechanism. Simply put, you can either mine cryptocurrencies or purchase them, and seeing as the mining process requires the purchase of expensive mining equipment, Cryptocurrency exchanges can be loosely grouped into one of the 3 following exchange types, each with a slightly different role or combination of roles.
Have you ever thought about what are the types of Crypto exchanges?
- Traditional Cryptocurrency Exchange: These are the type that most closely mimic traditional stock exchanges where buyers and sellers trade at the current market price of whichever asset they want, with the exchange acting as the intermediary and charging a small fee for facilitating the trade. Kraken and GDAX are examples of this kind of cryptocurrency exchange. Fully peer-to-peer exchanges that operate without a middleman include EtherDelta, and IDEX, which are also examples of decentralized exchanges.
- Cryptocurrency Brokers: These are website or app based exchanges that act like a Travelex or other bureau-de-change. They allow customers to buy or sell crypto assets at a price set by the broker (usually market price plus a small premium). Coinbase is an example of this kind of exchange.
- Direct Trading Platform: These platforms offer direct peer-to-peer trading between buyers and sellers, but don’t use an exchange platform in doing so. These types of exchanges do not use a set market rate; rather, sellers set their own rates. This is a highly risky form of trading, from which new users should shy away.
To understand how an exchange functions we need only look as far as a traditional stock exchange. Most all the features of a cryptocurrency exchange are analogous to features of trading on a traditional stock exchange. In the simplest terms, the exchanges fulfil their role as the main marketplace for crypto assets of all kinds by catering to buyers or sellers. These are some definitions for the basic functions and features to know: Market Orders: Orders that are executed instantly at the current market price. Limit Order: This is an order that will only be executed if and when the price has risen to or dropped to that price specified by the trader and is also within the specified period of time. Transaction fees: Exchanges will charge transactions fees, usually levied on both the buyer and the seller, but sometimes only the seller is charged a fee. Fees vary on different exchanges though the norm is usually below 0.75%. Transfer charges: The exchange is in effect acting as a sort of escrow agent, to ensure there is no foul play, so it might also charge a small fee when you want to withdraw cryptocurrency to your own wallet.
Regulatory Environment and Evolution
Cryptocurrency has come a long way since the closing down of the Silk Road darknet market. The idea of crypto currency being primarily for criminals, has largely been seen as totally inaccurate and outdated. In this section we focus on the developing regulations surrounding the cryptocurrency asset class by region, and we also look at what the future may hold.
The United States of America
A coherent uniform approach at Federal or State level has yet to be implemented in the United States. The Financial Crimes Enforcement Network published guidelines as early as 2013 suggesting that BTC and other cryptos may fall under the label of “money transmitters” and thus would be required to take part in the same Anti-money Laundering (AML) and Know your Client (KYC) procedures as other money service businesses. At the state level, Texas applies its existing finance laws. And New York has instituted an entirely new licensing system.
The European Union
The EU’s approach to cryptocurrency has generally been far more accommodating overall than the United States, partly due to the adaptable nature of pre-existing laws governing electronic money that predated the creation of Bitcoin. As with the USA, the EU’s main fear is money laundering and criminality. The European Central Bank (ECB) categorized BTC as a “convertible decentralized currency” and advised all central banks in the EU to refrain from trading any cryptocurrencies until the proper regulatory framework was put in place. A task force was then set up by the European Parliament in order to prevent and investigate any potential money laundering that was making use of the new technology.
Likely future regulations for cryptocurrency traders within the European Union and North America will probably consist of the following proposals: The initiation of full KYC procedures so that users cannot remain fully anonymous, in order to prevent tax evasion and curtail money laundering. Caps on payments that can be made in cryptocurrency, similar to caps on traditional cash transactions. A set of rules governing tax obligations regarding cryptocurrencies Regulation by the ECB of any companies that offer exchanges between cryptocurrencies and fiat currencies It is less likely for other countries to follow the Chinese approach and completely ban certain aspects of cryptocurrency trading. It is widely considered more progressive and wiser to allow the technology to grow within a balanced accommodative regulatory framework that takes all interests and factors into consideration. It is probable that the most severe form of regulation will be the formation of new governmental bodies specifically to form laws and exercise regulatory control over the cryptocurrency space. But perhaps that is easier said than done. It may, in certain cases, be incredibly difficult to implement particular regulations due to the anonymous and decentralized nature of crypto.
Behavior of Cryptocurrency Investors by Demographic
Due to the fact that cryptocurrency has its roots firmly planted in the cryptography community, the vast majority of early adopters are representative of that group. In this section we cover the basic structure of the cryptocurrency market cycle and the makeup of the community at large, as well as the reasons behind different trading decisions.
The Cryptocurrency Market Cycle
Bitcoin leads the bull rally. FOMO (Fear of missing out) occurs, the price surge is a constant topic of mainstream news, business programs cover the story, and social media is abuzz with cryptocurrency chatter. Bitcoin reaches new All Timehigh (ATH) Market euphoria is fueled with even more hype and the cycle is in full force. There is a constant stream of news articles and commentary on the meteoric, seemingly unstoppable rise of Bitcoin. Bitcoin’s price “stabilizes”, In the 2017 bull run this was at or around $14,000. A number of solid, large market cap altcoins rise along with Bitcoin; ETH & LTC leading the altcoins at this time. FOMO comes into play, as the new ATH in market cap is reached by pumping of a huge number of alt coins.
Top altcoins “somewhat” stabilize, after reaching new all-time highs. The frenzy continues with crypto success stories, notable figures and famous people in the news. A majority of lesser known cryptocurrencies follow along on the upward momentum. Newcomers are drawn deeper into crypto and sign up for exchanges other than the main entry points like Coinbase and Kraken. In 2017 this saw Binance inundated with new registrations. Some of the cheapest coins are subject to massive pumping, such as Tron TRX which saw a rise in market cap from $150 million at the start of December 2017 to a peak of $16 billion! At this stage, even dead coins or known scams will get pumped. The price of the majority of cryptocurrencies stabilize, and some begin to retract. When the hype is subsiding after a huge crypto bull run, it is a massive sell signal. Traditional investors will begin to give interviews about how people need to be careful putting money into such a highly volatile asset class. Massive violent correction begins and the market starts to collapse. BTC begins to fall consistently on a daily basis, wiping out the insane gains of many medium to small cap cryptos with it. Panic selling sweeps through the market. Depression sets in, both in the markets, and in the minds of individual investors who failed to take profits, or heed the signs of imminent collapse. The price stagnation can last for months, or even years.
The Influence of Age upon Trading
Did you know? Cryptocurrencies have been called “stocks for millennials” According to a survey conducted by the Global Blockchain Business Council, only 5% of the American public own any bitcoin, but of those that do, an overwhelming majority of 71% are men, 58% of them are between the ages of 18 and 35, and over half of them are minorities. The same survey gauged public attitude toward the high risk/high return nature of cryptocurrency, in comparison to more secure guaranteed small percentage gains offered by government bonds or stocks, and found that 30% would rather invest $1,000 in crypto. Over 42% of millennials were aware of cryptocurrencies as opposed to only 15% of those ages 65 and over. In George M. Korniotis and Alok Kumar’s study into the effects of aging on portfolio management and the quality of decisions made by older investors, they found “that older and experienced investors are more likely to follow “rules of thumb” that reflect greater investment knowledge. However, older investors are less effective in applying their investment knowledge and exhibit worse investment skill, especially if they are less educated and earn lower income.”
Geographic Influence upon Trading
One of the main drivers of the apparent seasonal ebb and flow of cryptocurrency prices is the tax situation in the various territories that have the highest concentrations of cryptocurrency holders. Every year we see an overall market pull back beginning in mid to late January, with a recovery beginning usually after April. This is because “Tax Season” is roughly the same across Europe and the United States, with the deadline for Income tax returns being April 15th in the United States, and the tax year officially ending the UK on the 6th of April. All capital gains must be declared before the window closes or an American trader will face the powerful and long arm of the IRS with the consequent legal proceedings and possible jail time. Capital gains taxes around the world vary from jurisdiction to jurisdiction but there are often incentives for cryptocurrency holders to refrain from trading for over a year to qualify their profits as long term gain when they finally sell. In the US and Australia, for example, capital gains are reduced if you bought cryptocurrency for investment purposes and held it for over a year. In Germany if crypto assets are held for over a year then the gains derived from their sale are not taxed. Advantages like this apply to individual tax returns, on a case by case basis, and it is up to the investor to keep up to date with the tax codes of the territory in which they reside.
2013 Bull run vs 2017 Bull run price Analysis
In late 2016 cryptocurrency traders were faced with the task of distinguishing between the beginnings of a genuine bull run and what might colorfully be called a “dead cat bounce” (in traditional market terminology). Stagnation had gripped the market since the pull-back of early 2014. The meteoric rise of Bitcoin’s price in 2013 peaked with a price of $1,100 in November 2013, after a year of fantastic news on the adoption front with both Microsoft and PayPal offering BTC payment options. It is easy to look at a line going up on a chart and speak after the fact, but at the time, it is exceeding difficult to say whether the cat is actually climbing up the wall, or just bouncing off the ground. Here, we will discuss the factors that gave savvy investors clues as to why the 2017 bull run was going to outstrip the 2013 rally. Hopefully this will help give insight into how to differentiate between the signs of a small price increase and the start of a full scale bull run. Most importantly, Volume was far higher in 2017. As we can see in the graphic below, the 2017 volume far exceeds the volume of BTC trading during the 2013 price increase. The stranglehold MtGox held on trading made a huge bull run very difficult and unlikely.
Fraud & Immoral Activity in the Private Market
Ponzi Schemes Cryptocurrency Ponzi schemes will be covered in greater detail in Lesson 7, but we need to get a quick overview of the main features of Ponzi schemes and how to spot them at this point in our discussion. Here are some key indicators of a Ponzi scheme, both in cryptocurrencies and traditional investments: A guaranteed promise of high returns with little risk. Consistentflow of returns regardless of market conditions. Investments that have not been registered with the Securities and Exchange Commission (SEC). Investment strategies that are a secret, or described as too complex. Clients not allowed to view official paperwork for their investment. Clients have difficulties trying to get their money back. The initial members of the scheme, most likely unbeknownst to the later investors, are paid their “dividends” or “profits” with new investor cash. The most famous modern-day example of a Ponzi scheme in the traditional world, is Bernie Madoff’s $100 billion fraudulent enterprise, officially titled Bernard L. Madoff Investment Securities LLC. And in the crypto world, BitConnect is the most infamous case of an entirely fraudulent project which boasted a market cap of $2 billion at its peak.
What are the Exchange Hacks?
The history of cryptocurrency is littered with examples of hacked exchanges, some of them so severe that the operation had to be wound up forever. As we have already discussed, incredibly tech savvy and intelligent computer hackers led by Alexander Vinnik stole 850000 BTC from the MtGox exchange over a period from 2012–2014 resulting in the collapse of the exchange and a near-crippling hammer blow to the emerging asset class that is still being felt to this day. The BitGrail exchange suffered a similar style of attack in late 2017 and early 2018, in which Nano (XRB) was stolen that was at one point was worth almost $195 million. Even Bitfinex, one of the most famous and prestigious exchanges, has suffered a hack in 2016 where $72 million worth of BTC was stolen directly from customer accounts.
Hardware Wallet Scam Case Study
In late 2017, an unfortunate character on Reddit, going by the name of “moody rocket” relayed his story of an intricate scam in which his newly acquired hardware wallet was compromised, and his $34,000 life savings were stolen. He bought a second hand Nano ledger into which the scammers own recover seed had already been inserted. He began using the ledger without knowing that the default seed being used was not a randomly assigned seed. After a few weeks the scammer struck, and withdrew all the poor HODLer’s XRP, Dash and Litecoin into their own wallet (likely through a few intermediary wallets to lessen the very slim chances of being identified).
Hardware Wallet Scam Case Study Social Media Fraud
Many gullible and hapless twitter users have fallen victim to the recent phenomenon of scammers using a combination of convincing fake celebrity twitter profiles and numerous amounts of bots to swindle them of ETH or BTC. The scammers would set up a profile with a near identical handle to a famous figure in the tech sphere, such as Vitalik Buterin or Elon Musk. And then in the tweet, immediately following a genuine message, follow up with a variation of “Bonus give away for the next 100 lucky people, send me 0.1 ETH and I will send you 1 ETH back”, followed by the scammers ether wallet address. The next 20 or so responses will be so-called sockpuppet bots, thanking the fake account for their generosity. Thus, the pot is baited and the scammers can expect to receive potentially hundreds of donations of 0.1 Ether into their wallet. Many twitter users with a large follower base such as Vitalik Buterin have taken to adding “Not giving away ETH” to their username to save careless users from being scammed.
It also must be recognized that market manipulation is taking place in cryptocurrency. For those with the financial means i.e. whales, there are many ways in which to control the market in a totally immoral and underhanded way for your own profit. It is especially easy to manipulate cryptos that have a very low trading volume. The manipulator places large buy orders or sell walls to discourage price action in one way or the other. Insider trading is also a significant problem in cryptocurrency, as we saw with the example of blatant insider trading when Bitcoin Cash was listed on Coinbase.
Examples of ICO Fraudulent Company Behavior
In the past 2 years an astronomical amount of money has been lost in fraudulent Initial Coin Offerings. The utmost care and attention must be employed before you invest. We will cover this area in greater detail with a whole lesson devoted to the topic. However, at this point, it is useful to look at the main instances of ICO fraud. Among recent instances of fraudulent ICOs resulting in exit scams, 2 of the most infamous are the Benebit and PlexCoin ICOs which raised $4 million for the former and $15 million for the latter. Perhaps the most brazen and damaging ICO scam of all time was the Vietnamese Pincoin ICO operation, where $660million was raised from 32,000 investors before the scammer disappeared with the funds. In case of smaller ICO “exit scamming” there is usually zero chance of the scammers being found. Investors must just take the hit. We will cover these as well as others in Lesson 7 “Scam Projects”.
Signposts of Fraudulent Actors
The following factors are considered red flags when investigating a certain project or ICO, and all of them should be considered when deciding whether or not you want to invest. Whitepaper is a buzzword Salad: If the whitepaper is nothing more than a collection of buzzwords with little clarity of purpose and not much discussion of the tech involved, it is overwhelmingly likely you are reading a scam whitepaper.
Signposts of Fraudulent Actors §2
No Code Repository: With the vast majority of cryptocurrency projects employing open source code, your due diligence investigation should start at GitHub or Sourceforge. If the project has no entries, or nothing but cloned code, you should avoid it at all costs. Anonymous Team: If the team members are hard to find, or if you see they are exaggerating or lying about their experience, you should steer clear. And do not forget, in addition to taking proper precautions when investing in ICOs, you must always make sure that you are visiting authentic web pages, especially for web wallets. If, for example, you are on a spoof MyEtherWallet web page you could divulge your private key without realizing it and have your entire portfolio of Ether and ERC-20 tokens cleaned out.
Methods to Avoid falling Victim
Avoiding scammers and the traps they set for you is all about asking yourself the right questions, starting with: Is there a need for a Blockchain solution for the particular problem that a particular ICO is attempting to solve? The existing solution may be less costly, less time consuming, and more effective than the proposals of a team attempting to fill up their soft cap in an ICO. The following quote from Mihai Ivascu, the CEO of Modex, should be kept in mind every time you are grading an ICO’s chances of success: “I’m pretty sure that 95% of ICOswill not last, and many will go bankrupt. ….. not everything needs to be decentralized and put on an open source ledger.”
Methods to Avoid falling Victim §2 Do I Trust These People with My Money, or Not?
If you continue to feel uneasy about investing in the project, more due diligence is needed. The developers must be qualified and competent enough to complete the objectives that they have set out in the whitepaper.
Is this too good to be true?
All victims of the well-known social media scams using fake profiles of Vitalik Buterin, or Bitconnect investors for that matter, should have asked themselves this simple question, and their investment would have been saved. In the case of Bitconnect, huge guaranteed gains proportional to the amount of people you can get to sign up was a blatant pyramid scheme, obviously too good to be true. The same goes for Fake Vitalik’s offer of 1 ether in exchange for 0.1 ETH.
Selling Cryptocurrencies, Several reasons for selling with the appropriate actions to take:
If you are selling to buy into an ICO, or maybe believe Ether is a safer currency to hold for a certain period of time, it is likely you will want to make use of the Ether pair and receive Ether in return. Obviously if the ICO is on the NEO or WANchain blockchain for example, you will use the appropriate pair. -Trading to buy into another promising project that is listing on the exchange on which you are selling (or you think the exchange will experience a large amount of volume and become a larger exchange), you may want to trade your cryptocurrency for that exchange token. -If you believe that BTC stands a good chance of experiencing a bull run then using the BTC trading pair is the suitable choice. -If you believe that the market is about to experience a correction but you do not want to take your gains out of the market yet, selling for Tether or “tethering up” is the best play. This allows you to keep your locked-in profits on the exchange, unaffected by the price movements in the cryptocurrency markets,so that you can buy back in at the most profitable moment. -If you wish to “cash out” i.e. sell your cryptocurrency for fiat currency and have those funds in your bank account, the best pair to use is ETH or BTC because you will likely have to transfer to an exchange like Kraken or Coinbase to convert them into fiat. If the exchange offers Litecoin or Bitcoin Cash pairs it could be a good idea to use these for their fast transaction time and low fees.
Knowing when and how to sell, as well as strategies to inflate the value of your trade before sale, are important skills as a trader of any product or financial instrument. If you are satisfied that the sale itself of the particular amount of a token or coin you are trading away is the right one, then you must decide at what price you are going to sell. Exchanges exercise their own discretion as to which trading “pairs” they will offer, but the most common ones are BTC, ETH, BNB for Binance, BIX for Bibox etc., and sometimes Tether (USDT) or NEO. As a trader, you decide which particular cryptocurrency to exchange depending on your reason for making that specific trade at that time.
Methods of Sale
Market sell/Limit sell on exchange: A limit sell is an order placed on an exchange to sell as soon as (also specifically only if and when) the price you specified has been hit within the time limit you select. A market order executes the sale immediately at the best possible price offered by the market at that exact time. OTC (or Over the Counter) selling refers to sale of securities or cryptocurrencies in any method without using an exchange to intermediate the trade and set the price. The most common way of conducting sales in this manner is through LocalBitcoins.com. This method of cryptocurrency selling is far riskier than using an exchange, for obvious reasons.
The influence and value of your Trade
There are a number of strategies you can use to appreciate the value of your trade and thus increase the Bitcoin or Ether value of your portfolio. It is important to disassociate yourself from the dollar value of your portfolio early on in your cryptocurrency trading career simply because the crypto market is so volatile you will end up pulling your hair out in frustration following the real dollar money value of your holdings. Once your funds have been converted into BTC and ETH they are completely in the crypto sphere. (Some crypto investors find it more appropriate to monitor the value of their portfolio in satoshi or gwei.) Certainly not limited to, but especially good for beginners, the most reliable way to increase your trading profits, and thus the overall value and health of your portfolio, is to buy into promising projects, hold them for 6 months to a year, and then reevaluate. This is called Long term holding and is the tactic that served Bitcoin HODLers quite well, from 2013 to the present day. Obviously, if something comes to light about the project that indicates a lengthy set back is likely, it is often better to cut your losses and sell. You are better off starting over and researching other projects. Also, you should set initial Price Points at which you first take out your original investment, and then later, at which you take out all your profits and exit the project. That should be after you believe the potential for growth has been exhausted for that particular project.
Another method of increasing the value of your trades is ICO flipping. This is the exact opposite of long term holding. This is a technique in which you aim for fast profits taking advantage of initial enthusiasm in the market that may double or triple the value of ICO projects when they first come to market. This method requires some experience using smaller exchanges like IDEX, on which project tokens can be bought and sold before listing on mainstream exchanges. “Tethering up” means to exchange tokens or coins for the USDT stable coin, the value of which is tethered to the US Dollar. If you learn, or know how to use, technical analysis, it is possible to predict when a market retreatment is likely by looking at the price movements of BTC. If you decide a market pull back is likely, you can tether up and maintain the dollar value of your portfolio in tether while other tokens and coins decrease in value. The you wait for an opportune moment to reenter the market.
Market Behavior in Different Time Periods
The main descriptors used for overall market sentiment are “Bull Market” and “Bear Market”. The former describes a market where people are buying on optimism. The latter describes a market where people are selling on pessimism. Fun (or maybe not) fact: The California grizzly bear was brought to extinction by the love of bear baiting as a sport in the mid 1800s. Bears were highly sought after for their intrinsic fighting qualities, and were forced into fighting bulls as Sunday morning entertainment for Californians. What has this got to do with trading and financial markets? The downward swipe of the bear’s paws gives a “Bear market” its name and the upward thrust of a Bull’s horns give the “Bull Market” its name. Most unfortunately for traders, the bear won over 80% of the bouts. During a Bull market, optimism can sometimes grow to be seemingly boundless, volume is rising, and prices are ascending. It can be a good idea to sell or rebalance your portfolio at such a time, especially if you have a particularly large position in one holding or another. This is especially applicable if you need to sell a large amount of a relatively low-volume holding, because you can then do so without dragging the price down by the large size of your own sell order.
Learn more on common behavioral patterns observed so far in the cryptocurrency space for different coins and ICO tokens.
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Photo FILE PHOTO: A Bitcoin logo is displayed at the Bitcoin Center New York City in New York's financial district in NY, U.S. on July 28, 2015. REUTERS/BRENDAN MCDERMID/FILE PHOTO (Reuters) - Cboe Global Markets Inc and CME Group Inc will launch futures contracts on bitcoin on Dec. 10 and Dec. 17 respectively. submitted by
Here are some of the differences between the products to be offered by the exchange operators.
-The Cboe Bitcoin Futures Contract will use the ticker XBT and will equal one bitcoin.
-The CME Bitcoin Futures Contract will use the ticker BTC and will equal five bitcoins.
PRICING AND SETTLEMENT
-Both Cboe's and CME's bitcoin futures contracts will be settled in U.S. dollars, allowing exposure to the bitcoin without actually having to hold any of the cryptocurrency.
-Cboe's contract will be priced off of a single auction at 4 p.m. Eastern time (2100 GMT) on the final settlement date on the Gemini cryptocurrency exchange.
-CME's contract will be priced off of the CME Bitcoin Reference Rate, an index that references pricing data from cryptocurrency exchanges, currently made up of Bitstamp, GDAX, itBit and Kraken.
-Cboe's XBT contract will trade on CFE, with regular trading hours of 9:30 a.m. to 4:15 p.m. Eastern time on Mondays and 9:30 a.m. to 4:15 p.m Tuesday through Friday. Extended hours will be 6 p.m. Sunday to 9:30 a.m. Monday, and 4:30 p.m. Monday through to 9:30 a.m. Friday.
-CME's BTC will trade on CME Globex and CME ClearPort Sunday to Friday from 6 p.m. - 5 p.m. Eastern time with a one-hour break each day beginning at 5 p.m.
MARGIN RATE AND CLEARING
-Cboe's contract will clear through the Options Clearing Corporation and a 30 percent margin rate will apply.
-CME's contract will clear through CME ClearPort and will have a 35 percent initial margin rate.
-Cboe said it may list up to four weekly contracts, three near-term serial months, and three months on the March quarterly cycle.
-CME said it will list monthly contracts for the nearest two months in the March quarterly cycle (March, June, Sept., Dec.) plus the nearest two serial months not in the March quarterly cycle.
PRICE LIMITS AND TRADING HALTS
-Cboe will halt trading in its contract for 2 minutes if the best bid in the XBT futures contract closest to expiration is 10 percent or more above or below the daily settlement price of that contract on the prior business day.
Once trading resumes, if the best bid in the XBT futures contract closest to expiration is 20 percent or more above or below the daily settlement price of that contract on the prior business day, the futures will be halted for 5 minutes.
-CME will apply price limits, also known as circuit breakers, to its bitcoin futures of 7 percent, 13 percent, and 20 percent to the futures fixing price. Trading will not be allowed outside of the 20 percent price limit.
Sources: Cboe and CME
(Reporting by John McCrank in New York; Editing by Lisa Shumaker)
Bitcoin and Money Services Businesses (MSB) find it very difficult to open and maintain bank accounts. The global hysteria over possible venues for money laundering (unless of course you are HSBC) has caused banks globally to curtail their support of MSB clients. submitted by
Several exchanges figured out that Taiwanese banks would bank them with minimal issues. The two most well known exchanges utilising Taiwanese bank accounts are Bitfinex and OKCoin International.
The American perception of Taiwanese banks lately is that of financial institutions with lax KYC / AML procedures. Read the following excerpt from a Reuters article about problems with Taiwan’s Mega Financial last October.
It is the second bank branch of the state-controlled firm to run afoul of U.S. financial authorities, after its New York branch was fined $180 million for lax compliance and anti-money laundering violations in August.
Mega Financial, which has close ties to Taiwan's government, has been under scrutiny since about 200 of its customers were named in the so-called Panama Papers, a massive leak of documents from a Panamanian law firm that put the spotlight on the shadowy world of offshore companies used to avoid tax.
In order for Taiwanese banks to maintain their banking relationships in America, they must update their KYC / AML procedures for MSB clients. Unfortunately a large swath of MSB clients will be deemed too expensive to bank, and will be jettisoned.
Compliance is extremely expensive. Banks waste billions of USD a year on compliance and compliance related technology. It only serves to further protect incumbent financial institutions at the expense of small and innovative upstarts.
Bitfinex, OKCoin, and possibly other Bitcoin exchanges are affected. It may be that they have been told their accounts will not longer by active by a certain date. They are now scrambling for alternatives.
Bitfinex officially announced that both USD deposits and withdrawals are halted. OKCoin International has posted a notice that all USD deposits will be refused by their banking partner in Taiwan. Many old-timers know that the suspension of fiat deposits and withdrawals heralds tough times ahead for any Bitcoin exchange.
To some traders, this feeling is all too familiar. Mt Gox's slow motion bankruptcy began in 2013 when their USD held in America was frozen. As users rushed for the exits, the Bitcoin thought to be held in custody was not there. In early 2014, Mt Gox shut its doors and filed for bankruptcy.
While traders are right to be nervous, it is not a given that Bitfinex and or OKCoin will be unable to operate. Yet, careful traders will take action. This post will examine how to get your money off the platform, and for those risk seeking traders, arbitrage opportunities that will arise during this time of stress.
The biggest hurdle to successfully operating a Bitcoin/Fiat exchange is obtaining and maintaining a bank account. The quality of the banking relationships held by the exchange is a large success determining factor.
Most Taiwanese banks have branches throughout the Asia Pacific region. However, most do not have branches in the US. Ultimately that means that movement of USD between non-Taiwanese entities must pass through a correspondent bank in the US.
The correspondent bank is fully licensed to do business inside America, and can clear USD. Without the assistance of a correspondent bank, exchanges’ Taiwanese banks cannot process USD deposits and or withdrawals for foreign entities. Given that the majority of Bitfinex and OKCoin’s customers are not Taiwanese, most if not all incoming and outgoing USD must be processed with the assistance of a correspondent bank.
Wells Fargo, The Canary in the Coal Mine
In late March, according to a lawsuit filed by Bitfinex, Wells Fargo ceased processing outgoing USD SWIFT wire transfers from Bitfinex’s Taiwanese bank accounts. Wells Fargo is the correspondent bank for the various banks Bitfinex uses in Taiwan. The lawsuit alleged that $180 million of USD was effectively frozen.
This lawsuit is one of the only public windows the community received into the struggle between Taiwan banking institutions and their American correspondent banks. A similar situation may have occurred with OKCoin, but they did not choose to fight back through a public lawsuit.
Bitfinex vs. Wells Fargo Lawsuit
Get Me Outta Here
Bitfinex and OKCoin USD IOU holders are rightfully concerned. All is not lost. There are still ways to remove funds from these platforms.
The easiest way is for users to buy Bitcoin and withdraw it. Then they can sell that Bitcoin on another platform. As more users exit via this method, the price of Bitcoin rises on Bitfinex and OKCoin relative to other exchanges. Those exiting these exchanges are pushing up the price globally.
Users can use altcoins such as Litecoin or Ether to exit as well. At the time of writing, the Bitfinex premium to buy alts with USD is similar to buying Bitcoins. Given the low liquidity in altcoins, this may not be cheaper.
Bitfinex first indicated in a blog post, that users could withdraw funds via Swiss Francs (CHF) and Hong Kong Dollars (HKD). However a few days later, they announced that their bank refused to process any outgoing wires in any currency.
The solution now put forward is to wash funds through their lawyer's trust account. They claim that as creditors of Bitfinex, users can withdraw via this method only once. Those lucky enough to have domestic Taiwanese bank accounts face no issues withdrawing any fiat currency.
As of right now, OKCoin has not issued any announcements regarding the status of funds in their Taiwan bank accounts.
Risk and profit seeking traders will be able to conduct arbitrage trades during this funding crunch. The trade I describe below is the most obvious.
Buy Bitcoin outside of Bitfinex.
Sell Bitcoin for USD on Bitfinex at a premium.
Withdraw HKD to your bank account from Bitfinex.
Wire the funds at your bank rate back into USD to a cheap Bitcoin/USD exchange.
Rinse and repeat.
The ability to execute this trade is predicated on the ability to withdraw HKD or another fiat currency easily and quickly from Bitfinex. Given the recent updates, this assumption is questionable. All MSBs globally face similar issues, it may be weeks if not months before Bitfinex, OKCoin, or any other affected exchange is able to establish banking relationships again.
Due to the halt of Bitcoin withdrawals in China, XBT/CNY trades at a 15% discount to Bitstamp and GDAX. Therefore the premium on exchanges where fiat cannot be withdrawn, could easily reach a similar 15% premium.
Bitcoin / HKD: Bitfinex and OKCoin’s Savior
Days after filing, Bitfinex withdrew the lawsuit against Wells Fargo. Suing a correspondent bank in America may have been lights out for Bitfinex’s current and future banking relationships. To make matters worse, it may have attracted attention to other exchanges. If Wells Fargo is blocking Bitcoin exchanges, other banks should be thinking: should we block them too?
For now, there is still some hope. For every HKD issued, the Hong Kong Monetary Authority backs it with an equivalent amount of USD. The Hong Kong Monetary Authority will conduct open market operations to maintain a peg between 7.75 to 7.80 USD. While the peg holds, HKD is a liquid proxy for USD. If Bitfinex and or OKCoin can launch a liquid XBT/HKD market, they can continue to effectively serve as the most liquid XBT/USD spot markets.
Clearing HKD does not require funds to transit through the American banking system. Most of the world just wants to do business, and not worry about hypocritical moralising American politicians' inspired regulations. Given enough effort, time, and willingness to pay high fees, exchanges will find banking partners willing to process HKD wires.
The on and off-ramps between digital currencies and fiat continue to cause significant friction. However, once traders squeeze through fiat gateways into the crypto universe, the trading opportunities are rich. If you desire a product to speculate on the value of Bitcoin without touching fiat, consider trading the BitMEX Bitcoin / USD Swap, XBTUSD.
Strongman Bullies and Bitcoin
Trump, Xi Jinping, Putin, and Erdogan: these four men are the embodiment of Strongman Bully leaders. Global trends indicate we will soon have more world leaders with similar mindsets.
Over the past 30 years, throngs of Chinese, Russians, and Turks have become rich. The masses held their tongue, while the elite shamelessly lined their pockets. In China, the wealth amassed in coastal cities like Shanghai, Beijing, Shenzhen, and Guangzhou stands in stark contrast to the developing and rural interior. Similar disparities exist in the metro areas of Russia and Turkey.
Xi, Putin, and Erdogan are all promising to restore the bargain with labour at the expense of capital. In previous decades, the masses have accepted disproportionally slow wage growth so long as their standard of living continued to increase. As global growth sputters, the bargain has become less tenable. The plebes are getting restless.
The marginal effectiveness of printing money to generate GDP output is waning. To make matters worse, population growth is shrinking in end markets like America and Europe. In response, central banks are reducing asset purchases. The net result will be higher interest rates and less trade.
All strongman bullies in all countries cannot be successful at the same time. Instead of trading for what they need, these leaders are likely to threaten to take what they need through war. A desperate leader can apply physical force to take resources, disrupt competing markets, and distract the local population from failed promises.
During times of war, assessing financial counterparty risk becomes a key investment survival skill. Will a USD deposit held in a Russian bank be worth the same as one held in an American bank? Every asset that you own must be evaluated on the basis of two concerns: beating domestic inflation and movement friction. In times of war, we are very likely to see inflation in necessity goods and deflation in other goods.
Where will the masses turn? Gold has value everywhere and is likely to triumph during these times. Recently, gold rallied when Trump authorised a missile strike against Syria, and when North Korea announced a potential nuclear missile test. Further rallies will come if global instability grows.
Bitcoin fits into this dynamic. Despite all of the issues it faces, it has persevered for over 8 years and still has substantial global value. Consider that as a vote of confidence in its ability to serve as a safe haven asset for a small pool of global capital.
Regardless of your political stance, the next 30 years will not be like the last. Highly intense regional conflicts are likely to flare up again. As desperate citizens look to store and transport wealth in the digital era, Bitcoin looks more attractive than ever.
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