Crypto Exchanges, NFT’s & Derivatives

November 25, 2021

A Digital Currency Exchange, (DCE), is a cryptocurrency exchange that is open 24 hours a day. It enables the trading of one cryptocurrency for another cryptocurrency, for cash (fiat currency), or for other digital currencies.   

There are two types of exchanges, centralised and decentralised. Centralised is like a stock exchange insofar as it is owned and run by an independent company for profit. Whereas the decentralised exchange is not run by a third party. All trading on a decentralised exchange is anonymous whereas on the centralised exchange proof of identity and a KYC is required. All trades on the decentralised exchange are peer-to-peer through an automated process. All trades on a centralised exchange are overseen by an approved authority. 

Do Crypto Exchanges Set the Prices? – The answer is no. There is no official set global price. The price or exchange rate of any cryptocurrency is set by the market itself and is based on the volume of trading. 

What are NFT’s 

An NFT or non-fungible token is unique and cannot be replaced by something else. To explain, a Bitcoin can be traded for another bitcoin as it is identical and therefore fungible. NFT’s are especially used for digital art and lately music, and can be sold and also resold on the Ethereum Blockchain. Other blockchains offer this service but the Ethereum Blockchain is primarily where sales of NFT’s occur as they use smart contracts. 

The NFT is perceived as a certificate of authenticity or proof of ownership, allowing the owner the right to display the art on the wall of their wallet. (Wallet is explained below under Useful Technical Information). There has been a lot of excitement over NFT’s as they promote ownership of something unique and scarce. So, providing the correct artist is picked the NFT can increase in value making it exceptionally unique. Interestingly, the Wall Street Journal in March 2021 said quote, “NFT’s are fuelling a BOOM in Digital Art”. 

London auctioneers Christies recently auctioned and sold a digital art NFT. If Christies can see the potential in NFT’s…

Derivatives 

Over the past 2 or 3 years, the market for cryptocurrency derivatives has exploded. These are side bets on the future prices of cryptocurrencies. Today cryptocurrency derivative trading can exceed USD100 billion on any given day on the Bitmex cryptocurrency exchange.  To put this in perspective, this rivals the daily trading volume on the New York Stock exchange. In June 2021 total global trading volumes in crypto derivatives exceeded USD3.2 trillion. 

Interestingly the trading activity within the cryptocurrency derivative market can and does affect the actual price of the cryptocurrencies. The most popular crypto derivatives are perpetual contracts, crypto options, crypto futures and crypto swaps. The trading in crypto derivatives were first offered in 2017 on the traditional exchanges of the CBOE, Chicago Board Options Exchange and the CME, Chicago Mercantile Exchange.  

This gave impetus to crypto exchanges to offer derivative products to the market. The market became very receptive to these products, add the ability to trade 24/7 and there are two big reasons why there has been a massive rise in crypto derivative trading. 

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