Since we have been pondering around cryptocurrency and its attributes for a while now, let me explain you another sector where the sole motive is trading of different cryptocurrencies against each other along with different assets.
If you already know a little bit about the equity market, this may seem like that, and the fact is, they do have some resemblance and by looking straight at it, the only major difference you could find would be what is your ownership in the market.
Wherein equity/stock markets, you own shares of different companies, in crypto markets (or more commonly known as crypto exchanges) you own cryptocurrencies of different sorts. But before getting to the differences, let me explain what cryptocurrency exchange is.
What is a cryptocurrency exchange?
If you’ll google up the term, you’ll find that cryptocurrency exchange (also called digital currency exchange), is a business that allows customers to trade cryptocurrencies/digital currencies for other assets, like conventional money or other digital currencies.
These exchanges can be done through conventional payment methods like credit/debit cards, wire payments and so on in exchange for digital currencies or cryptocurrencies.
They are many exchanges that allow you to trade in cryptocurrencies with varying rules and regulations.
Dedicated crypto exchanges like Binance and Coinbase lets users purchase and withdraw cryptocurrencies and even some brokerages like Robinhood and eToro allow usage of cryptos but with a catch. In these brokerages, purchases of cryptocurrencies are possible but direct withdrawal is not.
How do they operate?
Primary objective of these exchanges is to match prospective buyers with sellers. Like a traditional stock exchange, traders opt to buy or sell cryptos by inputting either a market order (a request by an investor via broker to buy or sell a security at the best available price) or a limit order (an order of purchasing or selling a security at a specified price or better).
After a market order is chosen, the trader authorizes the exchange at the best available price in the marketplace. In the case of a limit order, the trader proceeds with the exchange to trade the coins for a price below the current ask, or above the present bid, depending upon the situation (either buying or selling).
In order to transact a cryptocurrency in exchange, the user has to go through the registrations process with that particular exchange and undergo a series of verification process to authenticate his/her identity. Once done, an account is opened and allotted to the user to transfer funds into that account to facilitate in buying coins.
Differences between trading stocks and cryptocurrencies?
While purchasing a stock, generally you’re allotted a piece of the company (unless you’re a Billionaire who can afford to grab the actual-paper stock). In the case of cryptocurrencies, in less than 10 minutes, through peer-to-peer(P2P) method, you can trade crypto assets more comfortably.
Purchasing a stock entitles owners to legal rights, such as dividends (a share of the company’s profits). In the case of cryptos, the volatility aspect is very high.
Even though the structure of cryptos is very secure, ownership is not. And it’s not even difficult to remember the number of hacks happened to this aspect where a lot of people lost all the funds they had. Though this can be countered that this also allows traders to become rich very quickly, it should never be forgotten that the reverse is possible too.
The Howey Test
The Howey Test determines the regularity of the transaction by checking whether the transaction represents an investment contract if “a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” Simply put, it asks whether the value of a transaction for one of the participants is dependent upon other’s work.
If an asset, irrespective of it being digital or not, falls under any of these categories mentioned below, it will be labeled as a security:
- It is an investment of money.
- Expectation of profits from the investment.
- Investment of money is in a common enterprise.
- Any profit comes from the efforts of a promoter or third party.
Up till now, we have learnt how we can convert our currency into cryptocurrency through crypto exchanges. But what if we want to convert that same cryptocurrency into our conventional physical currency that we use daily? Let’s put it this way.
How can we move our cryptocurrencies in the bank account as our conventional currency?
The answer is, they are a couple of them. Let’s start with the easiest one:
- Through crypto exchanges
Exchanges like Coinbase and Binance allow you to sell the cryptocurrency in return of the cash which is directly deposited in your bank account. It is the simplest of them all and while not being the fastest, it’s easy and secure.
- Bitcoin ATM
Even though the number is very less (around 14,000 Bitcoin ATMs, as of January 1, 2021), you can use a physical center to buy or sell cryptos (primarily Bitcoins) with physical currency. These are comparatively faster given you have one around where you live and is safe and secure. One major disadvantage is its transaction fee, which typically ranges between 7-12%.
- Crypto Debit Cards
Several websites have an option to sell bitcoin in exchange of a prepaid debit card, which has usage like a regular debit card. An advantage since these cards are powered by either VISA or Mastercard which means that they can work for both online and offline shopping at most businesses anywhere in the world.
- Peer-to-Peer Transactions
Possibly the quickest, most anonymous method, you can use peer-to-peer platform to sell cryptocurrencies for cash. While selling, the trader can decide which payment method he/she want the buyers to use like Cash Deposit or Bank Transfer.