Custodial and Non-Custodial Cryptocurrency Wallets

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interest include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency, Web 3.0, and metaverse ecosystems.

Introduction

Cryptocurrencies (crypto) are a relatively new type of currency evolving rapidly in an increasingly tech-driven economy. They do not have an actual physical form, but rather exist in a blockchain on a server. They are not backed by banks or other traditional lending institutions, and transactions are highly encrypted to keep personal information private.

Crypto can be purchased, sold, or swapped on different types of cryptocurrency exchanges or on peer-to-peer marketplaces, like LocalCryptos. Once crypto is purchased, it is important to understand how this digital asset should be properly stored and how it can be securely transported or moved.

What is a Cold Wallet?

At the most secure end is what is called a "cold" wallet. A “cold” wallet is a digital wallet that stores the crypto private keys offline on a physical medium, such as a USB drive. These physical mediums are called cold storage wallets because they are not linked to the internet.

With a “cold” wallet, a user retains full control over when and where the wallet is accessed. Since all of the digital assets are stored offline, this makes it more difficult for hackers to access this crypto. But if you need to access the wallet quickly or while traveling, it is not the most convenient option of the two types of wallets. Let’s first take a look at soft wallets.

There are essentially two types of soft wallets: custodial crypto wallets (also referred to as hosted wallets) and non-custodial crypto wallets.

Custodial versus Non-Custodial Crypto Wallets (source:hub.easycrypto.com)

What is a Custodial Crypto Wallet?

Custodial wallets are essentially browser-based wallets that allow users to interact with them like a website. With custodial wallets, a trusted third party holds the private key and is tasked with keeping these assets and the private key safe. Two of the more popular custodial wallets are offered by Coinbase and Binance.

Online wallets are perhaps the easiest crypto wallets to use, making them very popular. However, cryptocurrency traders should be aware there are a number of obvious downsides to custodial wallets.

First, allowing a third party to manage and secure crypto might be convenient, but giving up control of the private keys can create susceptibility to exit scams, hacking, and theft.

Moreover, a custodial wallet provider can set a withdrawal limit setting a maximum number of crypto that one can withdraw. Alternatively, the wallet provider may unilaterally set high fees for using their services. In addition, if the platform experiences technical issues or system outages, this might cause crypto owners to temporarily lose access to their digital assets.

Basically, with custodial wallets, crypto owners are at mercy of the wallet providers since they do not have their own private keys. As they say in crypto, “not your keys, not your coins.”

What is a Non-Custodial Crypto Wallet?

Non-custodial wallets can be software wallets or hardware wallets. A software wallet can include an App that is downloaded to a mobile device or computer. A non-custodial wallet means that the wallet owner is in possession and control of the private keys. A few of the more popular non-custodial wallets include Zengo and Nuri.

A non-custodial wallet gives the owner complete control of their digital assets. However, as the owner, you alone are responsible for the safety of your crypto keys. Therefore, choosing from the best non-custodial wallets is critical.

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity with which Thomas Wettermann has been, is currently, or will be affiliated.

Trading digital financial assets such as cryptocurrencies can carry a high level of risk, and may not be suitable for all investors. Before deciding to invest, purchase, and/or trade cryptocurrency you should carefully consider your investment objectives, level of experience, adversity to risk, and volatilities. The possibility exists that you may sustain a loss of some or all of your initial investment; therefore, you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with cryptocurrency trading, and seek advice from a qualified and independent financial advisor.

Thomas Wettermann is not an independent financial advisor. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as a general market commentary of Thomas Wettermann and does not constitute investment advice. Thomas Wettermann will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. All opinions expressed on this site are owned by Thomas Wettermann and should never be considered as advice in any form.

 

Cryptocurrency Hot and Cold Wallets

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interest include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency, Web 3.0, and metaverse ecosystems.

Cryptocurrency Wallets (source:zipmex.com)

Introduction

Cryptocurrencies (crypto) are a relatively new type of currency evolving rapidly in an increasingly tech-driven economy. They do not have an actual physical form, but rather exist in a blockchain on a server. They are not backed by banks or other traditional lending institutions, and transactions are highly encrypted to keep personal information private. Crypto can be purchased, sold, or swapped on different types of cryptocurrency exchanges or on peer-to-peer marketplaces, like LocalCryptos. Once crypto is purchased, it is important to understand how this digital asset should be properly stored and how it can be securely transported or moved.

What is a Cryptocurrency Wallet?

When Bitcoin, Ethereum, or other crypto is purchased from a CEX or a DEX, these coins can be left sitting in the exchange where they were purchased. If purchased on a CEX, these coins will be kept secured in a storage mechanism referred to as custodial storage where the CEX maintains custody or control over the coins.

Alternatively, this crypto can be moved outside of the exchange and into non-custodial storage. These storage mechanisms are collectively referred to as crypto wallets.

A crypto wallet is a storage mechanism that allows for the secure storage of cryptocurrencies. You do not store your crypto but rather the public and private keys that provide access to your purchased crypto on the blockchain.

There are many different types of crypto wallets but generally, these wallets can be categorized into two main wallet types: a “hot” wallet (“software”) or a “cold” wallet (“hardware”). They vary in levels of security, accessibility, and usability.

Hot and Cold Wallets (source:coinmarketcap.com)

What is a Hot Wallet?

First, "hot" wallet options come in two forms: software wallets and online wallets. These two versions are termed “hot” wallets because they rely on an internet connection to properly gain access to the stored currencies.

Software wallets may be downloaded to a computer or mobile device, often in the form of an app. Online wallets act like websites and are usually controlled by major crypto centralized exchanges such as Coinbase or Binance. 

Both the software wallet and the online wallet possess similar benefits. For example, keeping crypto assets available online makes it easier for these to be transferred. This makes the hot wallets more convenient for users who intend to frequently trade their crypto.

However, a potential downside is connecting a hot wallet to the internet exposes the stored crypto to certain risks of potential attacks and hacking.

What is a Cold Wallet?

At the most secure end is what is called a "cold" wallet. A “cold” wallet is a digital wallet that stores the crypto private keys offline on a physical medium, such as a USB drive. These physical mediums are called cold storage wallets because they are not linked to the internet.

With a “cold” wallet, a user retains full control over when and where the wallet is accessed. Since all of the digital assets are stored offline, this makes it more difficult for hackers to access this crypto. But if you need to access the wallet quickly or while traveling, it is not the most convenient option of the two types of wallets. Let’s first take a look at soft wallets.

There are essentially two types of soft wallets: custodial crypto wallets (also referred to as hosted wallets) and non-custodial crypto wallets.

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity with which Thomas Wettermann has been, is currently, or will be affiliated.

Trading digital financial assets such as cryptocurrencies can carry a high level of risk, and may not be suitable for all investors. Before deciding to invest, purchase, and/or trade cryptocurrency you should carefully consider your investment objectives, level of experience, adversity to risk, and volatilities. The possibility exists that you may sustain a loss of some or all of your initial investment; therefore, you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with cryptocurrency trading, and seek advice from a qualified and independent financial advisor.

Thomas Wettermann is not an independent financial advisor. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as a general market commentary of Thomas Wettermann and does not constitute investment advice. Thomas Wettermann will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. All opinions expressed on this site are owned by Thomas Wettermann and should never be considered as advice in any form.

 

Cryptocurrency Wallets

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interest include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency, Web 3.0, and metaverse ecosystems.

Cryptocurrency Wallets (source:zipmex.com)

Introduction

Cryptocurrencies (crypto) are a relatively new type of currency evolving rapidly in an increasingly tech-driven economy. They do not have an actual physical form, but rather exist in a blockchain on a server. They are not backed by banks or other traditional lending institutions, and transactions are highly encrypted to keep personal information private. Crypto can be purchased, sold, or swapped on different types of cryptocurrency exchanges or on peer-to-peer marketplaces, like LocalCryptos. Once crypto is purchased, it is important to understand how this digital asset should be properly stored and how it can be securely transported or moved.

What is a Cryptocurrency Wallet?

When Bitcoin, Ethereum, or other crypto is purchased from a CEX or a DEX, these coins can be left sitting in the exchange where they were purchased. If purchased on a CEX, these coins will be kept secured in a storage mechanism referred to as custodial storage where the CEX maintains custody or control over the coins.

Alternatively, this crypto can be moved outside of the exchange and into non-custodial storage. These storage mechanisms are collectively referred to as crypto wallets. A crypto wallet is a storage mechanism that allows for the secure storage of cryptocurrencies. You do not store your crypto but rather the public and private keys that provide access to your purchased crypto on the blockchain.

There are many different types of crypto wallets but generally, these wallets can be categorized into two main wallet types: a “hot” wallet (“software”) or a “cold” wallet (“hardware”). They vary in levels of security, accessibility, and usability.

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity with which Thomas Wettermann has been, is currently, or will be affiliated.

Trading digital financial assets such as cryptocurrencies can carry a high level of risk, and may not be suitable for all investors. Before deciding to invest, purchase, and/or trade cryptocurrency you should carefully consider your investment objectives, level of experience, adversity to risk, and volatilities. The possibility exists that you may sustain a loss of some or all of your initial investment; therefore, you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with cryptocurrency trading, and seek advice from a qualified and independent financial advisor.

Thomas Wettermann is not an independent financial advisor. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as a general market commentary of Thomas Wettermann and does not constitute investment advice. Thomas Wettermann will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. All opinions expressed on this site are owned by Thomas Wettermann and should never be considered as advice in any form.

 

Custodial, Non-Custodial, and Peer-to-Peer Crypto Marketplaces

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interest include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency, Web 3.0, and metaverse ecosystems.

Centralized versus Decentralized Exchange (source:blockgeeks.com)

Introduction

Cryptocurrencies (crypto) are a relatively new type of currency evolving rapidly in an increasingly tech-driven economy. They do not have an actual physical form, but rather exist in a blockchain on a server. They are not backed by banks or other traditional lending institutions, and transactions are highly encrypted to keep personal information private.

Crypto can be purchased, sold, or swapped on different types of cryptocurrency exchanges or on peer-to-peer marketplaces, like LocalCryptos. Once crypto is purchased, it is important to understand how this digital asset should be properly stored and how it can be securely transported or moved.

What is a Cryptocurrency Exchange?

A cryptocurrency exchange provides a platform for purchasing, trading, or swapping cryptocurrencies. There are generally two types of crypto exchanges: a Centralized Crypto Exchange (CEX) and a Decentralized Crypto Exchange (DEX). There is also a hybrid exchange which will be referred to as a Peer-to-Peer crypto marketplace, such as the non-custodial platform offered by LocalCryptos.

What is a Non-Custodial Cryptocurrency Exchange?

Most decentralized crypto exchanges operate as non-custodial exchanges. As the name implies, a non-custodial cryptocurrency exchange does not hold the user's coins or tokens. The service handles the buy, sell or exchange transaction but requires users to have their own crypto wallets to hold the keys to their assets.

What is a Peer-to-Peer Crypto Marketplace?

A peer-to-peer marketplace allows individuals to purchase certain types of cryptocurrencies directly from sellers located anywhere in the world. Such a marketplace is different from cryptocurrency exchanges which operate to automatically pair a willing buyer with a willing seller and then handle the funds and coins being exchanged between these two parties.

A peer-to-peer marketplace is a matchmaker between one peer (the seller) and another peer (the buyer). It, therefore, avoids a middle man or third party (like a decentralized crypto exchange). Such a marketplace merely provides a platform for sellers and buyers to communicate and trade in a secure and trustless way.

To enable this peer-to-peer relationship, this marketplace is structured as a non-custodial platform. This means that the platform does not take “custody” or possession of the seller’s crypto but merely deposits these into an escrow fund. These funds can then be sent directly to a smart contract on the blockchain.

That is, participants will trade from their wallets which means they are always in control of their private keys. Unlike a CEX, the participants can create a web wallet or can utilize their wallet. Typically, a peer-to-peer marketplace will support several wallets such as Metamask, Fortmatic, WalletConnect, and Portis.

The non-custodial nature of the marketplace also means that the marketplace does not take control or does not store any crypto on the platform. Instead, the private key, and hence the crypto remains stored in a remote wallet, is entirely under the users’ control. Even if the marketplace platform's security is somehow compromised, the users' funds and crypto remain unaffected and securely stored.

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity with which Thomas Wettermann has been, is currently, or will be affiliated.

Trading digital financial assets such as cryptocurrencies can carry a high level of risk, and may not be suitable for all investors. Before deciding to invest, purchase, and/or trade cryptocurrency you should carefully consider your investment objectives, level of experience, adversity to risk, and volatilities. The possibility exists that you may sustain a loss of some or all of your initial investment; therefore, you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with cryptocurrency trading, and seek advice from a qualified and independent financial advisor.

Thomas Wettermann is not an independent financial advisor. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as a general market commentary of Thomas Wettermann and does not constitute investment advice. Thomas Wettermann will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. All opinions expressed on this site are owned by Thomas Wettermann and should never be considered as advice in any form.

 

Custodial versus Non-Custodial: Exchanges

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interest include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency, Web 3.0, and metaverse ecosystems.

Centralized versus Decentralized Exchange (source:blockgeeks.com)

Introduction

Cryptocurrencies (crypto) are a relatively new type of currency evolving rapidly in an increasingly tech-driven economy. They do not have an actual physical form, but rather exist in a blockchain on a server. They are not backed by banks or other traditional lending institutions, and transactions are highly encrypted to keep personal information private.

Crypto can be purchased, sold, or swapped on different types of cryptocurrency exchanges or on peer-to-peer marketplaces, like LocalCryptos. Once crypto is purchased, it is important to understand how this digital asset should be properly stored and how it can be securely transported or moved.

What is a Cryptocurrency Exchange?

A cryptocurrency exchange provides a platform for purchasing, trading, or swapping cryptocurrencies. There are generally two types of crypto exchanges: a Centralized Crypto Exchange (CEX) and a Decentralized Crypto Exchange (DEX). There is also a hybrid exchange which will be referred to as a Peer-to-Peer crypto marketplace, such as the non-custodial platform offered by LocalCryptos.

What is a Decentralized Cryptocurrency Exchange?

Unlike a “centralized” exchange, a “decentralized” exchange (DEX) avoids the third party or middle man altogether. A DEX establishes a buyer-to-seller or a peer-to-peer trading platform that enables the exchange of one type of token for another different type of token. Say, for example, a buyer wanted to purchase Bitcoin but only had Ethereum to trade or swap. This buyer would use a decentralized exchange or DEX.

DEX’s have several advantages over CEXs. For example, first and foremost, DEXs operate as a non-custodial crypto exchange. This means that investors are not required to turn over control of their private keys to initiate a transaction. Rather, a DEX is typically structured to interface with externally held wallets. Since there is no middle man to process the trade, DEXs often self-execute trades by way smart contracts on the blockchain.

DEXs also typically offer a broader portfolio of supported cryptocurrencies for investors to select. For example, CEXs typically will only offer trading services for the cryptocurrencies that they list, and will generally only list those currencies with adequate trading activity. Therefore, any altcoins are generally not tradable on a CEX, but rather only DEXs.

Alternatively, through smart contracts, DEXs execute trades and record them to the blockchain, enabling trustless transactions. And since DEXs operate as non-custodial exchanges and do not hold the trader’s funds, DEXs are less likely to be targeted by cybercriminals.

Importantly, traders who utilize a DEX also do not need to turn over their private keys because the trader’s wallets are held externally. As such, the DEX is not liable for the funds. For the same reason, users are typically not required to complete know-your-customer (KYC) and anti-money laundering (AML) procedures when using a DEX.

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity with which Thomas Wettermann has been, is currently, or will be affiliated.

Trading digital financial assets such as cryptocurrencies can carry a high level of risk, and may not be suitable for all investors. Before deciding to invest, purchase, and/or trade cryptocurrency you should carefully consider your investment objectives, level of experience, adversity to risk, and volatilities. The possibility exists that you may sustain a loss of some or all of your initial investment; therefore, you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with cryptocurrency trading, and seek advice from a qualified and independent financial advisor.

Thomas Wettermann is not an independent financial advisor. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as a general market commentary of Thomas Wettermann and does not constitute investment advice. Thomas Wettermann will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. All opinions expressed on this site are owned by Thomas Wettermann and should never be considered as advice in any form.

 

Custodial versus Non-Custodial: Exchanges

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interest include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency, Web 3.0, and metaverse ecosystems.

Centralized versus Decentralized Exchange (source:blockgeeks.com)

Introduction

Cryptocurrencies (crypto) are a relatively new type of currency evolving rapidly in an increasingly tech-driven economy. They do not have an actual physical form, but rather exist in a blockchain on a server. They are not backed by banks or other traditional lending institutions, and transactions are highly encrypted to keep personal information private.

Crypto can be purchased, sold, or swapped on different types of cryptocurrency exchanges or on peer-to-peer marketplaces, like LocalCryptos. Once crypto is purchased, it is important to understand how this digital asset should be properly stored and how it can be securely transported or moved.

What is a Cryptocurrency Exchange?

A cryptocurrency exchange provides a platform for purchasing, trading, or swapping cryptocurrencies. There are generally two types of crypto exchanges: a Centralized Crypto Exchange (CEX) and a Decentralized Crypto Exchange (DEX). There is also a hybrid exchange which will be referred to as a Peer-to-Peer crypto marketplace, such as the non-custodial platform offered by LocalCryptos.

What is a Centralized Cryptocurrency exchange?

For example, a “centralized” cryptocurrency exchange allows buyers and sellers to exchange cryptocurrencies. These exchanges are described as “centralized” because they rely on a middle man or third party to process and manage transactions between buyers and sellers. All parties to a transaction rely on and must therefore trust this middle man to properly handle their currencies.

Centralized exchanges have suffered several security lapses in the past. For example, several centralized exchanges have been vulnerable to online hackers and have also had poor luck reacting to certain blockchain hard forks.

Centralized exchanges keep their systems off-chain, meaning they operate as collateral holders for their clients. Importantly, centralized exchange transactions are also not recorded on the blockchain. Such scenarios can cause security breaches and potentially unsafe storage of customer information, stored coins, and private keys.

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity with which Thomas Wettermann has been, is currently, or will be affiliated.

Trading digital financial assets such as cryptocurrencies can carry a high level of risk, and may not be suitable for all investors. Before deciding to invest, purchase, and/or trade cryptocurrency you should carefully consider your investment objectives, level of experience, adversity to risk, and volatilities. The possibility exists that you may sustain a loss of some or all of your initial investment; therefore, you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with cryptocurrency trading, and seek advice from a qualified and independent financial advisor.

Thomas Wettermann is not an independent financial advisor. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as a general market commentary of Thomas Wettermann and does not constitute investment advice. Thomas Wettermann will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. All opinions expressed on this site are owned by Thomas Wettermann and should never be considered as advice in any form.

 

Public and Private Crypto Keys

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interest include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency, Web 3.0, and metaverse ecosystems.

Public and Private Crypto Keys (source: ledger.com)

How do Public and Private Keys Control Cryptocurrency Transactions?

When crypto is purchased, you do not possess any type of physical coin. Rather, crypto is a digital representation of a store of value that resides on a computerized ledger called a blockchain. And ownership of this crypto requires proof of both a public key and a private key. All cryptocurrencies have both a public key and a private key.

Owners of crypto can send and receive their digital currencies without requiring any type of third party like a bank or trustee to verify the transactions.

Rather, it is these keys that allow for crypto to be sent to any third party, anywhere in the world, at any time of day. The public and private keys work together as a key pair. Public keys can be shared with others to enable the receipt of transactions.

However, private keys must be kept secret. If anyone has access to these private keys, they will also have unfettered access to any cryptocurrency associated with those keys.

The public key allows one to receive cryptocurrency transactions. Public keys represent a cryptographic code that is paired to the private key. Having the public key allows that person to send transactions to the private key. Importantly, however, it is the private key that is required to “unlock” these transactions to prove the rightful owner of the crypto.

Therefore, crypto owners can be free to share their public key as this allows any third parties to send these owners transactions. However, crypto owners must be extremely mindful not to entrust anyone with the private key.

Private keys are maintained in a cryptocurrency wallet. As will be explained, such a wallet can be mobile or desktop software or a specialized hardware device. Private keys do not reside on the blockchain network. When cryptocurrencies are maintained on an exchange like Coinbase or Gemini, the exchange will be the custodian of the private keys.

If crypto is transferred from an exchange to a non-custodial wallet, then the owner of the wallet is in control of the private keys. The choice of “holding your own keys” or entrusting a custodian to hold these keys depends on your philosophy, risk tolerance, and a host of other factors.

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity with which Thomas Wettermann has been, is currently, or will be affiliated.

Trading digital financial assets such as cryptocurrencies can carry a high level of risk, and may not be suitable for all investors. Before deciding to invest, purchase, and/or trade cryptocurrency you should carefully consider your investment objectives, level of experience, adversity to risk, and volatilities. The possibility exists that you may sustain a loss of some or all of your initial investment; therefore, you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with cryptocurrency trading, and seek advice from a qualified and independent financial advisor.

Thomas Wettermann is not an independent financial advisor. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as a general market commentary of Thomas Wettermann and does not constitute investment advice. Thomas Wettermann will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. All opinions expressed on this site are owned by Thomas Wettermann and should never be considered as advice in any form.

 

Crypto IRAs – Advantages and Disadvantages

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interest include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency, Web 3.0, and metaverse ecosystems.

You’ve built up a balanced retirement nest egg including stocks, bonds, mutual funds, and other common investment types. You’ve seen the market cap of many cryptocurrencies explode over the last few years and are now wondering if you can diversify your retirement savings by adding cryptocurrencies. Well, one way to provide this diversification is by opening a cryptocurrency funded Individual Retirement Account (IRA).

What are the Advantages of Owning a Crypto IRA?

First and foremost, your crypto IRA will allow you to experience the tax-free growth of your holdings.

Crypto is not a typical asset like a stock, a bond, or a mutual fund. It, therefore, brings diversification to your portfolio. Cryptocurrencies can therefore act as a potential shield from stock market swings.

Investors add a certain amount of crypto exposure to their overall investment nest egg because of the potential upside for greater returns. Some cryptos have had meteoritic growth in their prices over the last few years.

For example, Bitcoin has seen a 600% increase in valuation over the last five years. Many see crypto as an inflation hedge. Traditional currencies like USD, EUR, or GBP lose their value over time to Inflation. For example, today US inflation is estimated at 7.0%

Unlike certain fiat currencies, cryptocurrencies such as Bitcoin are designed to have a limited supply. These cryptocurrencies cannot be devalued by government actions or by a central bank printing too much of it.

Therefore, your crypto IRA can act as an anti-inflationary investment. For example, some people refer to Bitcoin as “digital gold.” Why? Because just like gold, Bitcoin will not lose its value over time.

The crypto markets never sleep and are therefore active 24/7.

Therefore, a crypto IRA will also provide you with the ability to continuously monitor and invest in your investment portfolio at any time of the day. Indeed, most crypto IRA custodians, like iTrustCapital, provide 24 hour/day, 365 days account access.

What are the Disadvantages of Owning a Crypto IRA?

Before deciding to open your IRA, you should carefully consider your investment objectives, level of experience, adversity to risk, volatilities, and fees. For example, SDIRA custodial fees can get expensive when considering Setup Fees, Annual Account Fees, and Transaction Fees.

If you are close to retirement age, it is important to note that digital cryptocurrencies are speculative investments and have experienced extreme periods of volatility. Cryptocurrencies are not currently regulated and could result in rapid price fluctuations, based on potential regulations or statements made on social media.

Federal Deposit Insurance Corporation (source: fdic.gov)

And finally, the Federal Deposit Insurance Corporation (FDIC) and Securities Investor Protection Corporation (SIPC) provide investors with insurance for certain deposits and investments. However, be aware that cryptocurrency is not covered by the FDIC or SIPC.

In addition, the SEC has warned of the risk of fraud when participating in crypto SDIRAs. Most IRA providers do offer some types of insurance, so you should naturally investigate such coverage before you open a crypto SDIRA account.

Conclusion

If you are looking to diversify your retirement portfolio, adding a crypto IRA to your existing retirement nest egg might be for you. However, you might first consider heeding the advice of some investment professionals suggesting that you limit your crypto investments given their speculative nature.

For example, some investment professionals suggest that you limit your exposure to only 5% of your entire retirement portfolio.

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity with which Thomas Wettermann has been, is currently, or will be affiliated.

Trading digital financial assets such as cryptocurrencies can carry a high level of risk, and may not be suitable for all investors. Before deciding to invest, purchase, and/or trade cryptocurrency you should carefully consider your investment objectives, level of experience, adversity to risk, and volatilities. The possibility exists that you may sustain a loss of some or all of your initial investment; therefore, you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with cryptocurrency trading, and seek advice from a qualified and independent financial advisor.

Thomas Wettermann is not an independent financial advisor. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as a general market commentary of Thomas Wettermann and does not constitute investment advice. Thomas Wettermann will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. All opinions expressed on this site are owned by Thomas Wettermann and should never be considered as advice in any form.

 

Crypto IRAs – Are They For You?

Crypto IRA (source:irafinancialgroup.com)

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interest include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency, Web 3.0, and metaverse ecosystems.

What Types of Crypto Can you Hold in an IRA?

A crypto IRA can be structured to hold a single type of cryptocurrency, such as Bitcoin, Ethereum, or Solana. However, if you want to further diversify your IRA crypto holdings, you might consider holding a collection of different types of cryptocurrencies. Aside from just holding cryptocurrencies, you may want to consider holding one or more crypto-based Exchange-Traded Fund’s (ETF) that provides you with exposure to one or more different cryptocurrencies.

How Does a Crypto IRA Work?

A self-directed crypto IRA includes complex rules and presents certain risks. Such rules include prohibiting certain types of transactions along with how the assets can be used while they are held in the SDIRA. Moreover, the IRS requires custodians or trustees to hold the account for you. Therefore, it is always best to fully investigate your options and your requirements before opening an SDIRA. As they say in the crypto, DYOR.

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity with which Thomas Wettermann has been, is currently, or will be affiliated.

Trading digital financial assets such as cryptocurrencies can carry a high level of risk, and may not be suitable for all investors. Before deciding to invest, purchase, and/or trade cryptocurrency you should carefully consider your investment objectives, level of experience, adversity to risk, and volatilities. The possibility exists that you may sustain a loss of some or all of your initial investment; therefore, you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with cryptocurrency trading, and seek advice from a qualified and independent financial advisor.

Thomas Wettermann is not an independent financial advisor. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as a general market commentary of Thomas Wettermann and does not constitute investment advice. Thomas Wettermann will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. All opinions expressed on this site are owned by Thomas Wettermann and should never be considered as advice in any form.

 

Crypto IRAs – What Are They?

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interest include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency, Web 3.0, and metaverse ecosystems.

Bitcoin IRA (source: techbullion.com)

You’ve built up a balanced retirement nest egg including stocks, bonds, mutual funds, and other common investment types. You’ve seen the market cap of many cryptocurrencies explode over the last few years and are now wondering if you can diversify your retirement savings by adding cryptocurrencies.

Well, one way to provide this diversification is by opening a cryptocurrency-funded Individual Retirement Account (IRA).

What are Cryptocurrencies (Crypto)?

Virtual currencies are digital representations of value. Cryptocurrencies (crypto) are one type of virtual currency - they are represented by secured transactions on a blockchain. Cryptocurrencies are not a type of stock, bond, or mutual fund rather they are a type of property, much like gold or silver.

For example, the Internal Revenue Service (IRS) treats cryptocurrencies as property for federal income tax purposes. Therefore, when you sell cryptocurrencies, your capital gains or capital losses can be taxable events.

What Is a Crypto IRA?

A Crypto IRA, also referred to as a Bitcoin IRA, provides you with the tax advantages of a conventional IRA and also grants you the opportunity to invest in cryptocurrencies.

There are two types of conventional IRAs. There is the traditional IRA where contributions are made with pre-tax dollars. And there is the Roth IRA where contributions are made with after-tax dollars. Both have their own rules and restrictions regarding fund accessibility and eligibility.

Crypto IRAs can be established as either a traditional IRA or Roth IRA. However, since the IRS considers crypto as a property, you can only hold cryptocurrencies in self-directed IRAs (SDIRA).

An SDIRA allows you to hold alternative assets for retirement savings, like real estate, precious metals (gold and silver), commodities, and cryptocurrencies. Importantly, SDIRAs have the same contribution limits as conventional IRAs.

Unlike conventional IRAs, SDIRAs are “self-directed” - this means that you as the investor must directly manage your alternative assets.

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity with which Thomas Wettermann has been, is currently, or will be affiliated.

Trading digital financial assets such as cryptocurrencies can carry a high level of risk, and may not be suitable for all investors. Before deciding to invest, purchase, and/or trade cryptocurrency you should carefully consider your investment objectives, level of experience, adversity to risk, and volatilities. The possibility exists that you may sustain a loss of some or all of your initial investment; therefore, you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with cryptocurrency trading, and seek advice from a qualified and independent financial advisor.

Thomas Wettermann is not an independent financial advisor. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as a general market commentary of Thomas Wettermann and does not constitute investment advice. Thomas Wettermann will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. All opinions expressed on this site are owned by Thomas Wettermann and should never be considered as advice in any form.

 

Alternative Crypto Investment Vehicles

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interest include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency, Web 3.0, and metaverse ecosystems.

Investing in cryptocurrencies can be complex and challenging. Cryptocurrencies must be purchased through crypto exchanges and they must be held or stored in either cold or hot storage.

As such, retail investors interested in seeking crypto investment exposure often will choose alternative investment vehicles that do not require the purchase or custody of cryptocurrencies.

There are several such alternative investment vehicles.

Index Funds

Investors seeking to incorporate crypto into their portfolios can also purchase index funds.

Index funds - such as S&P 500 or total market funds - have inherent exposure to crypto-related companies.

For example, S&P 500 index funds include many companies that already have a certain degree of crypto exposure, including Visa, Microsoft, NVidia, Mastercard, PayPal, Tesla, Advanced Micro Devices, Goldman Sachs, and IBM.

Mutual Funds

Retail investors can also purchase sector mutual funds that focus on crypto or blockchain technologies.

A crypto-related mutual fund that retail investors should consider includes Bitwise Ten Crypto Index Fund (BITW).

BITW follows the performance of the Bitwise 10 Large Cap Crypto Index, representing the ten most highly valued cryptocurrencies. And the Bitcoin Strategy ProFund (BTCFX) invests in Bitcoin futures contracts.

Trusts

Grayscale is an asset management company that manages investment trusts, including the Grayscale Bitcoin Trust (GBTC) and Grayscale Ethereum Trust (ETHE). These trusts are structured to buy, hold, and protect cryptocurrencies so that the investor does not have to custody any digital assets.

The Grayscale Bitcoin Trust owns the Bitcoin coins and sells shares to retail investors that are supposed to track the price of Bitcoin. These trusts are traded over the counter.

Exchange-Traded Funds (ETFs)

ETFs track the performance of a certain industry or a sector and can be purchased on a stock exchange. 

Example ETFs include: 

- Amplify Transformational Data Sharing ETF: This is the largest blockchain ETF by total assets. This fund invests primarily in equity securities of companies actively involved in the development and utilization of blockchain technologies, such as PayPal, MicroStrategy, and Square. 

- Siren NASDAQ NexGen Economy ETF: This fund tracks the performance of the NASDAQ Blockchain Economy Index, comprising stocks that support blockchain technology. 

 - First Trust Indxx Innovative Transaction and Processing ETFs: This fund’s largest holdings include NVIDIA, Oracle, and Fujitsu.

Conclusion

Investors seeking crypto investment exposure without its related purchasing and custody challenges have a number of options. These options reduce some of the challenges of holding or maintaining custody of these digital assets. However, before deciding to invest, purchase, and/or trade cryptocurrency, investors should carefully consider their investment objectives, level of experience, adversity to risk, and volatilities. Therefore, with any type of crypto investment, it is always best to investigate before investing. As they say in crypto, DYOR.

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity with which Thomas Wettermann has been, is currently, or will be affiliated.

Trading digital financial assets such as cryptocurrencies can carry a high level of risk, and may not be suitable for all investors. Before deciding to invest, purchase, and/or trade cryptocurrency you should carefully consider your investment objectives, level of experience, adversity to risk, and volatilities. The possibility exists that you may sustain a loss of some or all of your initial investment; therefore, you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with cryptocurrency trading, and seek advice from a qualified and independent financial advisor.

Thomas Wettermann is not an independent financial advisor. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as a general market commentary of Thomas Wettermann and does not constitute investment advice. Thomas Wettermann will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. All opinions expressed on this site are owned by Thomas Wettermann and should never be considered as advice in any form.

 

Invest in Bitcoin Without Purchasing Bitcoin

Gemini Mastercard (source:gemini.com)

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interest include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency, Web 3.0, and metaverse ecosystems.

Investing in cryptocurrencies can be complex and challenging. Cryptocurrencies must be purchased through crypto exchanges and they must be held or stored in either cold or hot storage.

As such, retail investors interested in seeking crypto investment exposure often will choose alternative investment vehicles that do not require the purchase or custody of cryptocurrencies. There are several such alternative investment vehicles.

Bitcoin ETFs

The Securities and Exchange Commission (SEC) recently approved a Bitcoin based-futures ETF. Bitcoin futures are financial contracts that require a buyer and a seller to transact Bitcoin at a predetermined future date and a predetermined price. The buyer and the seller must execute this financial contract at the set price, regardless of the current Bitcoin market price at the time that the contract expires. 

For example, with the ProShares ETF (BITO), investors gain exposure to returns of Bitcoin simply by buying an ETF by way of a brokerage account.

Cryptocurrency Credit Cards

Another way to indirectly invest in digital currencies is to use a “crypto” bearing credit card.

With these cards, a purchaser can earn a small amount of crypto every time a purchase is made with the card. Popular crypto credit cards include: 

 

- BlockFi 

- SoFi Credit Card 

- Brex Card 

- Venmo Credit Card 

- Gemini Credit Card - Mastercard

Conclusion

Investors seeking crypto investment exposure without its related purchasing and custody challenges have a number of options. These options reduce some of the challenges of holding or maintaining custody of these digital assets. However, before deciding to invest, purchase, and/or trade cryptocurrency, investors should carefully consider their investment objectives, level of experience, adversity to risk, and volatilities. Therefore, with any type of crypto investment, it is always best to investigate before investing. As they say in crypto, DYOR.

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity with which Thomas Wettermann has been, is currently, or will be affiliated.

Trading digital financial assets such as cryptocurrencies can carry a high level of risk, and may not be suitable for all investors. Before deciding to invest, purchase, and/or trade cryptocurrency you should carefully consider your investment objectives, level of experience, adversity to risk, and volatilities. The possibility exists that you may sustain a loss of some or all of your initial investment; therefore, you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with cryptocurrency trading, and seek advice from a qualified and independent financial advisor.

Thomas Wettermann is not an independent financial advisor. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as a general market commentary of Thomas Wettermann and does not constitute investment advice. Thomas Wettermann will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. All opinions expressed on this site are owned by Thomas Wettermann and should never be considered as advice in any form.

 

HOW TO BECOME A CRYPTO INVESTOR WITHOUT PURCHASING CRYPTOCURRENCIES

MicroStrategy (source:bitcoinist.com)

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interest include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency and metaverse ecosystems. Investing in cryptocurrencies can be complex and challenging.

Cryptocurrencies must be purchased through crypto exchanges and they must be held or stored in either cold or hot storage. As such, retail investors interested in seeking crypto investment exposure often will choose alternative investment vehicles that do not require the purchase or custody of cryptocurrencies. There are several such alternative investment vehicles.

Companies That Own Cryptocurrencies

One way to invest in crypto without having to purchase or hold digital currencies is to purchase shares of companies that own a fair amount of digital currencies on their balance sheets. The general thought is that as the value of the crypto held by the company increases in value, the company stock price will also increase in value.

Companies that currently own a fair number of cryptocurrencies on their balance sheets include: 

- MicroStrategy (NASDAQ: MSTR) $7B USD 

- Tesla Inca (NSADAQ: TSLA) $1.5B USD 

- Square (NYSE: SQ) $259M USD 

- Marathon Digital Holdings (NASDAQ: MARA) $175.3M USD 

Companies Active in Cryptocurrencies or Blockchain Technologies

Investing in companies that concentrate on blockchain technologies or that engage in cryptocurrency operations (such as digital currency mining) is another option. 

 Exemplary companies include: 

- Bitfarms (NASDAQ: BITF) (blockchain-related company); 

- Coinbase (NASDAQ: COIN) (public cryptocurrency exchange); 

- Galaxy Digital Holdings Ltd (OTCPK: BRPHF) (financial services and investment management, trading, custody, and mining); and 

- Riot Blockbuster Inc. (NASDAQ: RIOT) (Bitcoin mining company). 

Conclusion

Investors seeking crypto investment exposure without its related purchasing and custody challenges have a number of options. These options reduce some of the challenges of holding or maintaining custody of these digital assets. However, before deciding to invest, purchase, and/or trade cryptocurrency, investors should carefully consider their investment objectives, level of experience, adversity to risk, and volatilities. Therefore, with any type of crypto investment, it is always best to investigate before investing. As they say in crypto, DYOR.

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity with which Thomas Wettermann has been, is currently, or will be affiliated.

Trading digital financial assets such as cryptocurrencies can carry a high level of risk, and may not be suitable for all investors. Before deciding to invest, purchase, and/or trade cryptocurrency you should carefully consider your investment objectives, level of experience, adversity to risk, and volatilities. The possibility exists that you may sustain a loss of some or all of your initial investment; therefore, you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with cryptocurrency trading, and seek advice from a qualified and independent financial advisor.

Thomas Wettermann is not an independent financial advisor. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as a general market commentary of Thomas Wettermann and does not constitute investment advice. Thomas Wettermann will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. All opinions expressed on this site are owned by Thomas Wettermann and should never be considered as advice in any form.

 

Bonfida: A DEX Supplement

Bonfida (source:mobile.twitter.com/bonfida)

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interest include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency and metaverse ecosystems.

What is Serum?

Serum is a decentralized exchange (DEX) and ecosystem that provides lightning-fast transactions per second (TPS). And, it achieves these transaction speeds with very low gas or transaction costs.

Serum is an open-source, permissionless on-chain platform for trades to take place. Trading is completed utilizing smart contracts on the Solana network instead of being done on a centralized platform. Importantly, Serum does not require that a third party retain control over private keys, trading parameters, user information, or fund security.

With Serum, users can exchange any type of cryptocurrency for another without having to go through any Know Your Customer (KYC) procedures.

How does it achieve such cost-effective transaction speeds?

Serum is based on the Solana decentralized blockchain architecture.

Solana is an extremely fast and secure, open-sourced blockchain. It differentiates itself from other blockchains by processing transactions as they arrive in the network, rather than processing these transactions in a block-by-block fashion.

To achieve its processing rates, Solana utilizes a novel blockchain structure that implements both a Proof of History (PoH) coupled with a Proof of Stake (PoS).

Since its initial release, Solana’s price has been nothing short of meteoric, hitting an all-time high of $256 last November. With a market cap of just over $36 billion, Solana now ranks in seventh place among the largest cryptocurrencies by total value.

Solana has been placed into a category of potential Ethereum killers, shared by other smart contract projects such as Binance Smart Chain, Cardano, and Avalanche.

The high throughput that Solana achieves through its innovative ecosystem makes it ideal for decentralized applications (dApps) like the Serum DEX. Simply put, it offers a more scalable platform with lower transaction costs.

What is Bonfida?

Bonfida is a decentralized non-custodial exchange built on the open-source Serum trading protocol. It is, therefore, powered by the Solana blockchain.

According to the Bonfida Whitepaper, Bonfida provides a full product suite that operates as a critical link between Serum, Solana, and the growing user base that is actively trading on the Serum DEX.

As stated, Bonfida’s long-term goal is to remain the flagship product of the Serum Graphical User Interface (GUI), which is illustrated below.

Bonfida Graphical User Interface (GUI) (source:bonfida.org)

Bonfida’s platform is engineered to include a backend structure that stores all Serum on-chain transactions. This backend allows Bonfida to provide data through a REST API. A service that has been adopted by key crypto exchanges, such as CoinMarketCap and Coingecko.

Recently, the Bonfida API has seen requests increase by more than 25% week over week. And, it currently processes more than 6 million API requests per day.

Going forward, Bonfida has lofty engineering ambitions to incorporate the following additional features. Bonfida plans to offer more advanced on-chain order types. Currently, Bonfida offers limit-type orders and market-type orders. However, Bonfida plans to add such advanced order types such as profit and stop-loss orders. It also plans to add additional on-chain and off-chain order types, but this would require traders to stake their FIDA holdings (the Bonfida token) to be able to use the feature.

In addition, Bonfida plans to enable order placements via the very popular TradingView charts that are developed with on-chain data. TradingView combines real-time charts, technical indicators, cross-platform alerts, and a social network. All of these offerings are available via a web interface, dedicated desktop app, or mobile and tablet applications. TradingView is the leading trading network of over 30 million traders and investors.

Bonfida also has plans to build out two trading modes: advanced and basic. In the advanced trading mode, users would be able to experience the current trading mode with more advanced features like Bonfida bots and advanced order types. The Bonfida basic trading mode would be focused on the convert function. It would offer any type of charts or advanced order types.

Conclusion

Because of its speed and efficiency, Serum will continue to see growing developer adoption as it moves up the ranks of top DEXs. Serum is unique in that it is a DEX that offers several competitive advantages including cross-chain transactions and open books. And the addition of Bonfida will offer even more competitive advantages not yet seen in a DEX.

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity with which Thomas Wettermann has been, is currently, or will be affiliated.

Trading digital financial assets such as cryptocurrencies can carry a high level of risk, and may not be suitable for all investors. Before deciding to invest, purchase, and/or trade cryptocurrency you should carefully consider your investment objectives, level of experience, adversity to risk, and volatilities. The possibility exists that you may sustain a loss of some or all of your initial investment; therefore, you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with cryptocurrency trading, and seek advice from a qualified and independent financial advisor.

Thomas Wettermann is not an independent financial advisor. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as a general market commentary of Thomas Wettermann and does not constitute investment advice. Thomas Wettermann will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. All opinions expressed on this site are owned by Thomas Wettermann and should never be considered as advice in any form.

 

DEX Order Books

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interest include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency and metaverse ecosystems. 

 

Example Bitcoin Order Book (source:phemex.com)

What are Order Book Benefits versus Other Types of Exchanges?

DEXs running on Ethereum are currently too expensive or slow to support an order book due to their system limitations. So instead of employing an order book, these exchanges utilize Automated Market Makers (AMMs). But, these AMMs have certain limitations.

What is an AMM?

AMMs are a part of (DEXs) that were introduced to remove any intermediaries in the trading of crypto assets. Basically, an AMM relies on smart contracts to mathematically compute the price of the crypto tokens and also to provide the exchange with liquidity.

How does an AMM work?

Centralized exchanges typically utilize trading pairs such as BTC/USD. In DEXs, these trading pairs are normally referred to as “liquidity pools.” For example, to trade Bitcoin for USD, you would need to find a BTC/USD liquidity pool.

And unlike in a centralized exchange where dedicated market makers provide liquidity, with an AMM, anyone can provide liquidity to these pools. They merely need to deposit the pair of assets within the liquidity pool. For example, if an investor wanted to become a liquidity provider for a BCT/USD pool, the investor would need to deposit a certain predetermined ratio of both BTC and USD.

AMMs use preset mathematical equations to guarantee that the ratio of assets within these liquidity pools is balanced. This reduces any discrepancies in the pricing of pooled assets.

For example, some DEXs use a multiplication A * B = K equation to set the relationship between the two assets held in the liquidity pool. In this equation, A represents the value of the first asset and B represents the value of the second asset, and K is a constant.

Graphically, this equation can be represented as follows:

AMM Asset Ratio Equation (source:CoinDesk.com)

As such, within the liquidity pools, the pools will have the same relative state where the multiplication of the price of the first asset A multiplied by the second asset B equals the constant K.

For example, assume that an AMM defines a liquidity pool with the following BTC/ETH trading pair where BTC is the asset to be purchased. When BTC is purchased, the purchased BTC is removed from the pool, and ETH is added to the pool.

Removing BTC will cause the amount of BTC in the pool to fall, which causes the price of ETH to increase in order to fulfill the balancing effect of A*B=K. In contrast, because more ETH has been added to the pool, the price of ETH decreases. When ETH is purchased, the price of BTC falls in the pool while the price of ETH rises.

When large orders are placed in AMMs and a number of tokens are removed or added to a liquidity pool, this can cause large discrepancies to be generated between the asset’s calculated price within the pool and its market price (the price it’s trading at across multiple exchanges.)

For example, consider a situation where the current market price of ETH is $2,000. However, the price of ETH within the liquidity pool might be less, say $1,800 because a good amount of ETH was added to a pool in order to remove the purchased BTC. Such a scenario would create what appears as a discounted ETH price residing within the liquidity pool.

This creates an arbitrage opportunity, where traders would try to buy ETH on the platform where it’s slightly cheaper and sell it on the platform where its price is slightly higher.

Because an order book relies upon real-time buyers and real-time sellers, order books eliminate such arbitrage opportunities.

Another potential limitation of AMMs is that liquidity pools that are not adequately funded are oftentimes susceptible to slippages. AMMs require high liquidity to promote buying and selling. If the liquidity pool lacks a proper amount of liquidity, this could also introduce high volatility in asset pricing.

DEXs that utilize AMMs are also forced to encourage users to deposit digital assets in liquidity pools to reduce the potential for slippages. To incentivize liquidity providers (LPs), AMM protocols provide paid-out rewards to LPs with a fraction of the fees paid on transactions executed on the pool. However, this places an added burden on AMMs to garner enough liquidity providers and pay out additional LP fees.

In addition, AMMs are also susceptible to impermanent losses. An impermanent loss can occur when the price ratio of deposited tokens changes after they are deposited within the pool. The potential impermanent loss is directly related to the size of the price ratio change. This is why AMMs often work best with token pairs that have a similar value, such as stablecoins.

The use of an order book also eliminates any type of slippage due to inadequately funded liquidity pools and the possibility of impermanent losses since an order book does not utilize any type of liquidity pool.

Another advantage of utilizing an order book versus an AMM is that with an order book, a DEX can provide more advanced trading functions and fill orders at a specific price for buying and selling. For example, one cannot place a limit order with a DEX utilizing an AMM.

In addition, it is also easier for investors to chart and analyze trades using an order book than it is within AMMs.

Conclusion

An order book visually depicts the buy and sell prices in real-time and is arranged at different price levels. Properly read and interpreted, it is an investment tool that allows buyers and sellers to understand market trends and market dynamics. A DEX that utilizes an order book has many advantages over a DEX that relies upon an AMM since there is simply no need for the potential complications that arise from the use of liquidity pools.

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity with which Thomas Wettermann has been, is currently, or will be affiliated.

Trading digital financial assets such as cryptocurrencies can carry a high level of risk, and may not be suitable for all investors. Before deciding to invest, purchase, and/or trade cryptocurrency you should carefully consider your investment objectives, level of experience, adversity to risk, and volatilities. The possibility exists that you may sustain a loss of some or all of your initial investment; therefore, you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with cryptocurrency trading, and seek advice from a qualified and independent financial advisor.

Thomas Wettermann is not an independent financial advisor. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as a general market commentary of Thomas Wettermann and does not constitute investment advice. Thomas Wettermann will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. All opinions expressed on this site are owned by Thomas Wettermann and should never be considered as advice in any form.

Order Books: A Tutorial

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interest include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency and metaverse ecosystems. 

What is an Example of an Order Book?

Below, is a screenshot of an order book for the BTC/USD trading pair, designating the Buyer’s Side on the left and the Seller’s Side on the right. 

Bitfinex BTC/SUD Order Book (source: Bitfinex.com) (annotated)

The Buyer’s Side identifies buy orders (investors who want to purchase BTC for USD) and the Seller’s Side identifies sell orders (investors who want to sell their BTC for USD). Transactions take place whenever a buy order finds a seller, or a sell order finds a buyer.

What are the Order Book Column Headings?

Starting on the left-hand side of the book, a number of column headings are provided, including the headings of Count, Amount, Total, and Price. The right-hand side of the book includes similar column headings. 

Count refers to the number of offers that are being offered at a given price level of the asset. Count is also referred to as market depth. For example, reading along the first row in the buy/bid side of this book, the count “433” represents that there are 433 different offers that are asking to purchase BTC at the price of $7,500. 

Amount is the second column. Starting with the first bid-offer listed on the first line on the buy-side of the order book, an amount of 778 units of this particular asset (BTC) is being offered to be purchased at a price of $7,500 USD.

Similarly, on the seller's side of this book, there is an Amount of 518 units of BTC that is being “asked” to be sold at $7,600 USD. The remainder of the order book is filled with units being offered to be bought or sold at other varying price levels as noted.

The “Total” columns are the cumulative amounts of the specific security being offered to be purchased or sold at different prices. From the buyer's side, the Total column represents the total number of offers that are pending for this given asset at the noted price level. For example, at a price level of $7,100, the amount of BTC offered to be purchased is 5,433 coins.

This amount is derived by adding the previous bidding offer of 4,693 coins to the current offer of 740 coins (4,693 + 740 = 5,433). Investors use these Total columns to monitor whether the buyers or sellers for BTC have stronger momentum during this particular period of time. For example, if the total buy orders are greater than the total sell orders, such a situation is a bullish market indicator where buyers have more momentum. Here, the BTC price is likely to increase.

Alternatively, if the Total sell orders are greater than the total buy orders, such a situation is a bearish indicator where sellers have more momentum. Therefore, the BTC price is likely to decrease.

In the order book reproduced above, since the total BTC purchase offers (14,691) is more than double the total BTC sell offers (7,340), this is a strong bullish indication.

What is the Bid-Ask Spread?

A bid-ask spread is a difference between the highest bid price and the lowest sell price. So, in our example order book above, the bid-ask spread is $7,600 - $7,500, or $100. The bid-ask spread is an important order book metric as it is an indicator of BTC’s supply and demand strength. It is one measure of the liquidity in the market and of the size of the transaction cost.

When the bid-ask spread is narrow, it means that there is a fair amount of liquidity in this particular asset. Having a fair amount of liquidity is one market indication that it is easy to buy or sell the security at a competitive price, especially if the order size is large. Alternatively, if the bid-ask spread is large, it may be difficult and expensive to trade the security.

How to Interpret Aspects of an Order Book?

Buyer’s Side

The Buyer’s Side of an order book can have pricing levels that create what is referred to as a buy wall where there are a large number of buy orders (demand) at a specific price level. In this situation, buy walls have an effect on the price of an asset because if the order cannot be filled at this particular price, buy orders at a lower bid price also cannot be filled since the higher bid price must be filled first.

The price will not be able to drop any further since the orders below the buy wall cannot be executed until the larger order is fulfilled. This wall and the respective pricing level will therefore act as a support level. 

Bitfinex BTC/USD Order Book Buy Wall (source: Bitfinex.com)

As illustrated in the Buyer’s Side reproduced above, there are 1,215 buy orders making up a cumulative large order of 1,676 BTC. These buyers are waiting for their orders to be filled at a price level of $7,200. Such a large order demonstrates high demand at this pricing level. Since this cumulative order is rather large compared to what is being offered (low supply), the orders residing below this bid price of $7,200 cannot be filled until this cumulative order of 1,676 BTC is filled.

Therefore, this cumulative order acts as a “buy wall.” In this case, the buy wall is helping the $7,200 price level act as a price support level for BTC’s price. At this level, usually the demand picks up and prevents BTC’s price from falling further as the buyers find the price attractive enough to buy and sellers are less willing to sell. Indeed, $7,200 has been a long-term key BTC price support level.

Seller’s Side

A large collection of sell orders (supply) at a specific price level generates a sell wall. If there is a large collection of sell orders unlikely to be filled due to lack of demand at a certain asset price, then sell orders at a higher price cannot be executed. This makes this particular price level a resistance level. 

Bitfinex BTC/USD Order Book Sell Side (source: Bitfinex.com)

As illustrated in the Seller’s Side reproduced above, there are 231 sell orders making up a cumulative large order of 1,161 BTC. So, for the above-identified entry on the order book sell side, this entry can be represented as the owner of these 1,161 BTC is asking someone to buy these units at $8,000.

This rather large order demonstrates high demand at this pricing level. Since this cumulative order is large compared to what is being offered (low supply), the orders positioned below this ask price of $8,000 cannot be filled until this cumulative order of 1,161 BTC is filled.

Therefore, this cumulative order acts as a “sell wall.” In this case, the sell wall is helping the $8,000 price level act as a resistance level for BTC’s price. At this level, the demand typically decreases and prevents BTC’s price from rising up further as the sellers find the price attractive enough to sell and buyers are less willing to buy.

And indeed, $8,000 has been a long-term key BTC price resistance level.

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