With recent soaring cryptocurrencies prices and associated hype, many investors are now taking the plunge and buying digital assets. This of course means finding an exchange, in order to convert your fiat currency (money issued by countries) into cryptocurrencies. There are, broadly speaking two major types of exchanges – ones where you are able to exchange fiat currency to crypto currency (F2C) and others with primary motives to exchange from one cryptocurrency to another (C2C). This article will primarily focus on the latter type – the C2C cryptocurrency to cryptocurrency exchange – and the benefits it can offer to investors.
A popular option for investors in this space to obtain their first cryptocurrency is via a F2C exchange where the deposit denominator will be fiat currencies (like USD, EUR etc.) But investors should note that higher fees are typically attached to these conversion transactions. Once an investor has made the conversion however, and are in possession of some sort of cryptocurrency (Bitcoin, Ethereum, etc), they can now move their virtual currency into a C2C exchange.
There are multiple benefits of moving to a C2C exchange.
Benefit 1: Can trade a larger variety of tokens
While many investors have gained familiarity with the more common types of cryptocurrencies, there are less-well-known types of cryptocurrencies which are termed “altcoins.” These can include NEO, Filecoin, Lumen, and many others. C2C exchanges often allow for a wide variety of altcoins, which can be exchanged for Bitcoin, which has historically been the largest exchangeable virtual currency for any altcoin. Additionally, there also exists a market where digital tokens can be traded against Ethereum. The main functional categories of tokens are as follows:
- A currency, used as a payment system between participants.
- A digital asset (a digital right – to land ownership, or tomatoes in a warehouse, and similar assets).
- A means for accounting (number of API-calls, volume of torrent uploads).
- A share (stake) in a specific start-up.
- A way of rewarding main players (the best example is bitcoin).
- A way of preventing attacks (such as commission within the bitcoin network).
Payment for using a system.
Benefit 2: Opens the gate to crypto derivatives
A number of C2C exchanges also facilitate the sale of derivatives, such as futures on select cryptocurrencies, so that investors can utilize additional financial tools. This is an area that traditional F2C exchanges generally avoid due to their practice of accepting fiat currencies, which financial regulators and authorities then monitor, and often consider securities.
An example of the leverages offered by different exchanges can be seen below:
A closer look at the Futures will show a variety of contract terms offered:
Benefit 3: Offers token-to-token arbitrage
C2C exchanges can also be used by investors to profit through arbitrage. In such a strategy, investors seek to take profit from systematic inefficiencies, without taking on risk. Arbitraging cryptocurrencies often involves buying a token or currency in an exchange where they are cheap, and then selling that same currency on another exchange where the price is higher. Given that there are still inefficiencies in the pricing of digital assets, it is possible to arbitrage such pricing inefficiencies via C2C exchanges. For example, during the Bitcoin split on Aug. 1, an arbitrageur could have in theory safely profited by buying into the BCC/ BTC pair on one exchange and then selling it or going short (by first borrowing bitcoin and then selling it) on another C2C exchange. In the example stated, a F2C will not be able to offer the diversity of arbitraging that C2C does.
Of course C2C exchanges are not without drawbacks. Some tokens traded on C2Cs are more volatile – and susceptible to ‘pump and dump’ schemes – than the standard tokens offered in F2C with higher liquidity and less probability for manipulation.
In sum, one’s choice of where to invest needs to be made carefully. And remember: never invest, what you can’t afford to lose.
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August 18, 2017