Crypto Trade Life Cycle: Is It Important for Crypto Trading?
If you're interested in investing in crypto, learning all the details of how crypto trades work can be quite useful. A lot of things that happen behind the scenes, and knowing what to expect can help you make wiser investment choices. Keep reading to discover the details and steps of the crypto trade life cycle â and how they affect the average investor.
Key Takeaways:
The crypto trade life cycle involves five steps of processing that help to ensure crypto smoothly transfers from one owner to the other.
At its core, the trade life cycle is all about the transition of crypto from one wallet to another. To achieve this goal, every transfer needs to go through the five steps of the crypto trade life cycle.
What Is the Crypto Trade Life Cycle?
The crypto trade life cycle consists of the stages that it takes to enact any crypto trade. It involves five steps of processing that help to ensure crypto smoothly transfers from one owner to the other.
Many people think that cryptocurrency trading is as simple as clicking a button and watching the numbers in your account change. However, the reality is that multiple processing stages are needed to finalize any trade. Depending upon the type of service you use, you won't necessarily encounter every part of the crypto trade life cycle, because many exchanges help to manage the steps of the crypto trade life cycle for you. However, even if you arenât aware of these steps, they still have a big impact on your trades.
Stages of the Crypto Trade Life Cycle
The trade life cycle is all about the transition of crypto from one wallet to another. To achieve this goal, every transfer needs to go through five steps.
Stage 1: Pre-Trade
The first stage of the crypto trade life cycle is the pre-trade. In this stage, all the people involved in the trade take the time to carefully evaluate the idea of the trade and take steps to achieve their goals. For example, traders will consider potential trading strategies, research desirable cryptos and analyze market sentiment. If the trader is selling something, they'll think about an acceptable selling price and possibly consider future plans for portfolio growth after the sale.
In addition to considering the theories behind the trade, the first step of the crypto trade life cycle also looks at the practicalities. This involves asking questions such as which exchange to use, how to acquire capital for trading and whether any regulatory laws need to be followed during the trade. For some trading entities, the pre-trade stage of the crypto trade life cycle can even involve designing new types of software, or writing smart contracts to run on a blockchain.Â
Everything from technological to legal details is considered during the pre-trade stage.
Stage 2: Trade Execution
Trade execution is the stage of the crypto trade life cycle which actually facilitates the trade. A person or investment organization places a buy or sell order for their crypto. Usually, modern investors get a crypto exchange to handle the second step of the crypto trade life cycle for them. The process might be as quick and simple as clicking on Buy on a site, and then entering your financial details.
However, when it comes to trading, crypto assets can be a lot more hands-on than traditional stocks and bonds. For some investors, trade execution might involve person-to-person trades. You might need to enter your private crypto key in a hardware wallet and manually type in the address of the party to whom youâre sending crypto.Â
When working with a crypto market, this stage of the crypto trade life cycle can be as simple or as complex as you want it to be. You can specify parameters, such as where you want to get the crypto from or precisely what price you want to pay for it.
Stage 3: Trade Clearing
Executing a transaction doesnât mean it instantaneously completes itself. With digital or virtual currency, there can be a lag between placing the order and completing it. This is one of the stages of the crypto trade life cycle that the average retail investor won't see, but it involves a lot of work behind the scenes.
Trade clearing is frequently rapid when working with crypto investments. It can consist of a millisecond pause as a blockchain network records a new block with the details of your transaction. However, if you're working with crypto options, such as a call option where you have the right to buy a certain amount of crypto on a certain date, it can take some time for a trade to clear. The transaction needs to be recorded â both when it's agreed upon, and when the settlement date is reached â and any shift in market sentiment could affect whether or not you choose to finalize the contract.
Stage 4: Trade Settlement
Trade settlement refers to the stage of the crypto life cycle in which you actually finalize the trade. This stage is finalized only when all requested assets have been sent to the correct entity and all contracts are fulfilled. For example, if you buy through an exchange, your trade isnât officially settled until the crypto is in your wallet and your payment is in the exchange's account.
Whether or not this stage is complicated depends upon the type of crypto trading you're conducting. If itâs just a simple exchange of one crypto for another, trade settlement might just involve simultaneously transferring cryptos and checking blockchain records to confirm the transfer was complete. However, if you're working with crypto funds or crypto options, it might require a more complex contract, perhaps one that involves confirming dates or checking to see if a product was delivered before you execute the final transfer.
Stage 5: Ongoing Position & Risk Management
The final part of the crypto trade life cycle is to take a step back and look at the big picture. You'll need to consider how the last trade fits into your plans for the future, and the market's overall movements. An investor may opt to check market sentiment, see whether it's a bear market or bull market, and decide how long they plan on holding the crypto theyâve just purchased.
Some potential actions during Stage 5 of the crypto trade life cycle include deciding which wallet to store your crypto in, setting up a market alert to tell you when the crypto's price changes and checking to see whether ownership of the crypto qualifies you for any DAOs or staking programs. This step of the crypto trade life cycle gradually leads to the restart of the entire cycle. As you continue to manage your positions and focus on portfolio growth, you'll naturally end up considering future crypto transactions that lead you once again to the pre-trade stage.
Is the Crypto Trade Life Cycle Important for Crypto Trading?
Because you can make trades at the click of a button, the crypto trade life cycle might not seem that relevant to your current actions. However, it actually has a lot of impact on the way you trade. Being aware of the crypto trade life cycle comes with many benefits for investors.
Approaching Trades Mindfully
Many traders make the mistake of trading on a whim. Because they miss out on the first and last steps of the crypto trade life cycle, they don't take the time to fully integrate their trades into their portfolios. By paying close attention to the first and last stages of the crypto trade life cycle, your trades become a lot more effective. You begin to see each trade as a small step in a bigger plan, so you can trade more analytically. Instead of being influenced by the hype of a bull market or the panic of a bear market, you choose cryptos that make sense for your long-term plans.
Understanding How Liquidity Affects the Market
Especially if you're trading smaller cryptos, all of the processing stages in the middle of the crypto trade life cycle can have a big impact. Without enough liquidity, trades lag and prices start to rapidly fluctuate. Understanding the work it takes to actually process crypto transactions can allow you to find the right trades for your needs. You can choose more appealing options, and select transactions that won't be hampered by potential market liquidity issues.
Keeping up With the Latest Regulations
The laws surrounding crypto assets are constantly changing, and if you aren't aware of new regulations, it can cause major problems. So much of the crypto trade life cycle revolves around considering the legal and financial details of a trade. Therefore, it's useful to stay aware of new rules. This ensures that you won't end up running into problems mid-trade because your preferred crypto or software is no longer available in your region. It also helps you avoid getting scammed, because youâll increase your awareness of when a trade isn't actually valid.
Finding the Best Software
To get the most out of your crypto trades, it's useful to find a service that provides the right amount of assistance. Some traders may want to deal with the steps of the crypto trade life cycle themselves, while others like to have the process automated. Whatever your preferences, knowing all of the necessary steps involved in your trade will help you find software that gets everything done correctly in a timely manner.
The Bottom Line
Ultimately, the crypto trade life cycle plays a big role in the crypto market. Each step of planning, executing and finalizing a transaction needs to run smoothly if you hope to have an effective trade. Whether you focus primarily on trading digital or virtual currency, the trade life cycle helps you focus on your portfolio and make plans for long-term success.
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