Crypto markets: custody, weekends and venues

There are two quite different ways to have a stake in the price of a cryptocurrency: holding the coin, or holding a contract on its price. They carry different risks. This lesson sets them side by side, then explains two features of the market itself: it never closes, and it has no single price.

Holding the coin

Whoever knows the private key controls the coins. A wallet is software or a device that stores keys; the coins themselves stay on the blockchain. Holding your own key is called self-custody. Nobody else can move the coins, and nobody can restore a key that is lost: there is no reset.

The alternative is to leave the coins with an exchange or another custodian, which holds the keys. The account then shows a claim on that firm, not coins under the holder’s control. If the firm fails, is hacked or freezes withdrawals, the claim is what is at risk.

Holding a contract on the price

A contract for difference (CFD) on a cryptocurrency is an agreement with a provider to exchange the difference in price between the time the contract is opened and the time it is closed. No coin is bought. There is no wallet and no key, and nothing can be sent on a blockchain or spent.

What is held is a claim on the provider, usually opened with leverage. A CFD can be opened to profit from a fall as easily as from a rise, and a position held overnight normally carries a financing charge. Leverage multiplies losses as well as gains, on a price that moves more than most.

A market that never closes

A blockchain adds blocks every day of the year, and crypto exchanges trade through nights, weekends and holidays. There is no closing bell and no official closing price.

Open is not the same as busy. At weekends banks are shut, so ordinary money moves to and from exchanges more slowly, and many large trading firms are less active. Fewer orders rest in the order book. Liquidity is thinner, spreads are wider, and an order of the same size moves the price further than it would on a weekday.

• A sharp move can happen on a Sunday, when other markets cannot react until they reopen.
• A leveraged position can reach its stop-out level at any hour, including while its holder is asleep.
• A product on the price may keep its own hours and breaks. The provider’s terms say what they are.

Why prices differ between venues

A share has a home exchange. A cryptocurrency does not. Each exchange has its own order book, its own buyers and sellers, and so its own last price. At any moment the same coin shows slightly different prices in different places.

Arbitrage keeps the differences small: traders buy where the coin is cheaper and sell where it is dearer. But arbitrage has costs. Moving coins takes time while blocks confirm, fees are paid at each step, and money left on an exchange is exposed to that exchange. In calm conditions the gap is small. Under stress it can widen sharply, and it can persist where money cannot move freely.

Two more things add to the difference. Some venues quote a coin in US dollars and others in a stablecoin, which may itself be trading slightly away from a dollar. And a CFD is priced by its provider from one or more venues, so its quote need not match the screen of any single exchange.

What follows

None of this says whether a cryptocurrency will rise or fall. It says what is held, who is owed, and why the number on one screen is not the number on another.