As you know, the exchange markets have opening and closing times that regulate the window during which you can carry out your operations. If you miss the working times, you might end up with worse deals for the assets your want to buy or sell. This is why it’s important to be aware of the way in which the crypto market works if you’re looking to join in.

In this article, we are going to look at the structural necessities that regulate financial markets and the crypto market in particular. After you are done reading, you will have a better understanding of the nature of these markets in terms of regulation and maintenance. So, without further ado, let’s get started.

Hourglass standing on top of laptop with financial market graphs on screen

How Do Traditional Financial Markets Work?

Not all exchange markets stay open all the time. For example, the Newyork Stock Exchange’s  (NYSE) trading hours are from 9:30 AM to 04:00 PM in the US, while the Australia Stock Exchange (ASX) is open Monday through Friday from 10:00 AM to 4:00 PM.

Financial markets like NYSE and ASX are still governed by some centralized authorities such as banks, i.e. they require supervision to function properly. Even though most financial markets integrate computers today, full automation is not possible or feasible due to the nature of traditional financial markets. For this reason, the operating hours are tied to the working hours of the people and institutions that run them.

You might think Forex is a counterexample for this, but Forex is open 24/7 because it is a global market, and the trading hours around the world collide. So if a customer in the US wants to trade at 03:00 AM, they can do it on the Australian Forex. This is impossible for ASX, as it is not a global financial market.

Having said this, it’s still possible to trade outside these hours in regular stock exchange markets with the help of electronic communication networks (ECNs). It’s called after-hour trading. Because there are fewer traders during this time, after-hour trading generally offers low volume, less liquidity, and more volatility; thus, it contains high risk compared to the regular trading hours.  

How Do Cryptocurrencies Work?

Cryptocurrencies are a paradigm-shifting innovation in money and finance. They offer a completely different way to look at money and value exchange thanks to the revolutionary technology that lies behind them. In the following section of the article, we’ll explain to you the mechanism behind these digital coins, as it would help us understand the crypto market as a whole.

Hashing Algorithms

A central part of every blockchain is the mining algorithm. For example, Bitcoin’s (BTC) mining algorithm is called SHA-256, short for secure hash algorithm 256 bits, and Ethereum’s (ETH) algorithm is called Keccak-256. These algorithms take an input, which can be anything of any length, and produce an output called a hash that will have the same length for any input. It’s a deterministic process; that is to say, the same input will give the same output every time. Because the mining algorithm is a fairly complex set of functions, it is subjected to the butterfly effect. In other words, the slightest change in the input causes an entirely different output that doesn’t carry any resemblance to the previous one.

This is also called the one-way function, meaning that if you only have the output, you can’t logically calculate what the input was. What you can do is generate a guess over what the input could be and check if it produces the output you have. For example, in the case of Bitcoin’s SHA-256 algorithm, the odds of guessing it right is 1 in 2^256. In case you didn’t notice, 2^256 is a gigantic number with 78 digits (corresponding to around 115 quattuorvigintillion), and the odds of getting a valid hash at the first try is virtually impossible.

The Blockchain Technology

We think of the blockchain as a system that supports Bitcoin and other cryptocurrencies. But the fact is, Bitcoin doesn’t exist per se. Instead, it’s the blockchain that defines it. Think about the blockchain as this huge public ledger that keeps a record of all of the transactions ever made. Thus, Bitcoin and other blockchain-based coins are created by verifying the transactions among the nodes in the network. They are different encrypted pieces of information rather than physical tokens that carry value. Sounds confusing? No need to panic. Here is a beginner-friendly guide that will help you understand blockchain technology. 

How Does Blockchain Work?

A simple cryptocurrency transaction demonstration is the best way to explain how the blockchain works.

Let’s say Alex and Brian each have 10 and 6 bitcoins, respectively. Suppose Alex owes Brian 2 BTC. For Alex to send Brian those BTC, Alex broadcasts a message to all the miners in the network with the transaction details. In that broadcast, Alex gives the miners Brian’s public address, the amount of Bitcoin he would like to send along with a digital signature, and his public key. The signature is added with Alex’s private key, which tells the miners that Alex is the owner of these coins and that it’s him who wants to make the transaction. You can think of the private key as a PIN code or a signature that validates your identity and ownership over the coins in your wallet, whereas the public key is more like a bank address that you use to send and receive funds in your wallet.

Once the miners are sure that the transaction is valid, they can put it in a block along with other incoming transactions and attempt to mine it. This is done by putting the block through the SHA-256 algorithm. If things don’t keep in line with cryptographic protocols, we can’t make sure the funds are spent only once, leading to the double-spending problem. For that, the output needs to start with a certain amount of zeros in order to be considered valid. The required amount of zeros depends on the mining difficulty, which adjusts the amount of computing power needed to find the solutions in order to keep the block generation time constant – around ten minutes in Bitcoin’s case.

What Makes the Blockchain Secure?

In order to produce an output hash with a desired amount of zeros, the miner adds what’s called a nonce number into the block before running it through the algorithm. Since a slight change to the input completely changes the output, the miner tries random nonces until they find a valid output hash. Once this is done, the miner mines that block and broadcasts it to the rest of the network. Then the other miners check if the block is valid so that they can add it to their copy of the blockchain. And the transaction is complete.

In the block, the miners also need to include an output hash from the previous block to tie the blocks together. Hence the name blockchain. This is how the blockchain ensures trust in the system by competitively encrypting the new transactions and comparing them constantly against each other. Everyone trusts the node that has the most computational work put into it. This is why the Bitcoin blockchain consensus protocol is called Proof of Work (PoW).

In the PoW protocol, altering the blockchain is practically impossible since Bitcoin mining is only possible through a correct hash that depends on the previous blocks. Thus, for a fraudster to modify the blockchain to their advantage, they need to supply a greater hash power than half of the cumulative hash power provided to sustain the Bitcoin blockchain. This equals a massive amount of computing power, which can hit around 200 quintillion hashes per second at times.

How Does the Cryptocurrency Market Work?

The cryptocurrency market is a somewhat decentralised marketplace where you can buy, sell and invest in Bitcoin (BTC) and other altcoins, such as Ripple (XRP), Litecoin (LTC), Cordana (ADA), and countless others.

Thanks to blockchain technology, we don’t need to monitor or regulate the crypto market; it is a self-regulated platform. Why do we trust it? Because we trust math and its implications in cryptography and, consequently, in blockchain technology. Thanks to the nature of blockchain technology, we have a crypto market that doesn’t need to string along with the timeline of any regulators. Thus, it can keep going day and night, 24/7. 

However, there are a couple of things to say about the decentralised nature of the cryptocurrency market. Since the invention of Bitcoin, many cryptocurrency exchanges have emerged, including popular ones like Binance, Kraken, Coinbase, Uniswap, and Pancakeswap. These crypto exchange platforms let you interact with the blockchain and buy, trade, or invest in cryptocurrencies. There are two types of crypto platforms depending on their ownership statuses.

Centralized Exchanges (CEX)

CEXs are cryptocurrency exchanges that are owned by a company such as Binance, Kraken, or Gemini. The company serves as an online brokerage service for your digital currency.

Since they are the most popular type of exchange in the market, CEXs offer high trading volumes and high liquidity. Moreover, they often support fiat-to-crypto conversions. For example, you can buy BTC in return for USD. They also often offer more features than crypto trading DEXs, such as margin trading, margin lending, exchange staking, derivatives market, etc. On top of that, they tend to be easier to use.

However, depending on your needs in cryptocurrency trading, CEXs might not be for you. For instance, these trading platforms usually subject their users to strict know your customer (KYC) policies. To open an account, you need to upload an official ID document and include a lot of personal details. Plus, they typically offer custodial wallet services meaning they hold authority over your digital assets.

Decentralized Exchanges (DEX)

DEXs are autonomous financial protocols working over smart contracts that eliminate the necessity of a third party to ensure trust over a transaction. This way, they can serve as an intermediary between their users and the cryptocurrency blockchains.

DEXs are typically preferred over CEXs for privacy reasons. To open an account on a DEX, all you need to do is to connect your wallet and sign a transaction. Generally, no identity verification or KYC procedure is required. Because they are decentralized exchanges, they are usually more secure than CEXs, as DEXs don’t keep custody of their users’ wallet keys and don’t have a central server that oversees the trading.

Alongside these perks, the trading volume is usually lower because DEXs are less popular than CEXs. Plus, they typically have a more complicated interface and no customer service.

Why Do Cryptocurrency Markets Never Close?

By now, we know how blockchain technology is an automated protocol that was made to work on its own without the supervision of a third party. The only necessary thing is for the nodes to validate the transactions. Within an automated mining process, there are always miners present on the network, keeping the blockchain functioning safe and sound. For this reason, there is no such thing as after-hours trading in the cryptocurrency market. Crypto traders can trade crypto assets regardless of the time of the day, independent of their time zones.

Having said this, another reason the cryptocurrency market never closes is that it is a global market. There is a huge number of crypto investors around and those traders around the world create demand and supply on cryptocurrencies. So it wouldn’t be practical to close it.

What Are the Benefits of a Market That Is Open 24/7?

First of all, it wouldn’t be a global market if the cryptocurrency market operated on the working days and hours just like traditional financial markets. An international investor base provides higher trading volume and consequently higher liquidity.

Secondly, even though it’s possible to trade after hours on the traditional financial markets, it’s typically more costly. The last price during after-trading hours might not match the market’s opening price. The price volatility is much higher, and it’s usually to the investor’s detriment. For example, the gap between the buying and selling price increases during after-trading hours in a foreign exchange market. But the price of Bitcoin, even though it is much more volatile for other reasons, is not affected by such a variable.

Thirdly, a constantly open market offers a wider time window to trade; hence, you can follow the price movements for your short-term investments and adapt better to the market, enjoying more flexibility.

A Few Words Before You Go…

Unlike traditional financial markets such as the stock market or the foreign exchange market, the cryptocurrency market never closes, thanks to its decentralized blockchain technology. The underlying blockchain technology that is the backbone of Bitcoin and other altcoins constitutes an autonomous protocol that facilitates a peer-to-peer transaction network. Because of this, the crypto market provides more flexible trading, no dramatic price movements between trading sessions, greater transparency in the market, and a global investor base that’s essential in terms of trading volume and liquidity.