How Crypto Markets Really Work: A Practical Guide for Traders

Want to know what I wish someone had told me when I first started trading crypto?

The crypto market isn’t just different from traditional markets—it’s a completely different beast altogether.

Over the past 10 years, I’ve watched cryptocurrencies evolve from a niche curiosity to a legitimate asset class that’s reshaping finance. From Bitcoin’s humble beginnings to today’s ecosystem of altcoins, stablecoins, and DeFi protocols, we’re living through a financial revolution.

But here’s the thing: if you’re coming from traditional markets like I did, you’re in for some surprises.

When I made my first crypto trade back in the day, I thought my traditional stock brokerage experience would translate seamlessly. I was wrong. Dead wrong. Trading crypto is like switching from chess to 3D chess while blindfolded—the rules are similar, but the game is entirely different.

Let me walk you through what I’ve learned about how these markets actually work, and more importantly, what makes them so different from anything you’ve traded before.

The Big Picture: Why Crypto Markets Are Different

 Crypto Never Sleeps (And Neither Will You)

The first thing that hit me? Crypto markets never close.

While NYSE traders get their weekends off, crypto keeps grinding 24/7/365. The blockchain infrastructure powering these markets doesn’t take breaks—it’s supported by thousands of computers worldwide, constantly validating transactions and keeping the lights on.

This is both a blessing and a curse.

On one hand, you can trade Bitcoin at 3 AM on a Sunday if you want. On the other hand, your carefully planned position can get blown up during a quiet weekend afternoon while you’re having brunch.

Crypto has fragmented liquidity

Unlike traditional markets where you might trade on NYSE or NASDAQ, crypto is spread across dozens of exchanges, each with its own quirks and characteristics.

These exchanges fall into two main camps:

Centralized Exchanges (CEXs) – The Traditional Approach:

Think of CEXs like Binance, Coinbase, and Kraken as the “banks” of crypto. When you deposit money here, they control your assets. You’ll need to go through KYC (Know Your Customer) and AML (Anti-Money Laundering) verification, but in return, you get:

• Faster execution speeds
• Higher liquidity
• Tighter spreads
• More user-friendly interfaces

I do most of my trading on CEXs because, frankly, they just work better for most vanilla active trading.

Decentralized Exchanges (DEXs) – The Not So Wild West

DEXs like Uniswap, PancakeSwap, and Raydium are different animals entirely. They don’t hold your money—instead, they provide a permissionless platform where you trade directly from your wallet, usually through an automated market maker (AMM) to route orders.

The trade-off? Higher fees, lower liquidity, and steeper learning curves. But you maintain full control of your assets at all times.

Here’s how I think about it:

Bottom line: I use CEXs for most trades but withdraw to external wallets for long-term holds.

Crypto markets are pseudo-anonymous

Here’s where things get interesting—and a bit scary.

Crypto transactions can be pseudo-anonymous. Your wallet address looks like this: 1A2B3C4D5E6F7G8H9I0J1K2L3M4N5O6P7Q8R9S0T. Good luck connecting that to a real person without additional information.

This creates a fascinating dynamic. On-chain analysts can track wallet behavior and identify patterns, but tying specific wallets to individuals? That’s much harder.

The result? A market that’s more opaque and susceptible to manipulation than anything in traditional finance.

And while regulators around the world are trying to improve safety and reduce foul play, traders and investors need to be wary of sketchy players and potential market manipulation at all times.

How Crypto Markets Actually Work

Now let’s dive into the mechanics. Understanding these different market structures has been crucial for my trading success.

A. Spot Markets – The Traditional, Standard Option

The spot market is where buy-and-hold retail investors and institutions go to buy and sell cryptocurrencies. If you want to hold crypto for the long run, this is the place to go.

If you buy through a CEX, the asset is deposited into your spot wallet and you can either keep it there or withdraw it to an external wallet like I do.

DEX to CEX Spot Trade Volume – Source: The Block

Key insight: Binance processes over $12 billion in spot volume daily. That’s massive liquidity, which means tighter spreads and better execution for traders.

B. Perpetual Futures – Crypto’s Unique Derivative Contracts

Here’s where most active crypto trading happens: perpetual futures contracts.

These are derivatives that let you go long or short with leverage on crypto without actually owning the underlying asset. Unlike traditional futures, they don’t expire—you can hold them indefinitely ­— so long as you pay the carrying costs.

The numbers are staggering: the biggest player in the sector, Binance alone processes $57 billion in perpetual futures volume daily. That’s nearly 5x their spot volume.

What makes perps special?

They stay efficient through a funding rate mechanism. When the perpetual price deviates from the spot price, funding rates adjust to incentivize traders to take the opposite side.

There used to be decent money to be made arbitraging these funding rates. The strategy is simple: when funding is positive, short the perp and buy spot. When it’s negative, reverse the position.

However, this trade is not as profitable as it was a few years ago. The market has matured and institutional players have deployed powerful low-latency bots with which you can’t realistically compete.

C. Traditional Futures Contracts – The Institutional Play

Large institutions like CME Group and even traditional crypto exchanges like Binance, Kraken and OKX now offer crypto futures that actually expire. These contracts have pre-defined expiration dates and are cash (USD) settled.

Traditional Bitcoin Futures (Volume and OI) – Source: CME Group

For example, CME’s Bitcoin futures contract represents 5 BTC, with a mini version at 0.10 BTC. CME contracts are usually preferred by traditional institutional players, as they can use assets like bonds and treasury bills as collateral for their leveraged bets.

D. DEX Trading – The Frontier

Decentralized exchanges are growing fast, but they’re still the new frontier of crypto trading.

They may operate either within a specific blockchain or allow for many of them (multichain) and do not require users to go through KYC protocols. DEXes support self-custody, allowing users’ assets to stay within their wallets at all times.

Decentralized exchanges are usually less liquid compared to traditional CEXs, and they typically charge higher trading fees.

In spot markets, PancakeSwap dominates with nearly 50% market share among DEXs. For derivatives, Hyperliquid leads with $6.5 billion in daily volume and 85% market share.

Two main types of DEXs:

1. Automated Market Maker (AMM)-powered (like Uniswap) – Use liquidity pools to settle trades
2. Order book-based (like Serum) – Match buyers and sellers directly

The trade-off is always the same: more control over your assets, but higher slippage and fees.

The Unique Crypto Risks That’ll Keep You Up at Night

Liquidation Cascades – The Domino Effect

Here’s something that retail investors are not used to in traditional markets: up to 125x leverage on both spot and derivatives.

On Binance, you can turn $100 into a $12,500 Bitcoin position. Sounds great, right?

Binance Leverage Selector – Source: Binance App

The problem is that when volatility spikes, leveraged positions get liquidated quickly, which creates a feedback loop – liquidations increase price volatility, thus forcing more liquidations and hence even more volatility.

I’ve seen entire market sectors get wiped out in minutes because of this domino effect.

Funding Rates – The Hidden Cost Of Trading Perps

Funding rates fluctuate based on the difference between spot and perpetuals prices. When the price of perps are higher than spot, funding rates are positive and those who are long the perps pay those who are short, and the opposite occurs when perps’ prices exceed spot ones.

Funding Rates for Various Assets – Source: Binance.com

One interesting thing about funding rates is what they can indicate about player positioning: during bull markets, funding rates tend to be extremely positive, as traders rush to buy perps to get more leverage.

During bear markets, the opposite is true, with funding rates turning negative and short-sellers paying to maintain their positions.

Crypto Has No Circuit Breakers

Traditional markets have circuit breakers that halt trading during extreme volatility. Crypto doesn’t.

Take a look at this ADA/USDT chart. Cardano was following a normal trajectory. Then, a downtrend started, but a big selling pressure shows up, likely some big player with a fat finger.

As other players tune in and liquidity shows up, the price quickly recovers, and all we’re left with is a large single-day wick. After that, normal trading resumes.

Look at any major crypto chart, and you’ll see these massive wicks that would never exist in traditional markets.

My rule of thumb: Always size small when trading crypto (1%~3% is my go-to position size) and always use stop losses, but don’t set them too tight. The risk of getting liquidated in a move like this is real.

Social Media Madness

Here’s something that still amazes me: a single tweet can make or break crypto markets.

I’ve seen tokens both pump and dump by over 50% because of a Reddit post or a Telegram signal. The FOMO (Fear of Missing Out) is real, and it creates incredible volatility.

Case study: In November 2024, someone bought $16 worth of Peanut the Squirrel (PNUT) token and after it went viral on social media, this position grew to $3 million in a matter of days. That’s the kind of opportunity—and risk—that exists in this market.

The Bottom Line: Opportunities and Risks

The Opportunities

1. Arbitrage still works – Especially across DEXs where inefficiencies persist
2. Always a trade out there – 24/7 markets allow for a new potential trades to arise every day
3. Innovation rewards – New protocols and tokens create outsized opportunities for early adopters

The Risks You Can’t Ignore

1. Regulatory uncertainty – Laws are still evolving globally, with a ton of uncertainty among assets and exchanges alike
2. Exchange hacks – Even major players like Bybit have been compromised, and it can happen again
3. Liquidity traps – Low-cap tokens can be manipulated with minimal capital
4. Leverage addiction – Easy access to high leverage destroys more accounts than bad analysis

My Trading Philosophy for Crypto

After years of trading both traditional and crypto markets, here’s what I’ve learned:

Crypto markets reward patience and punish greed more than any other asset class.

The 24/7 nature, extreme leverage, and social media influence create a perfect storm for both massive gains and devastating losses. Success comes from:

• Strict position sizing (1-3% per trade)
• Always use stop losses (but not too tight)
• Understanding market structure (knowing the products you’re trading and CEX vs DEX dynamics)
• Monitoring funding rates (for sentiment and arbitrage)
• Staying informed (but not letting social media drive decisions)

The crypto market isn’t just different, it’s revolutionary. But like any revolution, it comes with chaos, opportunity, and risk.