Cryptocurrency Crypto Trading and Markets 3 — Questions and Answers
Question 1: What is 'dollar-cost averaging' (DCA) in cryptocurrency investing?
- Buying the entire position at once at the lowest daily price
- Investing a fixed amount at regular intervals regardless of price (Correct answer)
- Averaging down by doubling the position after each 10% drop
- Splitting purchases across multiple exchanges to get the best rate
Correct answer: Investing a fixed amount at regular intervals regardless of price
DCA involves investing a consistent fixed amount on a set schedule, reducing the impact of volatility by averaging the purchase price over time.
Question 2: What is the primary purpose of a cryptocurrency exchange's 'order book'?
- To record all completed transactions on the blockchain
- To display outstanding buy and sell limit orders at various price levels (Correct answer)
- To track the total holdings of all registered users
- To list all trading pairs available on the platform
Correct answer: To display outstanding buy and sell limit orders at various price levels
An order book shows all pending buy (bid) and sell (ask) limit orders, providing transparency into current market supply and demand.
Question 3: If Bitcoin's dominance index rises from 45% to 55%, what does this typically suggest?
- Bitcoin's price has doubled in USD terms
- Capital is rotating out of altcoins into Bitcoin (Correct answer)
- More new Bitcoin has been mined
- Bitcoin's transaction volume has increased
Correct answer: Capital is rotating out of altcoins into Bitcoin
Rising Bitcoin dominance typically means Bitcoin is gaining market share relative to altcoins, often indicating a 'flight to safety' within crypto.
Question 4: What is a 'wick' on a candlestick chart in crypto trading?
- The body showing the open and close price
- The thin line showing the high and low price reached during the period (Correct answer)
- A large sudden price spike followed by an immediate reversal
- The colored portion indicating bullish or bearish momentum
Correct answer: The thin line showing the high and low price reached during the period
Wicks (also called shadows) are the thin lines extending above and below the candle body, representing the highest and lowest prices reached in the time period.
Question 5: What is the significance of 'support' and 'resistance' levels in crypto charting?
- Regulatory price floors and ceilings set by the SEC
- Historical price zones where buying or selling pressure has previously concentrated (Correct answer)
- The minimum and maximum prices set by the exchange per trading session
- Network difficulty adjustments that affect miner profitability
Correct answer: Historical price zones where buying or selling pressure has previously concentrated
Support is a price level where buying interest has historically halted declines, while resistance is where selling pressure has capped advances.
Question 6: In leveraged crypto trading, what is a 'margin call'?
- A notification that your account has reached a withdrawal limit
- A broker's demand to deposit more funds when losses reduce collateral below the required level (Correct answer)
- An alert that a limit order has been filled
- A request from the exchange to verify your identity before trading
Correct answer: A broker's demand to deposit more funds when losses reduce collateral below the required level
A margin call occurs when the value of a leveraged account's collateral falls below the maintenance margin requirement, prompting a demand for additional funds.
Question 7: What is 'arbitrage' in cryptocurrency markets?
- Using insider information to trade before a major announcement
- Profiting from price differences for the same asset across different exchanges (Correct answer)
- Borrowing crypto to sell it short and repurchase it cheaper later
- Staking tokens on multiple protocols simultaneously to maximize yield
Correct answer: Profiting from price differences for the same asset across different exchanges
Crypto arbitrage exploits temporary price discrepancies for the same asset across different exchanges to lock in a risk-free profit.
Cryptocurrency Crypto Trading and Markets 3
What is 'dollar-cost averaging' (DCA) in cryptocurrency investing?