Cryptocurrency Crypto Trading and Markets Questions and Answers

Question 1

A trader places a large market buy order for a token with a 'thin' order book. Which of the following outcomes is most likely?

Accepted Answer

The order will experience significant negative slippage, increasing the average purchase price.

Answer

A 'thin' order book indicates low liquidity, meaning there are few buy and sell orders at various price levels. When a large market order is placed, it consumes the available orders at the best prices and has to 'walk up' the order book to find enough sellers, resulting in an average execution price that is considerably higher than the initial market price. This phenomenon is known as negative slippage.

Question 2

An analyst is evaluating a new crypto project. The project has a Market Capitalization of $50 million and a Fully Diluted Valuation (FDV) of $500 million. What does the significant difference between these two metrics primarily indicate?

Accepted Answer

A large portion of the total token supply is not yet circulating, posing a future dilution risk.

Answer

Market Capitalization is calculated using the current circulating supply, while Fully Diluted Valuation (FDV) uses the maximum possible token supply. A large gap between the two, as in this scenario, signifies that a substantial number of tokens are currently locked (e.g., for team, investors, or future rewards) and will be released into the market later. This can create significant selling pressure and dilute the value for existing holders as the supply increases.

Question 3

Which trading strategy specifically aims to profit from price differences of the same asset across two or more different exchanges?

Accepted Answer

Arbitrage

Answer

Arbitrage is a trading strategy that involves buying an asset on one market and simultaneously selling it on another market at a higher price, profiting from the temporary price difference. This is common in crypto due to the fragmented nature of exchanges, where the same asset can have slightly different prices at the same moment.

Question 4

A trader wants to sell their crypto asset to limit potential losses if the price drops significantly, but they are concerned about executing the trade at a very poor price during a flash crash. Which order type allows them to set a trigger price to activate the order and a separate, lower limit price for execution?

Accepted Answer

Stop-Limit Order

Answer

A Stop-Limit order combines a stop trigger with a limit order. When the asset's price falls to the specified 'stop' price, it triggers the placement of a 'limit' order. This limit order will only execute at the specified limit price or better. This prevents the order from being filled at a much lower price during extreme volatility, which can happen with a standard stop-loss (market) order.

Question 5

What is the core function of a cryptocurrency exchange's 'matching engine'?

Accepted Answer

To pair buy and sell orders in the order book to execute trades.

Answer

The matching engine is the central component of an exchange's trading system. Its primary role is to continuously process incoming buy (bid) and sell (ask) orders, find compatible matches based on rules like price-time priority, and execute the trades. It is the system that maintains the order book and facilitates the actual exchange of assets between traders.

Cryptocurrency Practice Test

Cryptocurrency Practice Test

Cryptocurrency Crypto Trading and Markets Questions and Answers