In traditional financial markets, a pre-market is a special trading session conducted before the main market opens. According to common definition, it is an "opening auction." Pre-markets in TradFi can set the opening price of trading and are particularly significant for seasoned investors. How does this scheme operate in the Crypto World? Let's find out.
Why Are Premarkets Needed?
In the stock market, the moment the exchange opens is one of the most intense times. In order to alleviate the stress on trading systems in the first few minutes of the session, the pre-market procedure was introduced. During the pre-market period, the exchange collects and processes orders from traders for a specific asset and sets the opening amount based on these orders. This price is calculated 30 seconds before the start of trading as the average value of the lowest selling price and the highest buying price.
Pre-market tasks:
- Determine the opening price of trades
- Reduce market tension at the start of trading sessions
- Provide knowledgeable traders an opportunity for additional earnings
In cryptocurrency markets, pre-markets offer traders a chance to acquire tokens that are not yet in circulation or have not yet been distributed among airdrop participants. Participants in a cryptocurrency pre-market can trade tokens during a unique period: between the announcement of their distribution and their official listing on an exchange.
Pre-markets in TradFi and DeFi
In traditional markets, pre-markets are usually held a few minutes before the official market opening. For example, if the trading exchange opens at 10 AM, the pre-market might start 15 minutes prior. Informed traders get a unique opportunity to earn by participating in a discrete auction. The key feature of this event is setting the starting price of trading, and its outcome depends on each pre-market participant. The price is calculated at a random moment during the last 30 seconds.
In contrast, cryptocurrency markets operate 24/7 without time restrictions. Pre-markets here become a platform for trading protocol points, which are rewards for activities. Points are considered in the subsequent token distribution during airdrops.
Cryptocurrency pre-markets function on P2P platforms but with one key difference: funds from both sides are locked until the deal conditions are met. On decentralized platforms, funds are held using smart contracts, while on centralized ones, they are held by custodians. Such trading on cryptocurrency pre-markets has a high volatility index. Therefore, inexperienced traders or newcomers to the crypto space may encounter some unpleasant "surprises."
Types of cryptocurrency pre-markets
There are two main types of pre-markets in the crypto space:
- Pre-TGE (Token Generation Event)
- Points trading
TGE is the release of tokens by a crypto platform for sale. TGEs aim to create a community whose members can participate in governance, access exclusive features, and actively support and engage emotionally with the project, making it more successful. In a pre-TGE, traders trade tokens before their official listing, and a significant portion of the coins is distributed through airdrops. This is the most popular type of pre-market in the Crypto World.
Successful trading in the points market directly depends on user activity on crypto platforms. As with pre-TGE, assets are fully locked from both sides until all deal conditions are met.
Another typology of premarkets in the crypto space relates to power distribution within the system. Based on this, pre-markets are categorized into:
- Centralized
- Decentralized
Pros and cons of crypto pre-markets
Let’s take a look at some of the benefits of pre-market trading:
- Allow investors to purchase unique tokens with significant growth potential early
- Integration of smart contracts reduces risks of fraud, errors, and failures
- Crypto traders can analyze price fluctuations and predict upcoming trends before the TGE
- Global access allows participation in trading anytime and from anywhere with an internet connection
However, there are some disadvantages:
- Extremely high volatility
- Early investments carry significant risks, potentially leading to a complete loss of funds if the project fails
- Lower liquidity compared to regular crypto assets
- Unforeseen errors in smart contracts (though rare) can also result in the loss of investor funds
- Lack of regulators means that in case of a hacker attack, fund recovery is highly questionable
Thus, working on cryptocurrency pre-markets is an excellent way to hone crypto investment skills, gain valuable trading experience, and secure substantial profits with a competent approach. However, this type of trading is unlikely suitable for beginners, as success in this field requires extensive knowledge, experience, and understanding of both traditional and digital market trading processes. Market instability demands quick, correct decisions, necessitating knowledge, a resilient mindset (which is crucial), and good investor intuition.
If you want to learn more interesting facts about crypto then check out our blog! You might like our articles “Bitcoin vs Ethereum: Which Is Better for Long-term Investment?” and “Practical Applications of Peer-to-Peer Networks in File Sharing and Content Distribution”.
