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What is Uniswap?
Uniswap is the most widely used decentralized cryptocurrency exchange today and one of the largest exchanges by daily trading volume. Although it is actually a smart contract that is responsible for providing liquidity to the exchange market automatically.
It was created in 2018 by Hayden Adams inspired by some comments from Vitalik Buterin, the genius behind Ethereum. The Uniswap smart contract was designed to fulfill three basic functions: exchanging, sending and stacking cryptocurrencies.
And because it is a smart contract on the Ethereum network, it allows these operations to be performed with any ERC-20 cryptocurrency. ERC-20 are cryptocurrencies that work on the Ethereum platform, among them we can mention BinanceCoin, Tether, DAI stablecoin, among others.
How does Uniswap work?
How we already mentioned, it is a smart contract implemented on the Ethereum network so there are no people behind its daily operation. All the operation was set in advance in the main contract and after executed, it cannot be modified in any way.
In addition, Uniswap contains a smart contract for each cryptocurrency pair exchanged on the platform. That is, there is a contract to exchange Ethereum for Tether, another for DAI for BinanceCoin, and so on for each pair that can be exchanged.
Similarly, it has another contract for sending cryptocurrencies that allows you to exchange one token for another before it is sent to the destination address. So, if you have Ethereum in your wallet and you have to pay for something with Tether, you can send the Ethereum with Uniswap and the person will receive Tether. All with a small commission of 0.30% per transaction.
The most interesting thing is that Uniswap maintains the liquidity balance in the market automatically based only on a mathematical formula. Although it is the Uniswap users who participate in the stacking or pooling that actually provide the liquidity.
In the latter, users who stack or pool in Uniswap, deposit an amount of cryptocurrencies to the contract that maintains the liquidity of a certain pair and in return receive interest on the deposit made. Like a savings account, but with cryptocurrencies.
In this way, Uniswap fulfills its three established functions in a completely decentralized way, controlled only by smart contracts within the Ethereum network and in a completely transparent way, as there is no way to alter its operation.
What types of assets can you trade?
Let's discuss the most popular assets: stocks or shares. Stocks are portions of publicly traded companies. It is possible to be a shareholder of a company and have returns, but you must know where and how to invest your money.
There are, basically two types of shares: the ones that divide their earnings regularly among the shareholders, and those that don't. The former ones are great, obviously, but investing in the latter can be a good idea too since sometimes you can make even more money by selling the shares.
If you invest in equities that pay out dividends, you will receive them into your account on this broker. Therefore, you can collect that money or you can choose to reinvest it. Nevertheless, compound interest can do magic, so we would recommend reinvesting in the company.
If you invest in stocks on this broker, you will be able to use leverage. However, we don't recommend that, since it would be a CFD and you would not receive dividends. On top of that, equities are usually long-term investments, and you have to pay commissions.
Have you heard about Exchange-traded funds? They are similar to index funds and are known for merging the benefits of stocks and mutual funds: they can be exchanged regularly at market price, but have much more diversity and considerably lower rates.
Foreign exchange trading or Forex consists, as the name says, in the exchange of currencies. It is the conversion of one currency to another to make a profit through the operation.
If you want to exchange euros and dollars, you speculate how many dollars it will take to buy a euro, thinking that after buying the first currency (the euro) it will revalue compared to the second (the dollar), to make a profit by selling it. Assume you entered when the price of one euro is 1.10 USD and you close when the price has gone up to 1.15: thus, you will gain that margin.
Perhaps you already deducted this, but operating with currencies usually implies a large capital, because prices rarely increase that much, or using a lot of leverage, which is always a risk. Our advice for those who are new in the world of trading is not to start with Forex, but with a safer and simpler market.
The most usual currency pairs are available on this broker but remember that in this market sales are always made through CFDs, so you won't own the underlying asset.
About Contracts for Difference
If you browsed this broker previously, you must have seen how the initials CFD appear all the time. We will come back to it, but you should know first that CFDs on this broker are only possible when you are short-selling.
We will also refer to terms like leverage and “going short”, in case you are interested in day trading cryptocurrency or other more advanced operations.
this broker lets you bet both “in the black” and “in negative”. In a hypothetical case: you have the conviction that the Uniswap will fall, so the logical thing is to think “if it is going to depreciate or go down, I'll simply wait until it does and then I'll go in”. Nevertheless, if it really falls, it might mean extra money for you.
You can do that by “going short”. Here's how it works ,roughly:
- You obtain from a loan 100 units of Uniswap, which cost $ 5,000 (these numbers are imaginary)
- You sell the 100 units at $ 5,000
- The price falls, as you calculated, and the unit of Uniswap now costs $ 30 instead of $ 50
- You purchase all 100 units again, but at the current price, $ 3,000
- Then you give back the 100 units
- The difference is yours, so, you will have earned $ 2000
It all sounds more complex than it really is. Just remember that by trading in Uniswap on this broker, with CFDs you can make money when you anticipate the price will fall.
How does leverage really work
In case you still don't know what “leverage” is, we'll describe it briefly: it is, simply, the possibility to use a higher amount than you actually have. For example, you can enter with $ 100, but if you leverage x2, your initial investment will be $ 200.
What you should know about leverage
Let's pretend that you are confident that Uniswap will rise, and you want to “go long”. You have $ 1,000, but you actually can invest more and make more money.
Possibly, you could ask a financial company for a loan, put an asset as collateral, wait for it to be accepted and receiving the money, send the money to the broker, confirm that it arrived, and then obtain Uniswap… But maybe once you have made all that, your prediction could've been confirmed already and Uniswap is at such a high value that it is not worth trading.
Leverage is like a loan, but it is only a few clicks away! the broker allows you to operate with much more money than what you have on the platform. It is simple, before investing you will see the different options as in the image below:
Trading with other assets allows you to use higher leverage. This is because leverage is most common in short-term operations or day trading, and cryptocurrencies tend to be a medium or long-term investment. But let's deepen a bit more on how all this works.
If for your investment of $ 1,000, you choose leverage x2, you will be investing $ 2,000. Your broker would be “loaning” you the extra $ 1,000.
A week later Uniswap goes up by 20% and now your investment costs 2,400. So, a wise decision is to sell them back now.
You will have to pay back the $ 1,000 of leverage and you will have made $ 400 (since the other $ 1,000 was your initial investment).
By starting with $ 1000 and getting $ 400, you'll be earning 40% of your investment.
But watch out: if all goes as you intended and the asset increases, you will make money. On the opposite scenario, if the asset decreases, you will also lose more money than you invested.
For example: if the price falls by 10%, you do not lose $ 10, but twice (the leverage) that figure, that would be $ 20. For that reason, the concepts of Take Profit and Stop Loss are fundamental when using leverage.
Take Profit is a limit you can set when trading: you set the platform to sell your assets once they get to a point above the entry price. For instance, you can buy Uniswap at $ 100 and request that your position is closed automatically when it goes up to $ 120. It is very useful to avoid being blinded by greed: a 20% profit is usually very good, but once you see the price has risen, you might consider you can make higher profits, which is not always the case. Consequently, you might lose money if you don't close on time. So, Take Profit helps you to trade more safely.
Also, if you use leverage you absolutely need to place a Stop Loss order (take into account that any small loss is greater with leverage). For that reason, it is vital to establish a Stop Loss more tight than that suggested by the broker.