What Is Pre-market Trading and How Does It Work

What Is a Pre-Market?

The pre-market is a period in the stock market during which trading takes place before the opening of the main session. During this period, investors can trade stocks, bonds, and other securities, allowing them to gauge the market’s reaction to news and events that have occurred overnight. Pre market trading allows primary quotes to be obtained that can influence the opening price of an asset during the main session. An analog of the pre-market is the post-market—a trading session held after the main market closes, where quotes are also formed based on supply and demand. Investors closely monitor premarket movers to identify potential opportunities and trends before the main trading session begins.

The pre-market is often used to react to corporate reports, economic data or news released after the close of trading. Trading during this period has lower liquidity and increased volatility, which can lead to significant price fluctuations. In addition, the volume of trades in the pre-market is often smaller, creating a higher risk for investors.

What Is Pre-market in Crypto?

Unlike the stock market, the cryptocurrency market operates around the clock, and the premarket allows you to buy and sell new coins even before they are officially listed on an exchange.

Trading on the premarket involves trading not only tokens but also trading protocol points accrued for various activities, which can later be used as a criterion for obtaining airdrop.

How Does Pre Market Trading Work?

Premarket platforms resemble P2P services, but the funds of both parties are held until the transaction terms are fulfilled. On decentralized exchanges, funds are locked by smart contracts, while on centralized exchanges, funds are locked by custodians.

Traders can create buy or sell orders by specifying the price and quantity of an asset. Sometimes, a deposit is required, which is held until the trade is completed. If the order is not executed, the seller risks losing the collateral. Transactions usually have an expiration date, and if the seller defaults, penalties apply.

In decentralized pre markets, smart contracts manage collateral and payments, while in centralized premarkets, the platform itself does this.

What Are the Main Types of Premarkets?

Premarkets can be divided into pre-TGE (Token Generation Event) and protocol point markets:

Pre-TGE (Token Generation Event) is a stage where tokens have not yet been released to exchanges but are already available for buying and selling. This allows investors to buy tokens before they are officially listed. Such events are often associated with initial token offerings (ICO, IEO) or pre-sale stages.

Sellers on these platforms usually participate in preliminary stages, such as presales or airdrops, who have obtained tokens or the right to tokens. Buyers, in turn, are investors willing to take the risk to purchase these assets before listing, counting on a potential increase in value in the future.

Points markets are markets where no tokens are traded, but points or points that are awarded for performing certain actions within a project. These points can be used to participate in future airdrops or get tokens at a reduced price.

How Is the Pre-market Price Formed?

Crypto prices on the premarket are formed due to the interaction between supply and demand. The following key factors can explain this process:

1. Supply and demand. The bidders determine the price – sellers who set the price of their assets and buyers willing to pay for them. If demand for a token is high and supply is limited, the price rises.
2. Investor expectations. The price is influenced by expectations of the asset’s future value once it is listed. If the project is perceived as promising, investors are willing to pay more at the pre-market, which raises the price.
3. Project information. News about the project, smart contract audit results, team and partnership successes play an important role. Positive information increases the price, while negative information can decrease it.
4. Liquidity. Premarket liquidity is usually lower than on exchanges. This makes prices more volatile and sensitive to large orders.
5. Speculation. Investors often speculate on the premarket, creating artificial hype around the token and affecting its price.
6. Platform mechanisms. Some markets have built-in mechanisms, such as a minimum or fixed price, which can limit its extreme fluctuations.

The Pros and Cons of a Premarket

Premarkets offer investors unique opportunities but come with many risks that are important to consider when making decisions.

Premarket advantages:

• Platforms allow you to determine the price of tokens in advance, analyze quote fluctuations, and predict market trends before the TGE.
• Investors get early access to tokens of promising projects, which can bring significant profits.
• Using smart contracts minimizes the need for trust in third parties, reducing fraud risks.
• The decentralized nature of some platforms enables direct user interaction, eliminating censorship and manipulation.
• Transactions are conducted quickly and efficiently without the delays inherent in traditional financial systems.
• Global accessibility: any user with an internet connection can participate in trading.

Disadvantages of the pre-market:

• Investing in early projects involves high uncertainty and the risk of total loss of investment.
• Pre-market assets’ low liquidity makes it difficult to sell or exchange them quickly, and their high volatility can mislead investors.
• The lack of regulatory oversight creates a breeding ground for fraudulent schemes, requiring users to be extra cautious.
• Vulnerabilities and bugs in smart contracts can lead to loss of assets.

How to Trade On the Premarket?

Let’s take a look at the three basic steps for trading on the premarket.

Preparing for Trading

Before you start trading on the premarket, it is important to choose the right platform. This can be a centralized exchange (CEX) or a decentralized exchange (DEX). It is important to ensure the chosen platform has a good reputation, reliability and high security standards. You will need a cryptocurrency wallet such as MetaMask for decentralized platforms to manage your tokens. If you choose a centralized exchange, you must register and go through a verification (KYC) process. Also, before you start trading, you need to fund your balance with the cryptocurrency that will be used to buy tokens and pay the corresponding commissions.

Selecting and Buying an Asset

When you have chosen a platform and prepared funds, the next step is to choose an asset for trading. It is important to thoroughly research the project whose tokens are available on the premarket: familiarize yourself with its whitepaper, team, tokenomics and roadmap. This will help you evaluate potential profits and risks. On the platform, you can create an order by specifying the price and number of tokens you want to buy, or execute an existing order if the terms suit you. In some cases, sellers are required to post a deposit, which is held until the transaction is finalized to ensure that the terms of the agreement are met.

Finalizing the Transaction and Assessing the Risks

Once the transaction terms are fulfilled, the buyer receives the tokens and the seller receives the funds. In the case of decentralized platforms, this process is controlled by smart contracts that automatically enforce the terms of the transaction. On centralized platforms, the transaction goes through the exchange system as an intermediary. However, it is important to remember that trading on the premarket is always associated with high risks. Premarkets are characterized by high volatility and low liquidity, which can lead to sharp price fluctuations. Therefore, it is important to consider these risks and carefully analyze the project before investing to avoid significant losses.

Conclusions

Cryptocurrency premarket trading can be a profitable tool for experienced traders, but for beginners it can be a source of significant risks. It is important to carefully study projects and closely monitor the terms of transactions to minimize possible losses.