Crypto Assets Diversification - Crypto Academy / S4W4 - Homework Post for @fredquantum.

Hello again Professor @fredquantum. I think this week's class puts into practice a basic principle not only for trading, but I have also heard of the use of diversification in scholarship-seeking students or job seekers. It's a principle that applies to life in general..

Let's start!.

_{Image edited by me in Powerpoint}

1. Explain Crypto Assets Diversification.

It is a trading strategy in which you distribute your investment capital in different assets. In the particular case of the crypto market, the capital is distributed among several cryptocurrencies or several projects.

It is a strategy of high reliability and security, where more than achieving short-term gains, it is intended to protect the investor's entire wealth from the possible fluctuation of the price of a particular cryptocurrency.

This process requires the total discipline of the investor so that he/she is not tempted to bet all his money on a single project.

This is done under the premise that in case one or some of the options fail or the price of some of the assets falls, the other assets in which they are diversified can make up for the loss of the first ones. Naturally, this diversification must be accompanied by a fundamental analysis of each of the currencies in which it is invested.

A point to take into consideration is that it is not enough to invest only in different currencies, but true diversification leads you to invest in different currencies of different sectors. It is useless to invest in several projects of the same sector which can be affected by the same phenomenon, as happened in the most recent bitcoin crash.

For this reason, many investors choose to spread their capital between stocks, commodities, forex, gold, etc. In our case, we can invest in different crypto sectors such as Bitcoin, altcoins, DeFi sector, and NFT sector or gaming.

We must keep in mind that essentially you do not split the money but you split the risk.

2. What are the Benefits/effects of Diversifying one's assets?.

Benefits

1-More presence in the market: In the first place, the probability of receiving much more opportunities in the market increases due to being positioned in several projects.

It is no secret that in the crypto world changes are constantly occurring and projects are emerging with new opportunities from airdrops, ICO, NFT launches, games, platforms, launching new coins on the exchanges market, etc.

The more we embrace the more likely we are to come across an emerging project that can change our lives.

2-Better ability to cope with changes: Diversification requires constant study and analysis not only of different assets but of the market itself. This information that we gather over time becomes valuable when sudden changes occur in the market that no one anticipated.

Thanks to being better prepared we will be able to better face the challenges that arise, make the best decisions, and better understand the market landscape.

Side Effects

1-Stress Level: Another effect of diversification is that it increases the wear and tear and the level of dedication on our part.

It is not the same to analyze one asset as to analyze 5, 7, 10 assets. Or paying attention to a single asset than watching 5. Diversification is more demanding in terms of time. If you are a very busy person this could bring you problems.

2-Misclick chance augmented: It is also not the same to perform an Exchange operation as 10 operations... It also increases the chances of making a mistake.

For some people, it is common to make mistakes when transferring a cryptocurrency or placing bad a sell limit or buy stop order for example. Imagine having to do that for 7 assets.

In a way, diversification is a practice with which we must also mature our level of operability.

3. Construct Crypto Assets Diversification according to the 1 - 4 Rule.

As I explained in the first question, it is advisable to perform the diversification with assets belonging to different sectors of the crypto world, that is why I have chosen: Bitcoin, Solana, Sushi, and SLP. My detailed explanation is below.

For this question, I will first show the images of the four purchases and then I will explain one by one my analysis of the 4 assets.

Purchase

All trades were made on my verified Exchange FTX account on September 27th. As you can see I started with just over 60 USD in Fiat currency.

_{Here you can see my verified account in FTX ^Source}

My reservoir is 60 USD, so I will invest 15 USD in each asset.

_{RESERVOIR: 60 USD ^Source}

I then perform the transaction for Bitcoin, Solana, Sushi, and SLP respectively.

_{BITCOIN ^Source}

_{SOLANA ^Source}

_{SUSHI ^Source}

_{SLP ^Source}

Finally, my portfolio after the diversification process looks like this. Due to some movements in the market during the screenshots, some assets show a little less than 15 USD, and others a little more.

_{SLP ^Source}

BITCOIN

Fundamental Analysis

Bitcoin represents my main cryptocurrency asset. My analysis is based on the fact that Bitcoin is the cryptocurrency per excellence and a wealth generator. Today even with the small drops it has had lately, in general people still see Bitcoin as an option to preserve the value of their money in the face of a falling dollar. It still has the greatest market cap

We also see several countries adopting Bitcoin.

We can be guided by an on-chain metric. At this time we can see that the amount of people taking money out of exchanges to hold is increasing. This will lead Bitcoin to increase in value. Let's look at the percentage of supply to exchanges.

_{On-chain metric BTC ^Source}

In fact with the drop these past few weeks it's a good time to buy, because we may never see Bitcoin at this price ever again. Read this Article

Technical Analysis

Based on my technical analysis and chart reading I established certain strong support and resistance levels (some old) and based on them I placed stop loss and take profit.

_{Technical Analysis, Stop loss & Take profit. ^Source}

For this case I first set the stop loss and then following a Risk/Reward ratio = 1:2 I set the take profit.

SOLANA

Fundamental Analysis

Solana represents my asset in the Altcoin & Defi sector.

It is no secret that Solana has shown rapid progress in the last few months. This is due to the growth and expansion of Solana's project which encompasses not only a project but an entire ecosystem.

We are facing the birth of a whole world where the main asset is smart contracts it is expected that Solana will be a competitor to Ethereum, as well as several platform options in DeFi finance. Read this Article

Technical Analysis

Based on my technical analysis and chart reading I established certain strong support and resistance levels (some old) and based on them I placed stop loss and take profit.

_{Technical Analysis, Stop loss & Take profit. ^Source}

For this case I first set the stop loss and then following a Risk/Reward ratio = 1:2 I set the take profit.

SUSHI

Fundamental Analysis

Sushi represents my investment in the DeFi finance and decentralized exchange sector.

The interesting thing about SUSHI is that these exchanges allow us to trade in complete privacy and a decentralized environment. These platforms allow farming operations and liquidity pools from the native currency: Sushi.

In other words, every time someone wants to perform one of these operations within the Sushi platform, he must buy the token.... in turn this causes the supply to decrease and the price to increase.

Technical Analysis

Based on my technical analysis and chart reading I established certain strong support and resistance levels (some old) and based on them I placed stop loss and take profit.

_{Technical Analysis, Stop loss & Take profit. ^Source}

For this case I first set the stop loss and then following a Risk/Reward ratio = 1:2 I set the take profit.

SLP

Fundamental Analysis

It is the secondary currency of the Axis Infinity game, which is based on the Ethereum blockchain.

It is now low, so it is a good idea to get into the project. Currently, this coin is only used to pair or breed Axies, so it has a lot of production and its price is low.

However, as of this time, the developers are planning a new process, where instead of exchanging the SLP it is going to be burned.

Something even more interesting is that the game is growing in several ways, for example, they are working together with Ubisoft to improve the platform of the game.

Technical Analysis

Based on my technical analysis and chart reading I established certain strong support and resistance levels (some old) and based on them I placed stop loss and take profit.

_{Technical Analysis, Stop loss & Take profit. ^Source}

For this case I first set the stop loss and then following a Risk/Reward ratio = 1:2 I set the take profit.

4. Explain Arbitrage Trading in Cryptocurrency and its benefits.

It is a strategy where we rely on the price differences of the same asset in different Exchanges, or different assets in the same exchange to profit from that price difference.

For example, One type of arbitrage which is Exchange Arbitrage consists of we could buy one crypto in an exchange account at a low price and then move those coins to another exchange where the price is higher and sell it. Thanks to that price difference between exchanges we would be making a small profit when selling it.

This price difference between Exchanges is usually due to differences in the liquidity of the asset within the platform. On the other hand, these operations must be done quickly so that the price of the asset does not fluctuate too much.

On the other hand, there is the Triangular Arbitrage which is based on the price differences or cross rate of three cryptocurrencies, to obtain profits through the exchange between the three within the same platform.

Benefits

1-The main benefit I see is that you don't need specialized trading knowledge or technical analysis to generate profits.

Nor do you need fundamental currency analysis or spend hours studying a project. You only need knowledge of how to manage an exchange correctly, how to perform operations, and know-how to transfer from one exchange to another without making mistakes.

2-You can generate income immediately and daily. Even several times a day if you repeat the process with different currencies.

You do not have to go through the waiting process to see the development process of an asset, as it happens in the holding, but the profits are capitalized once you sell the asset in the second exchange.

5. Discuss with illustration how to take advantage of Exchange Arbitrage.

First, let's start by taking any coin and comparing its quotes on different exchanges. For my first example, I choose ETH on the Poloniex and FTX exchanges

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_{Image taken from: Source </ sup>}

As we can see there is a difference in the quotes so we have to carry out the following procedure.

_{Image edited by me in Powerpoint}

As we can see, we were not able to obtain much return, since to earn 3 USD we had to invest 2900 USD, only 0.12% profit. So to take more advantage of this strategy what we should do is to buy a pennycoin, which is cheap to be able to share many tokens and earn more by the variation in the price of exchanges.

Once again we are looking for a new coin. This time we will try it with TRX.

_{Image taken from: Source </ sup>}

_{Image taken from: Source </ sup>}

Repeat the process, this time initiating the purchase at FTX where the price is cheaper. Our investment will be 100 USD. Remember, the idea is to accumulate as many tokens as possible for the strategy to be effective.

_{Image edited by me in Powerpoint}

As you can see, we have made a better profit.

6. Creatively discuss Triangular Arbitrage in Cryptocurrency. How to identify Triangular Arbitrage opportunities and the risks involved.

It is an exchange strategy whereby speculators detect inconsistencies in the exchange rates of cryptocurrency prices, and once those inconsistencies are detected they can acquire an asset cheaply, sell it expensively and at the same time make a profit.

In this case, you have 3 exchange rates (R1, R2, R3), 2 of them with a common currency (R1, R2), and a third cross exchange rate (R3) in which are two currencies in front of the common one that cancels each other out.

As in the case of Exchange Arbitrage, all transactions are done on a spot basis. And again the idea is to profit by exchanging cryptos but this time through triangulation instead of buying directly.

Initially, we start with three cryptocurrencies that we must track. For my example, I will use some very well-known to all: SBD, STEEM, and USDT and their three exchange rates. We will perform our Triangular Arbitrage with these three. The data was taken from tradingview on September 29th.

_{Image edited by me in Powerpoint}

At this point, we can see that the market has consistency because the three exchange rates correspond qualitatively. So based on this third cross rate we will look for an inconsistency to detect the correct moment to make the Triangular Arbitrage.

_{Image edited by me in Powerpoint}

Therefore, for the condition to be fulfilled we must wait for the rate of exchange R3 to be smaller than 0.0748. For example 0.06 SBD/STEEM.

_{Image edited by me in Powerpoint}

Finally, we perform our arbitrage by interchanging USDT to SBD, then SBD to STEEM, and STEEM to USDT.

If we were to invest USD100 at the start, at the end we will have a return of USDT124.8 or a 24.8% gain.

RISKS

1- A risk is assumed that the rates will vary at the time the two trades are made. For this reason, this procedure should be done in spot trading and quickly.

2- You assume more fees due to extra transactions. If the fees are too high, they can consume our profit and even leave us at the loss.

3-The trade is highly dependent on the amount of liquidity the exchange can offer. If an illiquid currency is chosen, the trade may be halted and delayed, thus increasing the risk of rate fluctuations.

CONCLUSION

Today we have seen two types of very valuable tools in cryptocurrency trading, some more complex than others, such as Arbitrage.

In both cases, the aim is to minimize the risks of people as well as to increase profits. However, we must not deceive ourselves, in both strategies, there is an inherent risk due to market volatility.

That is why, regardless of the strategy we decide to use, it must always be accompanied by good risk management and not use money that we are not willing to lose.