Crypto Academy / S4W4 - Homework Post for [fredquantum] - Crypto assets diversification.
Hope you are all doing well. We are in week 4 / season 4 of cryptoacademy.
Today i am writing homework task for @fredquantum which is about crypto assets diverfication.
Explain Crypto Assets Diversification.
Crypto assets diversification or portfolio diversification refers to a risk management strategy of investing into multiple cryptocoins rather than investing into one coin. The basic principle of portfolio management or crypto assets diversification is that "never ever invest your all funds in one cryptocoin". The logic is simple, that is volatility of the price . As we all know that , cryptocoins have no intrinsic price value, price is wholly and solely determined by the demand in the market and other market forces. Therefore it is a sane practice to invest your funds in 3 to 4 cryptos. It is because if the price of one asset goes down, the others may compensate the loss.
Suppose i plan to make an investment of $1000 in cryptocoins. If i invest all funds in one coin (Say A) and if the price of coin drops by 50% , I would suffer a loss of 50% . On the otherhand , if i invest in 5 cryptos with 20% share in all ( 200$) , there are very less chances that all the coins may suffer loss at one time. Even if one or two coins drop in price, srill there are other coins to compensate the loss and even mount to profit despite loss in one or two coins.
One point that is worth mentioning here is, investment should not be random. It is not like that, we invest randomly in three to four coins and expect profits to yield. Investment must be based on some logic and research. Some widely used parameters of investment are, fundmanetal analysis and technical analysis. On the basis of these analysis techniques, investment is planned. But there are separate strategies developed by market analysts to determine how and how much to invest, period of investment etc. We have various investment strategies like lumpsum and SIP. Cryptoasset diversification, be it 1:4 or 1: 5 strategy, is also a part of strategy to mitigate the loss and maximise the profits.
What are the Benefits/effects of Diversifying one's assets?
Crypto Assets Diversification or portfolio diversification is always carried out with the intention of minimising loss and maximising the profits but it has certain pros and cons too.
Benefits of CAD
- The primary benefit of asset diversification is that, it minimises the loss and maximizes the gain by balancing the volatility and risk. It has been exemplified above.
Cons of CAD.
- The primary drawback of CAD is that, there are lesser returns as compared to one. For example, if a trader invests in one cryptocurrency and that coin goes up by 50% . It means that portfolio has gained 50% . On the otherhand, if a trader invests in 3 coins, it is less likely that all coins will be in profit at any point. Even if all are in profit, the average profit would be lesser than individual price hike.
- Management of more diversified portfolio is also difficult and time consuming. Transaction fee is also more in buying and selling more cryptos.
- Over - diversified portfolio may sometimes be more risky, if investments are made after poor research.
Construct Crypto Assets Diversification according to the 1 - 4 Rule . Choose 4 crypto asset (State the reasons for choosing them), discuss each of the assets, and perform a detailed fundamental/technical analysis on them. Invest a part of at least 15 USD into each of the assets based on the diversification constructed earlier, proper stop loss and take profit levels must be put into place. A real trade on a centralized exchange is expected here. (Graphics/Screenshots/Charts are required). Note that: You are expected to show your verified account screenshot, your reservoir and the steps involved while investing (For example, if you are investing a part of 15 USD at a time, then, the reservoir must have been 60 USD clearly shown, you can use Fiat or Stablecoin for construction). Kindly take note.
1:4 rule for CAD refers to investment of reserve into 4 cryptos (pools). Although there is no hard and fast rule of investment into 4 assets but it is just one strategy. For this part of task, I'll be investing in BTC, XRP , DASH and UNI. Let's do some analysis of these coins.
verified account
Reserve
BTC
Bitcoin released by mysterious satoshi nakamoto unleashed the magic of cryptocurrncy to the world. Being parent coin, it is king of cryptosphere . I choose to invest in Bitcoin for following reasons :
i believe " If there is no BTC, there will be no cryptos". Morever, BTC being the parent coin, it is getting more and more fame and recognition which can be understood by it's acceptance by companies like MICROSOFT and EXPEDIA. It being oldest crypto has strengthened its roots and determines fate of other coins.
Bitcoin dominance index as of now is 62. 43 percent, which is undoubtedly an achievement as cryptosphere currently includes more than 5000 coins.
Bitcoin has backing from smartest minds of the world.
All risks associated with Bitcoin are there with all other altcoins too. So let us shoot at moon not at stars .
No other coin has potential to overcome Bitcoin price at least in near future as it is booming far away from other coins.
Statistical facts of BTC1
As for coinmarketcap stastics is concerned at the time of writing this post. The Bitcoin price is $43,341.12 USD with a 24-hour trading volume of $30,954,610,793 USD. The current CoinMarketCap ranking is #1, with a live market cap of $816,127,147,355 USD. It has a circulating supply of 18,830,318 BTC coins and a max. supply of 21,000,000 BTC
coins.
Bitcoin taking support from important level.
Placing BTC order on binance
Order executed
UNI
UNI is a native and governance token of UNISWAP. uNI holders have right to vote on new developments and changes to the UNISWAP platform. UNISWAP is a decentralised cryptocurrency exchange based on Ethereum blockchain and created by Hayden Adams. UNiswap facilitates automated transaction via smart contracts. Exchange involves no intermediary and no order book . It is GPL Licenceced open source software.
UNi has some attractive features like :
When we look at crypto market, we notice that Bitcoin price has a great bearing on the price of altcoins. If price of bitcoin drops our investment in other altcoins also drops. However UNI is immune to such jerks.
Token price on traditional or centralised trading platform is determined by supply / demand ratio. More the demand, more is Price and vice versa. Uniswap uses mathematical algorithm to compute token price. That is an add on point to draw my attention.
Stastical facts 1
The Uniswap price is $23.16 USD with a 24-hour trading volume of $646,940,677 USE. The current CoinMarketCap ranking is #13, with a live market cap of $14,164,417,004 USD. It has a circulating supply of 611,643,724 UNI coins and a max. supply of 1,000,000,000 UNI coins.
UNI/USDT chart
UNI has taken supporr from the level multiple times and is therefore worth investing.
while placing order
order executed
DASH coin
DASH coin was launched in 2014 by Evan Duffield, as a fork of the Bitcoin protocol to provide an alternative payment system. DASH ( digital cash coin) was initially launched with name of Xcoin , later it was illegally used by miscreants on darknet and was tagged as "Darkcoin* but finally in 2015 , it was named as Dashcoin.
I choosed DASH coin for the following unique features that it offers :
Option to choose whether to keep transaction private or public. Being Bitcoin forked it works like bitcoin, that's user address remains visible to all blockchain users . The other set up being "PrivateSend" , in which user can keep identity anonymous. If transactions are performed with PrivateSend option, than it makes DASH a private coin and keeps user identity anonymous. DASH coin also make use of coinjoin to enhance privacy.
Instantsend feature of DASH allows speedy transaction. Scalability is also enhanced by bypassing of standard nodes by master nodes. Master nodes run on "proof of stake" where as standard nodes follow "proof of work" algorithm.
Being an effective and low cost payment option with practical utilities.
Being open source and decentralized payment nework with the aim of serving as cash payments in daily transactions .
Stastical facts 1
The live Dash price is $159.73 USD with a 24-hour trading volume of $228,399,272 USD. The current CoinMarketCap ranking is #61, with a live market cap of $1,654,627,367 USD. It has a circulating supply of 10,358,603 DASH coins and a max. supply of 18,900,000 DASH coins.
DASH has broken important consolidation zone and is worth investment.
Placing Dash order
Dash order placed
XRP- Ripple
Ripple is not actually cryptocoin but refers to the digital payment network or company . The cryptocurrency is actually XRP. Ripple transections are processed by trusted group of validators before recording on XRP Ledger. This sort of consensus mechanism is called Ripple Protocal Concensus algorithm. XRP ledger is more eco- friendly than BTC because energy expenditure in bitcoin mining is huge as BTC engages heavy hardware.
Why Ripple?
XRP has faster transaction speed than some of giamt names like BTC. Average transection speed of XRP is 3 sec where that of BTC is 10 seconds.
Ripple has gained popularity in the field of cross border transactions by setting a real world example in the form of Ripplenet.
XRP transection fee is much lesser than BTC.
Stastical facts 1
The live XRP price is $0.943985 USD with a 24-hour trading volume of $3,569,235,364 USD..The current CoinMarketCap ranking is #6, with a live market cap of $44,131,711,784 USD. It has a circulating supply of 46,750,439,262 XRP coins and a max. supply of 100,000,000,000 XRP coins.
We can see that XRP is taking support from important level. Below is proof of investment.
While placing order
order executed
Explain Arbitrage Trading in Cryptocurrency and its benefits.
There are scores of crypto exchanges available in cryptosphere and thousands of cryptocoins available for trade in pairs. It is worth mentioning that, price of any trading pair is not same on all the exchanges. Some traders take advantage of this price difference among the different exchanges and among different pairs . They buy the target trading pair on an exchange at low price and sell on other exchange at higher price or on the same exchange with different pair . Such a strategy of trading is known as arbitrage trading.
So there are two types of arbitage trading. One is to take advantage from price difference among different trading pairs and other is on different exchanges.
Benefits of Arbitage trading.
There is no trading skill like knowledge of technical analysis or fundamental analysis of asset required. Even a layman with simple knowledge of basic maths can take advantage of aebitage trading.
There is almost negligible risk involved.
There is no monitoring of price required, as it is carried out instantly. So there is little interference by market forces.
Discuss with illustration how to take advantage of Exchange Arbitrage.
Exchange aebitage is a type of aebitage trading where a trader benefits from difference in price of a trading pair on different exchanges. A crypto that costs low on one exchange is bought there and sold on other exchange where that costs higher.
I'll giving a practical example of arbitrage trading by looking at BTC/USDT price right now on Binnace and WazirX. At this time, if i buy 1 BTC on Binance, i will have to pay 41679 USDT and if i transfer BTC from Binance to Wazirax and sell it there, i would get 41701 USDT. So it would give a profit a profit of 22 USDT. It is a classic example of arbitage trading.
Creatively discuss Triangular Arbitrage in Cryptocurrency. How to identify Triangular Arbitrage opportunities and the risks involved.
Triangular arbitage is so called because it involves three trading pairs. The trader takes advantage of price difference in such a way that original asset is purchased back with some benefit. Suppose we take example of three crypto coins as A, B and C. Here A is exchanged for B and B is exchanged for C and C is exchanged for A. Due to disparity of price , we get more amount of A from C after completion of this traingle of exchanges.
Let me give example of crypto pairs. Suppose i had 0. 5 BTC and i spotted arbitage. I sold 0.5 BTC for USDT and got 26500 USDT. Than i bought BNB from USDT that i have and got 60 BNB. Now I'll have to get BTC back by converting BNB to BTC. On trading BNB for BTC, suppose i get 0.55 BTC. So there is 0.05 BTC as a profit from traingular arbitage.
How to identify .
Traingular arbitage is rare in the market and is difficult to spot manually. However, nowadays different trading tools and softwares like "crypto arbitage calculator " are available to spot it out. Coygo is one such tool.
Risks involved.
Traingular arbitage involves multiple trading pairs and therefore is subjected to slippage risk in high volatile and low liquid markets. As these trades are performed at market price, these are subjected to slippage risk especially if markets are volatile and show dip in price between the time of placement of trade and its execution and same can be seen in low liquidity assets and markets.
Data exchange varies between different exchanges and approximation of decimals tends to average out the profits earned out of arbitage. Example, wazirx approximates upto 5 places of decimal and in BTC we know that even 8 places after decimal have value.
Conclusion
Crypto assets diversification is a risk management strategy based on investment into multiple coins to minimise loss due to price dip. Diversified portfolio is less riskier than investment into single coin. Over diversification should however be avoided. Arbitage trading is a technique to spot out market inefficiency that results in variation in price among different trading pairs and or different exchanges and take advantage out of this differences.
UNI/USDT chart
while placing order
order executed
Option to choose whether to keep transaction private or public. Being Bitcoin forked it works like bitcoin, that's user address remains visible to all blockchain users . The other set up being "PrivateSend" , in which user can keep identity anonymous. If transactions are performed with PrivateSend option, than it makes DASH a private coin and keeps user identity anonymous. DASH coin also make use of coinjoin to enhance privacy.
Instantsend feature of DASH allows speedy transaction. Scalability is also enhanced by bypassing of standard nodes by master nodes. Master nodes run on "proof of stake" where as standard nodes follow "proof of work" algorithm.
Being an effective and low cost payment option with practical utilities.
Being open source and decentralized payment nework with the aim of serving as cash payments in daily transactions .
DASH has broken important consolidation zone and is worth investment.
Placing Dash order
Dash order placed
XRP has faster transaction speed than some of giamt names like BTC. Average transection speed of XRP is 3 sec where that of BTC is 10 seconds.
Ripple has gained popularity in the field of cross border transactions by setting a real world example in the form of Ripplenet.
XRP transection fee is much lesser than BTC.
We can see that XRP is taking support from important level. Below is proof of investment.
While placing order
order executed
There are scores of crypto exchanges available in cryptosphere and thousands of cryptocoins available for trade in pairs. It is worth mentioning that, price of any trading pair is not same on all the exchanges. Some traders take advantage of this price difference among the different exchanges and among different pairs . They buy the target trading pair on an exchange at low price and sell on other exchange at higher price or on the same exchange with different pair . Such a strategy of trading is known as arbitrage trading.
There is no trading skill like knowledge of technical analysis or fundamental analysis of asset required. Even a layman with simple knowledge of basic maths can take advantage of aebitage trading.
There is almost negligible risk involved.
There is no monitoring of price required, as it is carried out instantly. So there is little interference by market forces.
Exchange aebitage is a type of aebitage trading where a trader benefits from difference in price of a trading pair on different exchanges. A crypto that costs low on one exchange is bought there and sold on other exchange where that costs higher.
Triangular arbitage is so called because it involves three trading pairs. The trader takes advantage of price difference in such a way that original asset is purchased back with some benefit. Suppose we take example of three crypto coins as A, B and C. Here A is exchanged for B and B is exchanged for C and C is exchanged for A. Due to disparity of price , we get more amount of A from C after completion of this traingle of exchanges.
Traingular arbitage involves multiple trading pairs and therefore is subjected to slippage risk in high volatile and low liquid markets. As these trades are performed at market price, these are subjected to slippage risk especially if markets are volatile and show dip in price between the time of placement of trade and its execution and same can be seen in low liquidity assets and markets.
Data exchange varies between different exchanges and approximation of decimals tends to average out the profits earned out of arbitage. Example, wazirx approximates upto 5 places of decimal and in BTC we know that even 8 places after decimal have value.