Crypto Assets Diversification - Crypto Academy / S4W4 - Homework Post for @fredquantum
Q.1. Explain Crypto Assets Diversification.
Crypto asset diversification is the act of splitting our investments in crypto among different assets. This helps to cushion the effect of volatility though it can also reduce dividend as some might be in losses while others might be in profit.
Crypto assets diversification is essential is crypto investment. It's a more strategic way of investing in crypto currency. Asset diversification in itself is very important as it makes collosal loss more unlikely.
Diversifying our assets in crypto will make us immune to some adverse effects of volatility e.g where a coin drops to below 50%. When we diversify, we share our investment capital among various categories of crypto assets and this enables us to properly manage our investments and increases our chances of success.
Q.2. What are the Benefits/effects of Diversifying one's assets?
Diversifying our crypto assets has some effects, majority of which are benefits. They are listed below
RISK MANAGEMENT (BENEFIT)
It makes no fame saying crypto trading is a very volatile and risky business. In a matter of seconds, it can boom and can doom. Diversifying our investments among different assets will help us reduce the risk of an overall loss. This is because, while some will be in loss, others will likely be in profit and generally, the loss will either be reduced or removed totally.
INCREASED CHANCE OF SUCCESS (BENEFIT)
When we share our investments among different categories of assets e.g NFTs, DeFi, Play to Earn, PoW, Alts, etc. We increase our chances of making profit. This is because in the crypto industry, all these categories have their seasons and oftentimes, at least one is booming. If we enter the various markets at the right time, we increase our chances of making profit when we diversify.
AVOIDANCE OF COLOSSAL LOSSES (BENEFIT)
Investing in only one asset means that if there's a significant drop in that asset, the investment will suffer loss. E.g Internet Computer (ICP) was about $106 few months ago, but drop to $39. If this happened to be the only investment in one's portfolio then you can imagine how colossal the loss would be. Investing in different assets avoids this.
POSSIBLE REDUCTION IN PROFIT (SIDE EFFECT)
Here's the tricky part of asset diversification. Sometimes, it's all but certain that a particular coin is going to boom e.g, when ETH dropped to $1800, I knew ETH would spring back and double up. So if I had $1000 and I put it all in, when ETH reached $4000 I would have about $2220 (122%). But if I did asset diversification, very likely, not all the asset will appreciate up to double their prices, which means I won't be getting (122%) on the $1,000.
Q.3. 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.
When it comes to investments, there are different approaches and different time-frames. I prefer being the clueless investor rather than being a smart trader. A clueless investor acquires an asset and leaves it stored for years. These are the people who are likely to profit from the astronomic rise in price over time.
Personally, I don't do preset stoploss or take profit because I prefer to HODL, but I do asset diversification and I believe that's a safe way to play.
@fredquantum introduced a 1-4 rule which isn't a bad idea at all, though I'd prefer to HODL more than 4 assets. With this rule, there is 1 reservoir containing the overall capital and then there are 4 pools representing 4 different assets which the overall capital is to be invested in.
I'l be building a portfolio using this 1-4 rule with an overall capital of $60. For the sake of this course, the overall capital will be divided among pools equally. Let me begin...
ASSETS TO BE INVESTED IN
I will be investing in the following assets
Raydium (RAY)
Decentraland (MANA)
Reef Finance (REEF)
Ontology (ONT)
Since I'm looking to HODL these assets for a very long time (over 1 year) I won't be using stoploss or take profit.
RAYDIUM (RAY)
Raydium is an Automated Market Maker which runs on the Serum decentralized exchange. The Serum decentralized exchange is built on the Solana blockchain and as such has a lot of users as Solana has seen a surge in adoption with trading volume once exceeding that of bitcoin and ethereum.
This AMM is very different. It works like an order book. What it does it place the liquidity provided as limit orders on the order books of the Serum decentralized exchange. It also acts as a bridge between the Serum DEX, Solana and other projects. It is believed to be integral to expansion of the Solana ecosystem as a whole and is also one of the top AMMs in crypto today.
Raydium's native token RAY can be used to stake on the Raydium protocol to earn interests, vote on protocol decisions and stake to share in IDO distributions.
RAY has a max supply of 555,000,000 RAY and a current circulating supply of 70,224,289 RAY. It has a market cap of over $661M, being currently priced at about $9.
From the TA point of view, using Binance, we see RAY make a $3 debut and rising to as high as $17, over 500%. The recent market correction or bear 🐻 (whichever you prefer) has however impacted the price and it has fallen to $9. On the flip side, the impact of the downtrend has not be able to prevent RAY from trading at 3x its debut price.
Verdict: Buy RAY - $15
DECENTRALAND (MANA)
According to the project itself, Decentraland is a virtual reality platform built on ethereum. It supports the creation of virtual properties of about any sort and the monetization of such creations.
The origins of this project attracts accolades as it was founded by some reputable names in the business - Ariel Meilich and Esteban Ordano, the former being a serial entrepreneur and former analyst with Charles River Ventures and the later being a well experience crypto practitioner who was once an advisor to Matic Network and former software engineer at BitPay. He also has a history with smart contracts.
source - CoinmarketCap
MANA is the native token of the Decentraland platform and is burned to acquire the platform's NFT - LAND. MANA is an ERC-20 token while LAND is an ERC-721 non-fungible token.
About 2.1B MANA has been created but just 1.08B MANA is currently in circulation, and since MANA is burned to generate LAND, it implies that about 1B MANA has been sacrificed for LAND. MANA is also used to pay for items on the virtual reality platform and that suggests that as it's scarcity increases, an increase in value is imminent.
MANA is currently worth $0.6395 and has a market cap of $1.14B. although the supply seems to be limitless, the token is combustible.
From the TA point of view, we've seen MANA get to an ATH of $1.67 on Binance and though it didn't rally up to that during the 2021 bullish season, it still maintained decent high points, considering it's $0.03 entry point into the Binance centralized exchange.
It currently rests at $0.63 a decent 200-and-something percent away from its ATH of $1.67. Buying it now, should the price rally up to its ATH, we could be looking at over 250% in profits.
Verdict: Buy MANA - $15
REEF (REEF)
Reef is a DeFi platform that supports cross-chain trading. It has lots of potential from my point of view. This DeFi platform is built on Polkadot an offers its users yield and smart liquidity aggregation.
Reefs aims to address the drawbacks of major trading platforms including security, liquidity and usability. It also aims to provide an alternative to the high gas fee demanding DeFi space which makes DeFi expensive to use.
With Reef, users can access utilities on other platforms built on other chains without having accounts on them. Reef supports DeFi protocols from different chains including Ethereum, Moonbeam, Avalanche, plasma, etc.
REEF has a circulating supply of above 13B REEF and has a market cap of about $248M. It price is currently around $0.017 and its utility stem from the fact that it's the native token of the Reef DeFi platform.
From the TA point of view, the token started on Binance as a house on fire reaching $0.3, a figure that will eventually become it's ATH. It dropped early of to below $0.2 which is where it has spent most of its lifespan. It recently tasted the $0.029 mark before descending again to $0.018.
This token has lots of potential and it's ATH is more than 10x it's current price, showing that should the price at least retest it's ATH, investors would be in for a cash bath.
Verdict: Buy REEF - $15
ONTOLOGY (ONT)
The only blockchain among the lot. Ontology is an open source blockchain that thrives on digital identity and data exchange. It supports the creation of layer 2 solutions to enable scalability and it also has a plethora of protocols to provide and support these features.
The blockchain token ONT began life on the NEO blockchain as a token. The developers of the blockchain vetoed against starting with an ICO as they preferred organic growth to leveraging ready-made user bases.
The ONT token has 1B supply target of which it has attained about 875M. Its market cap is about $633M with a unit price of about $0.72. Early adopters enjoyed the generousity of the blockchain as they at some point received upto 1000 ONT tokens.
From the TA point of view, ONT boast of an ATH of about $10 and about $8.6 on Binance. It began it's time on Binance at that point and has climbed down over the years. It seemed to have found support at $0.2 but since then, it reached $2.8 before going back down.
It helps to mention that this is a token that began without an ICO and grow via organic discovery. It seems to be more focused on offering its goods which has become coveted over time.
At $0.7, it's still a decent way off from its recent peak with a 400% rise needed to reach that level. Considering it's ATH and its price evolution from its introduction, reaching it's previous peak is nowhere near impossible and also promises 400% profits to investors.
Verdict: Buy ONT - $15
PROOF OF TRADE
Q.4. Explain Arbitrage Trading in Cryptocurrency and its benefits.
Arbitrage trading is the act of trading on a particular asset with the motive of profiting from the price difference in different markets offering the asset at a particular time. It can either be exchange arbitrage, in which case the different markets are on different exchanges, or triangular arbitrage, in which case the different markets are different pairs.
BENEFITS OF ARBITRAGE TRADING
Arbitrage trading simply helps the trader to profit from the difference in prices of an asset in different markets.
Q.5. Discuss with illustration how to take advantage of Exchange Arbitrage.
Arbitrage trading employs the philosophy of buy low sell high. E.g LTC is sold for $152.2 on Kucoin and at the same time, $154.5 on Gate.io, arbitrage trading involves buying the LTC on Kucoin and selling on Gate.io. This kind of arbitrage is known as exchange arbitrage.
It is important to note that when transferring coins between exchanges and when trading them, there are fees attached. These fees should be taken into consideration when carrying out an arbitrage trade. If the fees will inflate cost and create loss, obviously, it won't be worth it.
Q.6. Creatively discuss Triangular Arbitrage in Cryptocurrency. How to identify Triangular Arbitrage opportunities and the risks involved.
Triangular arbitrage is a less costly than exchange arbitrage because the cost of transferring between exchanges is removed. This type of arbitrage involves trading a primary coin with two secondary coin. Eg, trading ADA/BTC, then BTC/ETH, then ETH/ADA. Here, ADA is the primary coin while BTC and ETH are secondary.
This done when an opportunity is identified. It is however quite tricky due to the issue of volatility, especially when you're not using a stable coin as the secondary currency.
Here's an illustration.
Assuming
XRP is discovered to sell for $0.95 and TRX is discovered to sell for $0.089. let's assume the exchange charges 0.1% as transaction fees.
A triangular arbitrage trading opportunity exists when we see a situation similar to this
1 TRX = 0.09 XRP.
Here's is the triangle.
- We sell 1 TRX for $0.089
Effect of trading fees,
0.1% of 0.089 = 0.000089
$0.089 - $0.000089 = $0.088911
- Next, with $0.088911 we will be able to buy 0.09359 XRP
Effect of trading fees,
0.1% of 0.09359 XRP = 0.00009359 XRP
0.09359 XRP - 0.00009359 XRP = 0.0934964 XRP
- Lastly, with 0.0934964 XRP we will be able to buy 1.038848 TRX
Effect of trading fees,
0.1% of 1.038848 TRX = 0.001038848 TRX
1.038848 TRX - 0.001038848 TRX = 1.037809 TRX
- Our profit will be the final TRX - the initial TRX.
1.037809 TRX - 1TRX = 0.037809TRX.
So for this triangular arbitrage opportunity, for every 1 TRX we arbitrage, we earn 0.037809 TRX.
If we arbitrage with 1000 TRX, we'll earn 37 TRX.
Note: The assets in this triangular arbitrage are - TRX, XRP and USDT.
Note: Holding BNB reduces your trading fees by 25% on Binance, which implies more profit.
THE RISK INVOLVED
It's rare for exchange fees to increase abruptly, but the cost of assets as you trade is subject to volatility and that's where the risk is. The cost of XRP could rise as well as the cost of TRX, before we complete our triangle. This will lead to a loss.
The risk therefore is the volatility of market prices.
CONCLUSION
It's been an excellent course by all standards. Crypto assets diversification is a safe way to go about crypto investments. Even though I would like to have a more elaborate portfolio, for a beginner who hasn't so much to invest, the 1-4 rule is a good way to start.
The 1-4 rule involves having a reservoir and from that financing the acquisition of 4 different assets. Proper analysis needs to be done to identify profitable asset.
With the 1-4 rule, a beginner can start with as low as $22, as platforms like Huobi has $5 as it's minimum threshold. However, when investing in crypto, the more, the merrier. I also will prefer to use Binance because of liquidity and fees. Binance though has a higher minimum trading threshold.
Arbitrage is a very exciting form of trade. I did it for a long time and am still doing it. It's a type of trade that has no business with bull or bear, just the instantaneous difference between prices of an asset in different markets. It's risky though, as prices could go sour along the way, and what you ordered may not be what you'll get.
Thanks for reading.
Cc: @fredquantum
References:
CoinmarketCap
