Crypto Asset Diversification- Crypto Academy / S4W4 - Homework Post for @fredquantum
.jpg)
Hello friends. This post is my homework submission to Professor @fredquantum's lecture on Crypto Asset Diversification. The assignment was given as below:
Explain Crypto Assets Diversification.
What are the Benefits/effects of Diversifying one's assets?
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.
Explain Arbitrage Trading in Cryptocurrency and its benefits.
Discuss with illustration how to take advantage of Exchange Arbitrage.
Creatively discuss Triangular Arbitrage in Cryptocurrency. How to identify Triangular Arbitrage opportunities and the risks involved.
Explain Crypto Assets Diversification
Cryptocurrency Asset Diversification is a practice whereby investors and traders practice proper risk management strategies through the proportionate acquisition of distinct cryptocurrency assets to generate profits while securing their capitals from wipe-outs in the case of unfavorable volatile market movements. This diversification is not done arbitrarily; rather investors and traders perform sound research about the respective assets before making an investment decision. Hence, a diversified cryptocurrency portfolio of investors comprises different assets that often have unique use cases and performance on the market.
There arises the need for diversification because it is particularly dangerous to invest all of one’s capital into a single cryptocurrency asset. This is so because, in the event that the cryptocurrency experiences a market crash or a violent depreciation of value, the value of the gross invested capital of the trader or investor will reduce accordingly. Cryptocurrencies are known for their volatility traits, and this feature makes it uncertain to perform robust forecasts about when such crash markets will revive. Hence, it is vital to spread one’s capital across different assets to protect the invested capital against turbulent shocks.
It is important to note that diversified portfolios are not immune to market crashes. However, it is very unlikely for all the different cryptocurrencies to experience a strong price dip at the same time. Usually, one or two of the asset may experience the downsizing of the asset’s value, but it will be only a fraction of one’s investment undergoing such changes. The remaining cryptocurrency assets, on the other hand, could be experiencing growth even as the other crash. This event can help compensate for the devaluation of the other assets.
Diversification of cryptocurrency is made based on factors like the use case of the asset, geography of the project behind the asset, the credibility of the team or developers, and many others. Investors based on such characteristics to perform solid fundamental analysis of the cryptocurrency asset before coming to a conclusion on whether to invest in it or not. So for instance, an investor can choose to invest portions of the capital in stable cryptocurrency assets, non-fungible tokens, smart contract-based cryptocurrency assets, and decentralized finance tokens.
Other strategies for diversification of cryptocurrency include the 1 to 4 Rule. This strategies primarily centers on spread one’s capital among four distinct cryptocurrency assets. Thus, 25% of the gross value of the capital will be distributed to each asset. For example, a capital of $80 will be equally shared among four cryptocurrencies. Hence, each asset will have a face value of $20 of investment. The practice of this strategy secures one’s investment against fierce market dips, and it also presents the opportunity for investors and traders to capitalize on the various market conditions of the different assets to make more profits.
What are the Benefits/effects of Diversifying one's assets?
One apparent effect of asset diversification is that the capital of investors is protected from the unfavorable violent market performance of an asset. This is because the incidence of risk is significantly reduced because the overall capital is distributed among different cryptocurrency assets. Therefore, should one or more of those assets experience value reduction, the side effects would not be immense because the percentage of the devaluation will be relative to that particular cryptocurrency and its initial proportionate value.
Additionally, the diversification of cryptocurrency assets causes the investor to put their monies into different cryptocurrencies. Every cryptocurrency has its market condition and performance during different seasons. So when investors commit portions of the gross capital to different assets, they are indirectly presented with the opportunity to make profits off these distinct markets of the assets. Through this, more profits can be secured from the favorable market performance of assets on the portfolio, and this can compensate for the losses on the market of the other assets.
That being said, this brings up the issue of reduced returns. Since the capital will be disbursed among a number of different cryptocurrencies, this means that each asset will receive a smaller fraction of the capital than it would have if it were the only asset on the portfolio. Therefore, should one of the assets on the diversified portfolio experience a percentage of growth, the growth will be only restricted and relative to the amount of that asset. Accordingly, the ROI of investors per cryptocurrency asset is reduced.
Furthermore, since the investment is based on fundamental analysis from the investors or trader, there is a chance that inaccurate analysis can lead the investors or traders to commit their resources to a cryptocurrency asset will bad market performance. In such a situation, investors can experience considerable losses across board, and this will cause significantly reduced value of the capital.
Construct Crypto Assets Diversification according to the 1 - 4 Rule
For this section, I will be using the Binance Desktop Application. My Binance account is verified, and the image below is the proof.
Also, I had roughly $60 worth of USDT in my Spot and Fiat account on Binance wallet. I shall use this account to make Spot trades on the Binance platform to demonstrate the 1-4 Rule strategy of asset diversification. The photo below shows the amount.
Now I shall perform some fundamental analysis on four selected cryptocurrencies, and demonstrate how I purchased fractions or a number of them on the Binance market.
Binance Coin ( BNB )
The Binance Coin is a crypto that is utilized mainly on the Binance trading platform. In July 2017, the Binance team held its Initial Coin Offering for the BNB cryptocurrency, where the coin was disbursed among the team, investors, and the public through sales. The initial price of the coin was $0.15, and about one hundred million of the BNB tokens were sold. The BNB has various utility functions. It can be used to settle transaction fees on the Binance platform, to pay for presents, used as loan collateral, and many others. It also has various supported trading pairs on the exchange market and can be used to perform cryptocurrency trades across different exchanges.
At the time of visit, the CoinMarketCap website indicated that the current selling price of the Binance Coin was $372.24. It was ranked fifth among all coins on the platform. It had a Market capitalization of $62.95 Billion Dollars and an equally $62.95 Billion fully diluted MarketCap. Its 24-hours trading volume was around $2.2 Billion Dollars. The maximum supply of BNB is roughly 168.1 Million coins, and they were all in circulation.
A look at its chart indicates that the BNB coin has been experiencing exponential growth lately. Thus, it has managed to skyrocket from a price of $337 the previous day to $372, as at the time of writing. This shows the dominance of buyers in the BNB market. If the Buying activity intensifies, the BNB coin can reach new Highs. Hence, it will be an effective asset to my portfolio.
On the Binance desktop exchange platform, the BNBUSDT pair was selected. I selected a Buy Limit order, where I placed 15.3762USDT for 0.042 BNB coin at the price of $366.1. The coin was selling at $336.9 at that time. It is also clear that the 15.3762 USDT accounted for 25% of the gross amount in my Spot and Fiat wallet on Binance. I clicked on the Buy button and placed an order.
Because the demand of the order was considerably below that of the market, the executed order was pending for a while. Eventually, the order was filled the corresponding amount of BNB was deposited into my wallet
The amount of BNB coin in my Spot and Fiat wallet on Binance is highlighted.
Basic Attention Token ( BAT)
The BAT is a cryptocurrency that has the Ethereum framework and is chiefly associated with the Brave browser application. On the Brave browser, users who opt to receive advertisements and publications curated by the Brave network are recompensed with the Brave tokens for their attention. These tokens can also be used by users to reward and support their favorite platforms. The token was launched by reputable individuals like Brendan Eich and B. Bondy. The launch of the token took place in 2017. The Brave browser, primarily, centers on the protection of users' privacy while remunerating them for their attention to ads and articles on its network. Additionally, the BAT token is actively traded on various exchanges.
At the time of visit, the CoinMarketCap website indicated that the current selling price of the BAT token was $0.6028. It was ranked 98th among all tokens on the platform. It had a Market capitalization of $893 Million Dollars and an $898 Million fully diluted MarketCap. Its 24-hours trading volume was around $165 Million Dollars. The maximum supply of BAT is 1.5 Billion tokens, and they were all in circulation.
Analysis of its chart shows that the BAT token has recorded significant growth over the past hours. Thus, it has managed to grow from a price of $0.595 the previous day to $0.6028, as of the time of writing. The chart also shows significant fluctuation in the price of the asset. This is a good indicator that there is an immense number of active bidders and sellers on its market. Also, the progressive bullish growth signals the dominance of buyers on the market at the time of visit.
On the Binance desktop exchange platform, the BATUSDT pair was selected. I selected a Buy Limit order, where I placed 14.9925USDT for 25 BATtokens at the price of $0.5997. The coin was selling at $0.6001 at that time. It is also clear that the 14.9925 USDT accounted for 33% of the remaining gross amount left in my Spot and Fiat wallet on Binance after the first trade. I clicked on the Buy button and placed an order.
Because the demand of the order was considerably below that of the market, the executed order was pending for a while. Eventually, the order was filled the corresponding amount of BAT tokens was deposited into my wallet.
The amount of BAT tokens in my Spot and Fiat wallet on Binance is highlighted.
TRON ( TRX)
Developed by Justin Sun in 2017 and originally operational on the Ethereum blockchain, the Tron cryptocurrency was made with the intention of rewarding individuals who are into content creations. Now, Tron has its own network that permits the development of DAPPs. The TRX cryptocurrency is primarily utilized on the Tron network for many purposes. It can also be traded on a variety of exchanges. the Tron network has integrated with other projects including Steemit. Now, Steemians receive TRX coins that are equivalent to the redeemable SP of the payout of a post on the Steemit network.
At the time of visit, the CoinMarketCap website indicated that the current selling price of the TRX coin was $0.08717. It was ranked 26th among all coins on the platform. It had a Market capitalization of $6.2 Billion Dollars and an $8.79 Billion Dollars fully diluted MarketCap. Its 24-hours trading volume was around $1.2 Billion Dollars. The total supply of the TRX coin was around 100 Billion, and 71.6 Billion were in circulation.
Analysis of its chart shows that the TRX coin has recorded significant growth. It has fluctuated its way from the $0.085 price mark to the $0.087. There are consistent swings in the market, and this indicates the presence of active buyers and sellers. The upward movement of the price point of TRX signals that the buyers were in control of the market at the time of visit. The Tron network has been integrating with various projects. So I believe as there arise multiple uses cases for the coin in various sectors, the demand for it will continue to surge, and the price will keep rising.
On the Binance desktop exchange platform, the BATUSDT pair was selected. I selected a Buy Limit order, where I placed 14.861USDT for 170.2 TRX coins at the price of $0.08732. The coin was selling at $0.08732 at that time I took the screenshot. The price, however, rose sharply afterward. I maintain the entry price and place a BUY LIMIT order.
Because the demand of the order was considerably below that of the market, the executed order was pending for a while. Eventually, the order was filled the corresponding amount of TRX coins was deposited into my wallet.n
The amount of TRX coins in my Spot and Fiat wallet on Binance is highlighted.
Bitcoin ( BTC)
Created in 2009 by an anonymous entity, Bitcoin has since been alluded to as the mother of all cryptocurrencies. It is believed that an individual with the pseudo name Satoshi Nakamoto developed Bitcoin. Bitcoin has dominated the cryptocurrency market since its inception. Most ALT coins have their fates linked to Bitcoin. Hence, in the event that Bitcoin goes bullish, such ALT coins also experience tremendous growth. Likewise, bearish price movements of Bitcoin are also seen across many ALT coins. I added BTC to my portfolio because it recently experienced a massive price dip due to the crypto ban in China. Hence, entering the market at such a low price means that I have more to gain if BTC restores its growth trend.
At the time of visit, the CoinMarketCap website indicated that the current selling price of the BTC was $42227.13. It was ranked 1st among all coins on the platform. It had a Market capitalization of $795 Billion Dollars and an $886 Billion Dollars fully diluted MarketCap. Its 24-hours trading volume was around $30 Billion Dollars. The total supply of the BTC was around 18.8 Million, and 18.8 Billion were in circulation.
Analysis of its chart shows that the BTC has been slowly gaining growth momentum with price dip here and there. It had fluctuated its way from the $41,540 price mark to the $42,227. There are consistent swings in the market, and this indicates the presence of active buyers and sellers. The bullish trend of the price point of BTC signals that the buyers were in control of the market at the time of visit.
On the Binance desktop exchange platform, the BTCUSDT pair was selected. I selected a Buy Limit order, where I placed 14.77USDT for 0.00035BTC at the price of $4200. The market was very active so at the time of the screenshot, the last sold price was at $42198. Right after the screenshot, the price rose sharply so I maintain the entry price and executed the Buy Limit order.
However, due to the market activeness, a positive slippage occurred, and the order was filled at the price of $42,184 as shown in the highlighted trade history.
.jpg)
The amount of BTC in my Spot and Fiat wallet on Binance is highlighted.
Explain Arbitrage Trading in Cryptocurrency and its benefits.
Cryptocurrency arbitrage is the situation whereby a trader capitalizes on the price difference of an asset on different markets. Usually, traders purchase an asset that is being sold for a lower price on one exchange platform, and then will later sell the same asset on a different exchange where the price of the asset is higher. The price differences of the asset on the two exchanges can be attributed to the nature of its liquidity and transaction volumes.
Arbitrage in cryptocurrency is not something considered illegal. It is permitted, and the multiple incidences of cryptocurrency arbitrage of a particular asset can lead to the uniformity of the asset price across the distinct exchanges. Arbitrages are easy to spot and do not require any advanced technical training or knowledge.
There are various forms of arbitrages, and some include triangular arbitrage, exchange arbitrage, statistical arbitrage, and many others. Though arbitrages are easy to spot, large capital is demanded in order to benefit from the price difference.
Capitals of small amounts will not experience an immense profit from the arbitrage execution unless the price gap is unusually extremely wide, which almost never happens. Also, taking into account the fees for transfers on these exchanges makes it unlikely for the small capital amount to benefit tremendously from arbitrage.
Nonetheless, the benefits of arbitrage still stand. Traders stand the chance of making profits off the different market conditions with low risk due to the rapid execution of buy and sell orders. Hence, the level of risk for this strategy is very mild.
Also, forms of arbitrages like Statistical Arbitrage integrates the notion of programming to scalp profits off the price differences on distinct exchanges without the intervention of humans. This feature confers a sustainable practice of the strategy and the opportunity to make more profits across different markets of distinct assets.
Discuss with illustration how to take advantage of Exchange Arbitrage.
Exchange arbitrage is simply the situation whereby a trader takes advantage of the different market prices of an asset on distinct exchanges to accumulate profits. Practically, the trader buys a number or fraction of the cryptocurrency asset at a low price on one exchange and sells on a different exchange at a higher price. In the end, the trader would record significant profit off the trade.
A real-case scenario is given below using the Coinbase and Binance cryptocurrency exchanges.
It can be seen that the Bitcoin cryptocurrency was selling at $41325.98 on the Binance exchange platform, according to the CoinMarketCap website at the time of visit.
The same Bitcoin cryptocurrency was being sold at $41365.49 in the Coinbase exchange, as of the time I took the screenshot from the CoinMarketCap platform.
So with the scenario painted above, a trader can purchase 1 BTC from Binance at the given price and then transfer the asset to the Coinbase exchange. The trader will then place the asset for sale at the respective market price on the Coinbase exchange.
In the end, the trader would record a profit of $39.51.
Creatively discuss Triangular Arbitrage in Cryptocurrency. How to identify Triangular Arbitrage opportunities and the risks involved
Triangular arbitrage in cryptocurrency is the product of the price differences between multiple crypto asset pairs on the market. Seasoned traders are able to take advantage of such market conditions and capitalize on them to acquire profits. The nature of triangular arbitrage makes it possible for traders to program software that performs these repetitive tasks for them.
In cryptocurrency triangular arbitrage, three cryptocurrency pairs with advantageous price discrepancies are resorted to by traders to obtain profits on the market. As a result, the trader will use on cryptocurrency asset as the base element, and then buy one crypto element and sell it for another. Finally, that asset is sold on the market for the base element.
For instance, let consider the cryptocurrency assets X, Y, and Z. Crypto X/Y pair is trading at 0.500, and the Y/Z pair is trading at 2.300. Also, the X/Z pair is currently trading at 1.100.
For such a situation, if we purchase $10000 worth of crypto-asset X after selling crypto Y based on the X/Y pair and its rate, we would have $5000 worth of crypto X. ($10000 * 0.500)
Next, we would place a sell order of the $5000 worth of crypto X for asset Z based on the X/Z pair and its rate of 1.100. Hence, the calculation would be $5000 * 1.100. This would give a value of $5500 worth of crypto Z.
Finally, we would sell crypto-asset Z for the base crypto Y at its respective rate of 2.300. This will result in the following computation: $5500 * 2.3. The final value will be $12650.
Therefore, the net profit from this triangular arbitrage would be $ 2,650.
The risk involved in triangular arbitrage is very low, however huge capital is required to obtain significant profit off such market conditions. Also, triangular arbitrages are ephemeral. Hence, traders often resort to automated bots or software to capitalize off these markets.
Conclusion
There is also the need for great risk management practices for highly volatile markets like that of cryptocurrency. Therefore, Cryptocurrency Asset Diversification is an essential tool for safeguarding one’s investment or capital from unfavorable market swings. CAD also present traders with the prospect of making substantial profits from different markets of the various asset on the portfolio.
Arbitrage is, indeed, a low-risk and great strategy for making profits off the price difference of an asset on different exchanges. However, huge capital is required for the investment to benefit immensely from the tradeoffs.
I would like to use this chance to thank Professor @fredquantum for this educational piece.
Nice article keep it up