Crypto Asset Diversification (CAD) - Crypto Academy /S4W4 -Homework Post for Professor @fredquantum
Hello Everyone, so today I invite you all to read today's Homework on Crypto Asset Diversification (CAD) subject which is given by Professor @fredquantum.
So let us continue with our homework.
Diversity refers to a state of variety or some kind of practice that involves a wide range of people, industries, or so on. This term makes us able to understand the technique of risk management that is known as diversification. Diversification is a technique that is used to allocate our assets in a wide range of industries or some other financial instruments. In this way, the investments are supposedly saved and secured from unwanted risks.
We all know that the crypto world is so very unpredictable and it can have ups or downs at any moment. Suppose that we have invested all our assets in one place and the very next day we woke up and found out the market has crashed, leaving us empty-handed. We have lost all our assets in one go. The crypto assets diversification is based on a very good and intellectual principle of “Don’t put all your eggs in one basket”. If you lose your basket, you lose all your eggs at once.
For example, Some people only invest in bitcoin as it can be seen that bitcoin has had a considerable increase in its price in the last few years as it was around $7000 in 2019 and has reached about $42000 or so in September 2021. But this value is not attained with stability in its price because bitcoin has seemingly dropped up to $29,000 in between. This rise and fall is a part of the crypto market and it should be kept in mind that all the gains of crypto assets are not equal. Several other cryptocurrencies have also gained a sufficient increase in their prices. So, these cryptocurrencies should also be added to the portfolio as they will make our portfolio presentable and risk-free.
Basis of crypto assets diversification:
Diversification by solutions: There are multiple solutions in everyday financial activities which include wallets, exchangers, staking platforms, cloud services. Investing our crypto assets in the above-mentioned solutions may enhance our chances of a good return.
Diversification by Time: Investing can be less risky if done after some time intervals. This technique is carried out by dividing the assets into many small parts and investing them after some time intervals one by one rather than investing as a whole at one time.
Diversification by industries: Investing in well-performing industries such as medical, gambling, technical or mechanical industries, finance, and gaming industries, may provide us with a good earning platform.
BENEFITS OF ASSET DIVERSIFICATION
As mentioned above, assets diversification have some very important benefits which are listed below;
The loss risk is minimized: The first benefit associated with asset diversification is the minimization of the risk of loss. This happens when one asset is facing downfall with continuously lowering the price the other asset is on the safe side and is having a progressive increase in price. So, in this way, the loss at one side is balanced with the gain at another side.
The money protected, capital preserved: with more diversification of the assets, the capital is provided with a kind of safety. A fixed return is assured along with low risk if the investments are done in debt instruments hence eventually the preservation of capital is done.
Long-term investment plans are achieved: when the investors invest in different sectors with a good record of performance, the achievement of long-term investment can be fulfilled. For example: when the investment is done in the stock sector and the market price is raised then in that case, high returns are inevitable. Or if the investment is done in the debt class and the market has a positive impact on it then more profits can be made from mutual funds.
EFFECTS OF ASSET DIVERSIFICATION:
Along with benefits, the crypto asset diversification may also face some negative effects which are listed below;
Effects of the correlating prices: sometimes it happens that the price of one crypto asset has an effect or is related to the other assets. In such a case, when one crypto asset is facing a downfall some other crypto assets are also facing the same scenario. And if you have invested in those particular classes you are bound to face an ultimate crisis.
For example, The price of bitcoin is correlated with most of the market. A downfall in its price brings down the market as well.
Low investment return: when the assets are diversified into different cryptocurrencies, It may also happen that the downfall of one asset affects the price of the other asset. This may mostly happen when the assets are diversified in a 60/40 manner and the 60% crypto assets are facing the downfall so obviously, being the larger portion, these assets will negatively affect the overall portfolio.
As you all know that we have to demonstrate to Construct Crypto Assets Diversification according to the 1 - 4 Rule. So for that, I will have to choose 4 different crypto assets which I will tell you all below with their technical and fundamental analysis.
To perform that I will be using Binance. As of now, you can see that I am a Verified user on Binance and I also have the USDT to Invest.
Fundamental Analysis:
So this project was launched in 2020. And is the second largest Decentralized Exchange (DEX) after Uniswap. It also has the BEP-20 tokens for Farming.
And like many Defi projects, the team of the Cake coin is also anonymous. In this project we can do Farming, Trading, Staking, Loterry, IFO, and NFT's. Making so many points from which one can earn.
So the Cake is a BEP-20 token and native cryptocurrency of the pancakeswap exchange. And the main part of this cryptocurrency is that CAKE has an infinite supply, and it makes the total amount of 720,000 per day. But it also has the weekly burning mechanism to control the supply and demand or to regulate inflation.
The price of the CAKE is demand on its demand, as the more people will use it or the more it will be used the price of the CAKE will increase.
Technical Analysis:
So as you can see that I have taken 4 indicators to do the technical analysis, as because of some past experiences I have some trust issues.
I have EMA, Vortex Indicator, MACD and the William %R Indicator. So here as I confirmed that the market is about to go up so I invested in it. As the EMA has now below the prices (which shows the Bullish Trend), which I confirmed with the other Indicators, as the VI+also goes above the VI- line which is also showing the prices are going up.
So now based on my technical analysis I made the Buy Trade, and there I have put the Stop Loss and Take Profit level also. And the ratio I have taken is 1:2 (risk: reward).
Fundamental Analysis:
ZRX was formed in 2017 and is a low friction peer-to-peer exchange of ERC 20 tokens of the Ethereum Blockchain.
It was made to serve the comment building blocks and open standards working in the Decentralized Apps or the dApps. Which uses the function of the Ethereum smart contract which is free to use and are accessible by anyone.
ZRX is a dApp built and can have access to any public liquidity pool and also can create their liquidity pool and earn through that by charging the fees on resulting volume.
Technical Analysis:
I have EMA, Vortex Indicator, MACD and the William %R Indicator. So here as I confirmed that the market is about to go up so I invested in it. As the EMA has now below the prices (which shows the Bullish Trend), which I confirmed with the other Indicators, as the here the VI Indicator was giving the false signal as other indicators were showing the bullish trend.
So now based on my technical analysis I made the Buy Trade, and there I have put the Stop Loss and Take Profit level also. And the ratio I have taken is 1:2 (risk: reward).
Fundamental Analysis:
As we that the Cardano is also known as ADA. So basically the Cardano is a financial system, which is divided into two layers. The first one is of the Exchange, while the other one is the smart contract which works on the Cardano Settlement Layer (CSL), and the Cardano Computation Layer (CCL).
As we know that the Ethereum also uses the Settlement and computation layer but the difference is that Ethereum uses it in just one Layer, while Cardano uses it in a two-layer different layer for each, to make things neat and flexible.
The team of the Cardano also have made a simple scripting writing known as Simon. As the scripting writing of Bitcoin and Ethereum is so complex and rigid. So Cardano now is easy to use and now it can be understood by more people. Know more about it.
Technical Analysis:
I have EMA, Vortex Indicator, MACD and the William %R Indicator. So here as I confirmed that the market is about to go up so I invested in it. As the EMA has now below the prices candles(which shows the Bullish Trend), which I confirmed with the other Indicators, as the here we can see that the William %R has touched the point of -80 to -100, that means it was on the Oversold level and now it is going up that means the bullish trend is about to come.
So now based on my technical analysis I made the Buy Trade, and there I have put the Stop Loss and Take Profit level also. And the ratio I have taken is 1:2 (risk: reward).
Fundamental Analysis:
AION was released in 2017, and currently, it has a supply of 496,453,580. And basically, it was designed to support the custom blockchains, which also provided the trustless mechanism to them.
Its mechanism works on cross-chain interoperability. And it also works as the representative of the crypto-economic incentives by providing fair security and is also the world's first public enterprise blockchain.
AION is also designed to help the buyers and developers to convert to different blockchains easily. And it also provides smart contracts like Ethereum and also executes the data for transfers.
It works on the DPoS (Delegated proof of stake) and proof-of-importance (PoI) consensus.
Technical Analysis:
I have EMA, Vortex Indicator, MACD and the William %R Indicator. So here as I confirmed that the market is about to go up so I invested in it. As the EMA has now below the prices candles(which shows the Bullish Trend), which I confirmed with the other Indicators, as the here we can see that in the Vortex indicator the VI+ line is above the VI- line, as well as William %R, has touched the point of -80 to -100, that means it was on the Oversold level and now it is going up that means the bullish trend is about to come.
So now based on my technical analysis I made the Buy Trade, and there I have put the Stop Loss and Take Profit level also. And the ratio I have taken is 1:2 (risk: reward).
As you all can see from above that I made investments of $15.5 in each crypto. And now I am gonna show you my Wallet in which you can see the investments which I have made in ADA, CAKE, AION, and ZRX.
The volatility of the crypto market is well known and traders are always eager to know the safest way to earn profit from the jungle of risks. Arbitrage trading is a strategy that helps traders make instant profits. It is a technique that works by taking advantage of the difference between the prices of exchangers. We know that every exchange has a different price for every coin. So, we can buy a coin from an exchange that offers a low price and then immediately sells it on another exchange that offers a higher price for that particular coin. In this way, profit can be earned. The changes in the different prices on different exchanges may be due to different reasons such as the fees, trade volume, bid, or liquidity of the order.
Let's take an example of bitcoin price on Binance and Gemini. Let's assume that Bitcoin has a higher value on Binance at about $200 rather than Gemini that is $170. Then, we can buy bitcoin from Gemini at $170 and then immediately sell it on Binance at $200 earning a profit of $30. After buying, we tend to sell the coin immediately due to the volatility of the market because we don’t know when the prices will change, so it is safer for us to sell the coin immediately.
The arbitrage trading in cryptocurrency can be categorized and further subcategorized into the following;
Spatial arbitrage: Spatial arbitrage is a kind of method where the exchanges take place between two exchanges. This type of arbitrage trading is the most common among the others where the traders simply buy an asset from one exchange at a lower price and then sell it to another exchange at a higher price.
Triangular arbitrage: triangular arbitrage is a strategy where three exchanges have been involved that offer slightly different prices. But this method is a bit complicated regarding the fees and trade management so it is not recommended for beginners.
Triangular arbitrage can be simply understood by an example such as we purchased bitcoin from one exchange then traded it with Ethereum at a second exchange eventually trading the Ethereum with Litecoin at a third exchange and finally trading this Litecoin with bitcoin again at the first exchange.
BENEFITS OF ARBITRAGE TRADING IN CRYPTOCURRENCY
Low risk and fast profit: This is a strategy that offers low risks if the exchange is done immediately without any delay. Fast profit is also achieved as the immediate working is done by the exchange and is completed within one hour because of our refrain to delay the trade.
Sea of opportunities: Along with an increase in the number of traders and assets the exchanges are also growing in number, hence providing us with a wide range of opportunities to trade.
Track of market volatility: The returns are maximized with the help of advanced technology and computer programs.
Cryptocurrency volatility: All the cryptocurrencies have been volatile since their launch. Their prices have changed terribly over time and this volatility ensures a difference in their prices at different exchanges.
RISKS ASSOCIATED WITH ARBITRAGE TRADING IN CRYPTOCURRENCIES
Fees: The exchange requires a certain percentage of the money as their fees. These fees include the transaction, withdrawal, trading, and deposit fees.
Withdrawal limit: Certain exchanges offer a withdrawal limit for the day so it is necessary to consider the limit when large tradings are being done. It may happen that you don’t get all the crypto balance on the same day due to the withdrawal limit and face loss because of the change in prices.
Fewer arbitrage opportunities: Since arbitrage is a good source of meaning fast profits, more traders may start seeking this opportunity which will result in competition among them and the trading volumes will start to change on different exchanges thus lessening the arbitrage opportunities.
Timing; good or bad?: trading needs some time to complete for as short as 10 minutes or as long as 1 hour. There may be a change in the coin price during that particular time and the profit could turn into a loss.
So now let's start with the coin, but firstly we should know the Advantage of Exchange Arbitrage. So by the arbitrage exchange, we can earn with low risk, as in this we compare some exchanges and buy from the one which is giving the lowest price and then transfer that amount to the exchange which is giving the highest price and then sell it there with a profit, and it is advisable to use the small coin in that to make more profit.
So I have taken the SHIB/USDT and I have chosen the Poloniex and Binance exchange. As I see in the Poloniex Exchange that the price of the SHIB is 0.00000752 while on Binance it is on 0.00000753. So I purchased it on Poloniex and then sell it on Binance.
Now as you can see that I have Invested 21 USDT and have bought 2802528.64 SHIB. So I transferred that SHIB in Binance and there I sold 2802528.64 SHIB, and I have got 21.30 USDT. So that's a profit. These profits can be increased according to the amount we invest.
Triangular Arbitrage trading is not so common, but still happening in the Crypto world. In this, traders buy crypto, then exchange it with another crypto and then another crypto, and by doing that a trader makes a profit because of the different prices of each crypto.
In instead of buying directly, it works on the triangulation and all the transactions are done on Spot. In Triangular Arbitrage in Cryptocurrency we take three cryptocurrency pairs with prices which gives the advantage to make a profit. A trader firstly chooses the base asset, then buys one crypto and then sells it for another, and finally, that last crypto got sold in the market for the base asset which the trader wanted from the start.
For example; there are three assets A, B, and C. And have a pair of B/A, B/C, and A/C. So a trader will buy B from A, and then bought C from B and then finally again bought A from C, but this type the total number of A has been increased which means a trader have made a profit.
Now think that I have $1000 in my hand and I see the Exchange rates of A/B= 0.500, B/C= 1.500, and A/C = 1.800.
So if we have purchased Crypto A by selling Crypto B, based on the A/B pair we will then have (10000.500) = $500. Now we have sold $500 worth of crypto C based on B/C pair and we will then have (500 0.800) = $750. And now finally we will sell asset C for asset A which was our base asset, based on pair and then we will get (750*1.800) = $1350.
So here we have made the profit of whooping $350.
Now regarding the risk, it has really low risk, but to earn some good profit in it one should have a huge amount in hand, as in small investment the profit level is also low but the higher the investment the higher the profit.
So today we have seen Crypto Asset Diversification (CAD) and the Exchange Arbitrage and both are the essential tools for one to know. They both are involved with low risk and if one has high investment then it also can give high profits.
It was a great and detailed lesson and I have learned many new things today, the practice I have done has opened my mind and now I knew more directions of making some profit.
That was all from my side.
Regards,
@maazmoid123
That is a great post my friend