Steemit Crypto Academy Season 4 Week 4 [Advanced Course] | Crypto Assets Diversification (CAD)
Hello everyone, a gracious salute to this week lesson. The lesson taught by professor @fredquantum was about Crypto Assets Diversification. In this post, I present the homework presented at the end of the class.
Qn 1. Explain Crypto Assets Diversification.
According to CoinMarketCap, there are over 12,200 cryptos in existence; new coins pop out nearly every day with different uses and backstories. The top currencies such as Bitcoin, Ethereum, and the likes are tradable to a great extent as they aggregate the most of the market. The wise action to take while investing in cryptocurrency is to diversify your assets. Thus, the profit or loss of an investment adventure depends on this principle. So, understanding how to broaden your assets portfolio is very useful to the investor.
Crypto asset diversification is the practice of distributing your funds into different cryptocurrency assets as a way of diminishing risk should one or two of the assets perform poorly or less than expected. In 2018 when the crypto assets crashed, investors who were using this strategy were saved from bankruptcy. Unlike small-scale investors, big-time investors have to create a sizeable portfolio of crypto assets.
To explain this, assume I buy $1,000 worth of Dogecoin and shortly after my transaction, the market dips at 40%. The of my Dogecoin will reduce to $600, which is a loss in the best-case scenario.
Although, if I had spent $250 each in other assets such as DOGE, LTC, ETH and STEEM, the 40% dip that affected Dogecoin would affect the $250 allocated to that asset. I would lose $100 instead of $400 and still have $900 instead of $600 if I had invested in only one crypto-currency.
The plan is to watch and pick some of the best performing cryptocurrencies and buy them. A few things are to be put into consideration when selecting these assets. These include; the asset’s earlier trends, their price, and likely potential as well. You can invest in either one or two different projects; the Asian, European, American blockchain.
Qn 2. What are the Benefits/effects of Diversifying one's assets?
Risk Mitigation
I presume that this is one of the top benefits of diversifying crypto assets in portfolios; you diminish the risk and volatility of assets in your portfolio. Let us say you have one crypto asset in your portfolio that isn’t doing great. Your portfolio will shadow the reality of that asset not performing great. Nevertheless, if you diversified your asset investments and one of the assets isn’t doing great, the other assets in the portfolio will cover its downsize. Therefore, this helps your portfolio to remain steady and less inclined to downsizing. It is unlikely that all your crypto assets will fall at once.
Investment opportunities
Assume you buy Dogecoin, Litecoin, Ethereum, Steem, Tron, or any other asset of your choosing. You have a greater chance of hitting it big when you invest in several assets at once. Compared to when you invest in one. Let’s consider your portfolio comprises the following coins worth $1,000 each
• Dogecoin (DOGE)
• Ethereum (ETH)
• Litecoin (LTC)
• Steem
• Bitcoin (BTC)
Then DOGE experiences a bull run at 10%, ETH 5%, LTC 8%, steem, 20%, BTC 4% respectively, all your assets will have increased;
10% + 5% + 8% + 20% + 4% = 47%.
($5000 * 47) / 100%** = $2,350 interest.
So, if you had invested your $5,000 capital into Dogecoin alone, with its 10% bull run, your Dogecoin asset would have a total portfolio’s worth of $5,500. But by diversifying your investments and investing $1000 into different assets, your portfolio grows to a tune of $7,350.
Qn. 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.
Before we get our hands dirty, let us first understand what the 1-4 rule is.
1-4 rule
This rule operates by distributing your capital into four different crypto assets as a way of decreasing loss. It is more like distributing your eggs in various baskets.
In this post, I will show you how I distributed $60 into four different assets as the professor instructed, $15 each:
• ADA-Cardano
• XRP-Ripple
• SOL-Solana
• UNI-Uniswap
Cardano ADA
In my research, I realised that Chainlink is about sealing a partnership with ADA that will, as anticipated, bring the bull track to the cryptocurrency. Furthermore, ADA has been on the bull track for a while now.
Ripple XRP
During this week, XRP has continued on a bull run, it has increased by nearly 2% in the last 7 days and by 9% in the last 24 hours thus, the prevailing price at the time of writing this post is now $1.03 and the market is still bullish.
Solana
DEX is a project powered by Solana that sealed a venture of $18 million. This single venture is expected to set ripple in a bull run, although the crypto has now been in a bull run for 7 days momentarily.
Uniswap UNI
China’s interference on exchange platforms tokens such as Huobi has moved down the drain, bearish style while Uniswap has been undergoing a bull run.
My Verification Status on Binance - Intermediate Verfied✅
After completing a comprehensive fundamental and technical analysis on all of the picked crypto assets I want to purchase, it is now time to make a real-time acquisition of the following coins below.
SOL
• To buy at least a 15$ equivalent of SOL, your account must have more than $15.
• Set my limit price, USDT amount and clicked on the Buy button.
• After clicking on Buy, the order instantly queued and was effected promptly.
ADA
• To purchase at least a 15$ equivalent of ADA, your account must have more than $15.
• Set my limit price, USDT amount and clicked on the Buy button.
• After clicking on Buy, the order instantly queued and was effected promptly.
###UNI
• To purchase at least a 15$ equivalent of UNI, your account must have more than $15.
• Set my limit price, USDT amount and clicked on the Buy button.
• After clicking on Buy, the order instantly queued and was effected promptly.
XRP
• To purchase at least a 15$ equivalent of XRP, your account must have more than $15.
• Set my limit price, USDT amount and clicked on the Buy button.
• After clicking on Buy, the order instantly queued and was effected promptly.
Qn. 4. Explain Arbitrage Trading in Cryptocurrency and its benefits.
Arbitrage strategy allows traders to secure profits by concurrently and selling alike cryptocurrencies across two separate and various platforms. This strategy enables traders to make earnings from the variations in pricing for similar assets between the two regions served on either party of the trade.
Moreover, arbitrage can be interpreted as the act of buying a crypto asset in one market and after a bull run, selling it for a more expensive price in a different market. So, if I want to make secure gains, I can choose to buy a cryptocurrency from a platform like Binance and sell it on Kucoin provided one of the markets trades it higher than the other.
Spatial Arbitrage
This is just the method of buying a crypto asset from one market and selling it instantly on another exchange for profit. This method is sincere and includes leveraging on the insignificant variations in price among exchanges to earn profits.
Triangular Arbitrage
This tactic suggests purchasing one cryptocurrency and then swapping it for different cryptocurrencies on the same exchange that is undervalued concerning the first. Because of the variations in prices, earnings are given.
Qn. 5. Discuss with illustration how to take advantage of Exchange Arbitrage.
To show Arbitrage, at the time of writing this answer 3rd October 2021 BTC/USDT was sold for $48,136.67 on Binance. While the same BTC/USDT pair was sold for $48,222.21 on Robinhood.
Arbitrage simply implies I'll purchase an asset for a cheaper price on one platform and exchanging it for a higher price on another. The price deviations in the exchange platforms will give me a profit.
Qn. 6. Creatively discuss Triangular Arbitrage in Cryptocurrency. How to identify Triangular Arbitrage opportunities and the risks involved.
As you can see from above, BTC/NGN was #26,614,600 and BTC/USDT was $44,946.00. As earlier said, the deprecating reality of the Nigeria Naira in comparison to the United States makes it an excellent sample to show Arbitrage.
While I was composing this task, 1 USDT sold at NGN591.2
The reason is that if I have $44,946.00, I will buy the BTC/USDT pair subsequent I'll proceed to sell the BTC on USDT/NGN pair which as shown above is #26,614,600.
After I successfully carry out this trade, I will then change it to USDT which as shown above is
=NGN591 to 1USDT
Thus #26,614,600 ÷ #591=$45,033.16
The profit calculation is thus:
Final USDT $45,033.16 - Initial USDT $44,946.00 = $87
By using the arbitrage strategy, I would have made an $87 profit.
It’s not all rosy, some of the limitations that are involved in this strategy are the sale fees which can be quite high seldom either as transfer, network, or withdrawal fees. Also, since we going with one or more of the currencies being underestimated, a dip might occur just before you sell or buy one of the coins which turn out to be losses in most circumstances.
For cryptocurrencies such as Ethereum, XRP, and Bitcoin I can identify an event by recognising that one or more of these currencies is underestimated in the exchange platforms. Thus, I can make again from triangular arbitrage by selling Bitcoin for Ethereum and using Ethereum to purchase XRP.
Conclusion
Crypto-asset diversification is a fail-proof strategy to reduce or moderate loss in trading. By placing your assets into different assets, you can rest assured of a profit. Arbitrage also is an excellent strategy that can help a trader get an easy and fast profit by purchasing a coin at a lower price from an exchange platform and trading it for a higher price on a different platform. If these strategies are comprehended, they can take one’s trading experience to the next level.
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