Crypto Academy / S4W2 - Homework Post for [@fredquantum] / Crypto Assets Diversification (CAD)

afzalqamar (72)in SteemitCryptoAcademy • 3 years ago

Explain Crypto Assets Diversification

There are different types of assets in the market which fall in different price cuts and with different investment projections. Crypto Assets Diversification is a asset management strategy to control our portfolio in a way that we can make maximum gains from it.

In this strategy a trader rather than investing on a single asset divides its capital into a number of assets. The strategy is designed to protect and even take advantage from the highly volatile nature of the crypto market. This follows the principle that not every individual has a same risk tolerance level therefore cutting a percentage of the total capital and dividing it in different assets with set risk and stop loss levels to make leverage from the difference in prices.

Before dividing the capital, the selection of preferred coins is based on the designed fundamental and technical analysis, risk management strategy. This makes sure that the investment strategy is not primarily governed by the emotion strains but on the basis of periodic behavior of the market structure of an asset.

Diversifying the investment among mid cap, short cap and long cap assets is based on similar strategy as some of them behave better in the short term and others in the long run we in diversified portfolio will always have something to gain weather in the short run or the long run. During this mean time the performance of each asset is monitored, stop loss limits are set, notifying alerts are on and risk management strategies are planned.

2. What are the Benefits/effects of Diversifying one's assets?

Asset diversification has number of benefits which include:
Different assets behave differently when the price rise or fall thus diversifying assets reduces the negative impact of the market volatility on our investment capital. A fall in one asset does not imply a loss in all others and thus our portfolio is saved from a larger impact.

In addition to that profit margins are relatively increased. In parallel to what was said above in case of a positive market move one asset may take more effect and the other but the profit is the sum of all and thus as compared to a non-diversified portfolio we make more gains in terms of compound profit.
It increases the number of investment options and give us an opportunity to understand the markets of many assets for example for a capital of 100$ and a 10% diversified portfolio rate we can investment in about 10 assets.

Effects of crypto asset diversification

Some downfalls or impacts of crypto asset diversification are:
When we invest in more than one asset managing them simultaneously becomes difficulty as different behave differently in different market situation accurate placemen of stop loss, take profit, risk management plans are necessary maximize gains and take advantage of the strategy.

On a scale of diversification crypto assets don’t do much. The movement of crypto assets is somewhat related more simply a movement in the BTC market effect the performance of large number of assets and thus limiting the scope of this strategy.

Transaction cost is another hindrance in diversified portfolio management. Buying and selling different crypto assets at different times may increase transaction cost or networking fees mor predominantly in Ethereum-based assets.

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.

The stable coin will be USDT
The first asset I have chosen is BTC:
The large market cap of bitcoin is an indication that it is a not worthy asset for long coming investment. It was developed by Satoshi Nakamoto and was the first digital currency. The trading activity affects many other coins as it dominates the market by 42%. The major issue faced by the blockchain is its scalability which was addressed by the introduction of lightening network in 2016. It uses proof of work consensus and has a total supply of 21Million.

It is currently trading at $47,364 and is expected to reach its all time high of last three months.

I chose bitcoin for two reasons. It is currently trading Above its key resistance line and the continued movement above the resistance line will be very favorable in terms of long-term investment. It is a reliable project and is worthy of giving heavy gains.

The second asset I have chosen is ETH:
Ethereum also has a good market cap. It is an open-sourced decentralized platform. The platform regularly accepts suggestion for the betterment of the platforms. It is considered as the father of the innovative smart contracts and decentralized apps. It was previously working on proof of work but shifted to a more sustainable consensus of proof of stake.

The coin is currently trading at number with the price tag of about $3,233.89.
It s market cap is about $380,641,273,600 and a total supply of 117,747,807.06 ETH.

I chose ETH because it is currently trading above its key resistance line and the continued movement above the resistance line will be very favorable in terms of long-term investment. It is a reliable project and is worthy of giving heavy gains.

The third asset I chose is TRX:
TRX is designed on the line of Ethereum in terms o encouraging users to design smart contracts. It is highly scalable allowing quick transfers and that is the major attraction point of this blockchain. It is an opensource platform with a good recent market performance. It was launched April 2017 April 2017 and the ICO was launched in August 2017 later after a year TRON Mainnet was Launched and all ERC-20 Tokens were migrated to the TRON blockchain.

Currently the TRX is trading at no 28 with the price tag of $0.0939. the coins price is in the dip however but a long-term investment as the coin is bound to reach its all time high will be very favorable and hence TRX became the part o my portfolio.

The market cap of the coin is $6,718,020,737 and the total supply is 71.66B TRX.

The last coin which I chose to add to my portfolio is Ripple

Ripple was designed to be an easy and cost-effective payment transfer option for global payments. Ryan Fugger presented its concept in 2004 but it was developed by Jed McCaleb and Chris Larson in 2012. The coin is used as intermediary for payment transfers. Due to low transaction cost users easily transfer source currency into XRP first and on reaching the receiver it is converted back to the desired currency.

The consensus mechanism for XRP is proof of work. The coin is currently trading at $1.03 at number 6. Its market cap is $47,835,037,803 and a total supply is maintained at 46.75B XRP. The reason I chose XRP as a part of my investment portfolio is that it is currently trading above its key resistance line and the continued movement above the resistance line will be very favorable in terms of long-term investment.

I Logged into my Binance account. Here you can see my total investment is 64$. But I will use 60 and will distribute 15$ among each.

⦁ Go to trade and click on classic select desired pair
⦁ Select buy
⦁ Enter amount and perform trades

Bitcoin

The fourth part of the investment i.e., 25% were invested. The stop loss was set to the recent low below the resistance line and the take profit was set to the recent high above the resistance line in the ratio 1:2.

Ethereum

33% of the total remaining investment was invested. The stop loss was set to the recent low below the resistance line and the take profit was set to the recent high above the resistance line in the ratio 1:2.

Ripple

The stop loss was set to the recent low below the resistance line and the take profit was set to the recent high above the resistance line in the ratio 1:2.

TRX

The stop loss was set to the recent low below the resistance line and the take profit was set to the recent high above the resistance line in the ratio 1:2.
Overall portfolio

4. Explain Arbitrage Trading in Cryptocurrency and its benefits

Arbitrage traders are the community of traders who trade the difference of prices between different crypto assets in different pairs and exchanges.

As we know that a single crypto asset is available at a number of exchanges. These exchanges can have different prices for the same asset. In arbitrage trading an asset is bought from a cheaper exchange and is sold on to a mor expensive exchange this is called Exchange Arbitrage trading.

Another type of arbitrage trading is Triangular Arbitrage trading in which traders earn profit by the difference of price between different crypto asset pairs. One crypto asset is traded for the other and the latter is then traded back to buy the first one.

5. Discuss with illustration how to take advantage of Exchange Arbitrage.

Exchange Arbitrage trading is possible due to difference in the price of an asset on different exchanges. At the time of writing

ETH/USD is trading on Binance at $3003, and on BITSTAMP at $2997 . Any trader can trade this difference he can buy ETH from BITSTAMP at $2997 and sell it on Binance. This is called exchange Arbitrage trading and the profit in this case is 6$.

This different although is nor very large but it is a lesser-risk profit. Traders can earn passive income through arbitrage trading.

6. Creatively discuss Triangular Arbitrage in Cryptocurrency. How to identify Triangular Arbitrage opportunities and the risks involved.

Triangular Arbitrage opportunities arise from the difference in the price of an asset by simultaneously selling and buying it but through different asset pairs.

For instance, an investor has 1 BTC and saw a triangular arbitrage among BTC, XRP, and ETH. He sells 1 BTC to buy XRP, which its equivalent is 4570 XRP. Then he sells 4570 XRP to purchase ETH, which is equivalent to 1.4618 ETH. And then to complete the triangle he sells the ETH to buy back BTC at the end of the transaction he receives 1.02 BTC. He makes a profit of 0.02 BTC.

The risks are price fluctuations because at the time of purchase it was the difference which was noted and not the price so during simultaneous buying and selling a sudden change in price can affect the outcome. The price difference among different exchanges can also affect the profit at the end of the arbitrage triangle.

Conclusion

I tried to delve into details in every question I hope professor will encourage my efforts. I tried to implement what I understood from the lecture. No doubt I was able to clear a lot of things regarding arbitrage trading and diversifying your portfolio for better risk profile management.

Cc: @fredquantum, @sapwood

#fredquantum-s4week4 #cryptoacademy #crypto-diversification #steemexclusive #blockchain

3 years ago in SteemitCryptoAcademy by afzalqamar (72)

$43.31

Sort:

Trending