Crypto Assets Diversification - Crypto Academy / S4W4 - Homework Post for @fredquantum.
QUESTION 1
Explain cypto assets diversification
Crypto Assets Diversification
Talking about diversification, it means here that if we have an investment capital of about $800, buying one crypto asset with it is not the best idea. What we need to do is perform diversification, that is we will be sharing the $800 of investment capital to a number of parts such as 3, 4, 5 etc., such that each share has a particular asset in which you purchase with.
This way, we see that if one share goes not as planned we will still have the other shares to back it up rather than losing everything in a single trade.
As explained by Professor @fredquantum, I will be explaining the two key strategies in crypto asset diversification which are the analysis and the 1-4 rules.
Analysis
In the analysis criteria during the construction of crypto assets diversification, it explains not to get into trades because of mare proposals from friends or some telegram channel. This is because when we get this events and to say we check at the crypto to see it is attaining a bullish trend just as indicated, we eagerly enter the trade without doing proper analysis which maybe the trade was at the level of exhaustion and awaiting distribution. The common name called the fear of missing out. This is the main reason why proper technical and fundamental analysis should be carried out on assets before purchasing.
1-4 Rule
Next I will be explaining is the 1-4 rule. With the 1-4 rules, it explains the usage of a reservoir and pools. The reservoir stands for the investment capital while the pool is the division of the investment capital. For instance in the case of the 1-4 rule, the pool will be divided into 4, such that each pool has an investment capital of 1/4 that of the reservoir.
Now let’s explain,
Take for instance in the case above we have an investment capital of $800, that $800 will be our reservoir, and since we following the 1-4 rule, I will share the 800 to the 4 pools; each pool having an investment capital of $200. In this way even if 2 pools goes not as planned, we still have 2 others for back up. And with proper technical and fundamental analysis it is difficult for up to 2 trades to go against you.
QUESTION 2
What are the benefits and effects of diversifying ones assets
Benefits of the Diversifying Assets
With crypto asset diversification, we see that we greatly reduce the rate of risk on trading. The diversification strategy mitigates risk such that if we were to invest a certain amount on a single trade to say $80, on a single trade, if the trade does not go as planned we will lose everything. Now let’s say we employed the diversifying strategy, such that we shared the investment capital into 4 parts, so if one trade goes against as in the case above, we will just be losing 25% of the total investment capital while 75% will be on a standby in other trades which if it goes into profit it will close up the loss made with the previous trade. This is a great reason why we should employ the diversifying strategy.
Negative effects of diversifying assets
Well, the diversifying strategy is not 100% accurate; it also has its drawbacks. One of the major drawbacks is that we have lower returns on the trades we place. Let’s take a practical example; if we come with a trading capital of $100, and use the diversifying strategy; by sharing the investment capital to 4 pools which is a capital each of $25, now if place the first trade, let’s say to a risk to reward ratio of 1:1, so if the trade goes into profit, we will make only $25 profit meanwhile if we placed all our initial investment we would have made a profit of $200. So the strategy brings about a lower return in general.
QUESTION 3
Construct crypto assets diversification according to the 1-4 rule; choose 4 crypto assets (state the reason for choosing them),discuss each of the assets and perform a detailed fundamental/technical analysis on them. Invest a part of at least 15usd into each of the assets based on 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.
Construction of a cryptocurrency Diversification
My Reservoir will be made up $100, which I will distribute to 4 pools, with $25 each. The 4 crypto currencies will be fantom, tron, ripple and verge. this is as shown below.
- Reservoir = $100
- Pool 1: Tron = $25
- Pool 2: Ripple = $25
- Pool 3: Fantom = $25
- Pool 4: Verge = $25
A) Ripple
Fundamental analysis
Beginning with the fundamental analysis on the cyptocurrency, the ripple is currently ranked at the #6 in the coinmarketcap with a current value of $1.028.
The ripple is known to a crypto currency running on the digital payment platform with the name ripplenet. It has a 24 hour trading volume of $3.716Bn and maximum supply of 100Bn XRP. Dominance is what many cryptocurrency face in the market as the famous bitcoin has taken it all, yet the xrp has a dominance of 2.32%. with an all-time high of $3.84, there is all evident that it has just retraced to follow its all-time high again.
Also with the recent new event which is just 12hous ago, we see that the xrp has launch a $250 million created fund, which I see this to really attract investors. This is shown in the screenshot below.
Technical Analysis
On the technical analysis, I will be using the Exponential moving averages. Using the 4 hours timeframe, we see that the exponential moving average just showed a buy signal as the prices went above the ema lines. We can see the trade entry points In the screenshot below.
Trade Entry on Binance
Using the first pool with is worth of $25, I will be placing a buy order on the ripple cryptocurrency as shown on the screenshot below.
B) Tron
Fundamental analysis
The tron has been a very promising cryptocurrency lately with many promising projects. The tron with symbol trx is ranked on the #26 on the coinmarketcap. The tron has current circulating supply of 71.66Bn and total supply of 100.851Bn. the tron has an all-time high value of $0.38 with current value of $0.09.
Technical Analysis
On the technical analysis, I will be using the Exponential moving averages as well just as above. Using the 4 hours timeframe, we see that the exponential moving average just showed a buy signal as the prices went above the ema lines. We can see the trade entry points and exits as shown in the screenshot below.
Trade Entry on Binance
Using the second pool with is worth of $25, I will be placing a buy order on the tron cryptocurrency as shown on the screenshot below.
Fundamental analysis
On the fantom cryptocurrency, it is one of the most trending cryptocurrencies with a current value of $1.35. the fantom with symbol ftm, has a market capitalization of $3.45Bn making it having a rank of #45 on the coinmarketcap. The fantom has maximum supply of 3.175Bn with a 24hour trading volume of $0.362Bn. With an all-time high value of $1.929, I see that the fantom cryptocurrency will resume its uptrend.
Technical Analysis
On the technical analysis, I will be using the Exponential moving averages. Using the 4 hours timeframe, we see that the exponential moving average just showed a buy signal as the prices went above the ema lines. We can see the trade entry points In the screenshot below.
Trade Entry on Binance
Using the third pool with is worth of $25, I will be placing a buy order on the ftm cryptocurrency as shown on the screenshot below.
Verge
Fundamental analysis
The verge is a cryptocurrency with a symbol xvg ranking on the #153 on the coinmarketcap. The verge is known to be a privacy-focused cryptocurrency which seeks fast, efficient and decentralized payment specifically for improving on the drawbacks of the bitcoin. It is for this reason that I see investors to be attracted to the verge cryptocurrency.
The verge has a market capital of $0.349Bn and a circulating supply of 16.48Bn with a total supply of 16.48 Bn. One of the main reasons that attracted me to the verge is the all-time high of $0.3 which I believe it will attain that value again.
Technical Analysis
The technical analysis on the verge crypto will be done as follows; I will be using the Exponential moving averages. Using the 4 hours timeframe, we see that the exponential moving average just showed a buy signal as the prices went above the ema lines. We can see the trade entry points In the screenshot below.
Trade Entry on Binance
Using the forth pool with is worth of $25, I will be placing a buy order on the verge cryptocurrency as shown on the screenshot below.
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QUESTION 4
Explain arbitrage trading in cryptocurrency and its benefits
Arbitrage Trading in Crypto Currency
Arbitrage in crypto currency is a strategy used by investors and traders to take the advantage of price difference of assets to make some quick profits. We have a number of arbitrage type with the most common being the exchange arbitrage and the triangular arbitrage.
We must have noticed how volatile the markets turn to be especially in terms of cryptcurrencies. With this, we some exchanges prices lagging behind others. This is mostly seen as bigger exchanges updates their current values while the smaller exchanges lags behind before updating.
This is shown for example by the prices of ripple trading at a value of $1.19 at an exchange to say poloniex and at the same the prices the trading at the hoabi exchange at a price of $1.21. traders can take advantage of this by buying the ripple at the value of $1.19 at the poloniex exchange and selling it immediately at the next exchange at a higher price and making a profit of the price difference.
This is just a simple explanation of how the arbitrage in the cryptocurrency works. In the case of triangular arbitrage as an example I listed above, we see it to be carried out on the same exchange taking its advantage of the price difference between 3 different cryptocurrencies.
Benefits of Cryptocurrency Arbitrage
The cryptocurrency arbitrage has one of the leading advantages in that it is less time consuming. In normal trading style, we see that need to go through many charts applying indicators and different strategies to find a signal. But with the arbitrage
Strategy we perform everything in very less time, in fast cases we can do it in less than 2 minutes and book our profits. This is then know to be more efficient and less time consumption.
Another benefit I will be explaining is the fact that the strategy adds liquidity to the market. The strategy is known to involve a good amount of capital especially in cases where you want to see a reasonable gain. In this case it will require the injection of high volume. And the injection of high volume increases the liquidity of the market. This is a great benefit of using the strategy
QUESTION 5
Discuss with illustration how to take advantage of exchange arbitrage
Exchange Arbitrage
Exchange arbitrage is a cryptocurrency type of arbitrage in which investors and traders takes advantage of the price difference of an asset between two exchanges. In this case, we see that a trader buys at a lower price in the first exchange and sells at a higher price in the second exchange.
The main reason for this is because; we see some exchanges updating their prices which lag behind other exchanges. This happens in most cases when related to large and small exchanges. Small exchanges might take some time to update the price to the latest value which is the perfect time to buy from them and sell to another exchange which is trading at a higher price. But we should note that this is done at a very quick pace avoid losses.
A simple example is the prices of the asset xrp. We see the xrp trading at a value of $1.0137 in binance while at the same it is trading at a value of $1.025 in poloniex.
We can take advantage of this by purchasing at a lower price in binance and selling it immediately at a higher price in poloniex. This is illustrated in the screenshots below.
QUESTION 6
Creatively discuss triangular arbitrage in cryptocurrency. How to identify triangular arbitrage opportunities and thee risks involved.
Triangular Arbitrage in Cryptocurrency
Triangular arbitrage is a cryptocurrency type of arbitrage in which traders takes advantage of the price difference of 3 different cryptocurrencies in an exchange.
I will explaining the triangular arbitrage more better with the usage of examples. Lets say we have usdt, ripple and bitcoin.
We are taking them to be cross currency pairs. Here we see that the prices of usdt and ripple is different from that of bitcoin and usdt.
- First currency = usdt
- Second currency = ripple
- Third currency = bitcoin
Now with these, I will be purchasing the ripple using the usdt and then purchasing the bitcoin using the ripple I just purchased, and finally purchasing the usdt again using the bitcoin.
I have just performed the triangular arbitrage. We can see that in the chain diagram below.
Conclusion
So far, I have explained on cryptocurrency diversification which is a strategy employed by traders as a risk management tool by sharing their investments into different parts to avoid total loss in cases of trading going against as planned. I have also demonstrated practically with the usage of the tron, ripple, verge, and the fantom cryptocurrencies.
Besides that, we have seen arbitrage trading specifically the exchange arbitrage which involves buying from one exchange with a lower price and selling in another at a relatively higher price, and also we have seen the triangular arbitrage which is taking the advantage of 3 cryptocurrency price difference.
Total| 5.5/10
Thanks prof for the kind observation.
Have just equally done it. Have put all of the tags just as required