Federal Reserve Inflation Fighting Tools

In the past, inflationary pressures were feared by financial market participants and this time is no different as some economists are worried that the Fed’s commitment to low rates will foster inflation. However, Powell countered these fears by saying he’s “very mindful” of the lessons from runaway inflation in the 1960s and ‘70s, but believes this situation is different.

“We’re very mindful and I think it’s a constructive thing for people to point out potential risks. I always want to hear that,” he said. “But I do think it’s more likely that what happens in the next year or so is going to amount to prices moving up but not staying up and certainly not staying up to the point where they would move inflation expectations materially above 2%.”

Powell further added that the Fed considers 2% inflation a healthy level for the economy while also giving the central bank breathing room for policy. Should inflation get out of control, Fed officials believe they have the tools to control it.

This article will explore some of the tools the Fed has at its disposal to combat rapidly rising inflation should it pose a threat to the economy.

Contents

Why Does the Federal Reserve Aim for Inflation of 2 Percent over the Longer Run?

According to Federal Reserve documents, the Federal Open Market Committee (FOMC) judges that inflation of 2 percent over the longer run, as measured by the annual change in the price index for personal consumption expenditures (PCE), is most consistent with the Federal Reserve’s mandate for maximum employment and price stability.

When households and businesses can reasonably expect inflation to remain low and stable, they are able to make sound decisions regarding saving, borrowing, and investment, which contributes to a well-functioning economy.

For many years, inflation in the United States has run below the Federal Reserve’s 2 percent goal. It is understandable that higher prices for essential items, such as food, gasoline, and shelter, add to the burdens faced by many families, especially those struggling with lost jobs and incomes.

At the same time, inflation that is too low can weaken the economy. When inflation runs well below its desired level, households and businesses will come to expect this over time, pushing expectations for inflation in the future below the Federal Reserve’s longer-run inflation goal. This can pull actual inflation even lower, resulting in a cycle of ever-lower inflation and inflation expectations.

If inflation expectations fall, interest rates would decline too. In turn, there would be less room to cut interest rates to boost employment during an economic downturn. Evidence from around the world suggests that once this problem sets in, it can be very difficult to overcome. To address this challenge, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation modestly above 2 percent for some time. By seeking inflation that averages 2 percent over time. The FOMC will help to ensure longer-run inflation expectations remain well-anchored at 2 percent.

Furthermore, the Fed has repeatedly said it will keep short-term rates anchored near zero and continue its monthly bond-buying program until it sees not only a low unemployment rate but also a jobs recovery that is “inclusive” across income, gender, and racial lines.

Powell believes the Fed has the Tools to Manage Inflation

Generally speaking, we now know why the Federal Reserve wants to see inflation at 2%, but Powell and his policymakers want to allow inflation to move above this mandated level until he is confident the economy has fully recovered from the shock of the pandemic. This is what spooked investors in March, but they have since calmed down with stocks hitting record highs.

Powell’s confidence in his ability to fight inflation may be responsible for the sudden surge in demand in equity prices and the market’s seemingly acceptance of rising Treasury yields.

As inflation rises throughout 2021, there will be pockets of volatility because some investors will believe the Fed is behind the curve by leaving its current policy of low-interest rates and aggressive bond-buying unchanged.

However, should it suspect that inflation is getting out of hand, it usually turns to open market operations, the federal funds rate, and the discount rate to stem the inflationary surge.

Open Market Operations

The Fed’s first line of defense against runaway inflation is typically open market operations. In implementing this policy, it sells securities like Treasury notes to member banks. The move reduces bank capital, giving them less to lend. Essentially, it removes money from the economy. As a result, banks raise interest rates and that slows economic growth, dampening inflation.

Federal Funds Rate

The Federal Funds Rate is probably the most well-known of the Fed’s tools. It’s also part of its open market operations. It’s the interest rate banks charge for overnight loans they make to each other. This is a very easy tool for the Fed to manipulate. Its purpose to pull money from the economy and slow inflation.

Discount Rate

This is the interest rate the central bank charges member banks to borrow funds from the Fed’s discount window. Once again the process of raising rates removes money from circulation, thereby reducing the money available for loans and mortgages. This helps slow down economic growth or inflation.

Reserve Requirement

The most powerful tool at the Fed’s disposal is the Reserve Requirement. The Fed eliminated the reserve requirement, effective March 26, 2020. This occurred at the beginning of the COVID-19 pandemic. The last thing the Fed wanted during that critical time was for banks to be pulling money out of the economy.

Once the economy regains its footing and as inflation hovers at or over 2%, the Fed has the power to reinforce the reserve requirement rule that will force member banks to hold more capital in reserve. This is another tool that removes money from the economy, and thus trimming inflation.

Summary

Federal Reserve Chair Jerome Powell and other Fed policymakers recently voted to keep short-term borrowing rates steady near zero, while continuing an asset purchase program in which the central bank buys at least $120 billion of bonds a month. Despite this move, inflation continues to run below 2 percent.

Treasury yields have been rising rapidly for weeks because the market is expecting inflation to heat up, which could force the Fed to change policy sooner than expected. The Fed however says that won’t be enough to change policy that seeks inflation above 2% for a period of time if it helps to achieve full and inclusive employment.

While some economists fear the Fed is inviting risks to the economy by allowing inflation to run above the 2% mandate, Fed policymakers believe they have the weapons to control inflation and to make changes quickly enough to push inflation back to or below 2%.

What are NFTs? Evrything you Need to Know About Non-Fungible Tokens

These are essentially cryptographic assets on blockchain with unique identification codes and metadata. These codes and metadata make them individual and unique.

One characteristic of an NFT, therefore, is that it cannot be copied or duplicated.

An example of an NFT from the real world would be a piece of art, such as the Mona Lisa. While Leonardo Da Vinci is known for numerous pieces of art, there is only one Mona Lisa.

While you can trade one Litecoin for another, you can’t trade one Mona Lisa for another Mona Lisa.

For the world of blockchain, a key advantage of NFTs is that they cannot be copied. And so, unlike the Mona Lisa, NFTs can be bought and sold without the possibility of fraud.

In the art world, a lot of money is spent to authenticate pieces of work before being sold. An NFT does not need middlemen to ensure authenticity.

Table of contents

What is fungible vs. non-fungible?

According to the Cambridge Dictionary, fungible or fungibility means simply interchangeable. “This is a characteristic of most financial instruments and market assets.”

By contrast, non-fungible property/assets/funds are not easy to exchange or mix with other similar goods or assets.

In other words, stocks, Certificates of Deposits, Cryptos, etc. are fungible assets.

An example of a non-fungible asset would be land or even diamonds. While land is a simple one to classify, each individual diamond is also unique. Each diamond has a different cut, size, grade, and so forth and therefore can’t be interchangeable with another diamond.

How Are NFTs Created?

NFTs are very simple to create, unlike blockchains and cryptocurrencies.

A number of NFT market places allow users to freely create an NFT and no programming knowledge is required.

Market places that currently allow users to freely create NFTs include OpenSea, Raible, or Mintable.

Creating art NFTs is particularly popular and these market places cater for just that.

How do NFTs work?

NFTs are digital tokens that are on a blockchain ledger. Once created, the market then trades the NFTs across market places.

Once an NFT is created, there is a proof-of-ownership that must be stored securely in an NFT wallet.

It is the proof-of-ownership that is ultimately the tradeable and non-fungible asset.

Once created, the blockchain ledger records the NFTs and their unique identifying codes. The blockchain ledger then also records each sale and resale and ownership.

This not only prevents the copying of an NFT but also removes fraudulent claims of ownership or even claims over creation.

Why do NFTs have value?

This is simply a case of supply and demand. The key here is the supply side that drives up the value of NFTs. Since there is only one individual asset, high demand can lead to significant increases in value.

Taking the Mona Lisa as an example, experts estimate the value of the Mona Lisa at more than $800m. Had Leonardo da Vinci painted numerous Mona Lisa paintings to exactly the same quality, these would be fungible. Their value would also be significantly less than the single painting thought to be edging towards $1 billion.

As the NFT market expands, the number of NFTs are likely to increase significantly. At this stage, demand will likely become the key price dictator.

Market appetite will continue to dictate value. A unique NFT of interest versus one of little interest to collectors and investors will vary significantly in price.

For example, Twitter CEO Jack Dorsey recently tweeted a link to a tokenized version of his first-ever written tweet.

Bids have reportedly reached in excess of $2.5 million. Other Jack Dorsey tweets are unlikely to have a collectible value, however, even though each tweet is unique.

How do I buy or trade NFTs?

For those looking to buy or trade NFTs, identifying the right marketplace is the first step.

There are numerous market places at present that cater to different areas of the collectible world.

For instance, NBA Top Shot is a marketplace for those looking to buy video highlights. Cryptoslam! is a site that lists the largest market places by sales volume for those looking to enter the NFT space.

There is also Sorare, which is a fantasy soccer marketplace, where you can manage, and buy and sell virtual teams. At the time of writing, Sorare ranked fifth on the all-time sales list, with $24.41m in total sales.

CryptoPunks ranks 2nd on the all-time sales volume list has 10,000 uniquely generated characters. Each can be officially owned and proof of ownership is logged on the Ethereum blockchain.

While there are many market places, those wanting to purchase an NFT will need an NFT wallet in order to store any purchased NFTs.

There are a number of NFT wallet providers in the marketplace. As with cryptos, NFT holders must store-purchased NFTs securely. Hard wallets would be more secure, protecting NFT holders from hackers.

When it comes to purchasing NFTs, some market places support purchases with a credit card. Others, however, require purchases with Ethereum.

For Ethereum purchases you will need to fund your NFT marketplace account with Ethereum to proceed.

To purchase your NFT, most market places sell NFTs in an auction. You simply need to place your bid and wait until the conclusion of the auction.

If your bid was successful, your account would be debited and your NFT wallet credited with your newly purchased NFT.

What are the most expensive NFTs?

Of late, NFT market news has flooded the crypto and mainstream newswires. With tech-savvy investors looking to be first to market, there have been a number of eye-watering bids for NFTs.

The largest NFT market places ranked by sales volume (all-time) at the time of writing include:

  • NBA Top Shot: Total sales $386.55m.
  • CryptoPunks: Total sales $161.32m.
  • Hashmarks: Total sales $43.71m.

For a full list of the largest marketplace NFT sales over the last 24-hours, 7-days, 30-days, and all-time, visit Cryptoslam.io.

Here you can view sales over a specified time period, the price change over the specified time period, and the number of buyers and transactions.

Taking a look at NBA Top Shot, there have been a total of 2.46m transactions that have led to total sales of $385.56m.

What is NBA Top Shot?

An NBA-Dapper Labs collaboration, delivering an on-line platform for trading virtual basketball cards.

These all exist on the blockchain making them unique and impossible to copy. More importantly, for some, authentication is immediate.

With the added advantage of virtual tech, it’s not just virtual basketball cards that are drawing attention.

There are also “moments” that are selling for 6 figure sums. Moments are video clips of the more popular players from the NBA.

One LeBron moment reportedly sold for $208,000…

Looking at the numbers for the broader NFT market, the last 30-days has been headline-grabbing.

From the $385.56m total sales across NBA Top Shot, more than $300m came from the last 30-days.

Looking at individual NFT sales

Christie’s Auction sold Beeple NFT for a whopping $69.3m. This is by far the largest sale to date.

The next 4 largest NFT were the sales of CryptoPunk characters. Sale prices ranged from $7.6m for CryptoPunk #3100 to $1.3m for CryptoPunk #4156.

The Rise of Defi: Powering the Next Crypto Boom

After a number of years of consolidation across the cryptomarket, new innovative protocols are drawing interest.

The interest has created a new crypto hype that is more than just reminiscent of the 2017 ICO boom.

As was the case back in 2017, there are a mass number of protocols hitting the crypto market.

This time around, the focus has shifted away from the CeFi space to DeFi. Decentralized Finance, better known as DeFi has become the buzz word of 2020.

Bitcoin and the broader crypto market delivered blockchain technology and decentralization. There was, however, an element of centralization in the CeFi space. Centralized finance became laden with governance and KYC/AML requirements and more in order to meet investor and government demands.

DeFi, by contrast, currently stands as truly decentralized. With an ethos of Permissionless and Trustless, there is no actual governance. And, there are no KYC/AML requirements. In fact, to access decentralized finance all a user needs is a wallet.

In concept alone, it is a mouthwatering prospect. True cryptocurrencies have yet to really make a dent in fiat money’s unwavering position as a primary payment source.

When considering the unbanked, the disgruntled, and the anonymous, however, DeFi may well give the banking sector a run for its money.

The Projects and the Returns

As entrepreneurs and scam artists enter the world of DeFi, a number of protocols have caught the eye amidst the mist…

While there are no guarantees that these protocols will be here tomorrow, there is the hope and with it the dream of incredible earnings potential.

Based on DeFi market caps from Coingecko, some of the more promising protocols that have enjoyed early success. These include:

Chainlink (“LINK”)

Chainlink sits at the top of the DeFi coin charts at the time of writing. Not only is Chainlink at the top of the DeFi list, but Chainlink’s meteoric rise has also seen it join the crypto giants in the top 10 by market. CoinMarketCap has Chainlink currently sitting at number 8, impressively outgunning the likes of Litecoin…

Year-to-date return: 473.2% to the end of day 28th September 2020.

What’s the hype? With DeFi driven by smart contracts, Chainlink connects smart contracts to data sources. Additionally, users can send payments from a smart contract to bank accounts and payment networks.

Dai

Dai sits at number 3 on the DeFi market cap table and is ranked at number 25 on the CoinMarket Cap.

Year-to-date: Investors will have missed gains from elsewhere, however, with Dai up by just 2.02%.

Why the lowly return? Dai is decentralized and backed by collateral. In other words, Dai is a stablecoin and as such, looks to maintain a value of $1.00. The position by market cap, however, reflects the degree of adoption across the DeFi space.

Uniswap (“UNI”)

Uniswap comes in at number 6 and number 42 on the CoinMarketCap ranking.

New to the market and launched on 17th September, founding investors have received a return of 1,318%.

The protocol allows investors to supply liquidity and to swap tokens.

Yearn.finance (“YFI”)

Yearn.finance sits at number 4 on the DeFi market cap list and number 27 in the crypto CoinMarketCap ranking.

New to the market, with a launch date of July 2020, YFI has delivered genesis investors a since launch return of 2,623%.

What’s on the package?

Yearn.finance provides investors with an array of financial products. These are categorized under:

  • Earn: A yield aggregator that seeks out the best ROI from leading DApps.
  • ZAP: Allows investors to swap between assets, whilst saving on gas fees.
  • Vaults: Delivers returns from liquidity mining and higher yields from more aggressive investments.
  • Cover: Yinsure allows investors to get insurance. A key product in the world of decentralized finance.

The Rest

And there are other worthy protocols worth mentioning including Synthetix, Ox, Oracle, Kava, Band, and Aava

In addition to viewing the DeFi rankings by market cap, DeFi Pulse provides a platform for protocols to list. Here, you are given a brief summary of what the protocol delivers and a direct link to the webpage.

The Road Ahead

While a number of these protocols will likely survive the early boom days, there are many that will fall by the wayside.

Investors only need to go back 3-years to the ICO boom of 2017 to get a glimpse of what likely lies ahead.

Just like back in 2017, however, talk of 1,000% returns are drawing investors back into the crypto world. For those, who entered the 2017 boom late, it may take a little longer, however.

At present, market leaders report the large existence of scammers and Ponzi schemes in the DeFi space. The current upward trend in DeFi’s market cap suggests that investors are willing to take another bite of the cherry.

Unlike investing in CeFi protocols, however, DeFi is a Trustless and Permissionless space. This means that there is little to no governance, testing, auditing, etc. It, therefore, means that some of the protocols drawing investor money could vanish in weeks, if not days.

For that very reason, investors are seeing exception returns. The protocols are drawing investors into the DeFi space, wooing them with double-digit returns from the least risky products on offer.

These include Yield Farming and Liquidity Pooling that puts the cherry on the top for investors today.

When considering the fact the DeFi is still niche, the rally may have some way to go. This is assuming, of course, that the victims of the 2017 crypto meltdown lick their wounds and return to the fray…

With platforms such as Binance setting up US$100m funds to seed new projects and fund development, the future of DeFi does look bright. It does not mean, however, that there will not be any cautionary tales.

The Future of DeFi: Boom or Bust?

After a slow start, with a number of DeFi protocols having been around for a few years, the segment has recently drawn plenty of attention.

Projects are on the rise and some of the main players within the CeFi space are making sure that they aren’t left behind.

As with any new space, however, the pitfalls are many and the gold rush could be short and sweet.

At the time of writing, simply comparing the market cap of non-stable coins and stable coins shows how far behind DeFi is from CeFi.

Based on numbers at the time of writing, the total market cap of non-stable coins stood at US$310bn. By contrast, the total market cap of stable coins stood at just US$16bn

Some of the main players within the DeFi space predict a 20 fold increase in the market cap of stablecoins. It is, therefore, unsurprising that there is an explosion in the number of protocols hitting DeFi.

The Projects

To view the current protocols launched within DeFi, DeFi Pulse provides a platform for protocols to list.

The list is broken down by function to make it easier for investors to find the protocol of their liking. These categorizations include:

Lending; Trading; Payments; Wallets; Interfaces; Infrastructure; Assets; and Scaling.

Additionally, there are the following categories to assist DeFi communities or new entrants:

Analytics; Education; Podcasts; Newsletters; and Communities.

While the projects are readily accessible, with DeFi Pulse making it easier for DeFi investors, key risks exist.

As a result of the very nature of DeFi, which is Permissionless and Trustless, not all of the protocols are audited.

Without governance and the anonymous nature, the protocol developers are anonymous. This has led to a vast number of scams and Ponzi schemes. Akin to any industry, bad news and dishonest participants tend to slow progress and, in particular, adoption.

Due to the sheer number of projects coming to the market, we, therefore, expect a period of consolidation. Many of the main players within the DeFi space expect that the vast majority of the existing projects will eventually fail.

What to look out for

When considering the view that a large number of scams and Ponzi schemes exist, there are ways to at least mitigate some of the risks.

These would include:

  • Avoid protocols that are unaudited or unverified: While DeFi is a Trustless and Permissionless world, the more serious projects provide investors with the necessary comfort.
  • Look for projects with longer vesting and incentive periods: Projects with vesting periods of as little as 2-weeks are unlikely to be there in a few months, let alone a few years. The anonymous founders will take their money and run… The same view is taken on incentives given to protocol communities. Within the DeFi space, it is the communities that are of greater importance. Short-term incentive schemes will not keep a community together for the longer-term. This should be considered negative.
  • Look for innovative protocols: The key to the success of DeFi is to deliver protocols over and above those available within the CeFi and banking space. Finding protocols that bring innovative financial services to the DeFi space will find support. This is assuming that they address the issues raised above.
  • Reputable Communities: As previously mentioned, communities are key to the success of a project. Not only must they be appropriately incentivized but they must also be reputable.
  • Governance and Transparency: Alongside the communities, some sort of governance is also needed. That should come from a degree of transparency in the early years before becoming fully Permissionless and Trustless.

The Risks

As with anything nascent, there are plenty of risks associated with DeFi. An advantage for the DeFi space, however, is certainly the lessons learned from the ICO boom.

For the DeFi space key risks and threats to its evolution include:

  • Bad news: As with any investment opportunity, bad news does not help. The ever-present threat of scams and hacks leave DeFi exposed to unscrupulous participants. News of thefts and hacks would give DeFi a bad name and put its advancement back by years.
  • Blockchain constraints: Ethereum’s blockchain is already at capacity. This means that the market requires a degree of fragmentation. Currently, Tron’s blockchain is the next viable alternative. Ensuring that there is not a complete fragmentation is important, however. A degree of specialization would be an acceptable solution. Here different blockchains would support different sectors…
  • Vesting and incentive periods: As previously discussed these would need to tie in developers and communities for the long haul. A cut and run mentality would slow the evolution and adoption of DeFi.
  • Financial Risk: Investors are currently exposed to the risk of significant loss. The developers and communities can mitigate some of the risks by:
    • Carrying out greater testing and verification to eliminate debilitating bugs.
    • Provide insurance to protect investor capital.
    • Educate: Vastly increase the education currently available on DeFi.
  • Platform Access: Simplify access to DeFi. The more user-friendly the greater the degree of user comfort. This is another avenue to build trust in the Trustless world of DeFi.

Looking Ahead

When considering the risks associated with DeFi, these are not wholly different from those seen in the CeFi space.

The key to the success of DeFi is to deliver communities with solutions that are also available in the CeFi and banking space. At a minimum, DeFi must deliver viable alternatives that deliver greater earning power.

Additionally, DeFi will need to be far more innovative and offer protocols that address the shortcomings of both CeFi and banks. In essence, this would be the development and mass adoption of automated asset managers.

Communities don’t need people but smart contracts that are able to locate the best earnings power across DeFi.

Coupled with smoother user experience, zero gas fees, and addressing the issue of unaudited smart contracts, the future does look bright.

DeFi will need to experience some consolidation, however. As was the case in the .Com and ICO booms, a large number of the DeFi projects will not last.

To prevent a DeFi implosion, however, developers and communities must address existing blockchain constraints. There will also need to be a greater degree of auditing, addressing vesting and incentive periods, and the availability of insurance to protect investors.

Fishing out the scammers and Ponzi schemes with limited reputational damage to DeFi will also be a must.

The Positives

Having said that, there are certainly some positives that yield optimism. These include:

  • Speed of innovation: While currently lagging CeFi, market leaders expect DeFi to grow exponentially relative to CeFi.
  • The benefit of hindsight: DeFi can take the lessons learned from CeFi and the ICO boom and avoid the same mistakes.
  • Early Awareness: There is early awareness of some of the key DeFi risks. This gives communities the opportunity to mitigate the risks quickly to support growth.
  • Education: As the news wires report huge earnings potential, the education side is also improving. There is yet the widespread awareness needed, however, to compete with the banking sector. DeFi remains a niche space today and will likely remain so for the near-term.

When considering the risks and the positives, addressing these while continuing to offer a greater earnings multiple would support a positive future for DeFi.

There is a sizeable audience that DeFi can capture with relative ease. Target audiences would include:

  • The non-banked: At the time of writing, the World Bank estimated 1.7bn people with access to basic banking. In the DeFi world, all a user would need is a mobile phone or a computer. There are no KYC or AML requirements…
  • CeFi Users: For CeFi users, a migration to DeFi seems a natural one. Once DeFi has gone through its teething problems it is hard to envisage CeFi keeping up.
  • Disgruntled banking customers: This is possibly the largest target audience of them all. For DeFi, the inflection point is expected to be when users don’t know that they are on DeFi. At this point, the banking community and CeFi may well find themselves in the history books.

In conclusion

We don’t expect a bust. The more innovative and transparent projects will likely enjoy longevity.

There is undoubtedly going to be some pain ahead, however, something that is hard to avoid in the early days.

As with blockchain and cryptos, the concepts are right and so it rests in the hands of innovators to deliver.

One curveball to consider, as always, is whether governments and central banks will allow the untimely demise of the global banking system.

If we learned anything from back in 2017 and 2018, anonymity within the world of finance is a no-no for governments.

How this plays out may eventually decide the fate of DeFi

How to Earn Passive Income with DeFi

Contents

Decentralized Finance

While Satoshi Nakamoto’s Bitcoin creation was to bring an alternative to fiat currency, DeFi is looking to take it one step further.

After the evolution of centralized finance in the crypto space, DeFi is looking to battle global finance and the long-established financial sector head-on.

As the name suggests, DeFi looks to bring a truly decentralized, community-driven financial services platform.

DeFi is designed to be both “Permissionless” and “Trustless” in a decentralized world akin to that of Bitcoin.

This is in contrast to the world of CeFi, where there are governance and control over the financial platforms.

As the market leaders look to innovate and deliver an alternative to the existing banking model, there are a number of ways in which crypto holders are able to generate income.

When considering the lack of KYC and AML requirements, due to the decentralized nature of DeFi, DeFi is not only targeting the banked but also the non-banked that is estimated to sit at around 1.7bn.

As is the case with more traditional financial products, investors have the option to generate active or passive income.

Active income would include the trading of assets available across DEX platforms, these being decentralized exchanges. Similar to trading cryptos and other asset classes, this is a hands-on practice and even more so in the volatile crypto world.

Passive income is just the opposite, where investors and crypto holders may earn income from cryptos held but are not being actively traded.

Passive Income

While DeFi is in its very early days, there are a number of ways in which investors can earn passive income. The entire reason for the existence of such platforms and products is to deliver liquidity to the DeFi space through incentivization.

Income-generating DeFi products currently include:

  • Yield farming
  • Liquidity mining
  • Staking
  • Decentralized Exchanges (“DEX”)

Unlike the CeFi space, there is also a low barrier to entry, supporting innovation that will be key in delivering an alternative financial services platform.

So, for those holding stablecoins looking to generate a steady income stream, the DeFi world offers just that.

Taking a closer look at the passive income products on offer:

Yield Farming

Yield farming is the generation of yield from crypto assets.

The product is comparable to bank deposits, fixed-term deposits, and even government bonds.

Investors deposit fiat money into financial institutions via bank deposits and fixed deposits, which gives the institution liquidity. Investing in government bonds gives governments liquidity. The liquidity is then used to generate growth by the institution or government.

Not only can the community generate income from crypto assets already held. Yield farmers can also borrow crypto and generate income. This is profitable when interest rate differentials are aligned in favor of the borrower.

Yield farmers can farm yield from DeFi money markets, liquidity pools, and incentives.

As an example, a yield farmer places 10,000 USDT into a DeFi protocol, delivering liquidity to the platform. The protocol gives the yield farmer a reward for depositing the USDT.

The yield farmer then takes the rewarded USDT or other tokens that may be given and deposit it into a DeFi liquidity pool accepting USDT or the token received. The yield farmer then receives a yield kicker from the incentives.

While at present there is an element of active management of assets, the DeFi space is evolving. Currently, yield farmers are manually in search of the best yields on offer. There are new protocols on offer, however, that can do the work for you. These are known as Robo-Advisors or Robot yield toppers.

Smart contract systems use “Oracles” in order to automatically transfer Robo-managed tokens to protocols offering the highest yields for a fee.

“Oracles” are services that provide “off-chain” data to smart contracts. “Off-chain” data is typically market prices of assets and world events, such as sports scores, weather, etc.

Revenue Streams

The types of returns that a yield farmer can earn are as follows:

  • Capital growth: Assets, fees, and rewards may be in stablecoins or non-stablecoins. Capital growth during a staking period is a passive income source. There is a risk, however, of “Impermanent Loss”.

“Impermanent Loss” is an opportunity cost incurred between supplying liquidity to an AMM pool vs simply holding the tokens in a wallet. The loss happens when asset prices diverge from original levels when tokens were first deposited.

Additional income streams include:

  • Token rewards
  • Transaction fees

Liquidity Mining

The 2nd step that yield farmers take in yield farming is liquidity mining.

From a protocol perspective, a token issuer or DEX rewards liquidity miners for providing liquidity to a specific token.

Here token holders deposit collateral into a liquidity pool offered by an automated market maker, (“AMM”).

Once you have identified a mining pool that accepts your idle tokens, simply stake your token in exchange for incentives. Incentives are normally tokens that holders can later exchange on a DEX.

It’s worth noting that liquidity pools tend to offer better yields than money markets. There is a greater risk, however, which justifies the greater reward.

Automated Market Makers

Automated market makers, more commonly known as AMMs, offer the liquidity pools to enhance farming yields.

In essence, the community trades with smart contracts and not with other community members.

AMMs are smart contracts that create liquidity pools, typically traded by an algo or “Robots” rather than order books.

From a DeFi perspective, AMMs are pivotal in its evolution. The liquidity is a must for the DeFi space to continue to evolve and deliver new protocols and products to the community.

The Risks

As is the case with any investment, yield farming is not risk-free.

Such risks stem from:

  • Smart Contracts: Developers can’t change smart contracts once the rules are baked into the protocol. This makes bugs permanent and could result in the material loss of assets.
  • Exchange Rates: Asset price volatility is unavoidable. As previously mentioned, “Impermanent Loss” is one risk related to exchange rates.
  • Price Oracles: Price-feed providers rely upon the quality of the data. That leaves “Price Oracles” exposed to price tampering. In an automated world, there are no audits to verify the accuracy of the data.
  • Hacks: Thieves and hackers target AMMs, particularly in the early days.

In conclusion

For the crypto market evolution, the most enticing element of DeFi must the offering of financial services without KYC and AML requirements. The DeFi community can enjoy full anonymity, while also enjoying the products on offer than range from trading to taking out loans…

Passive income is a key element, as the DeFi world innovates to even greater automation.

Investing does not come without its own risks, however. In the Trustless and Permissionless world of DeFi, there is no governance to identify the good from the bad.

As we saw in the boom days of crypto, however, this will eventually stabilize. Until then, investors need to tread cautiously when investing in the DeFi space.

Recommendations include:

  • Try to avoid investing in unaudited protocols unless you are fully aware of the risks and can stomach the loss.
  • Don’t invest money that you cannot afford to lose. There are Ponzi schemes abound.
  • Do some research and identify protocols that are likely to exist for the longer term. The longer the vesting periods and incentives for communities to remain in place for the long haul the better.

 

Decentralizing Traditional Finance: Bridging CeFi and DeFi

Contents

CeFi and DeFi Explained

With Bitcoin’s 10th birthday come and gone, developers and entrepreneurs are now looking to take a bigger bite out of the banking industry.

Over the last 10-years, the crypto market has been largely aligned with the global banking system in the form of centralized financial services.

In fact, only a handful of decentralized exchanges have existed in recent years. It’s also worth noting that, while the platforms such as Ripple delivers a decentralized global payment system, Ripple is not truly decentralized.

These platforms all fall under the category of Centralized Financial Services.

As far as the crypto world is concerned, the main differential between “CeFi” and “DeFi” is whether a community trusts people or technology.

Using the simple differential

CeFi: Users trust people behind a platform to manage and ensure that a crypto platform remains a going concern. In other words, the area of focus is on the appropriate governance to ensure the success and viability of a platform.

DeFi: The community trusts technology and its capability to function and deliver its core deliverables. Under the current ethos of DeFi, there is no governance and the success of a DeFi platform is reflected in the community behind it.

The Commonalities

For many in the crypto world, CeFi and DeFi provide very similar services at present, making them indistinguishable.

Currently, both CeFi and Defi platforms deliver financial services that include but are not limited to:

  • Borrowing
  • Crypto trading
  • Derivatives trading
  • Margin trading
  • Lending
  • Payments
  • Stablecoins

There are, however, some distinct differences.

The Differences

AML/KYC: In the world of DeFi, platforms don’t require user information. Users enjoy anonymity across the DeFi space. This is something that regulators brought an end to across the CeFi space, particularly in regulated jurisdictions.

Cross-Chain Support: DeFi platforms are unable to support the trading of some of the larger cryptos by market cap. In the DeFi space, at present, tokens must follow Ethereum standards, though this is expected to expand…

At the time of writing, Tron has also become part of the DeFi movement to compete with Ethereum that faces capacity issues.

Adaptability v Innovation: In the world of CeFi, governance and management ensure the right level of customer services to stay on top. This is adaptability over innovation. By contrast, the DeFi world is about innovation, as technology and not people is the influencer.

Crypto to Fiat: CeFi platforms are able to support crypto to fiat and fiat to crypto transactions. This is because of the AML/KYC requirements that CeFi platforms must adhere to.

Custody: CeFi platforms require users to keep funds on the platforms providing financial services. The issue of custody puts users at risk of hacks and theft. Let’s not forget that CeFi platforms also hold personal information in addition to user funds…

Transparency: Due to the nature of CeFi platforms, there is a transparency issue. Within the DeFi space, platforms are governed by technology and, specifically, smart contracts, ensuring transparency.

The Buzz Words

As DeFi etches is existence into the crypto sphere, there are a number of buzz words that any crypto trader and investor must know…

DEX: These are decentralized exchanges that run on smart contracts. The smart contracts are encoded with instructions to execute orders on a DEX.

Innovation, innovation, innovation: DeFi is technology-driven and, as such, will continue to innovate rather than adapt to meet customer needs. At present, the DeFi space is in Rapid Innovation Mode (“RIM”).

Permissionless: There are no AML or KYX processes to access DeFi platforms and financial services. This means that users do not need to provide personal information to fund DeFi accounts or to have access to DeFi financial services. All a DeFi user needs is a wallet.

Trustless: A DeFi community does not need to trust that a protocol will deliver what it says on the box. There are a number of auditors and more appearing in the space to assess and review capabilities. Most importantly is the ability to assess and verify smart contracts that DeFi protocols have in place to deliver and execute financial services.

The CeFi – DeFi Bridge

With the DeFi market in its infancy, the first step has been to build a bridge between the CeFi and DeFi worlds.

It’s not surprising that one of the crypto market’s most well-known names is involved in bridging the gap…

Binance is amongst the innovators building the CeFi – DeFi Bridge.

Why the need for a bridge?

The goal of DeFi is to reconstruct the banking system in an open, Permissionless, and Trustless space. DeFi advocates see DeFi delivering a more transparent, resilient, and less fragile financial system.

Following all the negative news surrounding Tether, the case for DeFi has become all the more compelling in recent years.

There are some challenges, however. One of the key advantages to DeFi is one of its disadvantages in the early days.

There is no governance in the world of DeFi. Anyone is able to launch a protocol and attempt to raise funds. The lack of oversight means that many projects will boom and bust, leaving investors with material losses. Along with protocols that may not make it, there are also scams to avoid in the space.

While this is the case, there are some impressive protocols that have already garnered plenty of interest.

As the DeFi world maneuvers its way through its early years, some of the crypto market leaders need to carefully woo users across from the CeFi space. This is all the more important with the lack of DeFi awareness today.

Estimates vary on the size of the DeFi community, with the numbers ranging from as low as 400,000 to as many as 5,000,000. Both numbers are small, however, when compared with the CeFi space.

The market caps of stablecoins and non-stablecoins tell the story. At the time of writing, the market cap of stable coins stood at about US$16bn, dwarfed by the non-stable coins market cap of US$310bn.

The Key Steps

In order to fully bridge the CeFi and DeFi spaces, developers will need to bring the offerings of the financial sector to the DeFi space.

Some key steps in bridging the CeFi and DeFi world include:

  • Materially reducing risks currently associated with DeFi platforms. Offering insurance, proper testing and auditing, and preventing hacks are a must. Any adverse news and the DeFi space will take even longer to establish itself as a viable alternative to the banking world.
  • A marked increase in DeFi education to shift the DeFi space from niche to mainstream.
  • Simplifying access to DeFi protocols. At present, there are too many steps to gain access, deterring possible early adopters.
  • Build reputable DeFi communities.

The speed of innovation is working in DeFi’s favor early on.

While progressing through the key steps outlined above, DeFi will also need to deliver key financial services products to build the community.

More importantly, however, will be for DeFi to deliver what the existing financial systems are unable to deliver.

The ultimate goal is for users interacting with DeFi to not even know that it is DeFi. Many leading figures within the DeFi space see this as the inflection point.

At the time of writing, the World Bank estimates that the total number of non-banked sits at 1.7bn.

The Road Ahead

A fully functional DeFi world would materially eat into the 1.7bn, not to mention draw across disgruntled CeFi and bank platform users.

Looking at early entrants and stakeholders, Binance has rolled out a $100m Support Fund for DeFi projects on Binance’s Smart Chain.

The Fund is to drive collaboration between CeFi and DeFi.

As part of the shift towards DeFi, Binance will provide liquidity support to DeFi projects. Binance will also carry out security audits and due diligence processes to deliver some order to a Permissionless and Trustless world.

Through Binance, selected DeFi projects will also have access to Binance’s customer base, media information, knowledge education, financial management, and more. Binance may also list a chosen few.

DEX platforms require all transactions to take place “on-chain”. When considering the trades per second that centralized exchanges(Verified Exchanges) (“CEX”) execute, that’s an incredible burden.

With Ethereum currently the chain on which DeFi exists, 15 second average block times doesn’t cut it. The rapid evolution of DEX platforms has brought Ethereum to its knees. Alarmingly, the number of DeFi users dwarf in comparison to CeFi users. This means that the situation will only become more exasperated without change or alternative.

Another major issue for DEX platforms is the need for all transaction cancellations to be on-chain. That exposes the DeFi community to front running.

It’s also worth noting that many decentralized exchanges position themselves as decentralized rather than centralized exchanges.

In reality, however, the vast majority fit and fulfill the criteria of a centralized exchange. AML/KYC requirements are one simple identifier…

In conclusion, there’s a long way to go. With the guidance of the more reputable to bridge the gap, however, the road will be a shorter one to success.

Forex Regulation Across Africa – The Complete Guide

Partly, this intense growth was caused by the fact that ESMA enforced new restriction laws on the maximum leverage that EU traders can use (this caused FX brokers to focus on other big markets, like Africa)

An average of over $5.1 trillion is traded daily in the Forex market. Though worldwide, there are major forex trading centres which include London, Tokyo, Paris, Sydney, New York, Zurich, Singapore, and Hong Kong. A Forex trading day starts in Australia and ends in New York. The market stays open for 24 hours a day and five and a half days a week.

There are specific regulations in countries, continents that oversee the trading of Forex. In some countries, FX trading is restricted and banned while in others, it is fully supported. In this post, our focus is on Africa as we’ll be looking at Forex regulation across the continent.

Overview of Forex Trading In Africa

Forex trading is a very competitive activity, and in Africa, it is no different. The market has experienced speedy growth over the last two decades as more Africans are being enlightened on what Forex entails.

Significantly, the last decade has seen the Forex market go from almost unnoticed to becoming one of the most dynamic industries in the content. This can be attributed to the advent of mobile devices and other technologies.

There are about 1.3 million Forex traders in Africa. South Africa and Nigeria lead the way as both countries constitute a large percentage of the total figure.

Other countries where Forex trading is gaining ground are Kenya, Egypt, Angola, Namibia, and Tanzania. This has attracted international Forex brokers like IQ Option, IC Markets, XM Forex Trading, ForexTime (FXTM), and Olymp Trade.

With this vast amount of forex traders, it is expected that government financial regulatory bodies will be interested in monitoring trading activities in individual countries.

Forex-Friendly African Countries

A lot of African countries are Forex-friendly, but there are minor restrictions from the government. Forex can be traded in Nigeria, South Africa, Egypt, Kenya, Namibia, Ivory Coast, and many other African countries.

Whereas Forex trading cannot be said to be legalized in these countries, it also does not break the law. Before a Forex broker can offer Forex trading services to a country’s citizen, it is mostly mandatory to acquire a trading license.

Forex-Prohibited African Countries

Currently, a complete Forex ban is not placed on any country in Africa, unlike world countries like North Korea and Israel. As stated earlier, there are minor restrictions from the government in some countries. These restrictions do not prohibit the trade of Forex but are imposed to prevent fraudulent and scam activities.

Some of these restrictions are on the maximum trading amount and the maximum amount you can have in your Forex account. These are similar to Forex restrictions imposed in countries like China and Russia. Furthermore, Forex trading with non-licensed Forex brokers is prohibited in some African countries. Likewise, you can only trade Forex for yourself and not for anyone else (identification is mandatory for most Forex brokers).

Forex trading is usually not welcomed in countries governed with strict sharia laws. As a result, countries like Algeria, Benin, Burkina Faso, Egypt, etc., may not be the best to engage in Forex trading.

Let’s consider how Forex trading is regulated in some major African countries:

Forex Regulation In South Africa

In South Africa, various regulatory trading rules are put in place to minimize Forex trading risks. These regulations are imposed by the South African Financial Sector Conduct Authority (FSCA), formerly known as the Financial Services Board (FSB). The FSCA is the body responsible for monitoring and controlling all financial activities in the country. It is the most vigorous Forex market regulation in Africa.

The FSCA regulatory policies are in line with what is obtainable from regulatory bodies overseas. Notably, all OTC derivative brokers must report all trades in a bid to organize CFDs. Through the FSCA, Forex brokers can relate with each other without resulting in conflict.

According to topforexbrokers.co.za, the FSCA license incorporates some immense benefits like that FX brokers regulated by the FSCA treat their customer in good faith and that they help them with financial education and financial literacy. Not to mention that if anything goes south, a South African trader who is trading with FSCA regulated broker can go to FSCA if they think they have been scammed by their broker or mistreated.

Forex Regulation In Kenya

In Kenya, the Capital Markets Authority (CMA) regulates all financial activities, including foreign exchange trading. Before a Forex broker can do business in Kenya, they must be registered and licensed by the CMA.

Forex was previously unregulated in Kenya. Before 2016, lots of Kenyans were trading with unregulated brokers, and there were too many reports of fraudulent activities. As a result, the Kenyan government authorized the CMA to regulate Forex trading activities in the Finance Act 2016. The principal aim of the regulation is to make the market transparent and protect investors’ funds.

The CMA drew regulatory leads from international regulatory bodies like the Australian Securities and Investment Commission (ASIC) and the United Kingdom’s Financial Conduct Authority (FCA).

Forex Regulation In Nigeria

Forex trading in Nigeria is still unregulated despite the market being one of the most active ones in the continent. However, it is perceived that the country’s apex bank is working with the Securities Exchange Commission to commence Forex trade regulation.

Despite the absence of regulation in the country, the government does not consider Forex trading illegal. There are local Forex brokers who register just like other businesses and carry out foreign exchange activities as usual. Most Forex traders in Nigeria make use of foreign Forex brokers rather than the local ones due to this lack of regulation. The trading risk is totally on the trader, so they assume the foreign brokers are more trustworthy.

Banking policies do have effects on Forex trading in Nigeria. Some Nigerian banks may prevent customers from using their electronic cards to make payments or withdraw from foreign exchange platforms. Presently, there are imposed restrictions on the amount of foreign currency a Nigerian can spend outside the country. These are individual policies that could be eliminated if the Nigerian government properly legalizes Forex trading.

How To Select The Best Forex Broker For Africa

Due to the risks involved in Forex trading, it is vital to be cautious when deciding on the best Forex broker to invest in Africa.

Firstly, you should check for the broker license. If Forex trading is regulated in your country, check to see the Forex brokers licensed by the regulatory body. For a country like Nigeria, where the market is not restricted, consider foreign brokers who are licensed by global licensing authorities.

The next thing to do is to check out the trading platforms offered by these brokers. Check for their deposit bonuses, ratings, minimum deposit, and payment options before making a decision. For a practical trading experience, a Forex demo account should be featured where you can try your hands before going live. Do not invest real money if you haven’t fully understood how the platform works.

How To Stay Safe While Trading Forex

You should avoid any unlicensed Forex broker in Africa. The amount of Forex scams in African countries is on the high side, and it has resulted in grave losses for the victims. By going with a well-licensed broker, this risk is almost eliminated, and you can trade more assuredly.

Additionally, you should be cautious when making a substantial investment when you don’t fully understand the Forex market. Likewise, you should control your emotions and don’t spend all your money on Forex trading.

Conclusion – The Future Of Forex In Africa

Interest in Forex will undoubtedly continue to rise in the coming years. The sensitization level is currently high as Forex trading is advertised on newspapers, TVs, radios, websites, etc.

There are equally Forex seminars and programs to create awareness. More overseas Forex brokers are also picking interest in offering their services to African countries. Consequently, better regulatory policies will be imposed in countries that lack them so that aspiring traders can trade safely.

Negative Commodity Prices – Causes and Effects

In commodity markets, we have seen markets move to levels where those holding long positions wind up paying other market participants to close positions. This can occur in the futures as well as the physical markets. The payment is not just market differences between the purchase and sale price. There have been instances where a purchase at zero turned into a losing proposition.

In the 1950s, the US regulators closed the onion futures market on the Chicago Mercantile Exchange as the price of the root vegetable fell into negative territory. At the time, trading in onions accounted for around 20% of the volume on the exchange. Market manipulation caused the price volatility in onions that have not traded in the futures market since 1958.

A raw material market can fall below zero

Negative commodity prices are nothing new, as other raw materials have declined to levels where sellers pay buyers to take a commodity off their hands. While some markets have seen zero or negative prices, others never experienced the phenomenon.

Aside from onions, another futures market has traded at or below a zero price. The power or electricity market is a use-it or lose-it market. The electric power runs along transmission lines, and if not consumed by a party that holds a long position, it becomes worthless or can even trade at a negative price.

April 20, 2020, was a day to remember in the crude oil market

Before April 20, 2020, the all-time modern-day low for the price of NYMEX crude oil was $9.75 per barrel, the 1986 bottom. In late April 2020, the price fell through that low and reached zero.

Source: CQG

The quarterly chart highlights the decline to a low that few traders, investors, and analysts thought possible.

Some market participants likely purchased nearby futures at or near zero, assuming that they were buying at a price that was the sale of the century. They turned out to be tragically wrong. Crude oil fell to a low of negative $40.32 per barrel on April 20. The problem in the oil market was that there was nowhere to put the oil as storage facilities were overflowing with the energy commodity.

Historically, oil traders with access to capital purchased nearby futures and sold deferred contracts at times when contango, or the future premium, was at high levels. The theory behind owning the nearby contract and selling the deferred contract is that those who can store and finance the energy commodity gain a risk-free profit.

Holders of the spread hedge the price risk with the sale of the deferred contract and own the physical in case the market tightens, which is a call option on the spread. Meanwhile, speculators often synthesize the cash and carry trade using nearby and deferred futures without the ability to store the energy commodity. When nearby futures dropped to over negative $40 per barrel, the unexpected losses for those holding synthetic positions were staggering.

Storage capacity is the critical factor

Supply capacity is the crucial factor for any market participant holding a long position in a nearby futures contract. Without the ability to take delivery and store the commodity, there is a potential for negative price levels. Assuming that the downside is limited to zero is wrong. Another market that could face a similar fate in the future is natural gas, where storage capacity is finite, and the price could venture into negative territory at some point.

Without the ability to store and finance a commodity, the downside risk is theoretically as unlimited as the upside.

Negative commodity prices may seem irrational, and it is always tempting to buy something for zero. In the world of commodities futures and some of the physical markets, zero could turn out to be a high price as the oil market taught us on April 20, 2020.

What are Commodity Currency Pairs?

The currencies of countries around the world are fiat instruments, meaning that they have no backing by anything other than the full faith and credit of the nations that issue the legal tender.In the past, many currencies used gold and silver to provide support for the foreign exchange instruments, but the metals prevented countries from making significant changes in the money supply to address sudden changes in economic conditions.

Meanwhile, some countries with substantial natural resources that account for revenue and tax receipts have an implicit backing for their legal tender. The ability to extract commodities from the crust of the earth within a nation’s borders or grow crops that feed the world allows for exports and revenue flows. While those countries have fiat currencies in the international financial system, the implied backstop of commodity production makes them commodity currencies.

Commodities provide support for some foreign exchange instruments

The fundamental equation in the world of commodities often dictates the path of least resistance for prices. While demand is ubiquitous as all people around the globe are consumers of raw materials, production tends to be a local affair.

Commodity output depends on geology when it comes to energy, metals, and minerals. Soil, access to water, and climate make some areas of the world best-suited for growing agricultural products. Chile is the world’s leading producer of copper. The vast majority of cocoa beans, the primary ingredient in chocolate, come from the Ivory Coast and Ghana, two countries in West Africa.

In Chile and the African nations, the production of the raw materials accounts for a significant amount of revenues and employs many people, making them a critical factor when it comes to economic growth. Meanwhile, the Australian and Canadian currencies are highly sensitive to commodity prices as both nations are significant producers and exporters of the raw materials to consumers around the globe.

Australia and Canada have commodity currencies

Australia and Canada produce a wide range of agricultural and energy products, as well as metals and minerals. Australia’s geographical proximity to China, the world’s most populous nation with the second-leading economy, makes it a supermarket for the Asian country. Canada borders on the US, the wealthiest consuming nation on the earth. Therefore, Australia and Canada are both commodity supermarkets for a substantial addressable market of consumers.

In 2011, commodity prices reached highs, and the price action in the Australian and Canadian currencies versus the US dollar shows their sensitivity to raw material prices.

Source: CQG

The quarterly chart of the Australian versus the US dollar currency pair highlights that highs in commodity prices in 2011 took the foreign exchange relationship to its all-time high of $1.1005. The price spike to the downside during the first quarter of 2020 that took the A$ to $0.5510 came on the back of a deflationary spiral caused by the global Coronavirus pandemic that sent many raw material prices to multiyear lows.

Canada is a significant oil-producing nation. In 2008, the price of nearby oil futures rose to an all-time peak of over $147 per barrel.

Source: CQG

The quarterly chart of the Canadian versus the US dollar currency pair shows that the record high came in late 2007 at $1.1043 as the price of oil was on its way to the record peak. The highs in raw material prices in 2011 took the C$ to a lower high of $1.0618. The deflationary spiral in March 2020 pushed the C$ to a low of $0.6820 against the US dollar.

Both the Australian and Canadian dollars are commodity currencies that move higher and lower with raw material prices over time.

Brazil’s real also tracks the prices of some commodities

Brazil is an emerging market, but the most populous nation in South America with the leading GDP in the region is a significant producer of commodities. The price relationship between the Brazilian real and the US dollar is another example of how the multiyear highs in commodity prices in 2011 sent the value of a commodity-sensitive currency to a high.

Source: CQG

The quarterly chart of the Brazilian real versus the US dollar currency pair shows that the real reached a record high of $0.65095 against the US dollar in 2011 when commodity prices reached a peak.

While the Australian and Canadian dollar and Brazilian real are fiat currencies, they each reflect the price action in the raw material markets, making them commodity currencies. The foreign exchange instruments may not have express backing of the nation’s raw material production; there is an implied backing as higher commodity prices lift the local economies and government tax revenues. Commodity currencies can serve as proxies for the asset class as they move higher and lower with raw material prices.

Beating The Crunch: Can We Invest Wisely in an Economic Downturn?

The very mention of a downturn can strike fear into the hearts of investors. Economics tends to be cyclical in nature and while steady periods of growth are revered with widespread speculation, they’re usually followed by a profound decline.

We currently live in challenging times for world economies. Uncertainty surrounding the United Kingdom’s Brexit alongside ongoing trade wars between the United States and China have sent some clear warning signs that investors may be facing some challenging times in the near future.

(The future of finance in the UK is conditioned primarily by Brexit, and could prompt an economic slowdown. Image: Institute for Fiscal Studies)

The UK isn’t alone in its uncertainty. With four possible outcomes of Brexit in the coming months leading to wildly different GDP forecasts, the United Kingdom is just one of many nations operating in a fragile economic climate.

But is it possible to successful invest within the volatile markets of a recession? Here are a few points on how to wisely develop your portfolio while navigating the potentially choppy waters of an economic downturn.

Coming to terms with a recession

It could be useful to clarify what is meant by the use of the term ‘recession’, as well as ‘economic downturn’.

(Chart illustrating the impact of the financial crash and the slowdowns within the global economy that followed. Image: The Economist)

Essentially, a recession is the name given to a sustained period of economic decline. Economists typically agree that two consecutive quarters of negative Gross Domestic Product (GDP) growth can be defined as a recession, but this isn’t always the case. It’s also worth noting that GDP acts as a measure of all the goods and services produced by a country over a pre-designated period.

There are plenty of factors that can contribute to a recession, which is why many economists avoid predicting their arrival with much certainty. In 2008 the collapse of the US housing market sparked a worldwide downturn, while other factors like governmental change, natural disasters, and new legislation can all be big contributors.

Recessions take shape as a result of a widespread loss of confidence from consumers and businesses when it comes to spending money. This, in turn, leads to stagnant incomes, loss of sales and ultimately production. Unemployment generally rises due to cutbacks in industries and national leaders face the challenge of kickstarting a weak economy to remedy the effects.

Right now you may be wondering how it’s even possible for anyone to build a successful portfolio from these circumstances, let alone those looking to make intelligent investments.

As they’re intrinsically linked to the financial markets, recessions tend to point towards more instances of risk aversion from investors as they plot methods of keeping their money safe from damaging losses of value. However, the cyclical nature of finance means that recessions must give way to recovery sooner or later. Let’s take a deeper look into some of the opportunities presented to investors during a time of severe financial difficulty:

Can opportunities be identified?

Recessions are terrible things that can severely impact the lives of millions, possibly billions of individuals worldwide.

But many negative events can come with some opportunities attached. And while recessions represent a considerable burden on the world financial markets, they can also offer some extremely high-value prospects for new investors.

When a recession takes hold, asset prices typically fall hard. This means that investors who were previously priced out of making meaningful revenue from stocks, bonds, mutual funds, real estate, private businesses to name but a few, can suddenly find themselves presented with considerably lower costs than a year or two prior. As other investors are forced to part with their assets, you could swoop in and grab yourself a bargain.

(The Financial Times highlights the inverted yield curves within US Treasury bonds as a sign of a coming recession – as evidenced by historical trends within this chart. Source: FT)

The Financial Times recognises that the US Treasury yield curve has inverted due, largely, to ongoing trade wars. Further to the chart above, the newspaper also reported that UK yield curves on two and ten-year gilts inverted over the past summer – indicating that there are challenging times ahead for investors.

Naturally, when market predictions appear ominous, bearish investor sentiments become more prominent. The Financial Times reports that in the current climate, the price of gold is “soaring.” With “the price of the yellow metal rising above $1,500 per troy ounce for the first time in six years” back in August.

Prolific investors will always be on the lookout for opportunities to buy low and sell high, and even though the markets will no doubt show volatility, there’s a good chance that as a recession subsides, the assets you’ve bought into will begin to regain their true value.

With this in mind, it’s worth exploring the prices associated with specific stocks and bonds. If their respective values appear to be outstandingly low compared to their value outside of the economic downturn, you could be looking at a good opportunity to gain money as the market recovers.

Searching for value in capital markets

When it comes to equity markets, the perceptions that investors hold of heightened risk typically leads to the urge for seeing higher potential rates of return for holding equities. For their expected returns to rise higher, current prices would need to drop. This happens when investors sell off riskier holdings and transition into safer securities like government debt.

This is what makes equity markets fall prior to recessions. As investors grow fearful of seeing the collective values of their assets decline, they take a series of steps in order to retain as much value as they can.

Safety in investing by asset class

History tells us that equity markets have a pretty useful habit of acting as reliable predictors of upcoming economic downturns, so it’s important to pay close attention to the optimism or pessimism of traders within this particular field.

However, even if the equity markets are in the midst of a deep decline, there’s still cause for optimism among investors. Assets still have the ability to undergo a period of outperformance, so it can often pay to keep your ear to the ground and hunt for small pockets of clear blue skies amidst the cloud-covered horizon.

Can efficiency be found within stock investing?

Stock markets can be volatile places even at the best of times. But history shows that there’s still plenty of security that can be found by investing during a recession.

One of the safest places to invest across a range of markets can be found within the stocks of high-quality companies that have been in existence for a long period of time. While this may not guarantee security, these types of businesses have shown that they can survive prolonged periods of financial difficulty in the past.

Indeed, the NASDAQ-100 index has experienced notably less profound volatility as it recovered from 2008’s crash than stock indexes comprised of less affluent companies.

Naturally, companies with credible balance sheets and little debt regularly outperform businesses with significant operating leverage and weaker cashflows. So it’s worth looking to established organisations for a little solidity when times get tight.

Will diversification remain a safe bet?

Even in the gloomiest of financial forecasts, always diversify your bonds. Even if you come across a company that appears to be thriving amidst an economic downturn, it’s vital that you diversify your assets.

Markets are extremely jittery when the world’s news is littered with closures and the falling GDP of nations and currencies. The landscape can change with little warning, and while diversification may not be a flawless way of thriving amidst the inevitable rainy days, it stands a much better chance than taking up the option of piling your faith into one company that looks stable today with no guarantee for tomorrow or the day after.

The world of finance hasn’t been brimming with confidence for some time now, and while investments should be made at the holder’s risk, there are certainly plenty of opportunities out there to build a respectable level of profits even in the midst of an economic downturn. Above all, stay patient, look out for emerging trends and make sure you diversify your investments.

The Crypto and Blockchain World – Trading and Investing in Today’s World

The Landscape

Throughout 2018, we saw regulators across key crypto markets including, but not limited to, China, India, Japan, and South Korea, clamp down on what was commonly referred to as the Wild West of the Global Financial Markets.

Over the course of the current year, however, the public attitude has shifted.

There are numerous reasons behind this, including significant steps by regulators and governments to shut down the more cavalier exchanges permitting the trading of cryptocurrencies, without the need for the standard disclosures seen across exchanges offering to trade of more traditional asset classes.

While jurisdictional restrictions continue to be a thorn in the crypto sphere’s side, crypto exchanges have also made significant strides in delivering more technically advanced trading platforms.

Not only have exchanges delivered the platforms for the effective trading of cryptocurrencies, but a number have also been built on blockchain tech, adding an additional layer of security.

Cryptocurrency Trading

Since the early days, when investors were only able to invest in the actual cryptocurrencies across exchanges that were no able to protect investor funds, times have changed.

The crypto trading market has evolved from exchanges offering crypto to crypto trading, into trading between cryptocurrencies and fiat money, but also the trading of certificates of deposits, derivatives and more.

As crypto exchanges have developed, risk management and other platform capabilities have been introduced. Encouraged by the volatility and potential earnings the crypto market offers more seasoned investors crossed over.

Across the crypto exchange spectrum, the types of exchanges on offer vary. While some are under the more standard web-based models, others are built on a blockchain platform.

As the blockchain world expands, the number of exchanges and trading platforms based on blockchain is also on the rise.

One such trading platform is Torex.

Torex

Torex is a multifunctional blockchain platform supporting cryptocurrency trading.

The advantage of using Torex is that it consolidates different exchanges, coins, and analytical tools onto the Torex platform.

In the first quarter of 2020, traders will be able to trade, gain experience and share trading strategies.

The Torex trading platform delivers the following capabilities to support both more novice and advanced crypto trading:

Centralized Parallel Monitoring

Enables the tracking of cryptocurrency rates on different exchanges on the Torex platform.

Advanced Analytics

The platform is planned to provide diverse analytics, ranging from embedded news aggregators to detailed technical analysis.

Multi-Exchange & Multi-Coin

Fast operations with any coin or token (like Bitcoin and Ethereum for example) from different exchanges.

Diverse Trading Tools

The platform, in 2020, will allow traders to choose between API-trading, copy trading, arbitrage trading, crypto betting, and more.

Advanced Cryptocurrency Arbitrage

Torex’s Arbitrage Tool analyzes the liquidity and depth of order books across multiple crypto exchanges, providing traders with easy access to liquidity-driven price arbitrage.

Cryptocurrencies are considered to be the most volatile of asset classes, with values capable of rising or falling by a few percentage points in a matter of minutes.

The volatility delivers traders with the rare opportunity of inter-exchange arbitrage.

Torex provides traders with the platform to take advantage of arbitrage windows. An arbitrage window develops when the strike price of a cryptocurrency at one exchange is higher or lower than found on another.

Using the Torex Arbitrage Tool, traders are also able to adjust the parameters. Traders are able to select the exchanges, cryptocurrency pairings, minimum trading volumes, and the minimum percentage of profit expected.

This capability is delivered through the manual mode of the Torex Arbitrage Tool. In automatic mode, an arbitrage assistant will carry out the functions, with the trader being required to make only minor inputs.

Cross-Platform

Torex is fully functional on PC and mobile devices. (A fully functional mobile version for Android and iOS is due out in Q4, 2020)

The Future of Crypto Trading

The nascent nature of the crypto trading world means there are plenty of opportunities for traders, both the novice and more advanced alike.

Crypto exchanges will need to continue to develop and introduce greater capabilities to hold onto existing liquidity and fee income.

Additionally, being flexible as such to meet the ever-fluctuating demands on the regulatory front, is also an important factor for traders domiciled across multiple jurisdictions.

The minimum requirements for the vast majority of crypto traders now include:

Stop loss, take profit, and trailing stop orders. Traders now can simultaneously place stop loss and take profit orders.

Trailing stops have become more popular in the volatile world of crypto trading.

Trailing stops allow traders to adjust the order limit along with the price, which is essential within the more volatile crypto sphere.

Other Modern Trading Platform Capabilities

API Trading

API Trading allows traders to make transactions and monitor currency rates across different exchanges. The added advantage is that it supports the managing of several accounts on one exchange.

Torex uses the official APIs, developed and released by the leading stock exchanges. These APIs allow users to manage all of their exchanges on the Torex platform.

Crypto betting is similar to the futures markets, where investors and traders forecast future prices.

Crypto Betting

Another development in the crypto world is the offering of crypto betting. In crypto betting, the user needs to predict how the rate of a coin or token will change in a given period of time. (Due for release in Q3, 2020).

Idea Sharing

On the Torex platform, there is also the opportunity to share trading tips through an encrypted TOREX end-to-end messenger.

Trader ideas is a recommendation to open a transaction that a trader creates and makes visible to all users on the platform.

Within the Torex world, traders will be able to purchase a subscription for a given number of published ideas for a given number of days. In 2020 traders will have a possibility to make payments in Torex tokens, called TOR. Basic Torex functionality is and will be available free of charge.

For an investor, the investor pays a commission for the ability to view and accept trading ideas.

The platform uses a Telegram Messenger bot to ensure both quick and easy to view trading ideas and signals in support of the network.

Trading ideas provides traders and investors alike with the opportunity to seize on a series of trading ideas.

Torex will release the idea-sharing capability in Q1, 2020. The copy trading capability is due to roll out in the 2nd quarter.

Blockchain

As the cryptocurrency world has evolved, the number of exchanges developed on blockchain technology has also increased.

A key attribute to the use of blockchain technology is the level of trust and transparency it delivers.

There are a number of increasing advantages of using blockchain tech. These go beyond the recording of transactions on the exchange.

The use of smart contracts is certainly one, which delivers even greater transparency.

Conclusion

As the crypto trading world evolves, more traders and investors continue to cross over from more mature asset classes. Trading platforms, including Torex, will need to continue to deliver equivalent, if not, more advanced trading experience than seen across traditional exchanges.

Catering to the need of both traders and investors will further fuel interest in crypto trading.

Alongside the necessary tools to trade and the appropriate transaction logging, security and speed are also significant priorities.

Since the early days, when hacking and theft was rife, cryptocurrency market players have begun to provide a far safer environment.

Exchanges are increasingly using cold wallets, which holds funds offline and out of reach from hackers. 2-factor authentication (“2FA”) is widely offered to further protect investor and trader accounts. With that in mind, 2FA authentication is implemented in Torex universal trading platform as well.

Coding has also become more sophisticated. Ensuring that hackers are unable to break into the system and take what very little is online is key.

We can expect the use of blockchain and an ever-increasing number of capabilities across the exchanges and trading platforms to further support the cryptomarket.

By historical standards, more recent crypto exchange offerings are certainly more sophisticated.

This is not surprising when considering the risks associated with trading in cryptocurrencies.

For investors looking forward to Torex, the IEO is coming soon. The soft cap has already been reached. Torex’s intention is to create a sophisticated, transparent and truly universal platform to meet the needs of every crypto trader.

How To Evaluate Leading Economic Indicators

The leading economic indicators are a set of factors that provide information that is current and foreshadows future changes to the US economy. This compares to lagging indicators such as job growth or GDP. Leading indicators can help economists predict changes in the US economy before they occur. Leading indicators are not always accurate predictors of future economic activity but they can work in conjunction with other indicators to provide data about the future expansion or contraction of the US economy.

What are the components of the Leading Economic Index

The US Conference Board created an index of leading economic indicators, that are part of a broader analytic system that is geared to point to inflection points in economic growth. There are three different indicators including leading, coincidental and lagging economic indicators. The conference board was established in the US in 1916. The group is a non-profit organization that can be described as a think tank.

The index of leading economic indicators is constructed to summarize future economic performance. The goal is to reveal inflection points in economic data that show when the US economy is poised to turn.

The ten components of The Conference Board Leading Economic Index include:

  • Average weekly hours, manufacturing
  • Average weekly initial claims for unemployment insurance
  • Manufacturers’ new orders, consumer goods, and materials
  • ISM Index of New Orders
  • Manufacturers’ new orders, nondefense capital goods excluding aircraft orders
  • Building permits, new private housing units
  • Stock prices, 500 common stocks
  • Leading Credit Index
  • Interest rate spread, 10-year Treasury bonds less federal funds
  • Average consumer expectations for business conditions

The goal of the Index of the leading economic index is to forecast potential changes to the trajectory of US economic growth. The 35-year chart of the leading economic indicators shows that the leading indicators begin to decline ahead of the 3-most recent recessions.

The recessions are reflected by a gray bar. The leading economic indicators show a dip in performance ahead of a recession and then a rebound as the US economy begins to expand. Recessions occurred in 1991, 2001/2002, and 2008/2009. Not only do the leading economic indicators forecast a recession, but it also helps determine when the US economy is poised to rebound.

What Does Each Component Tell You?

Many of the components of the leading economic index describe employment. Average weekly hours in manufacturing, as well as weekly unemployment claims, are employment components. Although both of these components are helpful, jobs data is generally a lagging indicator. When companies begin to hire or layoff people it is because business is either running at a brisk pace or declining sharply. Rarely due companies foresee that there is a need for expansion or contraction before it affects their business.

The second grouping of components that are associated with the leading economic index is orders related. These data points are very helpful in predicting future economic activity. The three orders components are Manufacturer’s new orders of consumer goods and materials. The ISM index or new orders and Manufacturer’s new order of nondefense capital goods excluding aircraft orders. This last component is a proxy for business capital investment.

US Housing Building Permits is the next component and it provides the index with information about future housing starts. Prior to building a home, a builder needs to secure a building permit which will provide him with the proper licenses to build in that area.

The next component is stock prices. The leading economic index uses the S&P 500 index prices to determine market sentiment. The leading index also uses a leading credit index to determine if people are attempting to increase or reduce their borrowing, which provides the index with information about future spending.

The next component of the index is the yield curve. The index calculated the difference between the 10-year US treasury yield and the Federal Funds rate set by the US Federal Reserve. The yield curve tells the index if borrowing costs increase or decrease with time. In general, a borrower will pay higher interest rates for longer tenor loans. This is because there is more uncertainty for longer periods of time. If you are looking to trade debt or currencies the yield curve is very important.

If short term yields are higher than long term yields, such as the fed funds rates at a higher level than the 10-year treasury yield, the yield curve is inverted. An inverted yield curve means that the investor believes there is more risk in the short-term than over the long term. This type of scenario usually points to a recession. The last component is the average consumer expectations for business conditions. This is a measure of sentiment and can be very helpful in determining the short term movements in economic activity.

How to You Trade Around the Leading Economic Index

The leading economic index has 10-subcomponents that can be gauged ahead of the release. Similar to other economic releases, this index will provide opportunities if it comes out above or below expectations. Since most of the subcomponents can be calculated by analysts in advance, a surprise should not be taken lightly. Both better than expected or worse than expected numbers should tell you that the market might be positioned incorrectly, which could generate a move in many underlying securities.

 

Summary

The leading economic indicators are a set of ten individual data points that are used by the US Conference Board to forecast future changes to the US economy. Leading indicators can help economists predict inflection points in the growth of the US economy before they occur. Leading indicators are not always accurate predictors of future economic activity but they can work in conjunction with other indicators to provide data about the future expansion or contraction of the US economy. The components consist of jobs data, manufacturing orders, housing information, stock and bond prices as well as credit and consumer sentiment information. Since most of the sub-indices can be calculated before the number is released, a report that reveals a greater than or less than expected index should be taken seriously.


This article is brought to you by the courtesy of SimpleFX. SimpleFX is a leading online trading provider, offering financial instruments including, Forex as well as CFDs on Bitcoins, Litecoins, indices, precious metals and energy. Our mission is to providing trading conditions that are simple and transparent.

Technical Analysis MACD – How Professional Traders Use it

When momentum begins to fall it signal to traders that prices could begin to consolidate or reverse. One of the best and most complete momentum indicators is the MACD (moving average convergence divergence) index. Many traders also use the MACD histogram to forecast MACD crossover signals.

History of the MACD

The MACD was created by Gerald Appel in the late 1970’s. The MACD measures momentum by measuring whether certain moving averages are converging or diverging. The MACD is considered one of the simplest and most effective momentum indicators available. The MACD calculates momentum by subtracting the longer moving average from a shorter moving average.

The Components

The nuts and bolts of the MACD consist of a 12-day exponential moving average, and the 26-day exponential moving average. The MACD line, is created by subtracting the 12-day exponential moving average from the 26-day exponential moving average. The MACD signal line is the 9-day exponential moving average of the MACD line. The MACD histogram is the difference between the MACD line and the MACD signal line.

The Crossover Signal Strategy

Divergence occurs when the 2-exponential moving average moves away from one another. Convergence occurs when the moving averages move towards each other. The shorter moving average (the 12-day exponential moving average is faster and responsible for most MACD movements. The longer moving average (the 26-day exponential moving average) is slower and less reactive to price changes.

When the MACD line crosses above the MACD signal line positive momentum is accelerating. When the MACD line crosses below the MACD signal line negative momentum is accelerating. You can use the crossover signal as a straight buy signal, but you can also incorporate this signal with other technical analysis tools.

You can see from the chart of gold prices that there are several MACD signals that are generated and when the price of gold is moving sideways the signals made it difficult to generate gains. On the other hand, when a trend breaks out, the MACD quickly exposes accelerating momentum, as does not turn back.

MACD Histogram

The MACD signal line can also be viewed in histogram form. The MACD histogram oscillates around the zero-index level. When the histogram crosses above the zero-index line a buy, a signal is generated. When the MACD histogram crosses below the MACD zero index level a sell signal is generated. The MACD-Histogram represents the difference between MACD and its 9-day EMA, the signal line. The histogram is positive when MACD is above its 9-day EMA and negative when MACD is below its 9-day EMA.

Trading the MACD Divergence

MACD divergence occurs when prices are rising or falling at a decelerating rate. This concept is important as you want to ride the trend of the market when price changes are accelerating. When prices begin to decelerate the market is moving into equilibrium and will likely consolidate until new information moves it again.

The way to measure a MACD divergence is to look for a situation where prices are rising and the MACD trajectory is falling. It could also occur when prices are falling and the MACD trajectory is rising.

Examples of Divergence

If you look at the chart of gold prices you can see that a MACD divergence occurred in February of 2019. Here the prices of gold were rising but the trajectory of the MACD line was declining. You can draw a trend line of the MACD line to determine the trend of the MACD line. You can also perform this analysis using the MACD histogram. If the price of gold is rising but the MACD histogram is flat or declining than a divergence is occurring.

Prices in these situations are rising while momentum is falling, which means that prices are experiencing a blow off. A good way to think about this is when you take your foot off the gas of a car when you are climbing up a hill. At first, you would continue higher, but as your rate decelerates, you eventually get to a point where you might begin to slide backward.

Using the MACD histogram to Forecast a Crossover

The MACD-Histogram can help you forecast a signal line crossover in MACD, when divergences are started to occur. These divergences signal that MACD is converging on its signal line and could be poised to generate a crossover signal. There are two types of divergences, peak-trough and slant. A peak-trough divergence forms with two peaks or two troughs in the MACD-Histogram. A peak-trough bullish divergence forms when MACD forges a lower low and the MACD-Histogram forges a higher low. Well-defined troughs are important. Slant divergence i like the divergences you see when you draw a trend line through the MACD line.

Summary

The Moving Average Convergence Divergence index is one of the best and most efficient momentum oscillators. The index is formed by deriving the difference between two moving average to determine if prices of an asset are accelerating or decelerating. The most common signal used by traders is the crossover buy and sell signal. In addition, many traders use the MACD histogram. This is the difference between the MACD line and the MACD signal line. When prices crossover the zero-index level a signal is generated. Traders also use divergence. This is when prices are moving one way and the MACD fails to confirm acceleration. There are two different types of divergence, the first is peak through and the second is slant.


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This is How to Trade the NFP Report



What is the NFP report?

The headline data point is the non-farm payrolls number. It is a measure of how many net new jobs are added to the U.S. economy each month. Along with the NFP figure are data on unemployment, which sectors are hiring or firing employees, the average number of hours worked, the average hourly earnings, and a few other key metrics of employment.

Two of the lesser watched yet still important metrics are the employment-to-population ratio and the labor-force-participation rate. The employment-to-population ratio is a measure of how many people are working relative to the total population, the labor-force-participation rate is a measure of how many people are working relative to those who could be. In recent years, because the Baby Boomers are retiring, the employment-to-population and labor-force participation rates have seen sharp declines.

Why is the NFP report so important?

The NFP report is so important because it is a reading of the core fundamental conditions that drive the U.S. The United States. is a consumer-driven economy, labor market health and wage gains have a direct impact on consumer health. When more people are working, when wages are rising, when employees are confident, and labor markets are tight the consumer if flush with money. When the consumer is flush with money, it is more comfortable spending on things it needs, services it likes, luxuries it can’t resist, and that fuels the broader economy.

The Report has flaws

It may surprise you to know that the NFP, the most closely watched economic indicator in the market, is also one of the most flawed. To begin with, the NFP is the difference between two estimated figures. The government estimates the number of job losses and the number of job gains subtracts one from the other and gives the NFP. It is far from an exact figure and gets revised not once but twice before it is finalized. This means the first figure you hear is often far from accurate.

Additionally, the margin of error is often larger than the actual number. At any given time, on any given release, the Non-Farm Payrolls figure you see in the headline is affected by such a large margin of error it is near meaningless without context.

Bottom line, the NFP is affected by so many variables, the figures are subject to so many revisions, with such a large margin of error it is unusable on its own.

This is how you read the NFP figures

The best way to read the report is over time. For one, this allows the first estimates to be finalized and revisions to be made. It is far better to track the trend of the Non-Farms Payroll numbers than the numbers themselves. Even more importantly, it is necessary to track the trend of the twelve-month average of job gains. The twelve-month average is the best gauge of labor market trends and can be used to judge the importance of all other data within the report.

Likewise with the unemployment and average hourly wage figures, the next two most important data points within the non-farm payrolls report. The headline figures are subject to revision so tracking them over time is the best approach. If unemployment is tracking lower, or wages are tracking higher, it is a good sign of overall economic health. The problem is that on any given month either of these figures could give a false signal, a market moving signal, and you can’t confirm it until the next report comes out.

What the NFP means for The FOMC, the Economy, and Inflation

FOMC has two mandates that it must work to fulfill; full employment and inflation. With this in mind, it makes sense that the FOMC would pay close attention to the NFP numbers and how they are tracking over time. In this respect, the average hourly wages are as important as the payrolls data. Ironically, the FOMC’s two mandates are often at odds with each other because their relationship is circular, one leads to the other.

Full employment leads to inflation leads to higher interest rates leads to less activity leads to less employment leads to lower inflation leads to lower interest rates leads to more economic activity leads to rising employment leads to full employment and on and on.

he FOMC’s true mission is to balance their mandate, keep economic activity as high as possible without inducing too much inflation. In terms of the NFP, the FOMC will be watching the trajectory of job gains, the number of employed persons relative to the workforce and population, and average hourly earnings. They want to see employment on the rise,  unemployment on the decline, and wages rising but not rising too fast.

The two biggest problems faced by the FOMC, relative to the NFP, is if wages are rising too fast and if wages are shrinking. When wages are rising too fast, the economy is in danger from unsustainable over acceleration which brings the need for higher interest rates into focus. Higher interest rates have a negative effect on the economy by making it more expensive to do business. When it is more expensive to do business there is less expansion, less expansion means less demand for employees and less inflationary pressure in wages.

Falling wages are a sign of an economic recession. Wages fall because there is an overabundance of employees for business to choose from. They are able to pay less for the same job because someone will always be there to take it, no matter how low the pay is. In this environment, the FOMC is faced with the dual problem of slowing activity and slack labor markets, problems that can be fixed with lower interest rates. Lower interest rates make it cheaper to do business and are a motivating factor for economic expansion.

How to trade the NFP report

There are two ways to trade the non-farm payrolls report, these are the long-term trend and the near-term news. By far the most effective way of using the NFP for trading is from the long-term perspective. Basically what you are doing is using the NFP to determine or confirm the trend, changes in trend, and major turning points in the market. If the NFP is trending positively and showing signs of strength ie trending above the 12-month average then the fundamental trend of the market is bullish.

In this case, it is advisable to follow only bullish signals when they are presented on a price chart. Price corrections and pull-backs to support levels are often opportune entry points for longer-term style trades. By longer-term style trades I mean trades you will want to keep open for multiple days, possibly even weeks or months.

The other method of trading the NFP is the short-term news; is the NFP better or worse than expected, or does it confirm or refute market expectations. The problem with this method is that the NFP doesn’t always get the market wound up enough to produce a move and, because of its flaws, rarely produces a figure that is truly market moving.

In practice, the two techniques bare some similarities. In order to capitalize on near-term expectations, you need to have a good understanding of the long-term trends and why today’s NFP is more or less important than any other NFP report. Changes in trend and confirmations of expectation are by far the best signals.

These are the assets that are most affected by the NFP

The non-farm payrolls report is important as an economic indicator and as an inflation gauge so it makes sense that it can affect multiple assets and assets classes. It is important to note that two important data points are the actual NFP figure including revisions and trend, and the hourly wage gains.

The Dollar

The dollar is the most obvious market affected by the NFP. The NFP is a gauge of economic health, it is a gauge of inflation, it is an FOMC influencing figure, it has bearing on interest rates, and it can move the dollar. When the NFP is positive and trending positive, especially the hourly wages, you can expect to see the dollar exhibit bullish behavior. Better than expected data is a possible catalyst depending on the inflation situation.

If underlying core inflation, as read by the PCE price index, is running tame it may not matter if hourly wages are running hot. Ironically, hot wage gains are good for the consumer which is also good for the overall economy. Tradable assets that may see a price move when the NFP is released include the Dollar Index (DXY), USD/EUR, GBP/USD, USD/JPY, USD/CHF, any other USD denominated pair including BTC/USD and other cryptocurrencies.

S&P 500/Indices

the NFP can have an impact on individual stocks and that effect is best seen in the indices. The indices movements are the net gain/loss of the stock market as a whole. If the NFP has buyers buying or sellers selling you will see it in the index charts. A strong NFP number can help confirm trends and pinpoint key turning points in bear markets. Likewise, weak or weakening NFP, especially with slowing wages or wage declines, would help confirm bear markets and changes in bull market conditions.

Gold

The NFP has an impact on gold if only because of its effect on the dollar. In reality, the NFP’s economic impact goes much further. A strong NFP may, in fact, support gold prices if there is a sign of industrial and/or physical demand within the economy. If not, you can expect to see gold move contrary to the dollar in relation to the labor data most times.

Oil/WTI/Brent

The NFP is an economic indicator that can affect oil/energy/gas demand outlook as well. If the NFP is trending strongly it is a sign of underlying economic strength and consumer health. These kinds of conditions typically lead to higher energy use for industry, housing/homes, travel, and work. By itself, the NFP is not a good indicator of oil price direction but it can affect the importance of other data. If global oil supplies are tight, tightening, or demand is high or rising, a strong NFP could help spark a rally or fuel one that is already in place.

Some other labor market indicators you should know

There are a few other important labor market indicators you can watch to help predict labor market trends and the NFP.

  • The ADP Report is a private-sector gauge of labor market trends akin to the NFP. The ADP and NFP are frequently out of alignment on their gauge of monthly job gains but tend to track alongside each other over time.
  • The Challenger, Gray & Christmas report on planned layoffs gives a read on job cuts and planned hirings over the course of the month.
  • The JOLTs report is a read on the number of job openings; when there are more job openings than available workers you can expect to see labor markets tighten.
  • The Kansas City Federal Reserve’s Labor Market Conditions Index is a broad gauge of labor market health and useful for pinpointing major changes in labor market trends.

The Non-Farm Payrolls Report; The Final Analysis

The Non-Farm Payroll’s report is without a doubt an important monthly data point. It is also, without doubt, one of the hardest to handicap and trade from. While it does have a near-term effect on the market and price movement its value is in the long-term analysis. The trend of job growth, the trend of wage inflation, and the trend of unemployment is far more important than any single data point on any given month.

You can trade the NFP report across any or all asset classes with Tickmill, a regulated forex and CFD broker with operations in all major jurisdictions.

Defensive Assets and How Should You Use It

To anybody who is seriously interested in defensive instruments, I highly recommend taking the time and studying in detail the questions listed below.

  • First, let us speak about the beta coefficient. We need to realize that such tools as SDS (2x leveraged inverse S&P 500 ETF), DXD (inverse Dow Jones ETF) and, for example, SPXU (3x leveraged inverse S&P 500) have a negative beta coefficient. This is due to the fact that they move against the market, shorting it and leading at the same time. For example, the beta coefficient of SDS and DXD is -1, and SPXU is characterized by a -1.7 beta coefficient.

If we secure our portfolio through buying volatility, namely VXXB and TVIX, they have a positive beta coefficient value since for these tools, the index is the short-term total result of VIX index futures – a strategy index that maintains positions in the two closest monthly futures contracts of the CBOE volatility index (VIX), and in no way the S&P 500 or Dow Jones stock indices. In this case, the beta coefficient is 1 and 1.5 for VXXB and TVIX, respectively.

  • Secondly (and, in my opinion, most importantly), we should stress the importance of the FUNCTION OF TIME when using these tools. By analogy with options (theta function), the time factor is also important here. These tools should not be kept in a portfolio for long or used as a long hedge. We need to try to get rid of them on time so as not to have hang-up adverse positions in our portfolio.

Here is an example. Suppose there is a decline in the market or there is going to be a correction. We are opening a long position in VXXB. For the period of time when the indices fall it provides an excellent hedge that compensates for our losses of positions in equities. Nevertheless, it is necessary to get rid of this protection on time because when the market direction changes, our defensive assets will incur our losses.

Keep in mind and memorize it! You should not keep defensive assets in your portfolio for long if you do not want them to work against you. Gold-mining stocks are excellent for the long run. First, they are not as volatile as reverse ETF, VXXB or TVIX. Secondly, they will give you an extra cash flow in the form of dividends.

You should not use insurance happy go lucky. It is necessary to monitor the market and make sure you study the material. All of my statements are of the utmost practical importance. In this case, time will either become your friend or your worst enemy.

Perhaps I’ve used gibberish, the language of an investment banker to write this text, so not everybody will understand all the aspects. Should you have any questions, you are free to ask me. But don’t forget the good old rule – “Study, study, study!” Whose words are these? I don’t even remember.

The article was written by Evgeny Kogan, Ph.D., investment banker, the author of the telegram-channel Bitkogan.

The U.S. Yield Curve Is Flattening And What You Need To Know About It

What Is The Yield Curve And Why Does It Matter

The yield curve is a much-talked-about phenomenon, especially in today’s market environment. With central banks around the world shifting policy stance, trade relations impeding economic activity, and global GDP slowing the yield curve is going to be in focus for some time. 

A yield curve is a plot showing the relationship between interest rates for similar securities across different maturities. The securities in question are fixed-income securities such as bonds. The most commonly tracked yields are for bonds issued by the U.S. Treasury but they are not the only ones. Bonds issued by any government could be tracked in this manner to glean information about the market.

The U.S Treasury issues bonds in durations of 3 months, 2 years, 5 years, 10 years and 30 years. The curve is most often used in two ways. In the first, the rates are used as a comparative benchmark when looking at other forms of investment.  These include but are not limited to mortgages and bank lending rates.

The second way the curve is used is to determine changes in the economy. A normal yield curve is one in which longer-termed maturities have higher interest rates. This creates a rounded or humped curve. A flattened or inverted curve shows longer-maturity bonds have an equal or lower interest rate than the shorter end of the curve.

A normal yield curve is viewed as a sign of economic expansion. That is because it shows buyers are more interested in shorter-duration securities. Flattened or inverted yield curves are often viewed as signs of impending recession because traders are rushing to lock in higher rates on longer-term “safer” securities. This is a sign of investors seeking shelter from the storm. When the curve is flattening, in either direction, it is a sign of economic change.

What Is The Yield Curve Doing Now?

The U.S. yield curve has flattened over the past year. The odd thing is that rates on the long end of the curve, rates for the 5, 10, and 30-year maturities, have remained relatively flat while those on the short end are rising. This shows investors are selling their short maturities but not yet begun buying up the long end. Economic change is afoot, the problem for investors is knowing what kind of change is coming.

Economic indicators show the U.S. and global economy slowed down in the fourth quarter of 2018. That slow down may linger into 2019, it may turn into a recession, but there is a question waiting to be answered before the market will commit to that view; trade.

The economic slowdown and the gloomy economic outlook is all tied to the trade war between the U.S. and China. If the two sides reach agreement and trade ties are renewed economic activity will pick up and the curve will return to normal. If the two sides are not able to reach consensus tariffs and non-tariff barriers, and escalation of tensions, will drag the global economy and the yield curve will invert.

The curve may continue to flatten or invert, with or without a trade deal. If it does the FOMC will be forced to ease monetary policy in order to support the U.S. economy.  Easing policy, lowering interest rates and ending the balance sheet run-off, are the only tools the Fed has to support economic growth and the yield curve. If there is no trade deal the Fed may not have enough fiscal power to stop the curve inverting. 

This Is The Outlook For The U.S. Yield Curve

The outlook for the U.S. yield curve is uncertain although there are some who say it will invert in 2019. The flattening we’ve seen over the past year suggest a change in the economy is at hand, the fact that change is induced by trade relations leaves the outcome uncertain. For now, investors should view the flattened curve as a sign of caution; the market is ready for a recession but equally hopeful an economic downturn won’t happen. If the data remains weak, if the trade talks fall apart, we may see an inversion.

How Interest Rate Differentials Fundamentally Drive the Currency Markets

The differential between the short or long term interest rates of the countries that make up a currency pair is used to create the forward rate, and over the long term, help drive the direction of a currency pair. While most professional traders are keenly aware of the debt market and how it affects the currency markets, many novice traders are unaware of how interest rates drive currency markets movements.

What are Interest Rates

Interest rates are the amount that is charged for a loan. The interest rates that affect the currency markets are sovereign interest rates. A sovereign rate is an interest rate from a loan that a country issues in the form of bonds to provide the capital it needs to run its country. Generally, when economic strength is pervasive, interest rates will increase, and when an economy contracts, interest rates generally decline.

Bonds, which are loans, are issued for many different tenors. Countries will issue short term notes or bills that can be as short as overnight rates, as well as terms that last for 30-years. The most actively traded bonds are those from developed countries such as the United States, Japan, and Germany. Emerging countries also have bond markets but those instruments are less liquid.

How Do Interest Rates Make Up the Forward Curve

When you purchase or sell a currency pair, you are buying one currency and simultaneously selling another currency. The majority of the currency transactions that take place globally are within the spot market. Spot market transactions settle within 2-business days. If you are interested in holding a currency transaction longer than 2-business days, you need to transact a forward trade. Forward trades add forward points to a currency pair that is transacted for three or more days.

To calculate the forward rate, currency traders use the interest rate differential. This is the difference between the short term interest rates of each of the countries that make up the currency pair. For example, if you purchase the USD/JPY currency pair, you would receive the US dollar interest rate, and need to pay away the Japanese short term interest rate.

Forward points are added or subtracted from the currency pair.  You would first need to determine which rate is higher. Currently, US dollar interest rates are higher than Japanese interest rates.  In using the example of the purchase of the USD/JPY, you would subtract the forward points from the rate which would provide a new rate that incorporated the forward points.

What Effects the Interest Rate Differential

There are several factors that drive the interest rate differential. Obviously, monetary policy changes are key to changes in countries interest rate levels. Since market forces drive interest rate levels, changes to economic data are also a key factor. For this reason, you might want to follow an economic calendar to determine if there are specific events that will drive the future direction of rates. In addition to economic events and policy changes, political strife can also drive interest rate levels. When there is uncertainty within a country, the markets will demand more from a country to lend them money.

Most developed bond markets move in tandem with one another. There are plenty of occasions where a specific event will alter the course of a countries interest rates, but when there is little new information available, most developed bond markets will move in tandem. Historically, the US bond market is the driving force behind most of the rate movements globally.

How Does the Interest Rate Differential Effect the Currency Pair

Interest rate differentials can be a benefit or deterrent when you determine to purchase or sell a currency pair. For example, if you are planning to either buy or sell the USD/JPY for 2-years, you will either receive 2.68% by purchasing the greenback, or pay away 2.68% if you purchase the yen and sell the dollar. This is because the 2-year US rate is 2.50% and the Japanese 2-year yield is -0.18%. If you buy the dollar and nothing happens for 2-years you will earn 2.68%. If you buy the Japanese yen and sell the dollar and nothing happens for 2-years you will lose 2.68%

Charting the Interest Rates Differential

One of the best ways to follow the interest rate differential is to chart it. Each currency pair reacts differently to changes in the interest rate differential. What is important to remember is that the differential works in tandem with the currency pair, so you are looking to see what the future interest rate differential will be.

You can see from the chart of the US 10-year yield versus the Japanese 10-year government bond yield that the interest rate differential trades in tandem with the USD/JPY currency pair. While there are times when the 2-assets diverge, over time they move in tandem with one another.

Many have asked the question, does the rate differential drive the currency pair, or does the currency pair drive the interest rate differential. Since the interest rate differential makes up the forward rate, the answer is both. What you want to evaluate as a trader is whether the currency pair is moving in one direction and the interest rate differential is moving in another.

Summary

The interest rate differential is the driving fundamental force behind the movements of currency pairs. The interest rate differential makes up the currency forward curve and therefore is an integral part of currency trading. Monetary policy, economic events, and political strife are the key factors that drive interest rates. To get a gauge of where the interest rate differential is relative to the currency pair you can chart the two. What you are looking for is a situation where the path of the interest rate differential and the currency pair have diverged, which might give you clues to the future direction of the currency pair.

Author: Fundamentals Translation

Fundamentals Translation, a division of the BelTranslation International Group, helps forex brokerage firms expand to 70+ global markets. Since 2002, we have been offering translation & localization services: fundamentals analysis, financial reports, broker reports, weekly market outlooks, webinar content, website text, and training material translation to our global clients. We proudly work with leading forex brokerage firms such as Swissquote, London Capital Group, trade Berry, TRADEMOTE, TRADEHOUSES.

Using Win/Loss Ratio in Trading

Avoiding this disaster is, luckily, easier than you think. Besides the win rate, we always focus on a simple formula called the “reward to risk ratio”. Simply said, it means that you compare two figures with each other: what do you win when you win and how much do you lose when you lose.

This article not only explains the reward to risk ratio itself but also shows how the reward to risk ratio offers more transparency and why this is one of our core principles at Elite CurrenSea. But first, we start with the importance of good Forex education.

Forex Education – Be Aware

The continuous supply of online trading education seems endless. The volume of material could easily overwhelm anyone who is looking to start with trading or anyone who is searching for more in-depth information about trading.

Often trading educators promote oversimplified information in an attempt to impress their public… But they purposefully ignore or fail to share their full trade statistics.

Luckily, there are a couple of key tips and tricks that traders can use in order to find good and reliable mentors. Following these few critical steps could save you a lot of headaches:

  • Research the mentoring website on Forex Peace Army. Evaluate the rating, check the comments and also make sure that there are a sufficient number of reviews.
  • Evaluate their transparency and openness. Evaluate whether they are sharing their trading statistics and also check what information is being shared.
  • Check out their YouTube channel. Are there serious videos with good analysis and education or are they only promoting others and offering quick-rich schemes?
  • Check their website for day-to-day help. Anyone can create a system and leave it there forever. Live analysis and setups indicate an active team.
  • Visit their seminars. Speaking to traders face-to-face makes a huge difference and you can judge their word and credibility easier.

When you keep an eye on these 5 things, then you know that you are talking to serious traders with meaningful and professional advice.

Especially seminars offer a useful way of learning. First of all, the information is conveyed face-to-face which makes it easier to retain knowledge. Secondly, seminars add a networking opportunity to the mix as well.

FX& CFD Education

Talking to other traders from the trading community can be almost as valuable as learning from mentors themselves. Traders like to help each other out by sharing tips, explaining tricks, and showing new short-cuts. Generally speaking, traders can learn a lot from their mentors, peers, and even students (teaching traders with less experience). Good mentors strive to offer a hub where trader learn, network, connect, become curious, and get creative.

The first concept that we explain to traders when they join our seminars or website is this simple fact: the reward to risk ratio is just as important as the win percentage. Most traders are surprised or even shocked, to hear this statement but the mathematical truth is simple. Let’s explain.

A danger of Only Using Win Rate

Do you sometimes dream of achieving a 99% win rate? It seems perfect but only a few traders understand the underlying risk. Essentially one bad loss or unlikely event could make your track record meaningless. Sometimes traders call this unlikely event a Black Swan (a low chance event with a massive impact – any regular loss in Forex and CFD trading is not considered a Black Swan).

Let’s say that you managed to trade with unprecedented accuracy and you made:

  • 25 wins in a row
  • With an average of 2 pips per trade
  • For a total of 50 pips.

Of course, nobody can book wins forever and a loss is only a question of time. Ironically, it only takes one loss of 50 pips to wipe out all of the previous gains. A loss of 100 pips in one single trade setup, in fact, puts the entire account at a major loss (+50 – 100 = -50 pips).

Most traders like to aim for and boast about a high win rate but unfortunately, it just gives traders a false sense of achievement and security. A trader could actually win 95%+ of their trade setups but still lose money in the long run.

Reward to risk ratio

Reward to Risk Ratio Explained

Traders can improve their approach and trading performance by simply adding the reward to risk (R:R) ratio, besides using the win rate.

The R:R ratio indicates what traders can expect to win and loss on average. As mentioned above, what do traders win when they win and how much do they lose when they lose.

Here is a definition:

  • Reward: average profit made per setup
  • Risk: average loss made per setup
  • Reward to risk ratio: average profit versus average loss.

Let’s give a simple example:

  • Your winners closed for an average of 15 pips and your losses for an average of 10 pips – what is the R:R ratio?
  • The answer is 1.5. The 15 pip average win is one and half time as a large as the 10 pip average loss.

Assuming an average win of 60% versus a loss percentage of 40, what is your expected profit?

  • Expected profit = (average profit * win percent) – (average loss * loss percent)
  • Let’s continue with our example:
    (15 pips * 60%) – (10 pips * 40%) = (9 pips) – (4 pips) = +5 pips per setup.

All in all, you are netting an average of +5 pips per trade setup, even though your win rate is only 60%. Now compare the +5 pips expected profit with the ultra high win rate (25 wins out of 26 setups):

  • (2 pips * 96%) – (50 pips * 4%) = (1.92 pips) – (2 pips) = -0.08 pips per setup.

The strategy with a 60%, counter-intuitive to many traders, is in fact far more profitable than a strategy that offers a 96% win rate. The R:R ratio helps you discover which strategy is better and more profitable and provides you with a 360-degree view of your average expected profits per setup.

There are two ways how you could improve your profit expectancy:

  1. Improve your win percentage by creating better trade ideas and/or improving your timing for trade entries.
  2. Improve your R:R ratio by cutting your losses short and/or letting your winners run.

The R:R ratio is a key aspect of risk management, which remains a core point for all type of traders.

Transparency and High Valued Education

We used the R:R ratio in this article as a prime example that trading is not as simple as some people promise. Many traders tend to boost their performance by only mentioning the pips gained (how risk is taken?) or their win rate (what is the R:R ratio?). Now you know that both of these statistics mean little without the proper context.

In fact, we at Elite CurrenSea decided to make its education more dynamic by offering regular forex and CFD seminars from the fall of 2018 and onwards. The first concept that we explain to traders when they join our seminars or website is this simple fact: the reward to risk ratio is just as important as the win percentage. If you find the topic interesting, join our facebook page and tune in to the live broadcast of the full Utrecht event 15:00 on February 16th. You can also find the recording later on our YouTube page.

REGISTER FOR FREE

Wishing you good trading,

Nenad Kerkez
Chris Svorcik

Elite CurrenSea

Elite CurrenSea is a website focused on Forex & CFD trading, analysis, systems, and software. It offers two proprietary trading systems called ecs.CAMMACD and ecs.SWAT and also a live service with trade setups, ideas, analysis, and webinars called “ecs.LIVE”. Our trading is based on a mixture of indicators, patterns, and price action for tackling the markets.

High Leverage Crypto Trading: Ultimate Guide

Crypto exchanges and brokers

Many would ask why you need brokers in order to trade cryptos when you have cryptocurrency exchanges where you can buy or sell them. This is a good question, but not that easy as it seems at first sight. Indeed, signing up for an account at a crypto exchange is hassle-free, and once you have it you can directly buy, exchange, and store cryptos on your wallet before the price goes up enough to sell them and earn your profits. Experienced traders, however, know, that crypto exchanges are unable to offer a comfortable trading environment and good conditions as most brokers do.

Simply put, crypto exchanges are new to the market, while most brokers have over 20-years experience in online trading and providing the clients with top tier services. An advanced user interface, 24/7 support, high security and safety, multiple charting options, mobile apps, and many more things are only available with online brokers.

Why cryptos are popular with traders

One of the major reasons is high volatility. While long term investors buy and hold assets for years, intraday traders prefer volatile markets to reap quick profits. Volatility offers a lot of trading opportunities, and although the risk is higher, the profit potential is much bigger. This is why those who prefer short term strategies are fond of digital currencies.

Another reason is that the crypto market is growing sharply. You will hardly find a person who has never heard of cryptocurrencies. It is being advertised heavily in financial media and elsewhere, which is also pushing the crypto market higher; as a result, people are constantly requesting crypto trading options from the brokers. Currently, there are many investors who trade on the digital currency market only.

Trading cryptos with leverage

Marginal or leveraged trading is very much popular with FX traders, as it enables trading large amounts that by far exceed the account balance. You should note however that trading leveraged products magnifies both potential profits and losses, so it is not fit for beginners.

Seasoned traders, however, tend to choose those brokers that offer good leverage, as they already have much experience in risk management. For your convenience, we have analyzed more than 50 most popular world-wide brokerages and have selected a list of brokers that offer cryptocurrency trading with a leverage of 10:1 and higher.

Leveredge

Each of the above has its own features and trading conditions that may have more or less weight for a certain trader. Please note that trading cryptocurrencies carries high risks by itself while using leverage in this market is even riskier and requires a lot of experience. If you are just starting out, we recommend you first testing your strategies on a demo account in order to understand whether you are fit for trading in this market. Only once you get positive results you can try it out on a live account.

‘Alternative Data’ is Going Mainstream, Here’s Why Investors Should Pay Attention

When it comes to investing, the name of the game is information. To keep up with others and outperform in an increasingly competitive market, fund managers and retail investors alike are always on the lookout for crucial information that will give them an advantage. Information comes in a variety of forms; most commonly, many are used to traditional data and information supplied by companies themselves. Investors look to a prospectus or other financial documents to make decisions, but that’s also the same information others are looking to for their own analysis. What other options do they have though?

One area of finance that’s rapidly expanding is the introduction of alternative data. Unlike traditional data sources, alternative data is information collected and utilized in an investment strategy that does not come directly from the company in question. To stay ahead of the curve, investors are using alternative data as a competitive advantage to generate alpha. Alternative data is a simple term used to describe a wide array of information that isn’t traditionally considered when making investment decisions. These data sets can range anywhere from social media feeds, to communications metadata, to satellite imagery, and nearly everything in between. In fact, the alternative data movement is getting so much attention that the Deloitte Center for Financial Services recently called it “today’s innovation [that] could be tomorrow’s requirement,” further stating that:

“The lure of alternative data sets is largely the potential for an information advantage over the market with regard to investment decisions. True information advantage has occurred at various times in the history of securities markets, and alternative data seem to be just its most recent manifestation…Speed and knowledge are advancing with the use of advanced analytics, and there will be no waiting for laggards, no turning back.”

This new trend is all about embracing the shifting investing landscape and looking at non-traditional ways of evaluating and monitoring industries. To put things into perspective, consider the case of alternative data in the way of logistics data. According to Greenwich Associates “Alternative Data for Alpha” research, logistics data is at the top of the alternative data wishlist for both asset managers and hedge funds, and for good reason.

In the study, Greenwich Associates gives an example of looking at the logistics and supply chain data for a large tech company that’s just about to release a new mobile device. Investors are anticipating this new device rollout to substantially impact upcoming earnings, but they also know that the success of the new device rollout is dependent on factors other than the tech company itself.

Other key factors to consider in the release, before making any investment decisions, is the company’s dependence on many small, private suppliers from across the globe. Alternative data like additional information on suppliers, their background, company health, and history, etc. all come together to give investors a bigger picture of the situation and make more informed investment decisions.

Above is just one example of using alternative data to inform investment decisions but there are essentially limitless possibilities and types of alternative data out there. For the time being, alternative data is still new enough to provide investors with an advantage over others; however, that likely won’t be the case for much longer. Greenwich Associates predicts that alternative data will “only be alternative for so long—eventually becoming a core part of any portfolio manager’s toolkit once the aforementioned roadblocks are taken down.”  Those roadblocks? According to their study, factors like “prohibitively high fees” and the procurement process is too cumbersome ranked the highest.

Providers Bringing ‘Alternative Data’ Mainstream

Since the future of alternative data in the investment world looks like it’s here to stay, the next question investors are asking is how do we get it to be more accessible? Given the responses from Greenwich Associates’ research, there are still barriers keeping alternative data from being utilized to its fullest extent. Fortunately for investors, there are some ways the information is being brought out from obscurity and into the mainstream. Here are some up and coming projects tackling the current pain points holding alternative data back.

AlternativeData is currently connecting institutional investors of hedge funds and long-only asset managers with alternative data for investing. The company, consisting of former buy-side and sell-side analysts and data analysts, allows investors an easy way to purchase data from their network of alternative data providers.

The Quandl Data Hieratchy
The Quandl Data Hierarchy

Competitor Quandl offers institutional investors similar services by connecting them with alternative data. Quandl believes that “alternative data is going to be the primary driver of active investment performance over the next decade.” Additionally, Quandl offers businesses the chance to work with them to convert current data they may have collected into a source of recurring revenue. Many companies have been using their own alternative data to inform their decisions, so why not leverage what they’re not using for more revenue?

Closing the list is SciDex, a blockchain-based alternative to other providers. The SciDex foundation is building a decentralized marketplace for users to buy and sell scientific data that can then be used for making more informed investment decisions. SciDex is different from other providers because of its focus on a democratized marketplace for data and its artificial intelligence (AI) tools used for building smart data sets. Exchange users will also have the ability to create calls for contributions of data they need and will have access to voting on the blockchain for issuing grants and subsidies for new data providers to grow the industry as a whole.

Whether your needs as an investor are looking to new blockchain and AI focused technology for access to alternative data or going through a more traditional provider, the number of ways to gain access to the data you need is growing. Current estimates put the total amount spent on alternative data to be around  $183 million per year, but Tabb Group expects that the amount could likely double over the next five years. It’s only a matter of time before alternative data is no longer “alternative” as more funds incorporate the data into their strategy and investors don’t want to fall behind; as Deloitte put it: Today’s innovation could be tomorrow’s requirement.