Stock Buybacks: Why Would a Company Reinvest in Themselves?

U.S. corporate buybacks are on the rise in 2021 lifting investor spirits after last year’s pandemic dampened activity. While most investors are eager to see how much buybacks may support their investments, some are confused over what they are and how they work, and whether they are actually good or bad for a company’s stock price.

Corporations often buy back large blocks of their stocks typically when share prices are low, but some may choose for other reasons to buy their company’s stock even when analysts believe company shares are overvalued. Whether they buy their shares at cheap or expensive levels, a stock buyback is not always beneficial for individual investors.

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Historic Background

Stock repurchases weren’t always legal per se. After the stock market crash of 1929 and the Great Depression, the U.S. government passed the Securities Act of 1933 and the Securities Exchange Act of 1934 to try to prevent it from happening again.

The 1934 legislation didn’t bar stock buybacks, per se, but it barred companies from doing anything to manipulate their stock prices. Companies knew that if they did a stock buyback, it could open them up to accusations from the Securities and Exchange Commission (SEC) of trying to manipulate their stock price, so most just didn’t.

Tax cuts during the Trump administration made stock repurchases very popular as corporations spent billions on their own stock to reward shareholders and investors. However, corporate executives and insiders have also been accused of taking advantage of the stock buyback boom to sell shares they own to the companies they work for, profiting handsomely. Companies are spending millions or billions of dollars to reward shareholders and prop up their stock prices with buybacks, even if that means laying off workers to do it.

Recently, the Biden Administration announced it was planning on reforming current tax laws. If corporations begin to fear that some of the tax advantages of a stock buyback may be reduced or eliminated then this may encourage companies to become more active in 2021 before the tax changes become law.

What is a Stock Buyback?

A stock buyback, also known as a share repurchase, takes place when a corporation buys its own outstanding shares in order to reduce the number of shares available on the open market.

In a stock buyback, a company repurchases its own shares from the broader marketplace, usually through the open market. That leaves the remaining shareholders with a bigger chunk of the company and increases the earnings they reap per share, on top of the regular dividend payments that companies make to shareholders out of their profits.

Why Companies Perform Buybacks

Corporations buy back shares for a number of reasons such as to increase the value of remaining shares available by reducing the supply of outstanding shares or to prevent other shareholders from taking a controlling stake, sometimes called a hostile takeover.

Another reason for a buyback is for compensation purposes. Companies often award their corporate employees with stock and stock options. This benefits the existing shareholders and board members who are usually paid in stock options.

Pros of Stock Buybacks for Investors

  1. Boost in share prices
  2. Rising dividends
  3. Better earnings per share
  4. Less excess cash
  5. Positive psychology

“With the market being as expensive as it seems, share repurchases could drive the market that much higher,” said Robert Pavlik, senior portfolio manager at Dakota Wealth in Fairfield, Connecticut.

“It adds to the Street’s belief that there’s an underlying bid, we’re not in this alone, and someone else is going to support the stock and that’s the company,” he said. “It turns out to be a good thing for share prices. But they run the risk of overvaluing stocks, and it speaks to the broader question about why companies are doing it.”

Cons of Stock Buybacks for Investors

  1. Poor predictions
  2. Sinking dividends
  3. Poor use of capital
  4. Management self-interest
  5. Cover for stock handouts

Larry Fink, CEO of BlackRock, one of the largest investment companies in the world, in 2014 warned U.S. companies to slow down on buybacks and dividends.

“We certainly believe that returning cash to shareholders should be part of a balanced capital strategy; however, when done for the wrong reasons and at the expense of capital investment, it can jeopardize a company’s ability to generate sustainable long-term returns,” he wrote in a letter.

Recent Activity Indicates Companies Leaning to the Pro Side

The rapidly improving economy and stocks at record highs may be fueling a flurry of stock buyback activity in 2021.

Banks have improved their capital positions and should be allowed to continue to buy back their own shares, Treasury Secretary Janet Yellen said in March.

Regulators restricted share repurchases in 2020 for the biggest institutions in the country as a precautionary measure after COVID-19 reached pandemic status. After those banks passed a pandemic-focused stress test in December, the Federal Reserve said it would allow buybacks to resume, though with some restrictions.

Yellen, speaking in March before the Senate Committee on Banking, Housing and Urban Affairs, said she agreed with allowing the share buybacks.

“I have been opposed earlier when we were very concerned about the situation the banks would face about stock buybacks,” Yellen said. “But financial institutions look healthier now, and I believe they should have some of the liberty provided by the rules to make returns to shareholders.”

They are expected to do just that as the buyback restrictions eased during the first quarter of 2021.

While Yellen see no problem with financial institutions resuming buyback activity, Warren Buffett’s capital-deployment machine pulled back on several fronts at the start of the year as the billionaire took a more cautious stance on stocks.

Berkshire Hathaway Inc slowed its buyback pace, according to a regulatory filing Saturday. Buffett has struggled in recent years to keep up with Berkshire’s ever-gushing cash flow. That’s led him to repurchase significant amounts of Berkshire stock, pulling a lever for capital deployment that he had previously avoided in favor of big acquisitions or stock purchases. He set a record in the third quarter of last year, snapping up $9 billion of stocks, but slowed that pace during the first quarter with repurchases of $6.6 billion.

Berkshire repurchased more stock in January and February than the company did in March when the stock climbed 5.8% according to the filing. Buffett’s long been disciplined on the price of buybacks, noting in 2018 when the company loosened its repurchase policy that he and his longtime business partner and Berkshire Vice Chairman Charlie Munger can repurchase shares when they’re below Berkshire’s intrinsic value.

Despite buybacks that fell short of Buffett’s quarterly record, the billionaire investor has continued to go after Berkshire’s own stock since the end of March, with at least $1.25 billion of repurchases through April 22, according to the filing. And given that Berkshire has no set amount allocated for buyback plans, sizable repurchases are still a nice bit of capital deployment, according to CFRA Research analyst Cathy Seifert.

“The fact that Berkshire allocated over $6 billion to buybacks this quarter is going to be positively received by investors” Seifert said.

What Bloomberg Intelligence Says

“The $6.6 billion 1Q buyback was an expected drop from 4Q, but still significant. Nearly all segments showed accelerated revenue and earnings.”

Share Buyback Plans are Booming

Corporate buyback announcements ‘exploded’ as trading in April wrapped up and that helped push stocks higher, said Vanda Research.

A jump in buybacks should help soften the blow in the U.S. equity market in the event of a drawdown.

“As net equity supply shrinks every dollar invested in the U.S. market will have a larger marginal impact,” said Vanda.

Proliferation Of Acronyms In The Investment World

For example, home mortgages get packaged and sold as CMOs (collateralized mortgage obligations). Yet CMOs are only one type of CDO (collateralized debt obligation).

Often described as financial abbreviations, the list is long and never-ending. It includes ARMs, CDs, ETFs, MMKTs, REITs, TSAs (no, not that TSA), UITs, etc.

Even individual stocks have their own trading symbols, such as BA (Boeing), AAPL (Apple), T (AT&T), TSLA (Tesla).

BANKING AND CORPORATE ACRONYMS

The banking world has its own terms of description. They include AIR, APR, EFT (not to be confused with ETF), FDIC.

Others terms of note include CAGR, CAPEX, COB, EPS, LLC, MTD, NAV, NDA, P&L, P/E, ROA, ROI, ROIC, RONA, ROS, SIV, and TSR.

Also, there are cute descriptive terms to describe various products. Some of these are general (strips and spreads); others are more specific (TGREs, pronounced ‘tigers’; and SPDRs, pronounced ‘spiders’).

And if all that isn’t enough, let’s go to the corporate world where officers in senior management are identified by their position. A CFO is Chief Financial Officer, a COO is Chief Operating Officer, and a CAO is Chief Accounting Officer.

More designations include CFA, CFM, CIA (Certified Internal Auditor), CMA, CPA, and CSO.

The corporate world’s tendency to assign three-letter designations to its officers also includes a CMO. This person’s full title is Chief Marketing Officer and has nothing to do with the CMO (collateralized mortgage obligation) referred to earlier in this article.

ACRONYMS FOR BROKERS

Apart from the tendency to describe and define using acronyms and financial abbreviations, there are brokers who in the investment world who identify themselves with various activities. Among these are stock brokers, bond brokers, commodity brokers, and foreign exchange brokers.

Yet the tendency persists. Foreign exchange is abbreviated as FOREX, or simply FX. And some FOREX brokers are known as ECN brokers, or, ECN Forex brokers.

The acronym ECN stands for Electronic Communication Network.

“ECN or Electronic Communication Network is a technology bridge built with the purpose to links retail Forex market participants or traders to liquidity providers. So eventually ECN is a non dealing desk bridge with straight-through processing execution that enables execution in a direct connection between the parties.”

There are also NDD Forex brokers and STP Forex brokers.

GOVERNMENT ACRONYMS AND MORE

No where is the proliferation of acronyms more prevalent than in government. Their use borders on excessive and the list is mind boggling. Here are some government agencies – NSA, NSC, CIA, NTSB, FDA, DEA, OMB, FAA, UST, IRS, HEW, OSHA, TSA, GAO, BATF, FBI, SBA, SEC and EPA.

The sports world is full of them: NBA, NFL, NHL, NCAA, PGA, NASCAR, NHRA.

Acronyms are all around us. Texting and social media reinforce their use for reasons of speed and expediency.

I suppose if there is an argument against their use, it is that we may have dampened our capacity for linguistics and conversation. I wonder how many of us know what a specific acronym stands for when we read something in which one or more of them are referenced; or when we hear them mentioned in a news report.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

For a look at all of today’s economic events, check out our economic calendar.

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.

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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.

What is Dogecoin?

Dogecoin describes Dogecoin as “the internet currency”.

The Shibu Inu is a Japanese breed of dog that was popularized as an online meme. “Doge” is a Shibu Inu and Dogecoin’s friendly mascot.

Dogecoin’s Community members are referred to as Shibes.

As a true cryptocurrency, Dogecoin provides users with a completely anonymous, decentralized, and secure environment.

Dogecoin holders can use Dogecoin to buy goods and services or trade them for other currencies.

Holders are also known to use Dogecoin to “tip” fellow internet-goers who create or share great content.

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Who invented dogecoin?

Jackson Palmer and Billy Markus created Dogecoin.

Dogecoin was born as a concept in 2013 and launched in December 2013 by engineers Jackson Palmer and Billy Markus.

Before the creation of Dogecoin, the two engineers had reportedly never actually met in person.

How can I buy dogecoin?

There are multiple ways to obtain Dogecoin, including getting tipped on the Dogecoin community and mining them.

You can also buy and trade Dogecoin, however, on crypto exchanges that support Dogecoin.

There are numerous crypto exchanges that support the buying and selling of Dogecoin.

Based on 24-hour volumes, WenX Pro, Binance, and CoinDCX have the largest 24-hour Dogecoin/USDT trade volumes at the time of writing.

Other popular exchanges supporting the buying and selling of Dogecoin include:

When choosing a suitable exchange to buy Dogecoin, the trading volume must be among one of the key deciding factors.

Others factors

When selecting an appropriate exchange, there are also a number of other factors to consider. These include:

  • Jurisdiction: Ensure that you find an exchange that supports your jurisdiction and language.
  • Exchange security: When considering the cases of exchange hacks in the not too distant past, 2FA should be a minimum requirement if you plan to hold your Dogecoin on an exchange.
  • Exchange Capabilities: For those look for more than just buying and holding, access to trading indicators and risk management controls including stop loss would be a consideration.
  • Trade pairings: For those looking to purchase with fiat money, the option to deposit fiat or purchase with fiat money is important. Not all exchanges support crypto purchases with fiat money.
  • Exchange Fees: Fees do vary significantly across the exchanges. This becomes a greater consideration for those looking to buy and sell Dogecoin on a more frequent basis.
  • Platform customer support: It is always important to have access to customer support to assist with any issues.

When considering the above, WenX Pro has the largest 24-hour DOGE/USDT trading volume at $360.16m

A distant 2nd and 3rd, by volume, are Binance ($149.81m) and CoinDCX ($149.70m), according to Coinranking.com.

For many, Binance may be the preferred exchange simply for market position and the sheer size of its global network.

When trading cryptos, significant daily volatility means that liquidity must be a deciding factor to limit slippage.

Dogecoin Wallets

Before signing up to an exchange in order to purchase your Dogecoin, you will need a Dogecoin wallet.

To get started, simply:

  • Get a Dogecoin compatible wallet.
  • Buy some Dogecoin.
  • Use your Dogecoin.
  • Stay up-to-date.

From the Dogecoin homepage, you can download a Dogecoin wallet for desktop or smartphone.

For your desktop, you can select a wallet for Windows, OS X, or Linux.

We do recommend that you store all of your purchased Dogecoin within your personal Dogecoin wallet.

Once you have your Dogecoin wallet, sign up to a Dogecoin-supported exchange and purchase your Dogecoin.

<h2 “what”>What can I buy with dogecoin?

The main uses of Dogecoin are currently:

  • Purchasing goods and services.
  • Tipping across the Dogecoin community.
  • Donating to charities.

For those looking to purchase goods with Dogecoin, there are numerous merchants that accept Dogecoin.

Dogecoin holders can purchase a wide array of goods ranging from cars to precious metals.

One of the more prominent companies accepting Dogecoin is the U.S NBA franchise the Dallas Mavericks.

In early 2021, the Dallas Mavericks owner claimed to have done more than 20,000 #Dogecoin transactions. Mark Cuban’s NBA franchise had become the largest Dogecoin merchant in the world.

What is going on with it now?

Its rise to fame has led to a far wider acceptance of Dogecoin.

Across the U.S, CoinFlip announced in early 2021 that people could purchase Dogecoin at 1,800 ATMs across 46 states.

Through the early part of 2021, Dogecoin had hit the crypto news headlines as more famous members of the crypto community began to plug Dogecoin.

Unlike other cryptos, such as Bitcoin and Litecoin, there is an infinite number of Dogecoins. As a result, Dogecoin will not face the same supply and demand outlook as the likes of Bitcoin and Litecoin.

While the endless supply means that the upside for Dogecoin may not be as meteoric as Bitcoin’s, there are also benefits.

The endless supply does mean that Dogecoin is ideal for smaller transactions.

At the time of writing, DOGE stood at $0.0575. While well below the January 2021 all-time high of $0.1004, DOGE has managed to retain much of its 2021 gains.

The crypto newswires contributed to late January’s spike and the upside for the current year.

Year-to-date, Dogecoin was up by over 1,000%, with the Dogecoin Shibes looking for a return to $1 levels.

As the community grows and Dogecoin becomes more widely accepted, more plugs by the crypto elite would support a return to $1 levels.

What are the risks of investing in dogecoin?

As is the case with any crypto, the volatility alone means that investors must trade Dogecoin with care.

As previously mentioned, the other issue that Dogecoin holders face is the endless supply.

This means that any intrinsic value could be diluted as the crypto market gets flooded with more Dogecoin.

As Bitcoin and Litecoin gain market interest, their finite supply remains an allure that Dogecoin is unable to compete with. This leaves holders facing downward pressure as the broader market makes ground.

On the tech side, there have been no material changes to the Dogecoin blockchain in recent years. This means that Dogecoin could also become dated and fall behind its peers.

There have been reports of Dogecoin Shibes leaving the Dogecoin community in favor of more current platforms.

As things stand, the Dogecoin community has been key to delivering price support. The community has, in the past, raised funds to return monies to those who have been hacked.

Once the community begins to weaken, Dogecoin may lose ground without any blockchain enhancements.

Why is dogecoin so popular?

In the early years, Dogecoin’s almost instant popularity was attributed to the founders’ lightheartedness.

While a number of crypto communities were battling it out, Dogecoin was meant to be a joke.

More significantly, however, was undoubtedly the generosity of the Dogecoin Community.

Not only did the community raise funds for multiple charities and good causes but also raise funds to cover losses faced by hacked Dogecoin holders.

To this day, the Dogecoin Community remains integral to the ongoing success of Dogecoin and its continued popularity.

Celebs and Dogecoin

A number of crypto celebs have surfaced and 4, in particular, have plugged Dogecoin, contributing to its early-2021 surge to $1.

Elon Musk, Gene Simmons, Mark Cuban, and Snoop Dogg are perhaps the most famous of them all.

Tesla Motors CEO Elon Musk single-handedly drove Bitcoin to its current all-time high $61,699 and Dogecoin to its all-time high.

After Tesla Motors’s purchase of Bitcoin and its acceptance of Bitcoin as payment, the Dogecoin plug had hit in the midst of the crypto market frenzy

As more prominent crypto advocates plug the likes of Dogecoin, the markets will be looking for fresh highs.

Will CBDC be the Factor that Paves the Way Towards a New Economy?

How Will State-Backed Digital Currencies Shape the Global Economy?

With improved transparency, traceability, security, CBDCs help central banks in creating a more efficient economy.

As cryptocurrency adoption has significantly increased among retail investors, institutionals, and numerous traditional finance players, central banks have entered into a heated race to develop their own CBDCs.

According to a Bank of International Settlements (BIS) survey from last May, 65% of the polled central banks stated that they had actively researched CBDCs. And multiple governments are well beyond the decision-making and research stages.

While the Bahamas have launched the digital sand dollar last October as the world’s first CBDC, China has emerged to be a leader in this field among major economies, conducting extensive pilots and preparing a draft law for its digital yuan project.

Sweden’s Riksbank has also been actively testing its e-krona CBDC, with its central bank recently announcing a one-year extension for the project. The Scandinavian nation’s government has already started reviewing whether to implement the digital currency expecting to complete it by November 2022.

CBDCs have become a top priority for central banks that had been previously hesitant about digital currencies. While the US published a research paper on central bank digital currencies last month, the EU announced the end of its public consultation on CBDCs in January.

Why Are Governments So Interested in CBDCs?

It’s no surprise that there is such a high demand for CBDCs among governments.

CBDCs combine most of the benefits of existing cryptocurrencies – such as the lack of intermediaries, enhanced transparency and traceability, secure and continuously operating networks, as well as instantaneous and cost-efficient payments – with increased government control and oversight.

For that reason, CBDCs allow nations to transform their existing financial and payment infrastructures to create a new, more efficient economy while maintaining their control over money issuance.

As state-issued and controlled digital assets tied to the value of national currencies, CBDCs use permissioned blockchain networks or another form of distributed ledger technology (DLT).

This allows the government to have full control over the network and the state-backed digital currency powering it and a deeper insight into its citizens’ finances.

While the latter could hurt users’ privacy, a government-controlled digital currency allows the state to crack down on illicit activities more efficiently. Examples of such include terrorism financing, money-laundering, and payments-related fraud, all of which have been presenting major problems for most nations worldwide.

In addition to a better taxation system and real-time insight into the current macroeconomic situation, CBDCs can finally offer a proper solution to the unbanked.

And we shouldn’t forget about cross-border payments, which have been traditionally going through obsolete and inefficient networks. Instead of slow and expensive transfers, international CBDC transactions feature (near-)instant settlements with inexpensive fees due to the lack of intermediaries.

The Future of CBDCs and Their Impacts on the Market

In 2021 and beyond, I expect the central bank digital currency race to further intensify, with multiple governments launching their CBDCs in the next few years.

However, even with several CBDCs on the market, the demand for decentralized cryptocurrencies will significantly increase among both retail and institutional investors in the coming years.

In addition to hedging against general market risks and inflation, crypto will provide a more private, trustless, and democratic alternative to the centralized and government-controlled networks of CBDCs.

For these reasons, even before state-backed digital currencies are launched, regulators will take action to provide more clarity around crypto, especially if more high net worth players join the space and put pressure on governments to act.

On the other hand, banks that have been the primary beneficiaries of the current financial system will face significant losses of revenue after the appearance of CBDCs.

Since central bank digital currency networks will operate without intermediaries, banks will lose out on most of the fees they currently collect from customers.

For that reason, they will be forced to innovate to minimize their losses and maintain their growth and market positions.

Creating a New World Economy

CBDCs have the potential to significantly improve finance while providing multiple benefits to both individuals and governments, such as making cross-border transactions faster and cheaper, combatting payments-related crimes, and controlling money issuance more efficiently.

With that said, there is still a lot of work to be done in this field.

But if it all works out, CBDCs could become the rails by which the world will move into a new economy.

Petr Kozyakov, co-founder and CBDO of the global payment network Mercuryo

What is NEM – The Full Guide

NEM

NEM is a blockchain written in Java, the double-layer blockchain supports multiple ledgers on its cryptocurrency layers. NEM’s ecosystem is built in such a way that seamlessly connects and transfers any type of digital assets between private and public blockchains. A collective growth mindset, made NEM to abdicate the POS consensus and introduce the POI. NEM is the world’s first practitioner of POI (Proof-of-Importance) consensus. Although it is similar to Proof-of-Stake which requires locking of certain amounts of coins in the ecosystem, there are several major differences.

The key difference between the POS and POI consensus is that in the POS consensus the amount of coins staked does matter, whereas a staker allocating 10% of the staked amount will be able to mine only 10% of blocks in the network. The POI consensus is used to determine network participants which are eligible enough to add blocks to the blockchain, in NEM’s ecosystem adding blocks to the blockchain is called “harvesting”.

In POS the more coins one stakes, the higher the reward and the reputation, however in POI mechanism, there are three key factors which build the reputation of the node: vesting (holding of 10000 XEM in the wallet), transaction partners, number of transactions within 30 days.

Symbol

Symbol is NEM’s project mainly focused on Enterprise. Symbol is a hybrid blockchain, which means that the blockchain is not fully accessible by anyone although it still bears features of a blockchain such as transparency, security and solidness. The hybrid blockchain is fully customizable and blockchain nodes can decide which transactions should be verifiable, who can participate in the blockchain and which transactions can be public.

The interoperability of public and private chains from what it seems like allow a cost-efficient, seamless data transfer between these two chains, avoiding third party bridges, which are used in interconnection of public and private chain protocols. Just like other blockchains built nowadays, Symbol is interoperable, which means no intermediaries needed for data transfer and token swaps between any blockchain and Symbol.

Source: Symbol Platform official website

As NEM commented, the launch of the mainnet of Symbol is scheduled on March 15, after a long 4 years of developments. On March 12, the project will pre-launch Opt-in and snapshot phase at a block height of 3,105,500.

The Opt-in means that any NEM’s proprietary token – XEM holders can receive Symbol’s proprietary token – XYM upon the mainnet launch. Basically what that means is that during the block height of 3,105,500 the system will read all wallets that have participated in the Opt-in and will allocate XYM to the Symbol account created during the Opt-in, which is exactly the same as the balance of one’s XEM wallet. In other words, hold your XEM in your NEM wallet (note: the wallet must be updated to the latest one), apply for Opt-in, create a Symbol account, for each 1 XEM in your balance you will receive 1 XYM, the XEM balance will remain intact, according to the announcement on NEM’s official website.

How is it going to impact XEM?

The Symbol is a promising project, it already made partners with some big names in the industry. The XYM token is already listed in Poloniex, Bitpanda, Gateio and others, and listing of the XYM is already on the task list of giants such as Binance, Huobi, Kucoin and 17 other exchanges. Some exchanges will support the snapshot of wallets for XYM allocation, among such are Binance, Kucoin, and recently announced Coinex.

While the excitement in this airdrop is heavy, XEM price seems to be silent and waiting for an alert to trigger. While the cryptocurrency market is in an uptrend today with Bitcoin gaining almost 4% today only according to the data of the cryptocurrency trading platform Overbit,

XEM/USD lies low like a leopard before a jump.

Source: TradingView

Based on the technical chart analysis, XEM/USD is currently in a corrective 5-wave ABCDE formation, which formed a symmetrical triangle. Based on the technical analysis, the chart pattern and the MACD indicator, XEM/USD will probably break the upper edge of the triangle and move upwards. The resistances to watch here are $0.7530 and $0.8000. Closing below the lower edge might lead to a drop to $0.6100 and $0.6000.

One should bear in mind that in most cases listings of new coins and airdrops led to massive sell-offs among the token investors. In case of NEM and Symbol such might not be the case or the so-called “dump” might not be as heavy as during the boom of ICO’s. The first reason is that in the emerging ecosystem of NEM, many might consider becoming network participants, the overall crypto market sentiment still remains bullish and tokens of cross-chain networks such as Polkadot are among the top investment appealing, enterprises are going blockchain and are integrating blockchain into their existing network another example of a project which allowed enterprises to connect their external data to blockchain is Chainlink, whose token LINK is along-side Polkadot’s DOT is an outperforming coin and still is appreciated by long-term investors. As the crypto-adoption is growing, more stores are tend to accept cryptocurrencies as payment, projects like Symbol will assist in bringing the crypto and blockchain to the IoT we got used to.

What Is The DXY Index?

Why is DXY Index important?

The US dollar is the most widely used and recognized currency worldwide. Central banks and governments hold US dollars as the primary exchange asset of their foreign exchange reserves. The dollar is the world’s reserve currency.

Reserve currencies are liquid, making them the foreign exchange instruments of choice for central banks and financial institutions for settling international transactions. Settling cross-border obligations with a reserve currency eliminates the need to exchange a country’s currency for each transaction.

The US dollar is the leading reserve currency because of the long history of political and economic stability in the US, the world’s leading economy. The dollar index (DXY) trades in the futures market on the Intercontinental Exchange (ICE) and the over-the-counter market between foreign exchange dealers.

The DXY reflects dollar strength or weakness and is a pricing mechanism for many commodities

Commodities are the raw materials that feed, clothe, power, and shelter the world. Production is a local affair in areas where the earth’s crust is rich in ores, minerals, metals, and energy. Agricultural products require suitable climates and available water supplies. Consumption is ubiquitous as people worldwide require essential commodities.

The pricing benchmark for most commodities is the US dollar because of its liquidity, stability, and role as the leading reserve currency. Local production costs and consumer prices may in various currencies, but wholesale supplies use the US dollar as the means of exchange. Over time, a rising dollar is typically bearish for commodity prices, while weakness in the reserve currency is a bullish factor. A strong dollar makes local production expenses fall, allowing foreign producers to sell output at lower prices and vice versa.

How is the DXY Index Calculated

The dollar index measures the US currency against other reserve currencies. Since the euro is the second-leading reserve currency, it has the highest weighting in the dollar index.

The dollar index is calculated according to the following formula of currency pairs:

USDX = 50.14348112 × EURUSD -0.576 × USDJPY 0.136 × GBPUSD -0.119 × USDCAD 0.091 × USDSEK 0.042 × USDCHF 0.036

Source: ICE

The six currencies that comprise the dollar index are freely traded foreign currency instruments from politically stable countries. There is no regularly scheduled rebalancing or adjustment in the dollar index. The ICE exchange monitors the index methodology. The index calculation occurs in real-time from a multi-contributor feed of the spot prices of the Index’s components.

The dollar index reached an almost two-decade high in March 2020

In March 2020, at the height of the risk-off price action caused by the global pandemic, the dollar index spiked higher. The US dollar’s role as a reserve currency makes it a safe-haven during turbulent market periods. Source: CQG

As the chart highlights, the ICE dollar index rose to a high of 103.96 in March 2020, the highest level in eighteen years since 2002. While the index exploded higher during the week of March 16, it turned lower the next week.

A falling knife led to price consolidation

The dollar index entered a bear market after reaching its highest level in nearly two decades. Source: CQG

As the weekly chart illustrates, the index moved from an eighteen-year high to its lowest level since February 2018 as it fell steadily through 2020 and into early 2021. The most recent low was at 89.165, only 1.015 above the early 2018 bottom, which was the lowest level since late 2014.

Interest rate differentials play a leading role in the value of one currency versus another. The short-term Fed Funds rate dropped to zero percent as the financial fallout from COVID-19 gripped markets, narrowing the rate difference between the dollar and the euro currency. As the yield benefits of the dollar declined, it sent the US currency lower.

Moreover, as Europe settled the Brexit issue in late 2020, it lifted the cloud of uncertainty hanging over the euro and British pound. The two currencies account for 71.2% of the dollar index.

After dropping from 103.96 to 89.165 or 14.2% in nine months, the dollar index has traded in a narrow range. Source: CQG

The daily chart shows that the ICE dollar index futures contract has traded between 89.165 and 91.605 in 2021, a narrow 2.44 range after falling 14.795 points. The index remains not far from the low, but it is consolidating and has yet to challenge its critical technical support level at the 88.15 low from February 2018.

Bearish sentiment is a dark cloud over the dollar for three reasons

The trend in the dollar index remains bearish since the March 2020 multi-year high. Three compelling factors are weighing on the dollar as it consolidated near the downside target at 88.15.

  • Short-term US interest rates remain only 50 basis points higher than short-term euro deposit rates. The narrow differential continues to support the euro as the yield difference collapsed from pre-pandemic levels.
  • The US Fed continues to inject record liquidity into the financial markets, increasing the US money supply. Government stimulus to stabilize the economy has caused the US deficit to soar over the $28 trillion level. The tidal wave of liquidity and tsunami of stimulus weigh on the dollar’s purchasing power.
  • The technical trend in the dollar remains lower. The trend is always your best friend in markets as it reflects the wisdom of the crowd. Crowds tend to make better decisions than individuals.

The dollar remains the world’s reserve currency, but that does not mean it will not continue to lose value versus other world currencies. A break below the February 2018 88.15 low in the dollar index could cause technical traders and speculators to pile in on the index’s short side. Meanwhile, central banks, monetary authorities, and governments tend to manage the foreign exchange market via coordinated intervention that provides stability by reducing volatility. Currency trends can last for prolonged periods. At the beginning of March 2021, the dollar’s trend remains lower.

Five Most Successful DeFi Assets of 2020

Money-lending services, decentralised exchanges and liquidity protocols, all running on smart-contracts, became a new popular agenda in the world of cryptocurrency in 2020. Many of these projects experienced wild fluctuations, both in terms of liquidity locked in the protocols and price action of their digital tokens.

Now, I will share with you my take on the most successful DeFi assets in 2020. In my list of projects I will use the data provided by the cryptocurrency data aggregators Messari and CoinGecko.

1. Aave (AAVE)

The money-lending platform Aave was launched in January 2020. At the end of 2020, its native token AAVE reached a $1 billion market cap and comfortably leads the DeFi project ranking by market cap.

Aave’s original token launched at the end of 2017 was Lend (LEND). In July 2020, the AAVE governance token was launched, and LEND tokens were swapped for AAVE at a ratio of 1:100. The AAVE token enjoyed spectacular growth in both spikes of the DeFi market in 2020: in August and November. From under $30 in July, the token rose to $90 in August, then fell to $25 on 5th November. Then the second wave of DeFi market growth began, taking AAVE to $96 on 3rd December.

As of mid-December 2020, AAVE is mainly trading between $75 and $90.

2. Uniswap (UNI)

Uniswap stormed the scene of decentralised exchanges (DEX’s) in 2020. It made a real breakthrough in terms of decentralised liquidity, quickly becoming the most popular DEX. In December 2020, the project’s reported market cap fluctuates around $850 million.

Since the launch of the UNI token on exchanges, its price quickly travelled from $0 to $8.5 in mid-September. Then the UNI price quickly reversed the gains in a corrective move toward $2 and sank below it in early November. But the second wave of DeFi market growth let the UNI token recover its positions above $3.

Since the launch of the UNI token on 17th September 2020, it has grown by over 200% as of mid-December 2020.

3. Yearn.finance (YFI)

The popularity of AAVE governance token and the governance tokens of such DeFi projects as Compound and Balance led to the rise of Andre Cronje’s Yearn.finance. The platform features several services, such as money lending, liquidity provision and insurance. As of mid-December 2020, the Yearn.finance market cap sits at around $734 million.

The platform was created single-handedly by developed Andre Cronje as iEarn, but the platform suffered an exploit in February 2020, creating a wave of criticism and making Andre Cronje step away. But he later returned and rebranded iEarn into Yearn.finance.

The project increased in capitalisation multifold after the launch of its governance token YFI on July 18th as people began pouring liquidity into the protocol. According to CoinGecko, YFI grew from $31.65 on 18th July to the dizzying $32,358 on 30st August. As of 16th December, the YFI price remains at around $24,500, with the astronomical 77,000% profit over 5 months, because there was no pre-sale or private sale of this token.

4. Compound (COMP)

Compound was the first big player among money-lending protocols in the DeFi space, and it remains one of the top DeFi players at the end of 2020. According to Messari, the project’s reported market cap amounts to around $660 million as of mid-December 2020.

Compound rose rapidly with the launch of its own governance token COMP. The token let people maximise their profits by benefiting from the liquidity locked in the protocol and mining the YFI, which surged from $61 on 18th July to $336 on 22nd July.

As of mid-December 2020, the COMP profit amounts to over 145%.

5. Synthetix (SNX)

Synthetic assets are derivative assets, created through liquidity locked in different liquidity protocols. Using crypto synthetic assets investors can peg the protocol’s token to any underlying asset and thus invest in various types of assets with a single token.

The most popular synthetic assets DeFi project has so far been Synthetix. As of 16th December, its reported market cap, according to Messari, constitutes around $560 million. The price of its SNX token launched in March 2019 has grown from $0.5 to an all-time-high of $7.84 on 1st September 2020.

Conclusion

The rise of DeFi in 2020 has clearly shown its potential in the financial world. The classic services revolutionised through trustless smart contracts have quickly gained public trust and interest, signaling high-profit potentials to high-net-worth investors and large companies. And this may only be the beginning of a larger adoption of DeFi technologies that the world may see in 2021.

Anton Chashchin, Commercial Director at CEX.IO Loan

What do Cultural Differences and Trading Behaviours have in Common?

An investor’s attitude to risk is usually associated with their wealth, job security, and inflation. Having this in mind, you might conclude that two people from entirely different cultures and countries will invest similarly if their economic situation is the same. And you would be right. The whole concept of investment starts within communities and individual households, built on the foundation of the societal norms that surround them and constitute the fabric of their culture.

A study by Mei Wang and Marc Oliver Rieger, professors in behavioural finance, shows that cultural background influences investment behaviour, even when inflation rates and wealth are taken into account.

According to Wang and Rieger, the more impatient the investors are, the higher the value premium in a country is. Russia and Romania, for example, are such countries. Anglo-Saxons are willing to pay more for equities. Traditionally some societies tend to be quite risk averse than others, which is reflected in the make-up of the overall economy. “Ego-traders” are usually situated in the United States. More patient ones live in Germany and the Nordics, where there are more value traders who prefer to wait for more significant returns.

People’s expectations and the idea of value or value creation have changed with time. Yet culturally, many societies still favour traditional investment tools as a way to preserve or create wealth.

The most historical of all emotional connections between cultures and specific asset classes is the one that exists with gold. The demand for gold trading has moved East over the last decade, and this is primarily due  to the cultural affinity that exists between precious metal and countries such as India and China, where gold is considered one of the safest stores of value.

A lot of capital in India is stuck in hard assets because that’s the traditional and cultural mindset of the society there. The culturally defined beliefs in the country drive high demand for gold as an asset class, whether it is traded as physical gold or as a CFD (contract for difference) on the precious metal. This cultural affinity to gold is also similar in China. It is instrumental in the Lunar New Year, and 24-carat jewelry featuring the zodiac sign is frequently given as presents, both for its symbolism and centuries-old value.

Superstition is another emotional factor influencing the investment. In the Western world, stock market returns are always lower on Friday the 13th. A similar  situation can be observed in East Asian cultures, primarily China, with the number four – investors avoid all sorts of trades on the fourth day of every month.

The coronavirus pandemic has already played out differently around the world according to individual cultures. The majority of investors globally have responded by increasing their trading activity significantly, not least because most people were quarantined at home for months, with more time on their hands to trade.

Multi asset broker Exness offers some products by region depending on geographic behaviour, popular asset classes, and even religion. Its swap-free trading accounts, for example, are explicitly created for traders of the Islamic faith. According to the Koran, they cannot take part in any trading activity that accumulates interest. These particular accounts, however, allow clients in some of Exness’s most essential regions to invest freely without compromising their faith.

According to Stanislav Bernukhov, market analyst at Exness:

“Though some specific behavioural patterns may be visible through different countries, the financial markets liberate people, allowing them to achieve success no matter what education or background one might have. Mr. Market doesn’t care whether you hold a CFA license or graduated from the Ivy League – you just need to have the skills and knowledge which comes from persistent learning and usually has nothing to do with nationality.”

Investors don’t necessarily have something to learn from their counterparts in other countries, but understanding cultural differences in trading behaviour can certainly point them to opportunities they haven’t considered before.

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.

How the Blockchain Can Turnaround Africa’s Mining Industry

The use of the blockchain, otherwise known as the Distributed ledger technologies (DLT), involves the setting up of digitally stored databases around several privately held locations around the globe, enabling the creation of electronic records which can be verified using peer-to-peer mechanisms, without any verifying party having centralized control of the database. Such a record is secure, accessible to all, and is immutable.

The very structure of the blockchain makes it suitable for use in eliminating the various challenges that have beset Africa’s mineral sector, which is riddled with problems that are created from the relative opacity of all segments of the sector. Take any person living in a typical African mining community and ask whether he or she knows what happens to the minerals taken from their soil and you would be lucky to get an informed answer.

The opacity of the processes involved from the extraction point to when the precious minerals and the payments change hands provides the perfect cover for those who game the system at all levels.

In many African countries, national governments do not even know how much of their minerals leave their shores. Such is the level of decadence in the mineral sector in Africa.

The situations above probably operate where there are legitimate governments in place. When there are conflict situations or conditions where renegade movements are in control of the areas where the mineral resources are located, things take a gory turn. The problems of conflict minerals which the film “Blood Diamonds” portrayed in a toned-down manner are now well known.

The emphasis now is to deploy initiatives that can address all the problems associated with Africa’s extractive industry and to bring about improvements. The use of distributed ledger technology will directly address the problems with record-keeping, traceability, and management of the entire supply chain. The blockchain can be used to enforce standards that comply with international conventions on the extraction, processing, marketing, and distribution of mineral resources and their derivatives.

The Issues

The political, economic and social cost of illegal mining in Africa is immense. From Ghana to DR Congo, Nigeria to South Africa, the story is the same. The locals and the economy of the mining communities are left impoverished as vast lands that could be used for agriculture are destroyed by uncontrolled and unethical mining methods.

Local workers are subjected to slave-like, dehumanizing conditions with armed soldiers paid for by these companies, set over these workers. The countries bleed foreign exchange as revenues that could have gone to development projects is siphoned off by large foreign corporations. The only gainers are the big mining companies, their executives and local collaborators in government and the communities.

The Blockchain: The Tool for Audibility and Accountability

Distributed ledger technologies have certain features that make them adaptable as tools of audibility and accountability in the African mineral sector.

  1. They are decentralized and available to all
  2. The records stored on the databases are immutable
  3. The records are open to public scrutiny and validation

The lack of a single clearinghouse or a single point at which information is warehoused makes it very hard to alter records pertaining to the mining operations. A government can in an instant, know who has been granted mining licenses, who has commenced operations, and which companies are not listed on the national database of mining licenses.

Records are secure and cannot be altered or subjected to fraudulent accounting practices. No single person can lay hold of control on the ecosystem. The records can be viewed by all. Transactions can be scrutinized and validated. Tax records of mining companies can immediately be accessed. Prosecution of errant parties in the mining industry can be made a lot easier as incontrovertible evidence of wrongdoing can be gathered quickly. Opacity is sacrificed instantly on the altar of transparency; this is what the blockchain offers.

The blockchain can significantly degrade the ability of those who game the mining industry in Africa in an instant. Its efforts can be supplemented by the demands of increasingly aware consumers, who want to be sure that what they are buying was ethically sourced in an environmentally friendly manner.

Consumers also want to be sure that what they are getting was not produced by dehumanizing labor practices, and that it passed through an accountable supply chain management system that can pinpoint the pathway of the minerals from point of origin to destination.

Blockchain technology is not a fix-all solution to the problems in Africa’s mining industry. But the blockchain forms a very strong foundation on which fundamental change can occur.

Use Case Applications of the Blockchain in Africa’s Mining Industry

One of the ways in which the blockchain can be used to benefit Africa’s mineral industries is by the tracking of conflict minerals. One country that is already doing this is Rwanda. Rwanda became the first country in the world to adopt blockchain technology in addressing the problem of conflict minerals within its borders. Rwanda uses the blockchain to track the entire mining chain of Tantalum, from the mining pots to the refining furnaces.

Another example of the use of distributed ledger technology to track minerals in Africa comes from a private company. IAMGOLD Corporation is a gold miner which is using the blockchain to track responsibly sourced gold. IAMGOLD Corporation has its African operations in Burkina Faso and uses a blockchain technology solution developed by California-based company, Emtech.

These two are examples of how a government and a private corporation in Africa are helping contribute to the use of distributed ledger technologies to combat Africa’s mining problems.

How to Invest in Cryptocurrencies: The Complete Guide for 2020

Seasoned investors continue to cross over from the more mature asset classes and regulators have eased off on the Crypto assault that led to the 2018 slump.

With Bitcoin and the broader market sitting at more than 50% below their all-time highs, there is still plenty of incentive to enter the crypto sphere.

For many, however, the crypto market may seem like a maze. There are a tremendous number of exchanges and brokers and that is before considering regulations imposed by regulators in recent years.

Investing in cryptocurrencies requires a level of due diligence not too dissimilar to the research involved in other more mature asset classes.

The volatility and sizeable returns on offer have certainly allowed investors to dream. After all, Bitcoin has yielded a mass number of Bitcoin millionaires, more commonly known as whales.

So, how do we invest in cryptocurrencies?

While there are multiple considerations, some are more important than others when looking to enter the crypto market.

Just jumping in on a whim that the majors will reach historical highs is a dangerous game. This is no dissimilar to jumping into the equity markets when they are sitting at record highs.

There is one material difference, however. The regulatory landscape has materially changed since late 2017. For this very reason, investors may continue to face plenty of uncertainty before the market can find a return to the hay days.

Understanding the key drivers and market characteristics are therefore particularly important.

Basic Essentials

In this guide, you will learn the key preparations that you need in order to build your cryptocurrency portfolio.

Before making an investment, deciding on the source of funds would certainly be step 1.

In spite of the current interest rate environment, it is recommended that you avoid funding the portfolio with debt.

Credit Card or Bank Account – Investors will, therefore, need to decide on cash or credit card. As an investor, you can either fund your crypto trading account with a debit/credit card or by funding with a bank transfer.

It is worth noting, however, that certain jurisdictions have banned the funding of crypto exchanges with credit cards. Some banks have even taken a step further and banned the transfer of fiat money to such exchanges.

Nonetheless, the simplest method to fund a crypto exchange account is with a credit/debit card. This does tend to come with higher fees and caps on transfer amounts, however.

Fiat to Bitcoin Exchange

First, you need to decide on which cryptocurrency or cryptocurrencies that you wish to trade.

You would then need to identify the exchanges that have the largest trading volumes for the chosen cryptocurrencies.

One consideration here is your source of funds. Not all exchanges allow fiat money deposits. A vast majority of exchanges restrict deposits to Bitcoin.

Carrying out the necessary research on the most appropriate exchange is important. If you are looking for an exchange that accommodates the purchase of Bitcoin with fiat money:

Coinbase is popular and easy to use, with a strong global presence. The exchange has the necessary security measures as well as delivering adequate liquidity for trading.

When searching for the right exchange, it is worth noting that each has its pros and cons. The important thing is to identify the exchange that, first and foremost, delivers on your personal requirements.

Other popular exchanges include:

These crypto exchanges not only cater to Bitcoin investors and traders but altcoins in general.

It’s also worth considering exchanges that offer a wider choice of cryptocurrencies and altcoins. This would allow you to diversify your investments and gain exposure to the broader crypto market.

Bitcoin to Crypto Exchange

The next exchanges that you should look into are the ones you will be using for the Altcoins. Many of the smaller coins, my market cap, are generally not supported by larger exchanges. Generally speaking, the only way to buy those smaller coins is by buying them using Bitcoins or Ethereum.

On most exchanges, you need to deposit Bitcoins as you cannot buy coins directly from the exchange. This is why it’s crucial that you have a Fiat to Bitcoin Exchange first.

You can buy Altcoins from Binance, BitTrex, Kucoin, and Kraken.

Choose the Right Wallet

The next step in the crypto investment journey is to select the appropriate crypto wallets. It is essential to have your crypto wallet before buying any cryptocurrencies. You will need wallets to store your coins within your secure personal wallets.

While exchanges allow investors to hold purchases coins within assigned exchange wallets, it’s recommended that you withdraw your cryptos and hold them in private wallets. This protects you and your investments from hackers and theft. It is also worth noting that wallet compatibility also needs to be considered.

Crypto wallets to choose from include but are not limited to:

Before Getting Started

Prior to deciding on the most suitable crypto exchanges and wallets to support your trading activity, you need a trading strategy. As part of your strategy build, there are a number of factors to keep in mind:

  • Only invest in what you can afford to lose
  • Do not take a loan to invest
  • Do your own research, monitor the news wires, and view technical analysis on the respective cryptos that you decide to go with. FX Empire covers the largest cryptos, with exchanges also providing technical analysis to their users free of cost.
  • Set realistic expectations, don’t be greedy, and know when to accept a loss. (It is easy to be influenced by the news wires and overzealous analysts talking of the next crypto boom or doom. It is best to block out such noise.

Forming a Crypto Trading Strategy

While identifying the most appropriate wallets and exchanges are vital, formulating a trading strategy is undoubtedly the most important pre-investment step for a prospective trader.

Key Decisions:

  • Cryptocurrency selection – A blend of the largest cryptos along with medium-sized to small cryptos by market cap is recommended. This also addresses any liquidity issues for the overall portfolio.
  • Worth noting – A certain cryptocurrencies may have values that exceed the intended investment size. In such instances, identifying an exchange that offers CFDs or partial investment of a crypto coin is important.
  • Trader durations – For traders with adequate time to trade, a short, medium, and longer-term trading strategy would make sense.
    • Smaller size, more volatile, coins increase earnings potential intraday. These should ideally form no more than 20% of the total investment pool.
    • The Largest coins should form longer-term strategies. With adequate research, however, smaller coins may also form part of this strategy.
    • For the more medium-term strategies, which would be anything beyond intraday but less than a month, a blended portfolio is recommended. This can comprise of small, medium, and large-cap coins.
  • In any trading strategy -using risk management tools and indicators is recommended. While there are fees incurred for using stop loss and trade profit, using these would protect your downside.

80/20 Rule

When considering crypto market volatility and the rise and fall of the smaller coins, an 80/20 blend of large-cap to mid to small-cap would be recommended.

This would provide the opportunity to make sizeable gains any sudden surge in the small to mid-cap cryptos, whilst also holding the more stable coins. Do note that stable is a relative term in the crypto market. Even Bitcoin can see sizeable swings on a given day…

Does the Number of Coins Matter?

It ultimately boils down to the investment strategy that you build. With a blended portfolio, 1 Bitcoin may make up your large-cap portfolio, or 20 Litecoin for instance. It is important to focus on the blend rather than the actual number of coins that make up each component of the portfolio.

Recommendations

Below is a range of cryptos to consider the different components of your portfolio. This is not a comprehensive breakdown of the broader market and there may be coins that are more to your liking. As always, carry out the necessary research before hitting the buy or sell order…

Large Caps

Tezos, Ripple, Bitcoin, Ethereum, EOS, Cardano, Bitcoin Cash SV, Bitcoin Cash, and Binance Coin.

Mid-Caps

Zcash, VeChain, True USD, Tron’s TRX, Qtum, OmiseGo, OKB, NEO, Ethereum Classic, Dogecoin, DASH, and Cosmos. These have been selected based on 24-hour volumes and have market caps of between $100m and $1bn.

Low Caps

This will consist of cryptos with a market cap of less than $100m and will likely have lower trading volumes. That means less liquidity, which is why this component should form a lower proportion of the portfolio.

Unibright, Theta Fuel, Status, MCO, Matic Network, IOST, HyperCash, BitTorrent, and ABBC Coin.

Next Steps

Once you have built your strategy, selected your cryptos, opened your trading accounts, and set up your wallets, it’s time to trade.

While you may be able to have a better sense of when to enter more mature markets, such as the global equity market, it’s less simple to pick the right entry point in the crypto world.

Other than entering at an all-time high, there’s no hard and fast rule other than waiting for any sell-off to flatten out.

Once you start trading, remain disciplined, and ensure you run your risk parameters each day.

These will include your charts that should have your support and resistance levels embedded.

And remember, not every trade will yield a return, so don’t panic should your first trade take a hit.

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.

Breakeven Crude Oil Production Costs Around The World

If the market price of a raw material is higher than its cost of extracting it from the crust of the earth or any other form of production, it leads to increased output. A profitable production process provides an incentive for output.

When the cost of production is higher than the market price, output declines as it becomes a losing proposition. The price cycle in commodities causes prices to rise to levels where production increases. Higher output leads to growing inventories. As a market becomes more expensive, the elasticity of demand causes consumers to look for substitutes and buying declines, leading to price tops and reversals to the downside.

When the price of a commodity falls below the cost of production, output slows. The demand tends to increase as consumers take advantage of lower prices, and inventories begin to decline, leading to price bottoms. The price cycle in a commodities market can change because of exogenous events, but it tends to be efficient. High prices lead to glut conditions, and low prices often create shortages, over time. Production cost is one of the critical variables that fundamental analysts use to project the path of least resistance for market prices.

In the crude oil market, output costs vary according to the production location. Saudi Arabia, Russia, and the United States are the three leading oil-producing nations in the world, and each has different sensitivities to output costs.

Saudi Arabia- Think turning on a garden hose

Over half the world’s crude oil reserves are in the Middle East, and Saudi Arabia is the leading producer in the region. The Saudis have long been the most potent force within OPEC, the international oil cartel. Saudi Arabia’s vast reserves make production as easy as turning on a garden hose in our backyards for the country.

Meanwhile, the Saudi economy depends on oil revenues. The rising costs of running the country have pushed the break-even level of the price of the energy commodity to over $80 per barrel on the Brent benchmark. While the nominal production cost of oil is the lowest in the world in Saudi Arabia at $2.80 per barrel, the requirements for revenues creates a wide gap between production economics and balancing the Saudi budget.

Russia- Output costs may not matter as much in the west

Russia is an enigma when it comes to the cost of production for the energy commodity. The Russians, under President Vladimir Putin, is structured as an oligarchy. A small group runs the nation’s economy. Therefore, the production cost of crude oil is an enigma and a state secret. In 2020, the Russian leader had said that he is comfortable with a Brent price around the $40 per barrel level. The statement could shed at least some light on the price level for the energy commodity that provides enough revenue to keep the system running smoothly.

The US- The marginal producer in the world

In the 1970s and 1980s, the United States was dependent on oil imports from the Middle East. Rising prices during this century, combined with reserve discoveries in shale regions, caused production to increase. Moreover, technological advances in extracting crude oil from the crust of the earth and regulatory reforms under the Trump Administration caused daily output to rise to over 13 million barrels per day, making the US the world’s leading producer and achieving the goal of independence.

The US is a marginal producer. While production costs have declined, they are still around the $30 to $40 per barrel level. The US is in a position where it is a dominant marginal producer. When the price of oil rises above production costs, the output can increase. When it falls below, the US can turn off production and import inexpensive crude oil from other nations.

In any commodity, the production cost is a critical factor when it comes to the fundamental supply and demand equation. Pricing cycles take prices above and below break-even output costs at times. Each leading producer has different requirements when it comes to prices, which makes a global analysis complicated and the worldwide break-even equation for crude oil an economic and geopolitical enigma.

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.

How To Use Technical Analysis In Forex Markets

Charts are useful tools for investors and traders as they offer insight into herd behavior. In a book written in 2004, author James Surowiecki explained how crowds make better decisions than individuals. Markets are embodiments of Surowiecki’s thesis as the current price of an asset is the level where buyers and sellers meet in a transparent environment.

When it comes to the global foreign exchange market, buyers and sellers of currencies determine the rates of one foreign exchange instrument versus others on a real-time basis. At the same time, governments manage the level of currency volatility to maintain stability. Technical analysis can be particularly useful in the currency markets as technical levels can provide clues about levels where government intervention is likely to occur.

Technical analysis includes support and resistance levels where currency pairs tend to find lows and highs. At the same time, price momentum indicators often signal where exchange rates are running out of steam on the up and the downside.

Technical analysis can breakdown at times when black swan events occur.

Futures are a microcosm of the OTC market

In the world of foreign exchange, the over-the-counter market is the most liquid and actively traded arena. The OTC market is a global and decentralized venue for all aspects of exchanging the currency of one country for another; it is also the largest market in the world. In April 2019, the average trading volume was $6.6 trillion per day. The OTC market operates twenty-four hours per day, except for weekends.

Futures markets for currency pairs are smaller, but they reflect the price action in the OTC market. When it comes to technical analysis, the futures market provides a window into the price trends and overall state of the strength or weakness of one currency versus another.

Volume and open interest metrics provide clues for price direction

The dollar versus the euro currency pair is the most actively traded foreign exchange relationship as both foreign exchange instruments are reserve currencies.

Source: CQG

The weekly chart of the dollar versus the euro futures contract displays the price action in the currency pair since late 2017. The bar chart on the bottom reflects the weekly volume, which is the total number of transactions. The line above volume is the open interest or the total number of long and short positions.

When volume and open interest are rising or falling with the price, it tends to be a technical validation of a price trend in a futures market. When the metrics decline with rising or falling prices, it often signals that a trend is running out of steam, and a reversal could be on the horizon. Volume and open interest are two technical metrics that aid technical traders looking for signs that a trend will continue or change.

Momentum indicators are powerful technical tools at times

Stochastics and relative strength indices can provide a window into the overall power of a trend in a futures market.

Source: CQG

Beneath the weekly price chart, the slow stochastic is an oscillator that aims to quantify the momentum of a price rise or decline. Stochastics work by comparing closing prices with price ranges over time. The theory behind this technical tool is that prices tend to close near the highs in rising markets and near the lows in falling markets.

A reading below 20 indicates an oversold condition, while over 80 is a sign of an overbought condition. On the weekly chart of the euro versus the dollar currency pair, the reading of 31.42 indicated that the stochastic oscillator is falling towards oversold territory in a sign that the downtrend could be running out of steam.

The relative strength indicator compares recent gains and losses to establish a basis or the strength of a price trend. A reading below 30 is the sign of an oversold condition, while an overbought condition occurs with a reading above the 70 level. At 45.55 on the weekly dollar versus euro chart, the indicator points to a neutral condition in the currency pair.

Technical analysis can fail at times

Technical analysts look for areas of price support and resistance on charts. Support is a price on the downside where a market tends to find buying that prevents the price from falling further. Resistance is just the opposite, as it is the price on the upside where a market tends to experience selling that prevents it from rising further. When a price moves below support or above resistance, it often signals a reversal in a bullish or bearish price trend.

Technical analysis is not perfect, as the past is not always an ideal indicator of the future.

Source: CQG

The chart of the currency relationship between the US and Australian dollar shows that the price broke down below technical support and experienced a spike to the downside. The price movement turned out to be a “blow-off” low on the downside that reversed after reaching a significantly lower price.

Technical analysis provides a roadmap of the past in the quest for insight into the future. Many market participants use technical analysis to make trading and investing decisions, which often creates a self-fulfilling prophecy as a herd of transactional activity can create or impede a price trend. Technical analysis is a tool that foreign exchange traders use to project the path of least resistance of exchange rates.

Some of the most influential participants in the foreign exchange markets are governments. Historical price volatility in foreign exchange markets tends to be lower than in most other asset classes because governments work independently or together, at times, to provide stability for exchange rates. Therefore support and resistance levels tend to work well over time.

What are Contango And Backwardation?

Term structure, the forward curve, or time spreads are all synonymous and reflect the price differences for a commodity over time.

In some commodities, seasonality causes prices to reach lows at certain times of the year and peaks at others. Natural gas and heating oil often reach seasonal highs during the winter months, while gasoline, grains, lumber, and animal proteins can move towards highs as the spring and summer seasons approach.

Meanwhile, the price differential for various delivery dates can provide valuable information when it comes to the supply and demand fundamentals for all commodities. Contango and backwardation are two essential terms in a commodity trader’s vocabulary.

Contango is a sign of a balanced or glut market

Contango exists in a market when deferred prices are higher than prices for nearby delivery. A “positive carry” or “normal” market is synonymous with contango.

Source: NYMEX/RMB

The forward curve in the NYMEX WTI crude oil futures market highlights the contango in the energy commodity. In this example, the price of crude oil for delivery in June 2020 was at $28.82 per barrel and was at $36.10 per barrel for delivery one year later in June 2021. The contango in the oil market stood at $7.28 per barrel.

The contango is a sign of oversupply. However, it also reflects the market’s opinion that the current price level will lead to declining production and inventories and higher prices in the future.

Backwardation signals tightness

Backwardation is a market condition in which prices are lower for deferred delivery compared to nearby prices. Other terms of backwardation are “negative carry” or “premium” market.

Source: ICE/RMB

The term structure in the cocoa futures market that trades on the Intercontinental Exchange shows that cocoa beans for delivery in May 2020 were trading at $2305 per ton compared to a price of $2265 for delivery in May 2021. The backwardation of $40 per ton is a sign of nearby tightness where demand exceeds available supplies. At the same time, the lower deferred price assumes that cocoa producers will increase output to close the gap between demand and supplies in the future.

Watch the forward curve

A fundamental approach to analyzing commodity prices involves compiling data on supplies, demand, and inventories. The term structure in raw material markets can serve as a real-time indicator for supply and demand characteristics. When nearby supplies rise above demand, the forward curve tends to move into contango. When the demand outstrips supplies, backwardations occur.

Watching the movements in term structure can provide value clues when it comes to fundamental shifts in markets. Exchanges publish settlement prices for all contracts each business day. Keeping track of the changes over time can uncover changes that will impact prices.

In tight markets where backwardations develop or are widening, nearby prices tend to move to the upside. In contango markets, equilibrium can be a sign of price stability, while a widening contango often is a clue that prices will trend towards the downside.

The shape of the forward curve can move throughout the trading day. Any dramatic shifts tend to signal a sudden change in market fundamentals. For example, a weather event in an agricultural market that impacts production would likely cause tightening and a move towards backwardation. As concerns over nearby supplies rise, the curve often tightens.

Conversely, a demand shock that leads to growing inventories often leads to a loosening of the term structure where contango rises. Observing changes in a market’s forward curve and explaining the reasons can provide traders and investors with an edge when it comes to the path of least resistance of prices.