submitted by kon_grin to OKSCHAIN [link] [comments]
The formula for determining capitalization is quite simple. The number of tokens in circulation multiplied by the current value of a token. For example, if there are 100 tokens in circulation, and the cost of each token is $10, then the capitalization equals $1000.
1st - CHAINLINK. At the moment, its market capitalization is $4,6 mln., with daily volume of $1,2 mln..
2nd - Wrapped Bitcoin. Market capitalization for the token is $1,4mln., daily volume equals $0,1 mln..
3rd place - Dai. Market capitalization for a given token consists of $0,9 mln.. Daily volume is approximately $0.1 mln.
4th - Maker. With the market capitalization of $0,6 mln, the volume reaches about $30,000.
Finishing the list on the 5th position - Uniswap. The token has a market capitalization of almost $0,6 mln.. The daily volume for a token is $0,3 mln.
What do you think, which of the tokens has the brightest future?
#cryptocurrency #bitcoin #defi #fintech
submitted by MyCoinStory to MyCoinStory [link] [comments]
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This is a chart I made up that roughly correlates Bitcoin market cap to Bitcoin mining costs. It is "normalized" through the halvenings. It definitely shows a downward trend. The "normalization" for halvenings applies a 100% coefficent post 2020 halvening, a 50% coefficent after the 2016 halvening and a 25% coefficent before the 2016 halvening.submitted by brianddk to Bitcoin [link] [comments]
The formula sprung from a discussion I was having on BTC wealth redistribution, and how the BTC holders rely on the miners to secure the chain. The counter argument was that the holders could just pay for the mining themselves.
Since bitcoin is non-inflationary, this could be thought of as a type of negative interest rate. If every holder had to offer a 100% subsidy to the miners to maintain the blockchain, what would that look like in the terms of a continual interest rate. So here's the formula.
Continual Interest function: A = P*exp(r*t) ln(A) = ln(P) + rt r = ln(A) / ln(P) / t r = ln(A/P) / t # (where t = 1/365, aka one day) r = ln(1 + I/P) / t # (where A/P = 1+I/P; with 'I' being pct growth interest = norm_coef * ln(1 + daily_mining_cost / btc_market_cap) * 365The datasource is from bitinfocharts.com referencing "Market Capitalization", "Hashrate" and "Mining Profitability" fields. "Daily Mining Cost" is derived by "Profitability * Hashrate" once correcting for unit scales.
So why is it after normalizing for the halvenings this interest function is on a negative trend over the last 5 years?
Interest -v- Date
Sourcesubmitted by pascalbernoulli to Yield_Farming [link] [comments]
It’s effectively July 2017 in the world of decentralized finance (DeFi), and as in the heady days of the initial coin offering (ICO) boom, the numbers are only trending up.
According to DeFi Pulse, there is $1.9 billion in crypto assets locked in DeFi right now. According to the CoinDesk ICO Tracker, the ICO market started chugging past $1 billion in July 2017, just a few months before token sales started getting talked about on TV.
Debate juxtaposing these numbers if you like, but what no one can question is this: Crypto users are putting more and more value to work in DeFi applications, driven largely by the introduction of a whole new yield-generating pasture, Compound’s COMP governance token.
Governance tokens enable users to vote on the future of decentralized protocols, sure, but they also present fresh ways for DeFi founders to entice assets onto their platforms.
That said, it’s the crypto liquidity providers who are the stars of the present moment. They even have a meme-worthy name: yield farmers.
Where it startedEthereum-based credit market Compound started distributing its governance token, COMP, to the protocol’s users this past June 15. Demand for the token (heightened by the way its automatic distribution was structured) kicked off the present craze and moved Compound into the leading position in DeFi.
The hot new term in crypto is “yield farming,” a shorthand for clever strategies where putting crypto temporarily at the disposal of some startup’s application earns its owner more cryptocurrency.
Another term floating about is “liquidity mining.”
The buzz around these concepts has evolved into a low rumble as more and more people get interested.
The casual crypto observer who only pops into the market when activity heats up might be starting to get faint vibes that something is happening right now. Take our word for it: Yield farming is the source of those vibes.
But if all these terms (“DeFi,” “liquidity mining,” “yield farming”) are so much Greek to you, fear not. We’re here to catch you up. We’ll get into all of them.
We’re going to go from very basic to more advanced, so feel free to skip ahead.
What are tokens?Most CoinDesk readers probably know this, but just in case: Tokens are like the money video-game players earn while fighting monsters, money they can use to buy gear or weapons in the universe of their favorite game.
But with blockchains, tokens aren’t limited to only one massively multiplayer online money game. They can be earned in one and used in lots of others. They usually represent either ownership in something (like a piece of a Uniswap liquidity pool, which we will get into later) or access to some service. For example, in the Brave browser, ads can only be bought using basic attention token (BAT).
If tokens are worth money, then you can bank with them or at least do things that look very much like banking. Thus: decentralized finance.
Tokens proved to be the big use case for Ethereum, the second-biggest blockchain in the world. The term of art here is “ERC-20 tokens,” which refers to a software standard that allows token creators to write rules for them. Tokens can be used a few ways. Often, they are used as a form of money within a set of applications. So the idea for Kin was to create a token that web users could spend with each other at such tiny amounts that it would almost feel like they weren’t spending anything; that is, money for the internet.
Governance tokens are different. They are not like a token at a video-game arcade, as so many tokens were described in the past. They work more like certificates to serve in an ever-changing legislature in that they give holders the right to vote on changes to a protocol.
So on the platform that proved DeFi could fly, MakerDAO, holders of its governance token, MKR, vote almost every week on small changes to parameters that govern how much it costs to borrow and how much savers earn, and so on.
Read more: Why DeFi’s Billion-Dollar Milestone Matters
One thing all crypto tokens have in common, though, is they are tradable and they have a price. So, if tokens are worth money, then you can bank with them or at least do things that look very much like banking. Thus: decentralized finance.
What is DeFi?Fair question. For folks who tuned out for a bit in 2018, we used to call this “open finance.” That construction seems to have faded, though, and “DeFi” is the new lingo.
In case that doesn’t jog your memory, DeFi is all the things that let you play with money, and the only identification you need is a crypto wallet.
On the normal web, you can’t buy a blender without giving the site owner enough data to learn your whole life history. In DeFi, you can borrow money without anyone even asking for your name.
I can explain this but nothing really brings it home like trying one of these applications. If you have an Ethereum wallet that has even $20 worth of crypto in it, go do something on one of these products. Pop over to Uniswap and buy yourself some FUN (a token for gambling apps) or WBTC (wrapped bitcoin). Go to MakerDAO and create $5 worth of DAI (a stablecoin that tends to be worth $1) out of the digital ether. Go to Compound and borrow $10 in USDC.
(Notice the very small amounts I’m suggesting. The old crypto saying “don’t put in more than you can afford to lose” goes double for DeFi. This stuff is uber-complex and a lot can go wrong. These may be “savings” products but they’re not for your retirement savings.)
Immature and experimental though it may be, the technology’s implications are staggering. On the normal web, you can’t buy a blender without giving the site owner enough data to learn your whole life history. In DeFi, you can borrow money without anyone even asking for your name.
DeFi applications don’t worry about trusting you because they have the collateral you put up to back your debt (on Compound, for instance, a $10 debt will require around $20 in collateral).
Read more: There Are More DAI on Compound Now Than There Are DAI in the World
If you do take this advice and try something, note that you can swap all these things back as soon as you’ve taken them out. Open the loan and close it 10 minutes later. It’s fine. Fair warning: It might cost you a tiny bit in fees, and the cost of using Ethereum itself right now is much higher than usual, in part due to this fresh new activity. But it’s nothing that should ruin a crypto user.
So what’s the point of borrowing for people who already have the money? Most people do it for some kind of trade. The most obvious example, to short a token (the act of profiting if its price falls). It’s also good for someone who wants to hold onto a token but still play the market.
Doesn’t running a bank take a lot of money up front?It does, and in DeFi that money is largely provided by strangers on the internet. That’s why the startups behind these decentralized banking applications come up with clever ways to attract HODLers with idle assets.
Liquidity is the chief concern of all these different products. That is: How much money do they have locked in their smart contracts?
“In some types of products, the product experience gets much better if you have liquidity. Instead of borrowing from VCs or debt investors, you borrow from your users,” said Electric Capital managing partner Avichal Garg.
Let’s take Uniswap as an example. Uniswap is an “automated market maker,” or AMM (another DeFi term of art). This means Uniswap is a robot on the internet that is always willing to buy and it’s also always willing to sell any cryptocurrency for which it has a market.
On Uniswap, there is at least one market pair for almost any token on Ethereum. Behind the scenes, this means Uniswap can make it look like it is making a direct trade for any two tokens, which makes it easy for users, but it’s all built around pools of two tokens. And all these market pairs work better with bigger pools.
Why do I keep hearing about ‘pools’?To illustrate why more money helps, let’s break down how Uniswap works.
Let’s say there was a market for USDC and DAI. These are two tokens (both stablecoins but with different mechanisms for retaining their value) that are meant to be worth $1 each all the time, and that generally tends to be true for both.
The price Uniswap shows for each token in any pooled market pair is based on the balance of each in the pool. So, simplifying this a lot for illustration’s sake, if someone were to set up a USDC/DAI pool, they should deposit equal amounts of both. In a pool with only 2 USDC and 2 DAI it would offer a price of 1 USDC for 1 DAI. But then imagine that someone put in 1 DAI and took out 1 USDC. Then the pool would have 1 USDC and 3 DAI. The pool would be very out of whack. A savvy investor could make an easy $0.50 profit by putting in 1 USDC and receiving 1.5 DAI. That’s a 50% arbitrage profit, and that’s the problem with limited liquidity.
(Incidentally, this is why Uniswap’s prices tend to be accurate, because traders watch it for small discrepancies from the wider market and trade them away for arbitrage profits very quickly.)
Read more: Uniswap V2 Launches With More Token-Swap Pairs, Oracle Service, Flash Loans
However, if there were 500,000 USDC and 500,000 DAI in the pool, a trade of 1 DAI for 1 USDC would have a negligible impact on the relative price. That’s why liquidity is helpful.
You can stick your assets on Compound and earn a little yield. But that’s not very creative. Users who look for angles to maximize that yield: those are the yield farmers.
Similar effects hold across DeFi, so markets want more liquidity. Uniswap solves this by charging a tiny fee on every trade. It does this by shaving off a little bit from each trade and leaving that in the pool (so one DAI would actually trade for 0.997 USDC, after the fee, growing the overall pool by 0.003 USDC). This benefits liquidity providers because when someone puts liquidity in the pool they own a share of the pool. If there has been lots of trading in that pool, it has earned a lot of fees, and the value of each share will grow.
And this brings us back to tokens.
Liquidity added to Uniswap is represented by a token, not an account. So there’s no ledger saying, “Bob owns 0.000000678% of the DAI/USDC pool.” Bob just has a token in his wallet. And Bob doesn’t have to keep that token. He could sell it. Or use it in another product. We’ll circle back to this, but it helps to explain why people like to talk about DeFi products as “money Legos.”
So how much money do people make by putting money into these products?It can be a lot more lucrative than putting money in a traditional bank, and that’s before startups started handing out governance tokens.
Compound is the current darling of this space, so let’s use it as an illustration. As of this writing, a person can put USDC into Compound and earn 2.72% on it. They can put tether (USDT) into it and earn 2.11%. Most U.S. bank accounts earn less than 0.1% these days, which is close enough to nothing.
However, there are some caveats. First, there’s a reason the interest rates are so much juicier: DeFi is a far riskier place to park your money. There’s no Federal Deposit Insurance Corporation (FDIC) protecting these funds. If there were a run on Compound, users could find themselves unable to withdraw their funds when they wanted.
Plus, the interest is quite variable. You don’t know what you’ll earn over the course of a year. USDC’s rate is high right now. It was low last week. Usually, it hovers somewhere in the 1% range.
Similarly, a user might get tempted by assets with more lucrative yields like USDT, which typically has a much higher interest rate than USDC. (Monday morning, the reverse was true, for unclear reasons; this is crypto, remember.) The trade-off here is USDT’s transparency about the real-world dollars it’s supposed to hold in a real-world bank is not nearly up to par with USDC’s. A difference in interest rates is often the market’s way of telling you the one instrument is viewed as dicier than another.
Users making big bets on these products turn to companies Opyn and Nexus Mutual to insure their positions because there’s no government protections in this nascent space – more on the ample risks later on.
So users can stick their assets in Compound or Uniswap and earn a little yield. But that’s not very creative. Users who look for angles to maximize that yield: those are the yield farmers.
OK, I already knew all of that. What is yield farming?Broadly, yield farming is any effort to put crypto assets to work and generate the most returns possible on those assets.
At the simplest level, a yield farmer might move assets around within Compound, constantly chasing whichever pool is offering the best APY from week to week. This might mean moving into riskier pools from time to time, but a yield farmer can handle risk.
“Farming opens up new price arbs [arbitrage] that can spill over to other protocols whose tokens are in the pool,” said Maya Zehavi, a blockchain consultant.
Because these positions are tokenized, though, they can go further.
This was a brand-new kind of yield on a deposit. In fact, it was a way to earn a yield on a loan. Who has ever heard of a borrower earning a return on a debt from their lender?
In a simple example, a yield farmer might put 100,000 USDT into Compound. They will get a token back for that stake, called cUSDT. Let’s say they get 100,000 cUSDT back (the formula on Compound is crazy so it’s not 1:1 like that but it doesn’t matter for our purposes here).
They can then take that cUSDT and put it into a liquidity pool that takes cUSDT on Balancer, an AMM that allows users to set up self-rebalancing crypto index funds. In normal times, this could earn a small amount more in transaction fees. This is the basic idea of yield farming. The user looks for edge cases in the system to eke out as much yield as they can across as many products as it will work on.
Right now, however, things are not normal, and they probably won’t be for a while.
Why is yield farming so hot right now?Because of liquidity mining. Liquidity mining supercharges yield farming.
Liquidity mining is when a yield farmer gets a new token as well as the usual return (that’s the “mining” part) in exchange for the farmer’s liquidity.
“The idea is that stimulating usage of the platform increases the value of the token, thereby creating a positive usage loop to attract users,” said Richard Ma of smart-contract auditor Quantstamp.
The yield farming examples above are only farming yield off the normal operations of different platforms. Supply liquidity to Compound or Uniswap and get a little cut of the business that runs over the protocols – very vanilla.
But Compound announced earlier this year it wanted to truly decentralize the product and it wanted to give a good amount of ownership to the people who made it popular by using it. That ownership would take the form of the COMP token.
Lest this sound too altruistic, keep in mind that the people who created it (the team and the investors) owned more than half of the equity. By giving away a healthy proportion to users, that was very likely to make it a much more popular place for lending. In turn, that would make everyone’s stake worth much more.
So, Compound announced this four-year period where the protocol would give out COMP tokens to users, a fixed amount every day until it was gone. These COMP tokens control the protocol, just as shareholders ultimately control publicly traded companies.
Every day, the Compound protocol looks at everyone who had lent money to the application and who had borrowed from it and gives them COMP proportional to their share of the day’s total business.
The results were very surprising, even to Compound’s biggest promoters.
COMP’s value will likely go down, and that’s why some investors are rushing to earn as much of it as they can right now.
This was a brand-new kind of yield on a deposit into Compound. In fact, it was a way to earn a yield on a loan, as well, which is very weird: Who has ever heard of a borrower earning a return on a debt from their lender?
COMP’s value has consistently been well over $200 since it started distributing on June 15. We did the math elsewhere but long story short: investors with fairly deep pockets can make a strong gain maximizing their daily returns in COMP. It is, in a way, free money.
It’s possible to lend to Compound, borrow from it, deposit what you borrowed and so on. This can be done multiple times and DeFi startup Instadapp even built a tool to make it as capital-efficient as possible.
“Yield farmers are extremely creative. They find ways to ‘stack’ yields and even earn multiple governance tokens at once,” said Spencer Noon of DTC Capital.
COMP’s value spike is a temporary situation. The COMP distribution will only last four years and then there won’t be any more. Further, most people agree that the high price now is driven by the low float (that is, how much COMP is actually free to trade on the market – it will never be this low again). So the value will probably gradually go down, and that’s why savvy investors are trying to earn as much as they can now.
Appealing to the speculative instincts of diehard crypto traders has proven to be a great way to increase liquidity on Compound. This fattens some pockets but also improves the user experience for all kinds of Compound users, including those who would use it whether they were going to earn COMP or not.
As usual in crypto, when entrepreneurs see something successful, they imitate it. Balancer was the next protocol to start distributing a governance token, BAL, to liquidity providers. Flash loan provider bZx has announced a plan. Ren, Curve and Synthetix also teamed up to promote a liquidity pool on Curve.
It is a fair bet many of the more well-known DeFi projects will announce some kind of coin that can be mined by providing liquidity.
The case to watch here is Uniswap versus Balancer. Balancer can do the same thing Uniswap does, but most users who want to do a quick token trade through their wallet use Uniswap. It will be interesting to see if Balancer’s BAL token convinces Uniswap’s liquidity providers to defect.
So far, though, more liquidity has gone into Uniswap since the BAL announcement, according to its data site. That said, even more has gone into Balancer.
Did liquidity mining start with COMP?No, but it was the most-used protocol with the most carefully designed liquidity mining scheme.
This point is debated but the origins of liquidity mining probably date back to Fcoin, a Chinese exchange that created a token in 2018 that rewarded people for making trades. You won’t believe what happened next! Just kidding, you will: People just started running bots to do pointless trades with themselves to earn the token.
Similarly, EOS is a blockchain where transactions are basically free, but since nothing is really free the absence of friction was an invitation for spam. Some malicious hacker who didn’t like EOS created a token called EIDOS on the network in late 2019. It rewarded people for tons of pointless transactions and somehow got an exchange listing.
These initiatives illustrated how quickly crypto users respond to incentives.
Read more: Compound Changes COMP Distribution Rules Following ‘Yield Farming’ Frenzy
Fcoin aside, liquidity mining as we now know it first showed up on Ethereum when the marketplace for synthetic tokens, Synthetix, announced in July 2019 an award in its SNX token for users who helped add liquidity to the sETH/ETH pool on Uniswap. By October, that was one of Uniswap’s biggest pools.
When Compound Labs, the company that launched the Compound protocol, decided to create COMP, the governance token, the firm took months designing just what kind of behavior it wanted and how to incentivize it. Even still, Compound Labs was surprised by the response. It led to unintended consequences such as crowding into a previously unpopular market (lending and borrowing BAT) in order to mine as much COMP as possible.
Just last week, 115 different COMP wallet addresses – senators in Compound’s ever-changing legislature – voted to change the distribution mechanism in hopes of spreading liquidity out across the markets again.
Is there DeFi for bitcoin?Yes, on Ethereum.
Nothing has beaten bitcoin over time for returns, but there’s one thing bitcoin can’t do on its own: create more bitcoin.
A smart trader can get in and out of bitcoin and dollars in a way that will earn them more bitcoin, but this is tedious and risky. It takes a certain kind of person.
DeFi, however, offers ways to grow one’s bitcoin holdings – though somewhat indirectly.
A long HODLer is happy to gain fresh BTC off their counterparty’s short-term win. That’s the game.
For example, a user can create a simulated bitcoin on Ethereum using BitGo’s WBTC system. They put BTC in and get the same amount back out in freshly minted WBTC. WBTC can be traded back for BTC at any time, so it tends to be worth the same as BTC.
Then the user can take that WBTC, stake it on Compound and earn a few percent each year in yield on their BTC. Odds are, the people who borrow that WBTC are probably doing it to short BTC (that is, they will sell it immediately, buy it back when the price goes down, close the loan and keep the difference).
A long HODLer is happy to gain fresh BTC off their counterparty’s short-term win. That’s the game.
How risky is it?Enough.
“DeFi, with the combination of an assortment of digital funds, automation of key processes, and more complex incentive structures that work across protocols – each with their own rapidly changing tech and governance practices – make for new types of security risks,” said Liz Steininger of Least Authority, a crypto security auditor. “Yet, despite these risks, the high yields are undeniably attractive to draw more users.”
We’ve seen big failures in DeFi products. MakerDAO had one so bad this year it’s called “Black Thursday.” There was also the exploit against flash loan provider bZx. These things do break and when they do money gets taken.
As this sector gets more robust, we could see token holders greenlighting more ways for investors to profit from DeFi niches.
Right now, the deal is too good for certain funds to resist, so they are moving a lot of money into these protocols to liquidity mine all the new governance tokens they can. But the funds – entities that pool the resources of typically well-to-do crypto investors – are also hedging. Nexus Mutual, a DeFi insurance provider of sorts, told CoinDesk it has maxed out its available coverage on these liquidity applications. Opyn, the trustless derivatives maker, created a way to short COMP, just in case this game comes to naught.
And weird things have arisen. For example, there’s currently more DAI on Compound than have been minted in the world. This makes sense once unpacked but it still feels dicey to everyone.
That said, distributing governance tokens might make things a lot less risky for startups, at least with regard to the money cops.
“Protocols distributing their tokens to the public, meaning that there’s a new secondary listing for SAFT tokens, [gives] plausible deniability from any security accusation,” Zehavi wrote. (The Simple Agreement for Future Tokens was a legal structure favored by many token issuers during the ICO craze.)
Whether a cryptocurrency is adequately decentralized has been a key feature of ICO settlements with the U.S. Securities and Exchange Commission (SEC).
What’s next for yield farming? (A prediction)COMP turned out to be a bit of a surprise to the DeFi world, in technical ways and others. It has inspired a wave of new thinking.
“Other projects are working on similar things,” said Nexus Mutual founder Hugh Karp. In fact, informed sources tell CoinDesk brand-new projects will launch with these models.
We might soon see more prosaic yield farming applications. For example, forms of profit-sharing that reward certain kinds of behavior.
Imagine if COMP holders decided, for example, that the protocol needed more people to put money in and leave it there longer. The community could create a proposal that shaved off a little of each token’s yield and paid that portion out only to the tokens that were older than six months. It probably wouldn’t be much, but an investor with the right time horizon and risk profile might take it into consideration before making a withdrawal.
(There are precedents for this in traditional finance: A 10-year Treasury bond normally yields more than a one-month T-bill even though they’re both backed by the full faith and credit of Uncle Sam, a 12-month certificate of deposit pays higher interest than a checking account at the same bank, and so on.)
As this sector gets more robust, its architects will come up with ever more robust ways to optimize liquidity incentives in increasingly refined ways. We could see token holders greenlighting more ways for investors to profit from DeFi niches.
Questions abound for this nascent industry: What will MakerDAO do to restore its spot as the king of DeFi? Will Uniswap join the liquidity mining trend? Will anyone stick all these governance tokens into a decentralized autonomous organization (DAO)? Or would that be a yield farmers co-op?
Whatever happens, crypto’s yield farmers will keep moving fast. Some fresh fields may open and some may soon bear much less luscious fruit.
But that’s the nice thing about farming in DeFi: It is very easy to switch fields.
Author: Gamals Ahmed, CoinEx Business Ambassadorsubmitted by CoinEx_Institution to Coinex [link] [comments]
Financial risk management is one of the most controversial topics in trading. Traders want to reduce the risk and potential loss, but on the other hand, these traders also want at the same time to get the best profits. It is known that in order to obtain greater returns, you also need to take greater risks.
Some may consider trading an entertaining and difficult pastime, but everyone should be aware that the most important aspect of trading is risk management.
What are the different risk management techniques used in trading?Long-term trading
Stock market traders use historical data to make long-term strategic business decisions. The long-term cryptocurrency strategy depends on current activity, and you will be more inclined towards hopeful information rather than reliable information and more suitable for cryptocurrencies.
Short term trading
Short-term traders benefit from the volatile cryptocurrency market by using swing trading when the price differs in short bursts of movement.
Technical analysis of cryptocurrencies requires research into project that affect the market based on price and volume data available through analytical technology.
Traders often look to blogs and information sites and study the whitepaper for cryptocurrencies or cryptocurrency community forums.
Why should you stick to risk management?You can get a series of successful deals based on good luck. You can also get a series of bad deals that depend on luck and feel.
It even happens to successful, experienced professional traders that they lose 10 trades in a row. Without risk management, this could result in your capital loss and final exit. The most important goal in trading is to stay in the market and preserve your capital. As long as you are in the market, you can recoup your losses.
If you lose 10% of your capital, this means that you must make a profit of 11.1%. If your budget is $ 1,000 and you lose $ 100 ( ~ to 10%), you’ll have $ 900. $ 100 is 11.1% of that.
This means that losses hurt more than profits of the same size. This becomes worse with more losses. If you lose 50% of your capital, you must double your money to offset the loss.
The new trader’s rule for managing at most risk is 1% of the capital for each trade. If you lose 10 deals in a row (which is unlikely) and lose 1% each time, how much do you have left? Still 90%.
If you risk 2%, what remains for you after losing 10 recurring deals is only 81% of the capital. You have to make 11% or 23% profit to make up for it. Even if you lose 100 deals in a row with a 1% risk management plan in hand, you still have 37%.
A seasoned trader may use 2% occasionally. A trader who risks 10% disappears quickly.
You might be wondering, if I decide to follow risk management with just 1% in the deal, does this mean that I can only invest 1% of the capital for each transaction? No. This is the ratio for determining the maximum acceptance of a loss from a single trade.
I assume you know your total capital, no matter if it is $ 100 or $ 1 billion. The main point is to have a specific budget available. Do not use borrowed money, which you have to repay in a deadline. Do not use money you need in the future. If you are emotionally attached to this money, these emotions will make you feel stressed. You want to be a successful trader and not an emotional gambler.
The next step is to find a deal. It does not matter if you do this daily and trade specific currencies or not. You have tools like fundamental and technical analysis to research deals. Immediately before entering into a trade, there is a basic calculation that must be performed:
Determine the entry price, stop loss and the amount of risk.
Well, the risk is easy. We already know that we will choose 1%.
The entry price is also easy. It could be the current market price or the limit you set for your order.
Now, stop loss: it is necessary to know and set the stop loss before entering a trade. Another rule is that you are not allowed to adjust your stop loss afterward to accept more losses.
How to determine the stop loss? Technical analysis is the only method available regardless of the random selection of something. Perhaps you will use something like “beyond the next support level (or resistance)” or “the other side of the trend line we just broke”.
Now we have the four components of risk management: budget size, entry price, stop-loss and risk-taking. The time to use the calculator.
The size of the deal
Now to find out how much money you are allowed to invest in this deal.
Transaction Size = (Risk Size * Budget) / (Entry Price — Stop Loss)
For example: If you have a budget $ 1,000 and want to buy bitcoin for $ 2,300 with a stop loss $ 2,200 and a risk 1%, then this means: The deal size is (1% * $ 1,000) / ($ 2,300 — $ 2,200) ) = $ 10 / $ 100 = 0.1.
So in this example you are allowed to buy 0.1 Bitcoin units for this trade.
You must make this account before every trade! Even if you do, you will encounter errors sometimes, but risk management will help you to preserve your capital. Courage will shout at you to take greater risks, because you are very sure of your prediction. But always remember, to succeed you must stick to your stop loss and strategy.
Before entering into a position, you must also have a target price in mind for sale. The risk must be doubled. If you risk 1% of your capital, the potential profit must be 2–3% of your capital. If the goal for profit is equal to stopping the loss, you must stay away from trading and ignore this deal.
This does not mean that you will always reach or lose your goal. You are allowed to manually track stop loss or exit early. However, the goal should be possible given the volatility of the market you are in.
Level of risk
Well, I got away from the plan and ignored your strategy. The deal entered without due diligence. whatever. How much risk did you just take?
You know your budget, entry price and deal size. You must quickly define the next stop loss. How much risk?
Risk = (Trade Size * (Entry Point — Stop Loss)) / Budget
For example, I bought 0.3 bitcoin at a price of $ 2,500 with a budget of $ 1,000. Stop loss is $ 2345. This means that the risk is (0.3 * 155 dollars) / 1000 dollars = 4.64%.
Now for some good things that can’t be used practically, however, the concepts are sound. Why the reader may ask 1% risk? Is it just a rule? Is there an ideal ratio? In theory, yes there is. We can use the Kelly standard. The formula is simple:
Risk = p-((1-p)/r
Getting those variables P and R is difficult. You have to know your profit rate, which is the number of times your goals are reached. You also need a profit-to-loss ratio, which is the average profit per trade.
For example, if you earn 47% of the time and 117% of your average capital, then the ideal risk is 1.7%.
In practice you don’t really know this specifically or variables p and r, so I recommend sticking to 1% as the basis for risk management.
Risk Management Tips for Cryptocurrency Investment1. You should never risk more than you can afford to lose.
However, this error is very common, especially among Crypto traders who are just starting out. The Crypto market is very difficult to predict, so traders who want to invest more than they can actually put themselves at risk of market and losing their money.
2. Don’t trade by all of your capital at same time.
Anything can affect the Crypto market. The smallest news can affect the price of a particular currency in a negative or positive way. Instead of trade with everything you own”, it is better to follow a more moderate path and trade reasonable amounts of your capital.
3. Improve your risk management performance
Fortunately, there are several ways to help avoiding these mistakes and avoid loss. You must have a well-tested trading plan that includes all the details of managing financial risk in Crypto. The trading plan should be practical — and you should be able to follow its steps easily. Experts recommend that it is better to focus on high-probability deals.
Crypto trading involves a high degree of risk, so it is essential that you be disciplined in all of your financial transactions. You should also be able to pay extra attention to your past mistakes, and practice trading activities in a demo account first. The time and effort you spend in creating a trading plan is often considered a major investment that helps you achieve a profit-able future.
4. Control your emotions and risk management
As a Crypto trader, you need to be able to control your feelings and emotions towards your open, future, and closed positions as well! If you cannot control your feelings, you will not be able to reach a position where you can make the profits you want to trade. Market sentiment can often trap traders in volatile positions in the market. This is one of the most common market risk for Crypto trading. Those with stubborn nature tend not to do well in the Crypto market.
These types of traders tend to wait too long to exit the trade. When a trader realizes his mistake, he must leave the market as soon as possible, to take the least possible loss. Waiting too long can cause you to lose a large portion of your capital. Once you exit the deal, you need to be patient and re-enter the market when it presents a real new opportunity.
5. Basic concepts in risk management
To reduce the financial market risk for trading Cryptocurrency, you will need to remember some of the basic points mentioned below:
The evaluation of money changes, and often affects companies and individuals participating in global stock exchanges.
Liabilities, assets and fund flows are affected by changes in exchange rates.
By trading small amounts of your capital and monitoring market movements, you will be able to see these concepts take hold throughout your daily trading sessions.
6. Important tips for developing a risk management plan model
Below is a series of simple tips that you can consider and include in the financial risk management plan model when trading Crypto, which may help you reduce trading losses associated with market risks:
1. Stop losses
Trading without a stop loss is like driving a car without braking at full speed — it won’t end well. Likewise, once your stop loss is set, you should never lower it. There is no point in having a safety net in place if you are not going to use it properly.
The goal of stopping a loss is to limit the size of the potential loss in order to be able to in-crease your total profits, and what needs to be done on the other side is to set profit-taking orders as well!
2. Do not link all your investments in one place
This applies to all types of investment, and Crypto is no exception. Crypto should be part of your portfolio, but not complete it. Another way that you can expand it is to invest or trade more than one crypto coin.
3. The general trend is your companion
You may have made the decision to be a long-term trader, with plans to keep these deals for an extended period of time. However, regardless of the deal you ultimately decided to take, you should not resist current market trends or movements. There will always be strong players in the market, and the best way to keep up with them is to absorb such changes and follow the general trend, and change your strategies to reflect this.
4. Keep teaching yourself
The best way to learn the financial risk management system in Crypto and become an efficient and successful Crypto trader is to know how the market works. However, as we mentioned earlier, the market is constantly changing, so if you want to stay ahead of your game, you have to be always ready to learn new things and update yourself about market changes.
5. Use the plug-in
To advance in Crypto, you may want to use some trading software that can help you settle your choices. However, these systems are not ideal, so it is best to use them as a consulting tool, and something to refer to rather than use as a basis for making business decisions.
6. Limiting the use of leverage
It can be very tempting to use leverage to make big profits. However, this can make it easy for you to lose a huge portion of your capital, too. So do not support the use of giant leverage. All it takes is one quick change in market direction, and you can easily delete your entire trading account.
Crypto risk management is not difficult to understand and implement. But in order to invest in any financial instruments, whether it be bonds, exchange-traded funds, stocks, contracts for the difference in prices or cryptocurrencies, you need to acquire advanced knowledge in the field of risk management. The hard part is having enough self-discipline to adhere to the rules of this risk management plan as the market moves against your positions.
The content is for opinion sharing only and should not be relied upon to make any investment decisions.
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