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crypto arbitrage

Crypto Arbitrage explained

Cryptocurrencies have grown into a mainstream phenomenon. As with virtually all types of global commodities, opportunities exist to make money but lose it as well.

Bitcoin may not be as well established as other trading assets, but it does have the advantage of being ‘open’ 24 hours a day, 365 days a year and is perhaps a little more accessible to everyday people. 

Bitcoin is global and not bound by borders or national restrictions. Bitcoin and other crypto can also be found on multiple exchanges across the globe whereas traditional assets are much more limited, although generally more robust for trading purposes. 

From futures trading, leverage and margin, to simply buying and holding, people entering into the cryptocurrency space are always looking for sure-fire ways to make their cryptocurrency grow, even beyond what its famed volatility will allow for. 

This is where crypto arbitrage comes in. Due to the volatile nature of cryptocurrencies like Bitcoin, traders can take advantage of price discrepancies across multiple global exchanges. 

Seeing as there are so many crypto exchanges and even more buyers and sellers across these markets, there will undoubtedly come a time when the price of Bitcoin is different from one market to another producing the perfect opportunity for crypto arbitrage. 

So what exactly is crypto arbitrage, and is it as easy as buying low in one place and selling high somewhere else? 

What is Crypto Arbitrage?

Simply put, arbitrage is when a person purchases an asset in one place and sells it in another to profit from a slight deviation in price between markets. 

As an example, if 1 BTC costs $30,000 on Binance but it’s currently also trading at $30,100 on Kraken, there is a $100 opportunity for arbitrage.

In this instance, if you purchase your Bitcoin on Binance and hopefully sell it quickly enough on Kraken you’ll make a $100 profit — easy enough, right? 

Unfortunately, while the mechanics are as easy as that, there is a lot more to consider before jumping fully into crypto arbitrage as a sure way to make quick profits. 

How crypto arbitrage works

As explained above, crypto arbitrage is looking for the same asset selling at different prices and taking advantage of that. 

There are mainly two types of crypto arbitrage: Arbitrage between exchanges and Arbitrage within the exchange.

The former is the most basic way to make crypto arbitrage work for you as different exchanges will have slightly different markets. However, with arbitrage between exchanges, some variations help you take advantage of price differences. 

Once you have identified the two exchanges you want to play off each other, it is time to enact the trades to make a profit. However, one also needs to be aware of the workings that can cause issues in trying to be profitable. 

It takes around 15-20 minutes for major coins to confirm the transaction. If the market price drops within this time frame, you may run a risk of generating less arbitrage profits. 

Factors like geographic location, time of day, and even different news cycles can all move the price of a coin within those 15-20 minutes and destroy your hopes of being successful in an arbitrage trade. 

Can crypto arbitrage be profitable?

Arbitrage is a well-known and established practice in the world of finance. It can be profitable. However, it will require dedication and persistence to succeed. 

Crypto arbitrages are usually quite small. You can earn profits from market differences, from about 0.2 – 2.5% ($10 to $100) every day. If you focus on around ten such spreads every day, you could make upwards of a thousand dollars per week.

However, you need to know what you are doing, and you have to be prepared with the right tools and platforms. 

If you are a day crypto trader, and there is not much market movement, you can always earn some profit from arbitrage. 

If you are persistent and quick to take action on profitable opportunities, it is possible to earn a decent profit from arbitrage. 

It will generally be a factor of just how much money you are able to put to work. Making 2% off of 500€ is nowhere near the same as 2% off of €1 million!

Crypto arbitrage comes down to awareness and speed. It is up to you to recognise the differences across various exchanges, and you need to access multiple listings at once, given that cryptocurrency exchanges operate 24/7/365, it can be very time-consuming.

Pros and Cons of Crypto Arbitrage

As with everything, there are certain pros and cons to crypto arbitrage, and a lot of it depends on you as a trader and what knowledge and access you have. 

There are indeed a lot of pros to crypto arbitrage, but it is not as simple as it sounds and many things need to be considered before jumping in. 

Pros of Crypto Arbitrage

Quick Profits

Because you can buy at one exchange and sell at another in a matter of minutes, the potential for profit in crypto arbitrage is fast. This is much quicker than traditional trading where you buy and hold cryptocurrency to sell at a later date.

A Wide Range of Opportunities

The cryptocurrency space is bursting with new markets, coins and exchanges and all of this gives rise to new potential avenues for crypto arbitrage. 

According to Coindesk, there are more than 391 cryptocurrency exchanges in the world today and these will all have a slightly different price for different cryptos.

The Crypto Market is Growing

Because crypto is still very much in its infancy and has not been totally adopted or accepted, it is not a mature and steady space. 

Due to this, there is quite a bit of irregularity, disjointing, and lack of information transfer between exchanges. There are also a fewer number of crypto traders than in the traditional markets, and thus less competition in the market, which leads to potential price differentials.

Cryptocurrencies are Incredibly Volatile

While volatility is often frowned upon in investing circles, it is the one aspect of crypto that makes it so enticing to risk-takers and traders. 

For crypto arbitrage, it also means more opportunities as there can be huge price changes between exchanges and this makes for a more lively opportunity for bigger arbitrages.

The Cons of Crypto Arbitrage

Anti-Money Laundering Rules and Restrictions

While not really a con, and quite acceptable with crypto, using multiple exchanges will often call for you to adhere to the KYC regulations that are in place. This will involve things like potentially holding a bank account in the same country where the exchange is based

Fees

This can be quite a hidden barrier for arbitrage. Because users are operating with often small profits, any fees for trading crypto, withdrawal fees, network fees or exchange fees, can impact the profitability of arbitrage, or could even lead to a loss. 

High Start-Up Capital

In order to really profit from crypto arbitrage, and make it worthwhile with the tiny profit margins there is a need for a relatively large amount of trading capital to make it worthwhile. 

Withdrawal Limits

With large trades and bigger capital amounts, there also comes an issue of withdrawal limits. Exchanges can have set limits for traders which means you may not be able to get the access you want to your profits right away. 

Slow Transactions

Crypto transactions are also susceptible to market volatility in terms of their speed and accessibility.  When the markets are on the move, the best time for arbitrage, it is not uncommon to have slower transactions, or even downtime on exchanges which could hurt profits. 

 

Things to Know and to Watch Out For

Understanding the pros and cons of crypto arbitrage will help you decide if this is the right option for you, but if you do decide to go down this route, there are a few more things to watch out for. 

A number of pitfalls can trap unsuspecting traders.

Similar Sounding Coins

The cryptocurrency space is large and constantly expanding. New coins are being created and brought to market all the time and they can often have similar-sounding names which can trick traders. 

A good example of this is the project ‘SIA’ which is an application for decentralized cloud storage solution and its symbol is very close to another project called ‘SAI’.

Even when it comes to the different coin tickers there can be issues — such as $HNC (HellenicCoin) and $HNC (Huncoin), or ($BTCS) Bitcoin Scrypt and ($BTCS) Bitcoin Silver.

Scam Coins And “Pump & Dump” Schemes

While the cryptocurrency space is certainly getting better and more regulated, there are still instances where people are being scammed out of their money. 

Many coins can come to the market with the express purpose of stealing money from investors. If you arbitrage such coins, you could get burnt. The same thing happens with pump and dump schemes where projects purposefully inflate the price of their coins only to sell high and collapse the market; this can also be devastating for arbitrage. 

A Lack of Trading Volume

Often when looking for arbitrage opportunities, you may be led to smaller, lesser-known coins with good potential for arbitrage. 

However, these coins can also lack trading volume. This can hamper large trades of the coin and lead to serious consequences such as delisting. You could avoid running into that issue by keeping an eye on the exchange order book and making sure that you see transactions happening or not.

Is Crypto Arbitrage Worth It?

Having considered all of the above, it is time to decide if crypto arbitrage is actually worth pursuing. Certainly, it is a viable opportunity, especially in the cryptocurrency space, but what needs to be understood is that it is not a silver bullet for making easy money. 

Buying a coin low, moving it across to where its price is higher, and selling it on to collect a profit sounds easy, but there are many considerations that need to be looked at. 

Dealing with crypto is still challenging and often lacks an easy user interface. More than that, the lack of full regulation means there are issues surrounding scams and schemes. 

Besides all of that, crypto arbitrage can be difficult to master and requires a lot of prior knowledge and experience, not to mention a decent amount of starting capital to ensure viable profits and some good coding chops if you are hoping to do it on a decent scale because if you are doing it manually, you are not going to be efficient. 

Crypto arbitrage is certainly an option to make money but to be successful it requires access to capital, hard work, a tolerance for risk and a thirst for knowledge. If you’re prepared to put in the work and have some skills it could prove profitable.

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crypto coins vs tokens

Crypto Coins vs Tokens Explained

It would be difficult not to have noticed just how much the world of crypto has exploded over the last few years, note here that I am using the word crypto and not specifically cryptocurrency. 

Crypto is nowadays no longer just about coins, but about tokens too. In this article we are going to get into crypto coins vs tokens and what this actually means.

Back in the day, a digital currency was the primary use case when the Bitcoin token arrived on the scene. Since then the crypto world has changed a lot! 

Where cryptocurrency was the main attraction, it’s now perhaps more of a supporting act without which the crypto scene wouldn’t be able to function. 

 

What are crypto coins?

Way back in 2009 when Bitcoin first arrived on the scene, we were looking at a revolutionary new form of digital currency built on an innovative technology called blockchain. 

The sole purpose of a cryptocurrency was to provide a decentralised means of digital value storage and transfer which was fit for the needs of the internet age, not controlled by any government or private organisation and not geographically limited. A digital currency for the entire world!

 

The basics of how blockchain technology works

A blockchain is a decentralised ledger running across a peer-to-peer network of computers. No single computer, organisation or person controls it. 

When done well, it’s near impossible to hack or manipulate and, if public, is totally transparent. 

A blockchain operates as a digital ledger validating and recording each transaction across the network according to strict protocols. 

Each blockchain has its own currency which effectively rewards the participant computers that make up the blockchain with coins such as Bitcoins or Ether in the case of Ethereum. 

Another key aspect of a blockchain is that the coins cannot be duplicated. 

All of these factors provided by blockchain technology have created a suitable environment in which digital crypto coins can be created and used as secure means of payment.

 

What are blockchain tokens?

Now that we have some understanding of what blockchain technology is, we can see that this non-centralised, robust, secure network of computers and strict protocols could be used to do a whole host of other things beyond simply being a currency and payment system. 

Well, some people realised this and the token was born!

 

What is a token? 

Tokens often get mistaken for digital coins but are in fact created on existing blockchains and are not a blockchain’s currency in their own right. 

The most popular blockchain platform for token developers is Ethereum due mainly to being a well-established blockchain and having a well-established cryptocurrency called Ether, which is the second most popular crypto coin after Bitcoin.

Tokens built on Ethereum follow several standards, but the most widely known and used is “ERC-20”. Those are “fungible” tokens. 

When built using the ERC-20 standard, tokens are known as ERC20-tokens. One such example is Uniswap’s UNI.

There are other blockchains that allow for the creation of tokens, such as Binance Smart Chain, Stratis, Waves, Lisk and NEO. 

NEO for example uses tokens known as NEP-5 tokens, Binance’s are BEP-20.

There are also “non-fungible tokens” (NFT) created atop blockchains. Those on Ethereum, for example, are known as ERC721.

In summary: a coin is a unit of value of and native to a blockchain network, and a token is a unit of value for something built atop a blockchain network.

 

Coins, tokens and blockchain simplified

A simplistic way to imagine how crypto coins, tokens and blockchains work together could be as follows: Imagine that blockchain is like the operating system running on your Android or iOS smartphone, something very powerful yet quite useless without any applications. An app like a video game – a piece of software running on the operating system – could be powered by a token. 

To play the game, you would pay for the use of your phone’s operating system with the OS’s native currency – the coin – and for in-game items using the game’s native currency, the token. 

The game can’t run on anything else than your phone, and the game’s currency can’t be used outside of the game, but any game can run on your phone and any game can create its own currency.

That’s how you have many decentralised exchanges on Ethereum (Uniswap, dY/dX, SushiSwap, …) each with their own tokens, but all requiring that you pay transaction fees in ETH for the privilege of using the underlying blockchain.

 

What are Stablecoins?

Stablecoins are called “coins” but are, in fact, an interesting application of the “token” use case.

Stablecoins are literally designed to be “stable” “coins”, and the name came in opposition to most crypto coins and tokens which experience very high volatility.

Stablecoins try to “peg” their price to that of something more stable and predictable. It can be a fiat currency like the US Dollar or EURO or a commodity such as gold or silver where the price does not fluctuate as wildly as is generally the case with crypto coins. 

Stablecoins on Ethereum usually follow the ERC-20 standard. 

Examples include USDC, Tether, Dai. But they are not all created equal, so let’s take a look at the types of stablecoins you can find.

 

A few types of stablecoins 

Fiat-backed stablecoins (USDC)

One of the ways stablecoins can manage price fluctuations is by tying the stablecoin to a fiat currency such as the US Dollar or the EURO. A currency like the US Dollar or EURO is way more stable when compared directly to crypto. 

Usually, the entity behind the stablecoin will have a reserve in place where it will secure or guarantee the value of each stablecoin on a par basis to a fiat currency. 

That way, if we take the example of the dollar,  1 coin can always be redeemed for 1 US Dollar. 

Just as in the old days of the gold standard, each coin is backed by real money sitting in a real bank somewhere. 

The price of the coin fluctuates as much as the currency does, in this case exactly as the US dollar fluctuates.

In this way, a digital stablecoin and a real-world asset such as the US dollar are neatly tied together.

 

Crypto-backed stablecoins (DAI)

DAI is a crypto-backed stablecoin on the Ethereum blockchain using the MakerDAO protocol. 

What sets DAI apart is that MakerDAO wants the DAI to be decentralised, i.e. there is no central authority that has control of the system. 

Instead, smart contracts running on Ethereum aim to maintain the “peg”. 

This effectively means that DAI does not hold collateral in a bank on a 1:1 basis like the fiat-backed stablecoin but rather holds decentralised Ethereum reserves in a smart contract that are not controlled by any single entity. 

Naturally Ethereum reserves can of course be converted to fiat money at any point thus still giving the stablecoin real value in the non-digital world.

Since Ethereum’s price can go up or down, DAI is “over-collateralized”; meaning that there the reserve of ETH is worth more, in dollar terms, than the value, in dollar terms, of all DAI in circulation. 

That way, if the price goes down, DAI can still be redeemed for 1 USD’s worth of ETH.

 

Algorithmic stablecoins (TERRA, CELO)

The algorithmic stablecoin takes a completely different approach and isn’t backed by “external” collateral waiting on the sidelines ready to step in if things go south. It uses its own native coins to make its tokens stable. 

Terra has a USD stablecoin (UST, and it actually has a lot of other stablecoins pegged to other stuff too) which is collateralized by LUNA, the native token of the Terra blockchain. 

The Terra protocol acts as a market maker for the stablecoin. If the stablecoin system runs out of assets, it restocks by inflating the native LUNA supply and it goes on the market to buy and sell the stablecoin to maintain the peg.

Some, like Terra and Celo, have done fairly well so far. 

Others, like FEI, haven’t fared too well. It’s admittedly harder to create that kind of market than to just hold the real asset which you will exchange on request against the “tokenized” proof.

 

Conclusion

In the ever-exciting and constantly changing world of crypto nothing ever stays still. 

What started out back in 2009 as a new and somewhat crazy idea of creating a digital currency that nobody owns or controls has morphed into something truly massive and continues to grow at an unprecedented rate. 

Crypto no longer just refers to a digital currency but to a plethora of digital assets in the form of coins and tokens. 

This constant innovation keeps the engine running and presents plenty of opportunities for investors. 

The blockchain technology that enables both coins and tokens really is something of an outstanding innovation to be marvelled at. 

From where we stand now, we are certainly nowhere near the end of the road but rather still very much at the beginning and opportunities abound. 

It will be exciting to see just where we go from here in the exciting and ever-changing world of crypto coins and tokens!

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CEX – Centralised Exchanges Explained

A CEX is a centralised exchange run by a 3rd party organisation that facilitates the buying, holding, exchanging and trading of crypto. 

A CEX is designed to be simple to use and in most cases makes the exchange to and from fiat currencies pretty easy and straightforward.

 

Okay, so you´re thinking of getting into crypto, where do you begin? 

The easiest and most convenient, especially for a crypto newbie would be via a centralised exchange also known as a CEX. 

Here you can buy your choice of crypto using a regular fiat currency like the EURO or US dollars.

Just as with a bank or a brokerage house, you have an account and in this account sits your crypto. 

The account allows you to trade that crypto with other crypto and whenever you like exchange that crypto back into a regular fiat currency.

 

The origins of the centralised exchange (CEX)

If you think the current world of crypto is the wild west, think again! In relative terms, we are nowhere near the kind of wild west scenario that was around in the very early days of Bitcoin. 

In order to understand the centralised exchange (CEX), we need to first go back to the genesis of crypto, Bitcoin.

When Bitcoin was virtually worthless and could be mined on a personal computer the only ways of getting it would be either via mining or by buying it from other Bitcoin holders. 

This initial buying and selling was somewhat risky and far from straightforward. It would usually require communicating via a forum like Bitcointalk which was set up by Satoshi Nakamoto, the mysterious inventor of Bitcoin. 

On that forum, early bitcoin enthusiasts could discuss, buy and sell bitcoin but there was no proper exchange in place. 

Of course, in those early days the stakes were low as bitcoin was virtually worthless, for example in 2010, Bitcoin peaked at $0.39, I´ll let that number sink in for a moment!

As bitcoin grew in popularity the need for some kind of centralised exchange was recognised and the seed for the first exchange was planted paving the way for the centralised exchanges and the crypto world that we know today. 

Interest in Bitcoin continued to grow and new ways of getting it started to appear. A core bitcoin developer, Gavin Andreson created a Bitcoin “faucet” ( a tap in British English).

It was a website that would give anyone with a Bitcoin address five bitcoins for free. It was around this time that the first bitcoin exchanges emerged. 

Bitcointalk launched Bitcoin Market in 2010, it offered a floating exchange rate for bitcoin and buyers could purchase bitcoin by sending another user US Dollars via Paypal during which time Bitcoin Market would hold the sellers’ Bitcoin in Escrow until the seller received their money. 

 

This got the ball rolling…

 

Things began to heat up and before long crypto highway robbers made their first appearance!

As crypto increased rapidly in value, the criminal elements began to take an interest, after all this was indeed a wild west environment with no regulation, no armed security guards or secure infrastructure in place, easy pickings!

A notable example of one of the first major crypto heists was Mt.Gox, an early centralised exchange created by Jed McCaleb in 2010 who would later go on to co-found both Ripple and Stellar. 

McCaleb sold Mt.Gox in 2011 and in that same year one of the first major crypto heists occurred on Mt.Gox where an account with a significant holding was compromised, allowing the hacker to sell the crypto causing the price of bitcoin to fall from $17 to $0 within a few minutes. 

The hacker also stole personal information forcing the exchange to temporarily go offline. However, by 2013, Mt.Gox was in full force handling 70% of all global bitcoin transactions.

Mt.Gox was the first of many crypto hacking victims, other major centralised exchanges to be hacked included Binance, Bithumb, Bitfinex, Poloniex and ShapeShift. 

The vulnerabilities of centralised exchanges to hacking attacks gave rise to the well-known and used mantra “not your keys, not your crypto”. 

What does that mean you ask? Well, very simply, unless you hold and secure your private keys yourself, your cryptocurrency is potentially vulnerable to criminal hacks. 

 

Let´s look at the centralised exchanges (CEX) of today

Some of the most popular centralised exchanges of today include Coinbase, Binance, Kraken, CEX.IO, Gemini and Bittrex. 

Compared to the early days of bitcoin where the trading volume was pretty tiny, these days we are talking massive numbers, in 2021, centralised exchanges recorded in excess of 2 trillion US Dollars in trading volume. 

That’s pretty amazing when we think that bitcoin and crypto only appeared on the scene in 2009!

 

The centralised exchange (CEX) as a physical marketplace

To look at the centralised exchange in a non-technical way we could imagine it like a physical marketplace owned and operated by a central 3rd party. 

People would store their goods in a large warehouse and the marketplace owners would facilitate trades between the owners of the goods in exchange for a fee. Pretty straightforward. 

If the warehouse was broken into by thieves they could make off with all the goods leaving the owners of the stock quite vulnerable. 

For small traders, perhaps it wouldn’t be too risky, but with large traders with a lot of stock, it could be a bit too risky. 

To reduce this risk these big traders could keep the majority of their stock in their own private warehouse and just add more stock to the central marketplace as and when needed. 

This would be a lot safer as not all their stock is at risk, however, the downside would be that they would not be able to immediately trade the goods that are sitting in their private warehouse. 

Well in crypto-centralised exchanges, something similar exists in the form of hot and cold wallets.

 

Custodial hot and cold wallets

With a centralised exchange (CEX), the crypto is held in what are known as custodial wallets, in simple terms this means that the centralised exchange is responsible for your wallets and the crypto you hold. 

As a customer, you do not hold a private key and therefore have no direct control over your crypto and its security. 

Think back to the “not your keys, not your crypto” scenario. Security of your assets is of course a major consideration and to make things a little less risky many centralised exchanges offer what are known as hot and cold wallets.

A hot wallet is directly connected to the internet, the “hot” and could potentially be vulnerable to outside attacks from hackers. 

Hot wallets however are fast as the crypto is immediately available for trading. On the flip side, a cold wallet is not directly connected to the internet, the “cold” and in the event of a hack, the attackers cannot get access to the cold wallets private keys which makes things a lot safer. 

There is a downside though, that is time and timing is pretty crucial in crypto trading due to the immense volatility. 

The crypto in a cold wallet is not immediately accessible for trades, the funds need to be first transferred to a hot wallet for trading. This could pose a disadvantage if the crypto is sitting in a cold wallet and you need to trade out really fast.

 

The centralised exchange (CEX) has a permanent bullseye on its back

As we have seen above, centralised exchanges are big business, over $2 trillion to be precise, this is naturally going to draw the gaze of both criminal organisations and governments as they are in many ways a perfect target. 

Centralised exchanges are a very attractive target for criminals for both the theft of crypto but also the theft of user data. Governments on the other hand, scrambling to find ways to maintain control over the money system and trying to bring about regulation would naturally make centralised exchanges their first stop. 

This is naturally quite disconcerting for the users of these exchanges, especially if they are holding large amounts of crypto.

 

What about alternatives? CEX vs DEX

Well, an alternative exists in the form of DEX, a decentralised exchange. 

Firstly, crypto is itself decentralised, but the buying, selling and trading of crypto is centralised when you use a CEX. 

A DEX, however, is decentralised, there is no central entity to hack and no central entity to seize by governments. 

Well, that fact has not been lost on the crypto community and decentralised exchanges are flourishing and not only that, challenging the established centralised exchanges pretty heavily.

In May 2021, the leading DEX, Uniswap processed over $76.9 billion in trading volume. Sushiswap did $23.4 billion and Ox Native did $12.8 billion. 

No small numbers. Overall centralised exchanges are still way ahead but the decentralised exchanges are growing fast. 

Aside from the vulnerability from criminals and governments, there is also the plain risk of the centralised exchange failing or the owners running off into the sunset with a huge chunk of your crypto. 

This centralised aspect and associated risk make the decentralised exchange appealing, after all, one of the appeals of crypto itself is the fact it is decentralised, why then have a central figure in the middle? 

Decentralised exchanges also tend to have lower fees. The downsides of decentralised exchanges can be a poor user experience.

Also, ironically there is a lack of any legal oversight or protection as transactions take place using smart contracts which are bits of code and quite importantly, decentralised exchanges trade crypto to crypto, there is usually no fiat on-ramp to make it easy to convert your Euros or Dollars into crypto. 

Lastly, there is the issue of liquidity, centralised exchanges are generally way more liquid and allow quick and easy trading in and out of different crypto. 

Decentralised exchanges on the other hand do not tend to be as liquid and this can be a definite disadvantage. 

The primary takeaway when thinking about centralised exchanges vs decentralised exchanges is that centralised exchanges have total control over your assets when trading whilst with decentralised exchanges the user has control over their assets and centralised exchanges tend to have greater liquidity, fiat currency on-off ramps and a better user experience.

 

Centralized Exchange (CEX): Pros & Cons

Below is a brief summary of the pros and cons of centralised exchanges (CEX)

 

First the pros

High Trading Volumes – This means liquidity in short. Centralised exchanges make it easy and possible to trade in and out of crypto assets fast which is a very good thing in the highly volatile world of crypto.

Fiat/Crypto and Crypto/Fiat Currency Conversions – Centralised exchanges tend to support fiat to crypto on and off ramps which means that you are able to buy say bitcoin with euros or US dollars.

Greater capabilities – Setting aside the huge array of crypto assets that CEXs support, they also offer features such as margin trading, crypto derivatives trading, exchange staking, margin lending and more.

Ease of Use – This is one of the greatest benefits of CEXs, ease of use. Nowadays crypto traders are not all techies, they are non-technical people too wanting to get in on the crypto craze. They need an app-like experience, similar to that of their online banking or Uber to get things done. CEXs are designed with this universal ease of use in mind.

 

Now the cons

Whilst overall centralised exchanges offer many advantages and ease of use, especially for those looking to buy and trade crypto using fiat currencies there are some disadvantages too 

A requirement for Know Your Customer (KYC) policies – for those that would like to trade anonymously a CEX is probably not the best choice as most if not all major centralised exchanges will require proof of ID before you are able to trade. For most people, it doesn’t pose a problem but for those wanting absolute privacy, it’s not the way to go.

You are not in complete control of your crypto – centralised exchanges (CEX) have custodial wallets, meaning that they hold control over your crypto, not you! If they disappear, your crypto disappears too.

Greater risks of hacks – as mentioned above, centralised exchanges are a prime target for criminals. There are centralised exchanges that have managed to avoid being hacked however, the risk is ever present and will continue to be well into the future. 

 

Conclusion

The above hopefully helps to explain why centralised exchanges exist and continue to thrive despite the inherent risks. 

Decentralised exchanges are nipping at their heels though and it’s not inconceivable to think that decentralised exchanges will soon catch up and eventually be able to offer the best of both worlds. 

For now, at least, centralised exchanges are big business and the easiest and most convenient way to get yourself onto the crypto superhighway!

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SATS - Satoshi Explained

SATS – Satoshi Explained

Sats stands for Satoshis, the smallest unit of bitcoin (BTC) recorded on the blockchain. One Satoshi (sat) is equal to 0.00000001 BTC or one hundred millionth of a Bitcoin.

We should begin by paying homage to the still anonymous man, woman, person or group of people known as Satoshi Nakamoto.

Satoshi Nakamoto was the inventor of Bitcoin, the very first decentralised digital currency. As Bitcoin has exploded in value since its inception in 2009 there has naturally been a need for a fractional form of bitcoin.

The world of crypto is not like the world of traditional retail that we have grown accustomed to, where something might cost €99.99 or a transaction fee might be €0.99.

We don’t usually pay €99.833453234 or €0.00000031, but in crypto land it’s common. Therefore, the concept of a highly fractional sat is needed to break down a single bitcoin into much much smaller units that could be used to pay small transaction fees for example.

The expected growth of bitcoin

Satoshi Nakamoto and the bitcoin community at large realised very early on that if bitcoin took off in a big way it could really explode in value.

The expected growth in value was also based on the fact that bitcoin would always be in limited supply, 21 million bitcoins to be precise, worldwide.

No more could ever be produced. This ultimate scarcity would play its part in increasing and maintaining value in something that you can’t actually see or touch like gold, silver, diamonds or even paper notes or coins and furthermore doesn’t have any government backing or collateral behind it.

So far the plan has worked incredibly well. Bitcoin continues to grow in value and has even spawned an entire crypto industry, although in 2023 things are a bit bumpy to say the least!

A fraction of bitcoin was going to be needed

Satoshi Nakamoto no doubt figured that if bitcoin grew in value as expected then tiny fractions of a bitcoin would be needed to pay for smaller transaction costs or who knows, maybe even a cup of coffee one day.

As it stood on 3rd August 2021, one bitcoin was worth 39,278.77 USD. You can immediately see the problem that Satoshi Nakamoto saw.

A single bitcoin could easily pay for a pretty nice BMW car back then. With this in mind, Satoshi Nakamoto came up with a fractional unit of bitcoin called a sat.

Originally it was suggested that one Satoshi would be one-hundredth of a bitcoin but eventually, the crypto community settled on one hundred millionth of a bitcoin (0.00000001 BTC) and this has turned out to be a pretty wise decision as it happens.

Think of the sat as we see cents, euro cents and pence in fiat currencies like the USD, EUR or the GBP. Again, looking at today’s bitcoin value, two decimal places as is common in fiat currencies simply wouldn’t cut it.

Imagine, even the equivalent of a single dollar cent in bitcoin terms would be equal to 392.78 USD today, that’s one expensive cup of coffee!

So the idea of a hundred millionth fraction of a bitcoin is something pretty genius as was the blockchain and bitcoin that Satoshi Nakamoto originally invented.

Satoshi, Satoshis, Sat or S and the Millisatoshi

The plural form of Satoshi can be Satoshi or Satoshis, or sats or s in abbreviated form. There is even a Millisatoshi, which is a hundred billionth of a single bitcoin that is used for example by payment channels to record very very small granular payments.

Sats provide easier and more affordable entry to the world of bitcoins

There are also other very important uses of sats in the crypto world. As bitcoin is, let’s face it nowadays, pretty expensive, if sats didn’t exist one would need quite a bit of money saved up just to buy a single bitcoin.

Not everybody has tens or hundreds of thousands of euros or dollars laying around collecting dust and furthermore, transaction fees require an ability to charge very small amounts.

With sats, however, you can purchase tiny fractions of a bitcoin, sats, and these sats are every bit as good as bitcoins.

Just like with fiat currencies, one hundred, one-cent coins are exactly as valuable as a single one-euro coin. In much the same way individual sats are just as legit and valuable as full bitcoins.

Sats into the future

Just because we are used to hearing about bitcoins, we shouldn’t forget about sats as they are actually way more practical, usable and accessible.

Assuming that bitcoin will continue to grow in value into the future the sat will no doubt become as well known as bitcoin itself and one day maybe every day people will be more used to talking about sats rather than bitcoins themselves.

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crypto robo advisors

Crypto Robo Advisors Are Here

As they say on Wall Street… money never sleeps and it’s true. The investment landscape is constantly changing and global markets are permanently reacting to political and economic changes occurring throughout the world.

Nowadays we are used to and expect everything to happen at lightning speed and most everything we need is never more than a click or tap away on a screen.

The financial world has always been quick and has used whatever was the cutting-edge technology of the day to trade and gather market intelligence. The difference was that everyday life wasn’t quite as fast as the speed at which the money markets and those that worked in it were.

With this in mind, the consumer-facing side of the investment world has been forced to adapt. Today’s consumers demand everything now along with ease of use and good value.

It therefore stands to reason that the consumer side of investing has had to catch up and this is where robo-advisors have come to the rescue.


Robo advisors in traditional markets

If you are not familiar with the term robo-advisors, they are algorithm-driven software bots that perform portfolio management 24 hours a day, 7 days a week, 365 days a year.

They don’t need food or sleep and that’s a very good thing when it comes to taking care of your hard-earned cash.

The first robo-advisors arrived on the scene way back in 2008 during the financial crisis and were initially used by financial managers as an online interface and to balance their client assets.

A couple of prominent robo-advisor examples are Betterment and ETFmatic. Betterment, one of the largest independent robo-advisors based in the United States was launched in 2010 by Jon Stein.

Betterment is primarily focused on the US market and as of April 2021 had over $29 billion of assets under management and over 600,000 customer accounts. Brussels-based ETFmatic is a major player in the European robo-advisor space specialising in exchange-traded funds (ETF) and was acquired by Aion Bank.

Since then robo-advisors have grown both in popularity and in terms of the sheer number entering the market.

The math behind robo-advisors has been around since the middle of the past century and the underlying technology behind robo-advisors has been available since the early 2000s. The arrival of cloud computing and the internet revolution has now made it cost-effective and available to the masses.


Robo advisors for crypto

Fast forward to today and say hello to crypto robo-advisors, the latest innovation in the world of robo-advisors.

In traditional stock and commodity markets money does actually sleep whilst the markets are closed but in the hyper-fast world of cryptocurrency money never sleeps!

The crypto market is running 24 hours a day, 7 days a week, 365 days a year. With this in mind, it would literally be impossible for even the most talented and determined person to efficiently monitor the crypto markets around the clock every day of the year.

Crypto robo-advisors however do exactly that. Crypto robo-advisors are built to automate and optimize the highly demanding task of monitoring and fine-tuning crypto portfolios.

But there are different ways to build robo advisors and different ways of managing portfolios. From Indexing solutions to using highly sophisticated algorithms built on advanced award-winning scientific and economic principles, let’s take a look at the options.

Robo Advisor Strategies: Modern Portfolio Theory (MPT), Indexing, the Ulcer index and iVAR

Let’s dive in a bit deeper and get a little more technical as to how robo-advisors and crypto robo-advisors actually work behind the scenes.


Modern Portfolio Theory (MPT)

Way back in 1952 Harry Markowitz introduced Modern Portfolio Theory as an approach to constructing investment portfolios and received a Nobel prize for his pioneering work.

Modern Portfolio Theory essentially boils down to constructing an investment portfolio that has the task of maximising the expected return whilst assuming a certain well-defined level of risk.

Markowitz defined this amount or level of risk as volatility, which is also referred to as the standard deviation, a value that measures the dispersion relative to the mean.

What this essentially means is that if a certain financial security has a larger price range variation where the data points are further removed from the average this indicates higher volatility and thus higher risk.

Most robo-advisors in traditional finance still rely on those basic principles of Modern Portfolio Theory to construct their portfolios.

However, it should be noted that investors generally do not perceive this standard deviation only as a risk but also as an indication of potential opportunity (i.e. when the price “deviates” upwards).

If a financial security hardly moves up or down, whilst it may be stable or safe it generally does not present much money-making opportunity either. What investors are interested in is a measure of the downward risk or drawdown as it’s known in investment talk in order to make safer investments with a lower downside risk.


Strategies based on Indexing

Today most robo-advisors in traditional finance work with exchange-traded funds built on market indices and they use Modern portfolio theory to decide what index fund to buy and in what proportion.

That’s certainly true for betterment and for ETFMatic that we mentioned above. Index Funds are great in traditional finance since they allow you to buy a whole swath of the market at once, and very cheaply.

So if you want to buy all the “financial” companies in the US, you can buy a share in an Index made up of all the “finance” companies listed on US Stock exchanges for about 100 dollars.

Because shares in traditional markets are not fractionable, it’s the easiest way of building a diversified portfolio with relatively little money.

Traditional market-focused Robo advisors will therefore choose from a list of 10 to 50 exchange-traded index funds to build your portfolio.

Indices (and so Index funds) are usually rebalanced on a monthly basis and work perfectly well for the somewhat slow-moving traditional markets.

In crypto too, some have replicated those strategies. MakaraDigital offers “baskets” of tokens you can buy at once, and which are rebalanced periodically.

TokenSets similarly offers a decentralized version of index investing with the DeFi Pulse Index and the Metaverse Index.

But applying the same principles used in traditional markets isn’t strictly necessary when it comes to crypto.

One can buy fractional shares in the vast majority of crypto and build a pretty respectable and diversified portfolio starting from just 100€, whereas 100€ would not buy you a single Amazon share!

Also, crypto moves fast. Really fast. At this point in time, it’s more like investing in startups and not like investing in 150-year-old industrial behemoths, so rebalancing on a monthly basis is maybe not the best approach and perhaps also a little risky when it comes to crypto robo-advisors.


Introduction to The Ulcer Index

The origins of the term Ulcer index you can probably guess. The term Ulcer index effectively derives from the level of volatility risk an investor can effectively stomach without getting an ulcer.

To deviate briefly from this point it should be noted that since the advent of the term Ulcer index, it is widely acknowledged that bacteria are the cause of gastric ulcers and not the stress from investments although the stress probably doesn’t help!

Be that as it may, the term Ulcer index has stuck and is an indicator of volatility that helps analysts and traders determine what are the optimal entry and exit points when trading.

The concept originates from 1989 when it was first introduced as a way to determine the downside risks of mutual funds. The Ulcer index is considered by many to be a superior way of calculating risk compared to say standard deviation.

The Ulcer Index calculates the amount as well as the duration of a percentage drawdown in comparison to the previous highs.

The worse the drawdown is, the more time it would take for a stock to recover and return to the original high point, therefore leading to a higher and less desirable Ulcer index value.

There are not many robo-advisors on the market that look at investment risk the way humans do.

iVAR – the answer to managing the risks you should actually care about.

Now that we understand a little about Modern Portfolio Theory and the Ulcer index we can begin to understand the concept and the origins of iVAR.

iVAR is a human-centred risk metric,  based on Value at Risk (VAR) which addresses the key factors that investors perceive as risk; namely the frequency, magnitude and duration of losses.

Here we should highlight that we are talking about the frequency, magnitude and duration of losses and not upward and downward fluctuations which is what is commonly measured using standard deviation.

Because with standard deviation one perceives their portfolio increasing in value as an actual risk.

As you will see, not all robo advisors are created equal and regardless of the market you are investing in, traditional or crypto, it is crucially important that you understand and are fully on board with your chosen roboadvisor’s strategy.


The pros and cons of crypto robo advisors


First the pros

Crypto robo-advisors are operating in a not-yet-mature market

Whilst traditional financial markets are quite mature, the crypto market in comparison is far from mature. It’s still relatively new, has many hurdles to overcome and can be extremely volatile.

This provides an even greater need for crypto robo-advisors that can mitigate and manage downside risk using sophisticated algorithms for portfolio construction.

24 / 7 monitoring

One of the primary advantages of particularly crypto robo-advisors is the ability to continually monitor the crypto markets on a 24/7/365 basis and automatically adjust the portfolios they manage within very tight tolerances that have been set by the teams managing the crypto robo-advisors.

We have to acknowledge that whilst the world of cryptocurrencies presents massive opportunities for gains due to high levels of volatility the risk needs to be managed very well and crypto robo-advisors are ideal for this kind of work.

Now if you found a robo advisor that only rebalances monthly, it might have been more inspired by the traditional markets than what is actually most effective for crypto.

Non-emotional decision making

Another key advantage is that crypto robo-advisors don’t have emotions, they don’t get tired and they don’t have a bad day.

Robo-advisors are there to do a fast-paced and demanding job at the same level of quality, speed, pinpoint accuracy and endurance 24 hours a day, 7 days a week, 365 days a year.

It would be practically impossible for a human being to perform this task with the same level of accuracy, precision or endurance that a crypto robo-advisor could provide day in day out, furthermore running the same equations every 15 minutes would also likely bore a human to death!

Investing democratized

Robo advisors in general and crypto robo-advisors have democratized investing and lowered the barriers to entry for everyday investors.

Serious investing was previously reserved for the wealthy who had the means to invest significant sums of money, think at least $50,000 and upwards and as a result were able to have a portfolio manager or financial advisor to manage their investment portfolios.

This however left behind a massive swath of everyday people who had relatively smaller amounts available to invest and were left to their own devices to devise and monitor their own investment portfolios while likely not being aware of the latest developments in applied mathematics for portfolio management because, honestly, who has the time?

Whilst this can work well for someone that has the available time, talent and interest, the majority of people simply don’t have the time or interest for that matter.

They want to put their money into safe, knowledgeable hands and not have to think about it. Crypto robo-advisors fit in perfectly here, they are relatively inexpensive and require very low opening balances and generally have lower fees than human managers.

The minimum investment levels are within the reach of most people and provide a very efficient and elegant solution for experienced investors as well as those that are maybe new to crypto investing.


Now the cons

It’s inherently less personal

One of the strengths of crypto robo-advisors, the lack of a real person managing the portfolio could also be seen as somewhat of a downside.

The fact is you cannot speak to your robo-advisor and discuss your very specific financial needs and goals. We should however put this into perspective.

Those with considerable funds to invest and wanting the reassurance of a person to call can always opt for a more traditional financial advisor, however, the sheer economical advantages of crypto robo advisors make it possible to have your portfolio managed 24 hours a day, 7 days a week using cutting edge technology and algorithms with lower fees and low opening balance requirements must surely be seen as a positive overall.

Crypto robo-advisors are by design built for the masses and have to fit the needs of a very wide cross-section of investors.

They are not bespoke like individual advisors and therefore are not tailored to the needs of an individual but rather to a large group of investors as a collective. This is however the only way such a technology can feasibly exist so perhaps it’s more of a pro than a con!

Also, they’re not all that different from one another, and the 10 or 20 types of portfolio a robo advisor can offer you is often enough diversity to satisfy 99.9% of people’s needs.

Robo advisor technology has not experienced a financial meltdown event

The first robo-advisors arrived on the scene in 2008 around the time of the global financial crisis and have since then operated in a relatively stable financial environment.

There is no proof yet as to how robo advisors would cope during another massive financial meltdown such as the global financial crisis of 2007 – 2008.

The 2020 pandemic is certainly a major global event however it has not shaken the financial markets in quite the same shocking way as the 2007 – 2008 global financial crisis compared to industries such as aviation, tourism, oil and brick and mortar retail which have certainly suffered more.

Fortunately, the financial markets have been more resilient since the 2007 – 2008 crisis and hopefully, this resilience could well spill over onto robo-advisory services whenever the next big one comes along!


Conclusion

The arrival of crypto robo-advisors should be seen as a real step forward.

The efficiencies brought about by highly advanced software algorithms, high levels of computing power and access at everybody’s fingertips mean that investing is truly becoming democratised.

You no longer need to have significant funds to invest or a deep knowledge of the crypto markets. As crypto robo-advisors grow in popularity and sophistication it is fair to say that we can expect a wider spreading of wealth across all levels of society, true accessibility at last!

But beware, they aren’t all created equal, so do make sure you really understand the pros and cons of the crypto robo-advisor you are considering very carefully!

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Gold Backed Crypto

Gold Backed Crypto Explained

Gold-backed crypto is a derivative-based digital asset and type of stablecoin whose value is matched to and should be backed by an equal value of gold measured in grams or troy ounces.

We are to this day undoubtedly experiencing a gold rush in the world of crypto, no pun intended! It’s still extremely wild! Huge fluctuations are the norm and well almost anything goes at this point in time.

This is quite a contrast to the traditional financial world where sure there is of course fluctuation but it’s generally nowhere near as volatile. This volatility and extreme unpredictability gave rise to stablecoins which are as you would guess, stablecoins. Typically stable coins are linked to and/or backed by fiat currencies or indeed valuable commodities such as gold or silver.

 

So why gold?

Gold as a value of exchange and valuable commodity goes back way more than the fiat currencies that we use every day.

Gold really has stood the test of time in terms of value and universal acceptance. Our fiat currencies such as the USD or the GBP were even historically backed by physical gold until not that long ago. Actual gold bullion sitting in vaults matching every pound or dollar.

As a very crude measure, it has been said that historically 1 ounce of gold would purchase 10 loaves of bread and throughout time this has been more or less the case to this day.

We can trust gold as a reliable holder of value and also as a commodity that sees respectable long-term growth and stability.

With some of these things in mind, it made sense to create gold-backed crypto tokens to hedge against the extreme volatility of crypto coins such as Bitcoin for example.

 

How do gold-backed crypto coins work?

A crypto backed by gold should generally be supported by actual gold sitting in a physical vault somewhere. So, one gold-backed crypto coin could be equivalent to say 1 gram or troy ounce of gold.

As mentioned above, a gold-backed crypto coin will typically be pegged to the price of say 1 gram or troy ounce of gold.

As the price of gold rises or falls the gold-backed crypto coin will fluctuate with it. As gold is generally pretty stable the volatility is not extreme.

Typically the issuer of the gold-backed crypto coin will be holding actual reserves of gold to back up the coin just as was the case with our paper money in the past. On some of these coin issuers’ websites, you can even get a live view of the safe vault and the physical gold at any time.

 

The benefits of gold-backed cryptocurrencies

If we think in terms of investing in companies, the gold-backed crypto could be the equivalent of buying shares in a very well-established and stable blue-chip organisation such as a bank or maybe a corporation like IBM, Apple or Microsoft.

They will have decent levels of liquidity, will be considered well-established, not be very risky and will tend to go up in value over time.

Now compare this to investing in a hot new startup company with no track record and little to no liquidity. The risk parameters are completely different.

Investors come in all shapes and sizes and invest in all sorts of things, some have high appetites for risk and may well back that startup, while others are more conservative and would prefer to put their money into Apple or Microsoft stock, or perhaps an index fund like the S&P 500 that tracks the performance of 500 large listed companies in the USA. 

In much the same way in crypto land, those with higher appetites for risk can put their money into higher-risk coins and tokens and those that may want to play it a bit safer and perhaps enjoy the best of both worlds can instead put their money into something like gold-backed crypto.

There is also, of course, a middle ground where a shrewd investor can put money into both and thus have the possibility to enjoy huge gains but at the same time hedge some of the risk.

Stablecoins such as gold-backed crypto can also be used for business transactions where a certain level of price stability is required.

For example in imports and exports, the common currency being used in the trade simply cannot fluctuate outside an acceptable range otherwise one of the parties will no doubt suffer.

The excitement and inherent volatility of the crypto market has undoubtedly made many people extremely rich. Still, by the same token, many have no doubt had their livelihoods destroyed or at least dented.

During this same time, gold has grown by around 25%, a very respectable level of growth and hence a relatively safe investment commodity for the masses. Gold has historically also beaten inflation by a fair margin so all in all, there is a pretty good case for a crypto that is backed by gold.

 

The downsides of crypto-backed by gold

What about the downsides? Gold-backed cryptocurrencies have historically struggled with certain issues such as:

Not really decentralised – gold-backed cryptocurrencies tend to be dependent on central parties for collateral safekeeping and auditing which kind of defeats their purpose as cryptocurrencies, with decentralisation generally being one of the core properties of cryptocurrencies

Irrefutable proof of actual gold reserves – it’s not easy to ascertain the proof of gold reserves as claimed by the coin provider. With crypto still being largely unregulated, there is no government body ready to step in if things go south. Investors are very much on their own with little to no recourse if the gold-backed crypto collapses for example.

Lower levels of liquidity – gold-backed cryptocurrencies tend to have lower levels of liquidity compared to other coins mainly due to not being traded across as many exchanges

 

A few examples of crypto-backed by gold

Below are a few examples of gold-backed cryptocurrencies:

Goldcoin (GLC)

Paxos Gold (PAXG)

Perth Mint Gold Token (PMGT)

Digix Global (DGX)

Tether Gold (XAUT)

Meld Gold by Algorand

 

Why buy a gold-backed cryptocurrency when you could simply buy and hold physical gold?

It’s true, very little can beat the security of holding physical gold. It doesn’t rely on technology, holds its value very well and is pretty liquid.

Even in urgent situations, there will always be people out there who will buy your gold and turn it into hard cash. What are then the benefits then of holding gold-backed crypto?

 

Below are some of the benefits of holding crypto backed by gold

A global market that can facilitate almost instant transactions – selling and transferring gold would be an expensive and time-consuming process.

As gold is valuable, insurance would no doubt be wise and would add extra costs on top of physical shipments. By contrast, gold-backed crypto coins can be transferred worldwide via blockchains relatively inexpensively, fast and securely.

Highly fractional – it’s way easier to purchase and transfer small amounts of gold using gold-backed crypto tokens.

A secure audit trail – transactions conducted on blockchains can be easily audited and traced. There is no risk of gold going missing in the post!

Backed by smart contracts – one of the inherent beauties of smart contracts is their absoluteness, there is no space for misunderstandings, mistakes or prejudice. A transaction does or does not take place based on very specific rules and once it’s done it’s done.

No need for banks – there is no need for banks or other intermediaries to carry out transactions due to the decentralisation of crypto and this should result in lower costs.

Conclusion

In summary, gold-backed crypto is very useful as a stable cryptocurrency, either to hedge against the volatility in the crypto market or trade in gold using the security and speed of blockchain technology or for use as a stablecoin for transactional purposes where volatility can be a problem.

Investors looking for alternative, stable long-term crypto investments can certainly consider digital assets such as gold-backed crypto as safer longer-term bets.

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