Welcome to the 27th edition of ‘The Digital Asset Digest’. Over the last few weeks, we’ve started our DeFi column, and in this new edition, we give a clear explanation of a term you’ve probably wondered about. Also, make sure to read to the end for an exciting announcement!
“Grayscale may be a pioneer, but it is Microstrategy that’s grabbed all the headlines in recent weeks. The Nasdaq-listed company, which develops mobile software as well as provide cloud-based services, bought $425 million worth of bitcoin in August and September, making BTC Microstrategy’s main reserve asset.”
“By airdropping this vast amount and encouraging residents to spend their funds in a short time, China will be able to test the transactional capacity and reliability of the DCEP system, while also isolating the trial from traditional payment methods and accounts.
Many cryptocurrencies currently in circulation are decentralized, which means that there is no central backing — loosening control in comparison to traditional fiat currency, but also increasing the likelihood of market fluctuations. ”
“Even cryptocurrencies, often shorn by states and condemned by European financial institutions and Chinese ones alike, get some light credit in the first section — though it’s in the context of the Federal Reserve piloting digital currencies, not in the context of independent peers arriving to a global consensus — in other words, cryptocurrency concepts without the governance and political choices that make cryptocurrency special.”
“Bitcoin has historically seen a strong inverse correlation with DXY, and fresh lows could thus be a boom for hodlers. In August, $12,500 highs for BTC/USD came in tandem with DXY dipping to just above 92 points. 2018 saw a dive to 89 — 4% lower than at present.
In addition, the roll-out of a coronavirus vaccine would serve to hinder, rather than help dollar strength.”
INDUSTRY WIDE SNAPSHOT
As we’ve talked about a few times in the last few weeks, there are tons of terms floating around related to DeFi that aren’t quite clear yet. You may read them in articles and have a vague definition, but not yet fully understand it. We want to amend this by filling in some knowledge gaps. This week, you’ll learn about impermanent loss and the major issue that automated market makers (AMMs) present to liquidity providers.
To put it in the clearest terms, impermanent loss is the difference in value between holding a token flat out and holding it in an AMM. The trading mechanism of the market maker means there fluctuations in the relative value of coins based on the amount of tokens in the pool. Arbitrageurs enter when they see an option to profit from a price differential.
AMMs aren’t directly connected to external markets, so when a change in price occurs on the open market, that isn’t reflected in the dynamics of the pool. The result is an arbitrage opportunity. To put this more clearly, if you have ETH and LINK in a pool and the price of LINK goes up, the implied rate in the pool will be inaccurate. LINK’s price in the pool is below the market price.
We’ll make the simple assumption that the pool has a 50/50 balance. An opportunistic trader could see this and sell ETH into LINK until the pool is rebalanced. Once they remove the extra LINK from the pool, they’ve made an easy profit.
The gain that a trader reaps is equivalent to the loss that the liquidity providers take. And this loss is referred to as impermanent loss. It’s called impermanent loss because if the tokens were to return to their previous relative prices, the loss would be erased. But as we know, this is rarely the case, which is why this is an issue that all AMMs must face before bigger institutions are comfortable providing liquidity.
“This year, when Ethereum fees started to creep up and then exceed those on Bitcoin, I wondered to myself whether Ethereum would see a reprise of Bitcoin’s fee-tx count dynamics. I puzzled over whether it would have the same effect, or be more disruptive to Ethereum, since so much liquidity is “on-chain” (as opposed to primarily off chain at exchanges). I figured we’d see the same thing, with a less dramatic oscillation, since the supply of Ethereum blockspace is somewhat dynamic and can increase in response to surging usage. As it turned out, fees would end up being more disruptive than I had expected.”
Source: Trading View
Today’s 5-day chart shows some positive developments over the last week with a few notable points to highlight.
Last week, we were excited by the idea that Bitcoin had ascended to the $10,750 mark. Now we find ourselves around $11,500 with lots to celebrate. Analysts across the world are calling this a sign of the next bull market, but they always do this.
What we’d like to put an emphasis on is the idea that almost every day in the last 5 days, we saw Bitcoin break through a resistance level and maintain. You can see it breaking deep into the overbought zone several times, whereas it only slightly touches on oversold.
If this pattern holds, people are going to get very excited and more money will flow in. We all know the pattern broad groups follow where they pile money in where there have already been big gains.
And this holds with our prediction that Bitcoin is holding course until the election, and then a big breakout will occur.
This week, we have an exciting event to announce. Our Global Family Office Summit is coming up, and tickets for the event are free right now. Next Tuesday, the virtual conference will take place at the Crypto Convention Centre in Decentraland. The Global Family Office Summit is the first gathering of private wealth that is accessible by zoom with a virtual conference also taking place.
This is a great opportunity to learn from experts in the space and build your understanding of the market and how it’s changing. You can register here.
This concludes another issue of the ‘Digital Asset Digest’. We hope you enjoyed this week’s edition. We are constantly making changes and are always open to feedback.
And as always, thanks for reading and we hope to hear from you soon.