The cryptocurrency market is filled with thousands of cryptocurrencies, some listed and trading on exchanges, others on the process, while some at the moment are currently not listed.
For those listed, some are limited to the exchange wherein they are traded; others enjoy global presence on exchanges. An example of this is Bitcoin (BTC). As newer coins continue to come to the market joining the existing and together increasing the total market capitalization as they create value, investors who buy in early on those ‘good’ coins are expected to make massive returns, for those less fortunate, meager returns or in the worst cases, massive losses.
In a perfect system, every crypto coin or token listed on an exchange will grow in value and give everyone gains. But that’s not how it works. In reality, some coins upon listing could send investors to financial hell. There are therefore several key indicators crypto investors and also traders consider before buying into a cryptocurrency. Amongst the several key points is Liquidity.
Liquidity simply means the fluidity at which a cryptocurrency can be bought and sold. Globally, chicken is a good product. There isn’t any nation that has a ban on the sale and purchase of chickens. This means for anyone who wishes to purchase chicken, he is very much likely to find it. Same goes for Water.
There’s a matured market where there’s constant demand such that if anyone wishes to sell, he will see buyers and if anyone wants to buy, he will see sellers. This is the same for any cryptocurrency that will be a good choice for crypto investors and/or traders.
A choice cryptocurrency for any savvy investor must be liquid; there must be readily available buyers and sellers of that cryptocurrency. Though some may not be exactly liquid (not enough buyers and sellers) at its’ early time, but there are key indicators that the coin will be liquid at a certain (near) future.
There are combinations of factors that will drive the liquidity of a new coin, one of which is the exchange it is listed on and the popularity of the coin. An obscure cryptocurrency exchange at the far end of the planet may not command enough buy and sell orders as the one seated high at the center of the earth.
Buying an illiquid Cryptocurrency; what could go wrong?
While buying a cryptocurrency that is not yet liquid may not be a bad thing, this is because they are other factors that may drive that investment decision. This is mostly done at the early time of a cryptocurrency and the fundamentals checks out after doing due diligence on the cryptocurrency. However, buying an illiquid cryptocurrency may present some significant damage to an investor’s portfolio.
As noted above, an illiquid cryptocurrency doesn’t command enough buyers and sellers to and therefore, an investor who purchases such cryptocurrencies may find it difficult to sell and/or recoup his investment. Even if there’s an artificial increase in price (pump) in price by a quite insignificant volume, there will still be difficulties in selling off and making profit.
One of the consequences of this is that an investor’s funds are left hanging on a potential risky investment, he cannot easily liquidate his investment. Another is that the investment could potential end at a disturbing loss thereby negatively impacting the portfolio of the investor.
Every investor has varying investment preference and risk. However, there are standard key evaluation metrics to consider when conducting due diligence on a cryptocurrency. The decision of an investor will likely be a weighted average of the various key metrics. The choice to invest in an illiquid cryptocurrency may be a good one, it may not.
The decision could be influenced by other key indicators, this notwithstanding, every investor takes the liquidity and expected liquidity of a cryptocurrency into consideration when making that decision of Invest or Not.
Why Investors Consider Low Cap Crypto as Gold Mines; and why it could also fail.
The creator of bitcoin Satoshi Nakamoto intelligently built an economic system that functions like the Gold mining business. Man will have to work, expending energy and time to gain profit in the form of gold, and bitcoin in the case of crypto. Sometimes the activity doesn’t go in favour of the miners and as such, they incur losses which impact their operations.
Cryptocurrency, the first and most popular application of blockchain has attracted several stakeholders of the global financial system. The ingenuity in the design of cryptocurrencies presents a fascinating starting point for financial players to learn how to better serve the newer generations that do not wish to rely on buggy, old and slow financial systems as the world moves in flashes before them.
Cryptocurrency has also caught the attention of global and national regulators. This is very much reflected in the FATF regulation of cryptocurrency exchanges and the development of Central Bank Digital Currency (CBDC) many other events.
The year 2016 and 2017 say the magnificent rise in the price of cryptocurrencies with bitcoin exceeding $20,000 in some crypto markets while other alternative coins (altcoins) gave some impressive returns even far better than Bitcoin. This is widely referred to as the Bull Run of 2017.
Some believe there will be a bull run in 2020, others do not share the same sentiments.
But how are crypto investors making great profit even without a 2017 crazy-rush? Savvy crypto investors take a considerable amount of time to evaluate possible investment options to make good choices. Amongst several key metric investors use to evaluate cryptocurrencies for investment such as Liquidity, is Market Capitalization plays a serious role in determining the when, if and why of investing in cryptocurrencies.
What is Market Capitalization?
Market capitalization or market cap as it is normally called is a metric used in measuring and comparing the size of a cryptocurrency. The market capitalization of a cryptocurrency is arrived at by multiplying the price of a cryptocurrency by the total number of the coin/token in circulation.
A simple example is XYZ Coin, currently priced at $4/per coin and having a total supply of 50,000,000 XYZ coins with 10,000,000 coins in circulation (i.e tradable and transferable at the moment). The market capitalization of this XYZ therefore becomes $40,000,000 ($4 * 10,000,000)
Why Market Capitalization is Important?
The crypto market is filled with thousands of cryptocurrencies with each doing something or nothing. But why is market capitalization important to investors besides other crypto evaluation metrics?
Market capitalization as said above is used to measure the size of a cryptocurrency. This is why crypto market aggregators like CoinMarketCap list cryptocurrencies in the size of their market capitalization. The largest being bitcoin is at the top and is followed by Ethereum. Bitcoin’s market cap trumps several of the other cryptocurrencies combined together.
The size of a coin’s market cap is important to investors because it allows them to evaluate and decide if a cryptocurrency will give enough returns.
Low cap cryptocurrencies are gold mines for investors because, since their market size is low, these coins have enough potential to give amazing returns as the market capitalization grows with time.
A simple description of this is a farmer purchasing 100 chicks for $200 ($2/Chick), and rearing them till they are table size with a market value of $20 per chicken. The chicks had gotten fed and grown in size via investment of the farmer in feeds and drugs by 10 times their original size.
This is similar for cryptocurrencies for investors. Small Cap coins have the potential to turn an investor’s $1000 investment to $10,000 than buying coins with large market caps. The volume of trading needed to increase a coin from $0.01 to $1 is quite smaller than the volume needed to push a coin’s price from $5,000 to $10,000.
Small caps coins are gold mines for investors. Maybe not.
Why Market Capitalization as a metric could fail an investor
The market capitalization metric measures the market size of a cryptocurrency and it’s important for comparing cryptocurrencies. However, the metric is just a market size measurement metric. It doesn’t measure real value. This is arguable because the value if reflected in the fundamentals of a cryptocurrency and this ultimately pushes the market price and cap of a cryptocurrency yet, cryptocurrencies has been known to be speculative.
The bull run of 2017 saw the hype that has never been seen before in the cryptocurrency industry and these resulted in the creation of high market cap cryptocurrencies from tiny caps they had.
When the bear market came, many of these high market cap cryptos saw an unimaginable crash in price and market cap. Also, not all low cap coins will really generate good returns. Some cryptocurrencies will not increase significantly in price because of several factors.
This is therefore why market cap as a metric should not be used alone; however, low cap cryptocurrencies present a fascinating opportunity for crypto investors to make the “lambo” type of gains if things work out well.
Binance Launches Option Trading on its Mobile App
Binance has announced the launch of its Option Trading platform on its Mobile Apps. The platform which is available on the latest update of the exchange’s Mobile App was recently released allows the millions of users on the Binance ecosystem to trade on various markets.
What’s an Option?
“Options are contracts that give the bearer the right, but not the obligation, to either buy or sell an amount of some underlying asset at a pre-determined price at or before the contract expires”. Options can be based on a wide range of underlying assets, including stocks, commodities, indices, currencies, cryptocurrencies or even another derivative product.
The Binance Options platform according to Binance offers users a lower entry barrier and provides flexibility required by option traders. With this platform, Binance allows users to take advantage of the price movement of assets within different time frames and enjoy the rewards therefore.
According to Binance, the Binance Options is an American style option which executes traders contracts anytime before the expiration date. The firm boasts of an intuitive design to enhance traders’ trading experience, unlike traditional options products and of a shorter time frame compared to traditional options that range from 10 mins to 1 day.
Arguing further, Binance said traditional options products are less liquid especially such that are far “out of money”. In order to avoid this, the Binance Options are ‘designed with only one strike price which is equivalent to the contract price on Binance Futures’.
The firm continues to marshal on taking giant strides in the industry with its acquisitions, partnerships and launch of new products. Binance which started operations in 2017 continues to against varying odds build a giant and global ecosystem.
The launch of the Binance Options represents the lastest of the many strides which the ecosystem giant is making. Recently, it acquired popular crypto market data aggregator Coinmarketcap and it also announced intention to go into the cryptocurrency mining business.
COVID-19: CBN Responds With Control Measures to Ensure Integrity of the Financial System
The Central Bank of Nigeria (CBN) has responded with policy measures to preserve the nation’s financial system amid the continued spread of the economic impact of the corona virus pandemic sweeping across the globe affecting stocks, crypto market, nation’s economies etc.
The virus which was first noticed in Wuhan, China has now spread to other nations and continents not excluding Nigeria. It has resulted in the death of several thousands of lives and global trade is also having its own hit.
As a nation that depends on crude oil for majority of its foreign exchange, the Nigerian economy has also been affected owing to the crash in crude oil price. In view of this, the Apex Bank has through a circular dated 16th March, 2020 responded to the growing threat which the pandemic bears on the Nigerian economy.
The CBN in the circular has stated that all its intervention facilities are effective from March 1st, 2020 granted further moratorium of one year on all principal repayments. The Bank directs all participating financial institutions to provide new amortization schedules for all beneficiaries.
In boosting economic activities in the country, the CBN has reduced its Interest Rate from 9% to 5% per annum on all applicable intervention facilities. And this is effective from the 1st of March, 2020. Understanding the impact the global pandemic have had on Nigerian businesses, the CBN through the NIRSAL Microfinance Bank has established a N50 Billion facility for households and small- and medium sized enterprises (SMEs). This also includes but not limited to hoteliers, airline service providers, health care merchants etc.
As an active measure against health issues that could affect the economy now or another time, the CBN will grant intervention facilities, loan to pharmaceutical companies intending to expand/open their drug manufacturing plants in Nigerian as well as to Hospital and Healthcare practitioners who intend to expand/build the Health facilities to first class centres.
Deposit Money Banks (DMBs) or Commercial Banks have been granted leave by the CBN to restructure the tenor and loan term of businesses and households most affected by the outbreak of the COVID-19 virus. This is particularly those in the Oil & Gas, Agriculture and Manufacturing.
According to the CBN, it will “work closely with DMBs to ensure that the use of this forbearance is targeted, transparent and temporary, whilst maintaining individual DMB’s financial strength and overall financial stability of the system.
As the corona virus takes the world on in various areas of human endeavours, policy measures which would sustain and cause the economy to grow are ever needed. The CBN has said it will continue to monitor developments and will issue further updates as may be appropriate.
COVID-19: Fundamentals Not Strong, Naira Not Heading For Devaluation – CBN
The Central Bank of Nigeria has openly made its position known regarding flying rumors of the possible devaluation of the naira.
Since the virus has been wreaking havoc on global commerce, Nigeria has also felt the impact as it has officially reported two cases within the state.
The virus which has affected global oil trade; crashing the prices puts the Nigerian state in a dangerous position. This belief is held by many and a devaluation of the naira appears to be a possibility.
The Apex bank through a document dated 12-03-2020 and signed by Isaac Okorafor, Director, Corporate Communications said the “Market Fundamentals Do Not Support Naira Devaluation at This Time”
According to the Central bank of Nigeria (CBN), it “wishes to note with displeasure, the rumours and speculative activities of unscrupulous players in the foreign exchange market, borne out of the impression that the CBN is on the verge of devaluing the Naira, and triggering panic in the FX Market. These rumours are false, unwarranted and calculated to serve their dubious and selfish ends.”
The Apex bank went further saying it has begun a coordinated investigation in collaboration with the Nigerian Financial Intelligence Unit (NFIU) and other agencies to uncover the unscrupulous persons and FX dealers who are creating panic and will punish them according to the full extent of the law ,even with the charge of economic sabotage.
The CBN said it has for four years successfully maintained relative stability in all segments of the foreign exchange market, which has enabled people to plan and to conduct their genuine FX transactions with ease.
As much as the virus has affected global trade most especially the oil market which Nigeria owes majority of its FX inflow to, the CBN maintain that the “size of Nigeria’s foreign exchange reserves remains robust and comfortable, given the current realities of Nigeria’s genuine and legitimate FX demand. As such, the CBN remains able and willing to meet all genuine demand for foreign exchange for legitimate transactions”
Devaluation according to the Nigerian Bankers Bank believes owing to the current circumstances and macroeconomic fundamentals, it will not devalue the naira and for anyone caught disrupting the sanity of the FX market, will be visited with the full weight of the law.
On crypto exchanges, Naira is trading above 400NGN as at Press time.
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