ML Finance: Weekly Report 1 -Feb 6,2022
It’s quite an interesting time for crypto right now, one of the biggest losses in a while for the crypto community as bitcoin saw a fall below 40K to right under 36K at its lowest. This has impacted the whole market sending some tokens to lows that were not predicted.
1/ Cascading Liquidation:
“It’s a cycle that’s played out several times in the crypto market: cascading liquidations triggered by an over-heated and over-levered retail market. “
“The former Goldman Sachs oil trader told The Block that the proportion of retail trader using leverage is higher in crypto than in traditional markets. In a drawdown, crypto futures traders can be liquidated or closed out of their position because of losses in their initial margin.
“Those losses can force traders to sell even more crypto, thus amplifying the effect of the liquidations, thereby causing more liquidations.”
· This article is also very interesting because it helps us understand that a lot of the volatility in the crypto market is due to leveraged investors. This is the case due to individuals being liquidated by the exchanges they are borrowing from. The main reason why an investor is liquidated is due to the price of the token they have as collateral falls below a price which the exchange deems too risky, at this point the exchange sells all of the investors collateral into a stable coin or fiat money taking it out of the market. Exchanges usually have a standard of having higher liquidation prices for individuals who are over leveraged(those who borrow more than they have in collateral) and a lower price for those with “safer” leveraged plays.
EX: If the Price of AVAX is $100 let’s take a look at how it would look so you can understand how this works.
I put $100 AVA in as collateral and have borrowed $50 USDC(stable coin) , this means I am leveraged at 50% since I have a 100 dollars worth of AVAX.
% leveraged = Borrowing amount/Collateral * 100
$50USDC/$100AVAX * 100 = leveraged at 50%
At 50% collateral a DEFI bank might put the liquidation price at $50/AVAX token.
I put $100 AVA in as collateral and have borrowed $150 USDC(stable coin) , this means I am leveraged at 150% since I have a 100 dollars worth of AVAX.
% leveraged = Borrowing amount/Collateral * 100
$150USDC / $100AVAX * 100 = leveraged at 150%
At 150% collateral a DEFI bank might put the liquidation price at $90/AVAX token.
What’s the Takeaway?
As an investors % leveraged increases so does the liquidation price, meaning that the more money an investor is borrowing the better chances he might be liquidated. This means that once the market dips a little bit even if sentiment is bullish many over leveraged investors are then liquidated literally causing a negative price action, causing the prices of a token to drop when this happens in a bull market and one which is still mainly retail investors, amateur/new investors start taking out money, causing more negative price action, then investors who are close to their liquidation price will sell due to the fear of being liquidated, causing the price to drop even more, at this point the individuals start to get liquidated as the market starts to drop fast and the exchanges start selling all of their assets, leading to Cascading Liquidation, which can be seen in the crash the market saw for the past two weeks As the market took a steep fall.
Another factor that that seems to be at play as well is FUD. This acronym stands for Fear, Uncertainty, and Doubt. It is usually a marketing tactic to scare off investors, and can be seen in the past as the media says one thing about the market then does the opposite to make a profit. I saw this a lot personally in some of the DAO discords, however it was the worst for Wonderland.fi(TIME) as it saw a dramatic decrease in its price per token.
In general, what I think occurred was that the price took a hit due to a couple whales getting out of the market and then the cascading liquidations started to occur, which led to more FUD on the streets scaring away investors from a market that is yet to even be close to where it will be in the next 10yrs.
2/Where are the markets headed from here?
For me, right now it’s hard to see whether this is leading to a bear market, or whether this a short-term contraction in the bull market. Whatever be the case, I want to be prepared for both.
I am very bullish long-term and even in the short future if the market allows for individuals to get into the crypto space as its still extremely small with much more room to grow. The reason I say the market allows is that the only way for the smaller protocols to gain traction and bring in the real money, with how small they are at this time, need a mass adoption or at least institutional investors, the more that the big companies invest the more the average retail investor will invest leading to positive price action.
I see Avalanche doing very well as it has already surpassed well bast 1 billion in market cap close to 20 at the time of this article and it is an emerging network for financial services at a fraction of the cost per transaction compared to where ETHY is at right now. It also is home to the DAO with the largest treasury in crypto, WONDERLAND.fi. That’s what a lot of individuals who are getting out due to FUD don’t realize, that there is so much potential with this project, which will only help the avalanche network. Also, I am bullish on wonderland long — term however, for me short — term to start getting back in am wanting to see all its proposals go through and see what the plans for the project are. I still have everything I put in Wonderland there now, but I am talking about more investments than those already done.
Fantom is going to be an extremely useful network and for me it has the most growth potential for investors. It gives more options to individuals in terms of services and diversity of markets. As it is so cheap right now it has a very good entry price now as in the coming future it will have its so called “Solana moment” stated by Prometheus one of the leaders in Hector Finance (Solana is trading above 100 as of now, with a high of 200+ in a span of 6 months. I can see this happening as the fantom network is even cheaper than the avalanche network which is cheap as it is. Hector Finance is also on the Fantom network another project I am bullish on short and long-term; it has one of the best kept discords compared to any other DAO, also it is very discounted right now, They have also just announced that the protocol is now deflationary as it is burning more than it mints, in other works the investments have already started to give a return to the project, I see this becoming one of the main reasons the fantom network gets more exposure.
Other than that, I am looking into the TOR stable coin farming as its above 50%APR right now and it will only increase as the pool increases.
Also, I am looking at farming on other Decentralized Exchanges on Avalanche such as Traders Joe and Abracadabra.Money as they have some competitive rates for stable coin farming.
The future is bright for this space and those in today and even those in the next year who enter can have an opportunity to see juicy gains in the next 5–10 years.