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Friday metrics watch; a brief introduction to margin trading..

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Satoshi&Co Daily Crypto Newsletter

July 12 · Issue #209 · View online
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We recently covered the growth in the area of crypto derivatives. As crypto gains legitimacy as an asset class derivatives grow into a larger proportion of the overall markets, in line with traditional markets.
Margin trading in a nutshell:
While the potential rewards can be high, there are some sizeable risks that investors need to contend with too.
Let’s start with an example using dollars. Imagine you have $50. Margin trading is where you could gain exposure to, say, $500 using a 10x leverage, based on this $50 in your pocket.
As you can imagine, the principle in the cryptocurrency world is quite similar. Let’s say you want to buy Ethereum worth $1,000, but you’ve only got $500 available. Through margin trading, you’d be able to borrow an extra $500 – getting you up to the magic total.
If your $1,000 in Ethereum grew in value, to say $1,500, you’d be able to liquidate it and return the $500 to the lender, leaving you with a gross profit of $500. In the unlevered scenario you would have only made a $250 gain on your $500 investment. For the moment, let us ignore borrowing costs.
Of course, the value of cryptocurrencies can go dramatically down as well as up. In a scenario where the price of Ethereum went down by 50 percent, your lender would be able to get their $500 first before you can access funds, potentially leaving you with nothing.
In the traditional finance world, margin trading is predominantly employed by sophisticated hedge funds, typically with leverages varying from 1.5x to sometimes even more than 5x, depending on the asset class and strategy, which use a variety of complex strategies to achieve superior returns. On the flip side, excessive leverage can completely wipe out invested capital, as was the case with Long Term Capital Management (LTCM), one of the largest hedge funds of its time that eventually collapsed. In case you have not, you should definitely check the seminal When Genius Failed, which chronicles in detail the circumstances around the collapse of LTCM.
Margin Trading in the context of cryptocurrencies: 
As we opined in our last week’s piece, a majority of derivatives trading in cryptocurrencies happens on unregulated exchanges. One of the unique features of crypto trading is the excessive leverage (up to 200x) that is offered to woo unsophisticated retail investors with the indirect promise of earning very high returns on investment in a short period of time. Leverage is often cited as the cause of financial bubbles and 100x leverage in a highly volatile crypto space raises the stakes to a new level. With 100x leverage, a 1% move in the right direction can net you 100% return before fees and funding costs in just a matter of minutes. On the flip side, if the price moves by a few ticks in the wrong direction, your entire capital will be wiped out. What makes matters even worse is the lack of regulation and the presence of whales who are often accused of market manipulation. 
BitMEX recently released some insightful statistics on the high stakes leverage game that most traders on BitMEX engage in. 
The dichotomous nature of the distribution shows that while a majority of traders’ use leverage in a more reasonable and measured manner, there still exists a significant chunk of traders who are drawn towards the 100x leverage offered by leading crypto exchanges.  
To be clear, a crypto derivatives exchange will need to have what is known as an insurance fund. Imagine a dip where the long positions take a pounding, and there is a cascade of margin calls. The long positions need to be sold in to the orderbook, but this can trigger further liquidations. The exchange might not be able to liquidate the long positions in time, but it still owes money to the folks that took the other side of the trade, the short holders who are deep in the money on their bets. The insurance fund primarily covers this shortfall. 
When shit really hits the ceiling, the exchange sometimes literally goes in and removes corresponding positions from the long and the short side so that it does not have to pay out on these bets. This phenomenon is called auto-deleveraging, and this is something that crypto derivatives traders hate. There are decentralized crypto derivative exchanges that aim to solve some of these problems, as we briefly discussed a few editions ago.
To be clear, all this ‘hedging’ is necessary because, with crypto derivative trading venues, unlike in traditional exchanges, there are no third-party broker-dealers providing leverage, or exchange members back-stopping exchange operations. 
Ethereum Locked in DeFi
MakerDAO still accounts for a lion’s share of ETH locked up in collateral, with more than 1.56 million of ETH locked up. Uniswap and Compound showed a w/w increase of 13% and 12%, respectively, in ETH locked up and Augur showed a w/w decline of 11%. ETH staked in MKR was flat w/w.
Lightning Network Growth:
Capacity per channel showed a strong increase of 4% w/w. The total number of nodes increased w/w by 1%, and the total number of channels decreased significantly by 4%.
(For reference, some previous articles on LN, here).
DEX Tracker:
Trading volumes on DEXs have increased on a w/w basis, with the average daily trading volume averaging 35k ETH for this week. IDEX remains the biggest DEX in terms of trading volume and DAI is the highest traded cryptocurrency on DEXs.
(For reference, some previous articles on DEXs, here and here).
Crypto Loans Tracker:
Compound Loans:
Total loans issued on Compound for the last week stands at approx. $3.2 million for the week, a meaningful decline from $3.4 million in the previous week. WETH is the most borrowed cryptocurrency on Compound followed by DAI and BAT.
Dharma Loans:
Total loans issued on Dharma Lever for the last week stands at approx. $737k for the week, almost a 7x increase from the previous week. DAI is the most borrowed cryptocurrency on Compound followed by WETH and USDC.
MakerDAO Loans:
DAI loans issued on MakerDAO for this week stand at ~$6.5 million, a meaningful decrease from $14.4 million last week. The total outstanding DAI debt currently stands at ~$91 million.
(For reference, some previous articles on MakerDao, here and here).
You can also check out last week’s Metrics Watch here.
Meanwhile in Crypto Wonderland....
“Veil To Shut Down”
Veil, a peer-to-peer prediction markets and derivatives platform built on top of Augur, 0x and Ethereum, is shutting down just six months after its launch. Paul Fletcher-Hill, Veil co-founder and CEO, announced the news on Friday in a Medium blog post, stating that no new markets will be added to the platform. Users can trade in existing markets until July 24, and after that, it will continue to host the Veil product at least until Augur v2 launches. Veil was designed to make Augur’s platform accessible to the mainstream audience, which enables users to create and trade prediction markets on a variety of topics from sports to elections to crypto prices.
“More Entrants Into Regulated Crypto Derivatives Trading”
Institutional digital assets platform trueDigital Holdings has announced plans to offer bitcoin derivatives for U.S. investors. In a press release on Friday, the company said it’s reached an “agreement in principle” to acquire designated contract market (DCM) and swaps execution facility (SEF) registrations with the U.S. Commodity Futures Trading Commission (CFTC) from a firm called trueEX. Going forward, the company plans to add additional crypto derivatives.
“Prasos Receives Payment Institution License”
Finland-based cryptocurrency firm Prasos has secured a payment institution license via the Finnish Financial Supervisory Authority (FFSA). The news comes by way of an official announcement via its crypto exchange website on July 12. According to the announcement, Prasos is now the third crypto firm in Europe to secure a payment institution license. According to its website, Prasos operates a crypto exchange, a crypto investment platform, and Bitcoin (BTC) ATMs. Prasos stated that, thanks to its new license, its crypto investment platform Coinmotion is now capable of supporting a payment service in the European Economic Area (EEA), which includes EU member states as well as Iceland, Liechtenstein and Norway.
“Japanese Exchange Apparently Hacked”
A cryptocurrency exchange in Tokyo has halted services after it lost $32m (£25m) in the latest apparent hack on volatile virtual monies. Remixpoint, which runs the Bitpoint Japan exchange, discovered that about ¥3.5bn in various digital currencies had gone missing from under its management. The apparent hack emerged after an error appeared in the firm’s outgoing funds transfer system on Thursday night. It said the cryptocurrency went missing from a so-called hot wallet, which is connected to the internet, but that currency held in cold wallets that are offline was not affected.
Crypto Twitter Pick
Jameson Lopp
You shouldn't like Bitcoin simply because Trump hates it. You should like Bitcoin because people who want to control you hate it.
What We Are Reading / Listening To
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