2022

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Compound Interest Explained & Calculator

3 minutes to read

The power of interest-only interest compound interest

The Concept of Interest

Interest is a kind of fee paid by a borrower to their lender for the funds lent. Interest should be thought of as the rent of money. It can be observed that the person who pays the interest is always considered high and the person who receives it is always low. Anyone who forgoes their money and thereby forgoes the material goods available for their money for a while and takes the risk that they may not even get their money back is entitled to expect to receive interest for this sacrifice. Therefore, the money has a time value, a few hundred dollars is worth more today than it will possibly be tomorrow or even a month from now.

Compound Interest

Concept and Calculation Of Interest-only Interest

Compound interest is generated when collective interest is added to the loaned money. This is because, from this moment on, in addition to the loan itself, the added interest will go towards accruing more resulting interest than in the initial period. For example, suppose the bank pays 10% interest per year. If we put $10,000 into the bank, it will bring interest of an extra $1000 by the end of the first year. If we then leave the initial amount plus that interest in the bank, by the end of the second year it will bring in more interest than the first year – This would now be $1,100 of interest earned.

Exactly how do we work out our earned interest for each year?

We take the initial investment and multiply it $10,000 * $0.1 = $1,100. Following this formula, we can see that by the end of the second year, there would now be a total of $12,210 in the account.

Learn more about compound interest here is a link to wikipedia

compound interest 2

Interest Rate Calculator

Attention! In the world of the stock market, monthly yields (interest) are more often calculated.

There are several reasons for this:

1. On an annual basis, the yield available on the stock market would be too high and thus figures that would be completely incomprehensible to people less familiar with the stock market would come out.

2. Since there are strategies where it is worth taking part of the earnings (profit) regularly (every 2-3 months), it is easier to calculate monthly percentages.

Please note: If you want to use decimal numbers, enter a decimal point, not a decimal point.

For the Initial Amount, enter the amount you want to invest.

For Monthly Interest, enter the percentage of return you want per month.

For Months, enter how many months you want your money to be used for.

When you click on another field, the calculator always calculates the last two fields:

The Total is replaced by the amount by which the money multiplies.

The total return (profit) is replaced by the profit on the initial amount invested.

Try the following values:

1.

Initial amount: 10.000

Monthly interest %: 15

Number of months: 72

2.

Initial amount: 100.000

Monthly interest %: 5

Number of months: 96

3.

Initial amount: 1.000.000

Monthly interest %: 10

Number of months: 120

Investment Compounding Calculator

Invested amount : Your initial investment
Annual Contribution: Optional
Interest rate: % Return on investment (Interest)
Number of years:
Compounding percentage: % reinvested profits
 

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How To Make Money Work for You!

9 minutes to read
Growing wealth

Table of Contents

  • 1) What does it mean to make money work for you?
  • 2) Interest Rate: The Eighth Wonder of the World
  • 3) What we aren’t taught in school
  • 4) The formula for wealth
  • 5) Your house and your car are obligations
  • 6) Focus on building income-generating assets

Have you ever wondered what it would be like if you got your current salary without having to work for it?

One of the very important pillars of my path to financial independence and my blog is this: take your money to work for you so you never have to work for the money again.

Money can work nonstop 24 hours a day, 365 days a year, on public holidays while you’re asleep while you’re on vacation.

Money will never rest, it will not go on holiday, but will always work faithfully and diligently for you and generate even more money.

Money’s busy!

I guess you can see what I’m trying to say…

I think it’s so important to understand this, I named my blog after that.

The goal of financial independence is to have your money working for you 100% instead of having to work for you.

If you get to the point where your money alone generates enough money, you will never again depend on your current job.

But if for some reason, you don’t care about financial independence, it’s still important to have your money worked, because, on the one hand, it means additional income to build a more secure future – I mean your retirement years, among other things – and on the other hand, under your pillow – or even in your bank account in the current interest rate environment – your money will be devalued.

What Does It Mean To ‘Make Money Work For You’?

The best way to answer this question is through an example.

For this example, we will assume that you have $3,200 (£2,339) to invest in shares.

The stocks will be valued at a price and will pay you a dividend. For simplicity, let’s say your annual return before inflation is 10% in the form of dividends.

This means that in a year overall you will have $3,520 (£2,572.90), that is, you have an absolute return of $320 (£233.90).

Basically, it took you a few clicks to make the initial investment, and your money then took care of itself. That’s what they mean when they say money works for you.

But what happens if you leave your money to work by itself for more than a year?

Interest Rate: The Eighth Wonder of the World

Continuing with the example above, let’s see what happens if we do not touch the $3,200 that we invested in equity for, let’s say… 30 years (calculated with an annual return of 10%):

make money work for you
Compound interest graph

In the diagram above, you can see the power of your money if you let it go to work.

While in the first year you received only 10% of the $3,200, i.e $320. In the second year, that yield from the previous year will also generate additional money, so this time around you will get 10% of $3,520. This is called interest.

This continues for years as your money generates more and more profits. As your profits grow, your wealth grows at a consistently accelerated rate.

The perfect analogy for this would be to compare it to a snowball. As this snowball rolls down the side of a mountain, it picks up more snow and compacts itself, growing exponentially as it goes.

You will see that the $3,200 will become nearly $57,582 without you having to do practically anything!

Now let’s look at what happens if you regularly invest $95.97 at the beginning of each month for 30 years instead of $3,200:

make money work for you 2
Compound interest diagram

Saving and investing only $95.97 per month, will end out being somewhere over $217,532 in 30 years.

Although your return is minimal in the first year ($64.33), at about the tenth year your wealth should usually start to grow at a really accelerating rate as your money (and its return) generates more and more additional growth.

Finally, the savings of $95.97 per month will make you more than $217,532, or £159,059.40 (GBP)!!!

Most of your wealth will come from the return ($184,262.40), while monthly payments account for only a small part of your total wealth, i.e. $34,549.20 (= 360 months x $95.97).

What We Aren’t Taught In School

Now that you know what it means to put your money to work, let’s see how you can get it to work for you.

But first, let’s clarify some important basic concepts that are extremely important for you to understand if you want to put your finances in order and build wealth.

These two concepts are assets and liabilities. Unfortunately, most people are unaware of the difference between the two, setting them on a lifelong financial slope in the wrong direction.

Assets will bring you money, while liabilities will take money out of your pocket.

Assets include shares, bonds, rented properties and other income-generating assets which will, as we have already stated, bring you money.

In contrast, liabilities include your car and apartment, credit card, consumer credit and any other debt form you have.

Another two important accounting concepts* are the income statement and the balance sheet. The profit and loss account shows your income and expenses, as well as the difference between the two.

The balance sheet lists your assets and liabilities at a given time.

The Formula For Wealth

According to the author of the popular book ‘Rich Dad Poor Dad’, the main difference between rich and ordinary people is that while the rich focus on increasing their assets, ordinary people accumulate obligations.

The average person’s only source of income is their job and the main direction of his cash flow is outwards.

It is clear that liabilities take money out of your pocket and deprive you of additional sources of income without actually owning the individual assets.

make money work for you 3
Cash flow

This perfectly shows that the average person works only for others: 

  • the employer for which he pays with his time
  • the state, since most of his gross income goes to the state in the form of taxes, and 
  • the bank, since he has to sacrifice most of his income to repay the accumulated loans

In contrast, the rich don’t work for their money and instead, the money works for them!

On the balance sheet of the rich, we mostly find income-generating assets. These assets continuously generate money in the form of income, dividends, interest and other passive income – for example from rented real estate.

Your House And Car Are, In Fact, Obligations

From an accounting point of view, your house and car are also listed on the balance sheet as assets. Using the aforementioned definition though, an asset will only generate money. However, our house and car use up our resources and are actually liabilities.

Why?

Your house, which you use for your own housing, will not generate money for you but will take money out of your pocket and usually in larger portions (Mortgage repayments to the bank, as well as various taxes, insurances, renovations and maintenance costs, etc.).

Obviously, we are not saying that you should not have a house or an apartment, but merely that we want to refute misinformation, such as the often heard – “it is worth buying a house because it is a good investment”.

In a general sense, it would not be a returnable investment to take on a house, etc. until you take steps to start earning from it, such as renting the property out to another party.

It’s the same with the car. Although it does have its own respective worth – usually 4 figures or more- this is not an investment, as it is not an income-generating asset. It’s actually an obligation because you will have to continually take out of your own pocket for the running and upkeep.

The following example is great and illustrates the difference in thinking between rich and ordinary people:

Ordinary people use their money to buy a German car, the value of which is constantly declining and costs money for maintenance. This is one of the main obligations of the average person today, which is largely due to the fact that the expensive car has become a status symbol in today’s society.

Conversely, if they had invested their money in the German stock index instead of the German car, which had tripled in value over the same period of time and paid dividends, they would have increased their wealth.

Focus On Building Income-Generating Assets

Based on the above, you now know that if you continue to accumulate obligations, you will probably work for someone else for the rest of your life in order to make your money.

But if you want a more free outlook on life and financial security/independence, it’s important to focus on increasing your assets and reducing obligations where reasonably possible.

These assets will appreciate in price and keep generating revenue for you. Thanks to the effect of compound interest, your wealth and income will also grow exponentially. As you buy more and more assets, your revenue will grow at an ever-increasing rate, which you can spend on buying more assets. This will further increase your wealth and will mean more and more extra income.

Once you’ve managed to accumulate growing wealth which is consistently above the costs of covering your living expenses, you’ll never have to work again. This blog is also about achieving this goal.

So, in theory, you can use your money to redeem your own financial freedom and take control of your life.

However, it is important that wealth-building works in the long run, unless you win the lottery, so patience is a must and certainly is more than just a virtue. The example above shows that, although yields are minimal in the early years, as your money generates more and more money, compound interest will have an effect over time and your wealth will show exponential growth.

This is why it’s perfectly okay to start off small, and exactly why large initial investments aren’t necessary – The most important thing is to take the first steps and get started.

The secret to building wealth is actually simpler than you think: save as much as you can and invest the difference in income-generating assets.

According to Albert Einstein, “Interest rate is the eighth wonder of the world. Anyone who understands gets it. Those who don’t understand will pay.”

Whether you get it or pay it is up to you.

Which one do you choose?

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*The third is the cash flow statement, but this is not relevant for this article.

Top 10 Forex, Stock Market and Money Management Tips for Beginners

6 minutes to read
Top 10 forex tips

To help you better prepare for the world of Forex Trading, we have put together our top Forex money management tips, which you will find below.

As always, in order to be successful in trading, you need to have a complete, and carefully thought-out trading plan. A good trading plan will tell you when to enter a trade, when to close that trade, which currency pair to trade, and how to manage your money overall. As you can probably tell from this, the forex money management strategy is vital, but it is a small part of a much bigger picture.

Stock Market Tips – Money Management Tips

Our Stock market tips (basically investment tips) are not placed in order of weight and are equally just as important as each other. Don’t feel like you can only read through this once, if you do need to go through multiple times it doesn’t make you any less of a trader.

If you feel the need to, browse through the list several times to learn each one properly so you can then know how to best implement them into your own trading strategy. If that is what you wish to do of course!

1. Quantify your risk capital

In many respects, this is one of the keys to forex money management strategies. For example, the size of your total venture capital may be a determining function of the maximum size of your position.

You should know that within any single trade, you should never risk more than 2% of your total capital.

2. Avoid trading too aggressively

Trading too aggressively is probably the biggest mistake that beginners will make. If a shorter losing streak is enough to grind down most of your capital, it shows that you’ve taken too much risk in each trade.

One way to set yourself the right risk is to choose the size of your position based on the volatility of each pair. Remember, a very agile couple requires a smaller position than a less volatile companion.

3. Be realistic

One reason new traders are too aggressive is that their expectations are unrealistic. They believe that aggressive trading will help them get rich quickly. It’s important to always have reservations about the investment tips you read online, as what works for someone else may not work for you.

The best traders are constantly making returns on their money, however realistic goals and a more conservative approach are the right way to start trading.

money management tips

4. Admit if you’re wrong

The golden rule of trading is basically to just let your profits run and to, of course, cut your losses in time. It’s essential that you quit quickly if there’s clear evidence that you’ve entered into a bad trade. It’s a natural human instinct to try to turn a flawed situation around and change it for the better, but in FX trading this would be a huge mistake.

Why? Simply because you can’t control the market. 

5. Prepare for the worst

We don’t know the future of the markets, but there’s plenty of historical evidence. It will not be repeated again, but it shows what patterns and trends have formed over time. That’s why it’s important to also look at the past behavior of the pair you’re trading on the charts.

Think about what steps you should take to protect yourself, for example, don’t underestimate accidental price shocks. Being in a very unfavorable price move is not a misfortune – it’s a natural part of trading. So you have to have a plan for these extraordinary situations. You don’t have to go too far in the past to find an example of a price shock. In January 2015, the value of the Swiss franc increased by around 30 % against the euro in a matter of minutes.

6. Set exit points before you enter a position

Think about what goals you want to set for profit and how much of a loss you’d be willing to accept, should it go the other way. This will help maintain your discipline in the heat of trading. Also, it emboldens you to think more about the risk-return ratio.

7. Use some kind of stop loss type

Stop-losses will help keep your losses low, and they’re especially useful when you can’t keep an eye on the market all the time. If nothing else, at least use a mental stop-loss i.e. A mental note of the lowest point of loss you’d be willing to accept, at which point you no longer want to risk new trades. Price alerts can also be very useful.

You can also set up notifications for MetaTrader 4, for example

8. Don’t trade out of a sudden agitation

At some point, you might make a massive loss and even lose a significant portion of your entire capital. As we mentioned earlier, here you will be tempted to try to recover all the losses in one trade.

The problem with this though, is if you increase the risk when your capital is already in trouble, the worse the potential position that you could end up in. This is a Forex tip you should definitely take heed of.

Instead, reduce your exposure to losing positions or wait a while until you find a really clear new sign. Always stay in balance, both mentally and in terms of the size of your positions – this perhaps one of the most important tips on Forex money management strategies.

9. Respect and understand leverage

Leverage allows you to take a much larger position than your true capital would allow, but of course it also increases your potential risk in the same way. It is very important to understand the size of your total exposure.

10. Think long term

It goes without saying that the success or failure of a trading system will manifest itself more so in the long run than it will in the short term. With this in mind, be careful not to attach too much importance to the success or loss of a trade. Don’t make exceptions by changing or ignoring the rules of your usual system just to make sure your current trade is going well.

Whilst reading our Forex, Money Management and Stock Market Tips for Beginners please bear in mind that, Like all aspects of trading, the acceptance of investment tips purely depends on the preferences of the individual. However, when presenting the above stock market tips, we tried to be able to advise in such a way that would be found useful by a wide range of traders.

We would also like to point out that some traders are able to endure higher risks than others. But if you’re a novice trader, no matter who you are, we recommend you start out more conservatively.

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Egypt: New hosts of the 2036 Olympics?

3 minutes to read
Egypt is building a new capital city

As previously reported, Egypt is building a new capital city, and now it has also signed up to be the new hosts of the 2036 Olympics.

Just in case you haven’t read our previous article, here is a catch up:

Construction of Egypt’s new administrative capital began in the sands of the Sahara, 45 kilometres (25 miles) from Cairo, in 2015. The new city is not yet anonymous and the application for the name has not yet been completed. The first eight quarters with a population of two and a half million were completed by early November 2021, and in December, government offices, embassies and ministries began moving from Cairo to their new location.

According to the plans, the New Administrative Capital will be the place of the best – the themed districts will be powered by a huge solar park, the lampposts will give a wifi signal next to the light, a modern railway will connect the town and its new airport with the old capital. In the middle of the new city there will be a public park called the “Green River” the size of six Central Parks. In addition to the 20 skyscrapers of the business district, a world record building, 1 km high, is planned to make the settlement truly imposing.

Egypt’s largest mosque and largest Christian church is already standing here. The new presidential palace, which is eight times the size of the White House in the United States, has also been completed.

The intention to apply was made public by the Arab country’s sports minister, the insidethegames.biz page, which is familiar with the five-ring cases, reported.

Egypt to be new hosts of the 2036 Olympics

Speaking to Sky News Arabia, Asraf Sobhi said Egypt would be standing for the host officer with a formal request to the International Olympic Committee (IOC). He added that a comprehensive feasibility study – which carefully considers the technical, logistical and financial aspects – is currently being worked on, but work is already underway in the new administrative capital, for the multimillion-dollar sports complex, which will include a 90,000-seat stadium, an Olympic-sized swimming pool, several tennis courts and an indoor hall.

IOC President Thomas Bach has previously said he wants the Olympics to reach Africa and is determined to ensure that African nations can apply for the Games, as it is the only inhabited continent that has not yet hosted an Olympics. The sports minister said the African National Olympic Committees association supports his country’s ambition.

IN ADDITION TO EGYPT, INDIA, RUSSIA, SPAIN, TURKEY, GERMANY AND UKRAINE HAVE SO FAR EXPRESSED INTEREST IN HOSTING THE 2036 GAMES.

Next summer’s Olympics will be hosted in Paris in 2024, Los Angeles four years later and Brisbane in 2032.

New hosts of the 2036 Olympics
Modern Cairo

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What is market risk? Complete Guide

15 minutes to read
bear

When a market bear strikes it’s practically impossible to gather enough time to grieve your losses.

Without market risk, there is no investment. If someone misjudges the dangers of a market bear, they might as well lose everything. That is what we saw in the financial crisis of 2008, and it is still the case today if one holds himself to account. When a small investor does this, it’s unpleasant, but if it’s a big bank, it can be a disaster. Market risk is one of the biggest financial risks and we are here to help you understand the basics. We’ll go through exactly what it means and how it’s generated. The focus of our article is on banks, showing how they quantify this threat and what regulations apply to them.

The Bear

The period 2007-09 taught many that the market bear is no spoof or joke. When stock market prices and OTC fell like dominoes, the world turned upside down. But it doesn’t even take a financial crisis to burn ourselves with bad exposure. Market risks can come in many forms, and often very unexpectedly. This was the case, for example, with retail foreign currency loans (with a debtor’s eye), where masses went into credit transactions without knowing the existence of foreign exchange risk. It was a painful lesson for many.

“Of course, it wasn’t just the public who were wrong at the time, it was the banks and regulators,” he said. Indeed, in the great financial crisis, it turned out that market risks were being measured inaccurately and were poorly regulated.

In this article, we will now continue on the topic of financial risks and deal with the measurement and regulation of threats arising from market movements after credit risk. Again, we are doing this from a banking point of view, as these are the protagonists of the financial world. Plus, it is the banks who are most likely to be able to manage market risks well, because if they do not, they would put our money at risk.

What is the risk here?

Let’s start with a tour of the concept. Market risk involves an adverse change in the exchange rate or implied volatility of financial products. Simply put, it seeks to capture the risk of loss due to the entire market or specific market exposure. It is no coincidence that we are wording a little carefully here. This is because the literature divides market risk into two main components; The first is general market risk, which includes the risks specific to the market as a whole. This risk cannot be diversified, although it can be protected against it by using special cover techniques. A good example is when stock market indices all start to fall in the market, and even though we keep a lot of different stocks in our portfolio, we still suffer losses.

https://www.bis.org/publ/bcbs159.pdfThe other component is the specific (unique) risk associated with the closer product, such as a particular share or a specific bond issuer. This is already a diversifiable risk, but there is not always a business need to defend ourselves against it. It is worth noting that there is even some credit risk and migration risk deep in the market risk, as we give and take shares with great intensity in vain if their issuer suddenly goes bankrupt or their credit rating changes. In such cases, a serious loss can always arise. This was therefore particularly taken into account in banking regulation when a framework for market risks was developed; For example, the IRC calculation was born, which in English stands for Incremental Risk Charge.

Market risk may arise in many cases, but regulation focuses mainly on financial products held for trading purposes. The basic premise behind this is that if we keep something in our book until maturity, not for trading reasons, then it is worth applying the credit risk framework there. After all, it basically doesn’t matter how, for example, a bond’s price develops when coupons are paid out without any problems and the transaction expires without any problems.

The area of ​​market risk should therefore be narrowed.  The Basel guidelines state that all fixed income and equity exposures in banks’ trading books should be included.  Moreover, we also include foreign exchange and commodity exposures in the bank’s complete Trading and Banking Book.  Due to the latter, it is otherwise quite rare for a banking business mix where there would be no market risk and no RWA or capital reserves would have to be created for it.  Even if the bank does not have a trading book anyway.

What is a bank doing on the market?

To understand the topic, let’s get a little more into what this aforementioned ‘trading book’ means. To do this we will take a closer look at what banks are doing on the market, which exposes them to market risk and special regulation.

In addition to their role as money creators and creditors, banks occupy a key position in financial market and capital market intermediation. It would be reasonable to say that they are the selling side of the market, because in many cases it is really thanks to them that some products and securities have a market at all. In OTC markets, such as the foreign exchange market, banks play a decisive role and without them we would live in a completely different world. But there are a lot of misunderstandings and malicious assumptions about what exactly a bank does on these fronts.

With our previous statement in mind, we find it important to remind you to not forget that the market presence of banks is not focused on speculation, but on mediation and the provision of services.

U.S. big banks have also been banned from trading their own accounts (proprietary trading) by adopting the Volcker rule. This type of activity has not completely disappeared from the banking world, but a significant transformation has taken place. From the global big bank, these divisions, as well as the star investors working there, have emerged and established hedge funds. Thus, in this form, own-account trading has not been lost on the economy, only the circle of risk-bearers has been transformed. The latter is therefore correct, as Paul Volcker and other prominent economists have argued.

Even if international banks no longer take market positions for their own gains, they will still remain very active in the market due to customer needs. This is because of the so-called market making and brokerage activities.

This is in reference to when the bank’s traders trade or hold securities to meet customer needs. For example, a customer can ask the bank to acquire XYZ’s hard-to-buy shares on the OTC market. Or the bank may decide to buy in advance from that XYZ paper due to expected customer needs. Moreover, you can build such large portfolios from such securities that your clients can then sell and buy at any time.

In the case of the former two, the bank receives revenue from a certain percentage of the transaction fee, and in the latter line-up it makes a profit on the difference between the buying and selling rates

From this we can see that a bank doesn’t play directly to make exchange rate gains on securities, but it still exposes itself to market risks in the same way.

This is a typical business setup for banks, and is what can lead investment banks to face very significant market risks.

The rules of market risk

It is of the utmost importance, both for the well-understood interests of the bank and for the regulator, to quantify these risks. Unfortunately, the financial crisis of 2008 highlighted the lack of a Basel 2 framework, which was ironically designed for this purpose.

In response, the so-called Basel 2.5 guidelines were established as a rapid remedy in July of  2009, which significantly increased the capital requirement for market risks. But that wasn’t enough. So, in 2012 a thorough rethinking of market risks began, which the industry called the FRTB (fundamental review of the trading book).  This comprehensive study transformed both the standardized approach to market risk and its quantification with internal models.

Banking regulation never happens overnight, it often takes years for impact assessments to be carried out. In addition, the banking sector will still need to be consulted afterwards, and individual states will have to legislate. Moreover, after that, banks even need time to prepare and adapt. It’s understandably not easy as any substantial change here will always take years to be considered to be a positive success.

Thus, it is not surprising that four years after the start of FRTB consultations, the framework had only just been re-amended in 2016. Nor is it that the rules need to be further refined, and in 2019 the Basel Committee on Banking Supervision (BCBS) announced new changes. This latest guideline finalised only Basel 3, the European introduction of which has only just been discussed with CRR2.

In short, it was a long birth by the time the market risk framework was born, which we can read today and which is intended to ‘finally’ address the lessons of the financial crisis.

market risk

How does this system work?

We cannot compress all of the countless essential points of the market framework into just one article, but we have summarized its most important pillars and the risk measurement is explained a little better below.

As with credit risk, the starting point for measuring market risk is that banks either use their own model to calculate risk-weighted assets (RWA) or follow a standardized approach.  Here again, the idea is that through their own internal models, banks will be able to assess actual risks more accurately, as they only really know their products and they can see up close what losses their market business has suffered in the past.  At the same time, the regulator needs to set minimum requirements for models and or modeling to make it work well. The standard method should be a credible basic method at all times, where the risk from each product is quantified with sufficient sensitivity.

However, in addition to defining the methodology, the regulator should also address other issues. A key issue is that the bank correctly defines the actual range of products (the trading book) that fall under the market framework. The possibility of the bank abusing the classification should be excluded from the possibility of artificially lower capital requirements. The latest regulation therefore strictly stipulates this, and if one exposure is transferred from one book to another – say, from trading to banking – then the bank should not have a reduced capital requirement.

Finally, it is even necessary to regulate when banks’ models perform reasonably in measuring risks. This is also a part of the market framework that has received considerable attention in recent years, as many models failed in the 2008 crisis.

The four themes are the cornerstones of the market risk framework. Themes are as follows; Internal model measurement, standard method measurement, model validation, and the definition of the trading book.

In this article we will go deeper just into the topic of risk measurement. In particular, we only look at the basics of the most common VaR-based modeling. This method is a very nice and relatively new scientific direction in quantifying risks. There are problems with this, of course, which the regulators have discovered. These will be discussed and summarized in the remainder of this article..

Modeling market risk

The so-called Internal Modeling Approach (IMA in the literature) is currently based mainly on various applications of VaR (Value-at-Risk). This is about trying to estimate the frequency of the distribution of gains and losses (P&L) and then shooting the risk profile of a product or portfolio based on the area under the curve.  In this way, it is possible to say the probability of a given loss occurring in the examined period.

Looking at a portfolio, we can say what is the maximum probable loss we can have in the coming days or months.  If, for example, the 30-day 1% VaR is usd 10 million, this means that we have a 1% chance of making a larger loss in one month.  On the other hand, out of 100, we will only face a loss of less than 10 million in 99 months.  This value of 10 million can be obtained by estimating the density function of a given portfolio, from which the value at 1% can be obtained directly.

VaR is an extremely popular and very widely used method of assessing the maximum loss that can be made in a bad month, with a given confidence in the results.

There are several ways to model a risk value, but three main groups can be identified. The simplest variety is the variance-covariance method, for which it is enough to estimate the average change and standard deviation. Much more work is needed by the historical method, which reconstructs the actual distribution of gains and losses from past data. The most complex method is the Monte Carlo simulation, in which a separate model is responsible for future outputs, such as a share price. This really has an advantage if we can really capture the characteristics of a product’s exchange rate turf and simulate it by simulating it to generate a P&L distribution that is more authentic than the historical method.

This is no easy task so, unsurprisingly, the vast majority of banks follow the Historical VaR Approach.

The regulator, on the other hand, can penalise inaccurate models by setting VaR multiplication factors, thus encouraging banks to choose the best possible solution. How successful this is in practice is already the subject of a separate professional debate.

VaR calculation, regardless of what method you choose, has several limitations. One of the most important is that if we do not have enough information about a financial product, we cannot monitor its price regularly – therefore it cannot be modeled properly. When this is the case, VaR calculations are not actually able to capture market risk well.

The other problem stems from the realisation that market losses have a particularly cruel nature. The edge of loss distributions often crept upwards, that is, it does not behave according to the normal distribution. This means that very large losses are not necessarily so rare, but it is very difficult to see. The VaR calculations used in practice can easily underestimate the value actually at risk, and the 2008 financial crisis was a disrepute example of this.

The banking industry has come up with several ideas to compensate for this. For example, it has invented the stressed VaR calculation (SVaR), which calibrates the quantification of risks to adverse market conditions, thereby helping to define the overall market RWA and capital requirement more accurately (and higher).

But the latest regulatory approach goes beyond that and introduces the so-called conditioning VaR (CVaR), commonly referred to in the industry as ES (Expected Shortfall). The essence of this is to try to capture the average of the margin of loss distribution. So while the VaR of 1% says that the worst 1% of the distribution has a limit of this size, the ES tells us how much loss is generated on average in the area below the 0% and 1% curves. If there are good high values at the very edge, then the ES will significantly estimate a higher risk than VaR. This solves a major shortcoming of previous VaR modelling practices.

The important difference between the VaR and ES methods is how it captures the edge of the distribution. Source: Bank for International Settlements

Basel 3 – The end of a long journey

Market risk regulation is no longer content with banks meeting the regulatory requirements once their internal models are introduced. Instead, the BCBS recommendation requires continuous retesting of models (This is known as a backtest requirement).

As soon as the supervisor finds that the model used in one of a bank’s trading business is not performing well, i.e. the estimated losses are significantly below the realised level, it may suspend the model use licence. In this case, the bank should return to the standard method, which usually leads to a higher capital requirement.

But the regulator doesn’t even stop there. Under the new recommendations, the difference in capital requirements resulting from internal models and the standard method will be increasingly limited. This will eliminate the need for VaR or newer ES model variants to underestimate market risk and thus reduce the capital that is trained on it.

If we had known the interpretation, the measurement method and the regulatory method, as described above, before the financial crisis happened, we would probably be a few steps further ahead.

However, the problem of measuring and regulating market risks is very likely that the finalisation of Basel 3 (which many people from within the banking industry are already calling Basel 4) is not over. Financial products have evolved enormously over the last few decades and we have seen a new face of market risks in the last few crises.

It is almost impossible that, as financial innovations progress, there will be no need to further clarify the practice of measuring market risks and the related banking regulations. Of course, it’s also a big deal that we’ve come this far, and the banks have become much safer.

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A Complete Guide to Short Selling

7 minutes to read

What short selling is and everything else

The topics that we will cover in this article are: How can each of us play our part in an exchange rate decrease; What is short selling as a general concept; What are the rules of short selling; As well as how possible it would be to shorten the market.

Surely you have heard the phrase that speculators shortened or, in other words, briefly sold a currency, a stock, and specifically mortgage-backed securities – like those shown in The Big Short. A 2016 film that highlighted the dark pits of the modern financial world was led by Director Adam Mckay.

It is likely that this negative-sounding news is causing short deals to be embedded in the back of people’s minds.  At first glance, it may not be clear, and even a little alien, but it is possible to profit from a depreciation.  In what follows, we show that without shorting, not only would the cinema world be poorer by one great film, but that shorting is one of the defining gears of the entire capital market machinery.

If we interviewed people about the nature of the profits made in trading, the vast majority would buy cheaply to then sell more expensively and enjoy the profit generated by the exchange rate inflation. 

There is also a gap in this, because in the long term, when at this with a perspective of 20 or 30 year, stock prices will generally tend to creep upwards on the chart.    

But what if we think the price of a product is skyrocketing or massively overpriced and will soon fall?

You don’t have to be a stock market magnate to realize that rising and falling exchange rates are constantly following each other. If the market rises, the rising waves are longer, and in the case of bear markets, it is the other way around. It makes sense to enjoy the downward wave in order to reach cheaper buying prices.

Riding this downward curve is, in essence, what short selling is there to help you to do.

A short position (or short trade/short selling) means speculating on a fall in the price, i.e. generating a profit when the price of the selected product decreases. In the case of short selling, therefore, we start trading with a sale, and the plan is to close it by buying at a lower price in the future.

HOW IS THAT POSSIBLE?

If you open a short position, the brokerage company will lend you the product you want to shorten.  This allows us to sell what we don’t have. Yes, but the borrowed product has to be returned over time, that is, as opposed to a buying position, where you can hold these shares and give them to your grandchildren, you can typically open the selling positions for a shorter term, up to a maximum of a few months. 

short selling
Trading

WHEN WILL THE SHORT POSITION BE PROFITABLE?

A short position started with a sale will be profitable if the price of the instrument decreases, in other words, if I sell and buy it cheaper.

Keep in mind that while your risk for a long position is capped, at worst the company will fail and the exchange rate will be 0. On the other hand, there is virtually unlimited vertical space,  and there is no ceiling to hold back the exchange rate price. For example, the price of Tesla, depreciated by $100 at one point and then was above $1,000 a few months later, which in this case would result in a loss of $900 per share. In the case of short selling, it is therefore essential to focus on the appropriate risk management.

WHAT IS A FUTURES INDEX?

The development of futures trading in the mid-1800s was driven by the need for the producer and the user to be able to sell or buy at pre-fixed prices. In the case of a miller, it is useful to know in advance as early as February how much wheat will cost in July, while it is also an advantage for the producer to know how much revenue he can expect even at the moment of sowing. In this situation, the producer sells, the miller buys the July wheat futures contracts. Actual physical delivery is increasingly rare on the futures market, with the buyer and seller mostly accounting for the difference in exchange rate movements in money.

Futures are concluded by some market participants for so-called hedging and risk reduction purposes. For example, a European export company sells its expected dollar revenue against the euro on time, thus securing the exchange rate for itself in advance.  In the case of futures stock market indices, an investment fund manager may reduce the risk of position by selling stock market index futures without selling existing shares if it fears a market fall.

Similarly, for any regulated market that is traded by any man, speculators give the most of the trading on the Futures Exchange.

The majority of futures market participants therefore simply want to benefit from the exchange rate shift, taking advantage of the fact that futures products can be traded up and down without any restrictions.

Trading a futures product is like anything else, if you expect a rate hike, buy it, if you sell it for a drop, you sell it.  There are four differences from the stock market:

Futures products have an expiration date, upon which the product expires and ceases to exist. There are usually quarterly maturities, so there’s always something new to continue doing business with. The fact that the futures product has an expiration date does not mean that it is not possible to close the position at any time before that date nor is it impossible to open a new one at any time. In the case of futures products, the easiest way is to ride the exchange rate decrease is to open a short position.

For futures products, a unit price shift usually causes a higher profit or loss than for a share. For example, in the case of the E-mini S&P 500, a 1 point shift causes a profit or loss of 50 USD. Futures allow for leveraged trading, i.e. we can take positions that exceed our personal equity. For a disciplined trader who knows the rules of position sizing, leverage is irrelevant. Leveraged trading can easily become Russian roulette, only all six bullets are already in the gun. In the case of futures products, the basic unit of trading is called a contract, so you trade one or more contracts with the Stock Exchange.

Let’s say a few words about short selling on the stock exchange.

Short selling on stock exchanges is not much different from buying positions.

Finally, let’s have a couple of cutting-up terms techniques that will make us the stars of every party next to the nodding pots.

WHAT IS THE DIFFERENCE BETWEEN SHORT SQUEEZE AND SHORT COVERING?

The short squeeze has accelerated the buying surge among short-buyers as a result of a rise in the price of a security. The rise in the stock price is prompting short-time buyers to buy back their short positions and book their losses. This market activity causes a further increase in the price of the security, forcing more short-backs to cover their short positions.

Unlike short squeeze, short-covering means the purchase of securities to cover an open short position. In order to close the short position, traders and investors buy the same amount of shares from the securities they shorten.

Let us give you an example:

Zane will be the name of our character.

If Zane shorts 500 ABC shares at $30 per share, and then the ABC stock price dropped to $10. And if He then covers his short position by buying back 500 ABC shares at $10 per unit. This would earn him $10,000 worth of profit; (($30-$10)*500).

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BITCOIN IS 13 YEARS OLD! HERE’S A SUMMARY TO CATCH UP QUICKLY

22 minutes to read
bitcoin

October 31st is an illustrious date for Bitcoin believers, as it was on this day that Satoshi Nakamoto published the Bitcoin white paper, which essentially marked the birth of the leading cryptocurrency. We’ve gathered a wealth of information you need to know about Bitcoin, its birth and the last 13 years.

OUR BITCOIN SUMMARY;

TABLE OF CONTENTS

  • About Bitcoin in brief
  • How does Bitcoin and the blockchain work?
  • 51% Attack, i.e. Weaknesses in the blockchain?
  • Satoshi Nakamoto and the birth of Bitcoin
  • Bitcoin’s highlights from the past 13 years
  • Bitcoin; Purchasing and storage
  • What do you need to know about Bitcoin and cryptocurrency mining?
  • So, how green is Bitcoin mining now?
  • What does ‘DEFI’ mean?
  • How do NFTs work?
  • El Salvador is an ambassador for Bitcoin!

ABOUT BITCOIN IN BRIEF!

Bitcoin can also be seen as a digital currency created as a demand for the modern age. In essence, it is an electronic money that can be transferred independently of national borders and can be held without restrictions, which is safely available 24 hours a day.

On 26.10.2020, 88,857 Bitcoins were transferred using a single transaction with a value of $11.5 billion (at that time), all with a transaction cost of just $3.54.

Unlike “fiat” money issued by nations, it is an important feature that it exists and operates without central bank involvement. It runs on a distributed network, maintained by thousands of computers around the world, they are the miners of certain. Bitcoin is actually the world’s first truly open financial network run by a predefined program code. In other words, users rely on the rules of exact mathematics and programming instead of politicians.

bitcoin

Bitcoin’s most important innovation lies not only in the development of an efficient payment system it invented, but also in the creation of a completely new industry. The leading digital currency uses blockchain technology that can be used for a variety of tasks other than payment. Blockchain records and validates all transactions and ensures network integrity. These transactions are grouped as a system of linked blocks, which thus create blockchain.

So Bitcoin enables fast, transparent and inexpensive transactions in a decentralized, centralized way with the help of blockchain technology.

Bitcoin is seen by many not only as a simple currency, but as a value-for-money investment that has made fabulous returns over a decade. Indeed, the predetermined characteristics of the programme in the code are significantly positioned as an alternative to gold. Many refer to Bitcoin as “digital gold.”

HOW DOES BITCOIN AND THE BLOCKCHAIN WORK?

Blockchain technology is often compared to the Internet and it may not even be foreseeable how it will transform our future world. Just as you weren’t sure what the future was like when you created a simple Internet protocol. We also had no idea that over time it would spread to our daily lives. Bitcoin, as the digital currency of the modern world, is one of the most well-known and perhaps easiest forms of implementation of Blockchain technology.

Blockchain is a digitally shared ledger of information, unique copies of which can be found in all nodes of the blockchain system. In blocks, we may store any information that is the sum of a transfer, the address of the recipient and sender in the case of Bitcoin, for example. All participants in the system can check previous transactions and add new ones. Transactions are arranged in blocks because of ease of processing, and these blocks are chained together. This is the blockchain name.

The relationship between the contents of the blocks and each block is protected by the cryptographic tool. This guarantees that the transactions carried out are irreversible and indestructible. In this way, you can create a ledger and transaction network where no third party is required to complete the transaction. This brings us to one of the most important features of the blockchain system: decentralisation.

The decentralised nature of the system not only ensures that no intermediary is needed, but also records transactions in a way that is transparent to anyone. This is the guarantee that the stored data will be irrevocable. The data is linked as links and cannot be changed retroactively. After all, the integrity of the system would be compromised in relation to the block that follows.

51% ATTACK, I.E. WEAKNESSES IN THE BLOCKCHAIN?

However, in the case of Bitcoin, we cannot only talk about benefits. Shared data, information stability, decentralised characteristics and transparency are all groundbreaking advantages, but there are potential disadvantages. This could be the possibility of a risk factor called a 51% attack, which is highly unlikely due to the size of bitcoin’s network, but it may be feasible for smaller projects.

There may also be a problem with a hosting issue. Finally, the immutability of the data must also be mentioned here. It has already been mentioned as an advantage, but in some cases it can also be a disadvantage. For example, if you mistakenly send Bitcoin to the wrong address, there is no one who can undo or compensate for it. At the same time, the areas of use of the technology are quite wide. We can see examples in the fields of logistics, health, financial sector, IT and even education – examples can be classified indefinitely.

SATOSHI NAKAMOTO, AND THE BIRTH OF BITCOIN

With regard to Bitcoin, the question may legitimately arise as to how it was created and who might be behind it. There are many mysteries and legends associated with the creation of Bitcoin, but it is certain that after a little research, the name of Satoshi Nakamoto will be mentioned. It is widely believed that Satoshi Nakamoto’s name is likely an alias – otherwise known as a made-up name. Satoshi means “wise” in Japanese, and nakamoto is a common family name, one meaning “origin.” And you don’t have to be a linguist to read the “origin of wisdom” composition in the context of bitcoin.

In fact, no matter what the motivation of the unknown programmer was to create Bitcoin, he certainly didn’t want to reveal his identity. With this fact, Satoshi Nakamoto says that the idea of the “product” is important, not the identity of the creator or programmer. Over the past 13 years, it has been suggested that he may be the mystery developer, but in the end we could appreciate the desire of those individuals to come into the limelight rather than reality.

Satoshi Nakamoto, by his own admission, started working on the bitcoin protocol in 2007. On 31 October 2008, he published a white paper on the operation of the electronic cash system, and on 3 January 2009 Nakamoto mined the first genesis block to launch the bitcoin network.

To date, it hasn’t been revealed who the mysterious creator of Bitcoin was.

Satoshi Nakamoto worked on coding himself until 2011, before disappearing completely from the world’s eyes in April. At the same time, he handed over the work he started to Gavin Andresen and the Bitcoin development community that has since emerged. Although not much is known about Nakamoto himself, his emails with programmers suggest his eccentric character.

László Hanyecz, a Programmer of Hungarian descent, also worked with Nakamoto. However, they never met in person, but based on their email exchanges, he is portrayed as a rather strange figure. According to László, there was something strange about working together and in the person of Nakamoto. He was bossy when there wasn’t an official working relationship between them. On the one hand, he seemed to be part of the development team in terms of work, but he consistently did not reveal anything about his personal side. He rigidly refused to do so and didn’t even answer questions about it, almost patiently guarding his incognito status.

However, given Bitcoin’s future and the main purpose of the project, this was understandable and certainly necessary. Bitcoin might not exist today if Satoshi hadn’t kept so much secrecy about the foundations of the system.

BITCOIN’S HIGHLIGHTS FROM THE PAST 13 YEARS

2008:

  • September: the U.S. bank known as Lehman Brothers goes bankrupt, resulting in a global crisis;
  • October 31st: The white paper of a new decentralised currency, Bitcoin, is published.

2009:

  • January 3rd: The Bitcoin blockchain is started with the creation of the Genesis block;
  • January 12th: The first Bitcoin transaction (from Satoshi Nakamoto to Hal Finney) was completed;
  • October 12th: The first exchange rate was set, this was 1 dollar = 1309.03 BTC.

2010:

  • 22 May: Hungarian born László Hanyecz is the first person to buy a product for Bitcoin; a $25 pizza for 10,000 BTCs;
  • July: Mt. Gox, which was created as a collectible trading card game, became Bitcoin’s first stock exchange at $7:06 per BTC;
  • October 28th: the first short transaction was made;
  • November 1st: Bitcoin’s capitalization value exceeded $1 million and the price of 1 BTC had reached 50 cents.

2011:

  • February 9th: The cost of one BTC token continues to grow, now reaching a 1-2-1 rate (1 BTC = $1);
  • February 14th: Adoption of Bitcoin slowly begins to develop further and a used car is offered at sale for 3000 BTC;
  • March 27th: It is now possible to trade Bitcoin for not only USD but now also GBP;
  • April 16th: TIME magazine writes an article about Bitcoin;
  • June: The Wikileaks platform becomes one of first organizations to accept Bitcoin donations
  • July 22nd: the first Bitcoin app is published for iPad.

2012:

  • March 1st: The biggest theft in Bitcoin history happens early, with almost 50,000 BTC being stolen.

2013:

  • February 28th: The exchange rate reached a new high of 31.91 USD/BTC;
  • March 28th: The total value of Bitcoins market capital exceeded 1 billion USD;
  • April 1: BTCs exchange price exceeds $100 per token (1 BTC = $100>).

2014:

  • February 28th: Mt. Gox, the largest stock exchange at that time, fails

2017: 

  • June: BTC exchange rate reaches $3,000 (1 BTC = $3000);
  • August: Bitcoin cash from BTC fork;
  • October: BTC exchange rate reaches $6,000 (1 BTC = $6000)
  • November: BTC exchange rate reached $10,000 (1 BTC = $10,000);
  • December: BTC reaches a peak of $19,783 for the first time (1 BTC = $19,783).

2018:

  • Twitter CEO Jack Dorsey predicts that Bitcoin would grow to be bigger than the US dollar and will become the world’s primary currency.
  • October; China and South Korea are the first states to restrict or even ban bitcoin trading altogether

2020:

  • More and more institutional investors have put their savings into Bitcoin
  • In Maj, the new Bitcoin halving has taken place. From 12.5 Bitcoins to 6.25 Bitcoins, block rewards are reduced
  • Competitive thanks to the widespread spread of the digital currency (PayPal, Revolut, etc.).
  • Bitcoin’s price has also broken its previous peak of $20,000 and ends 2020 at a record high of $29,110

2021:

  • April 14th: BTC’s price has set a new high of $64,800;
  • May 19th: BTC’s price plummets to $30,000, thanks in part to news that Tesla is selling its Bitcoin stock
  • June 4th: The world’s largest Bitcoin conference is held in Miami, here El Salvador President Nayib Bukele announces his country plans to soon recognize Bitcoin as legal tender;
  • September 7th: In El Salvador, in addition to the dollar, Bitcoin is finally accepted as legal tender;
  • October 19th: The first Bitcoin ETF appears on the New York Stock Exchange
  • October 20th: BTC’s price has set a new all-time high of $66,974.

BITCOIN; PURCHASING AND STORAGE

Especially during the bull market period, in the case of a parabolically rising exchange rate, many people ask where I can buy cryptocurrency and what to do with it. Fortunately, the answers to these questions are now considerably simpler than it was 13 years ago when the White Paper was first published. Since then, we have been able to buy Bitcoin for cash almost anywhere in the world. This can be presented with the help of a special ATM located in several parts of the world. And the process is just like using your favorite ATM. Only in this case will the bitcoin you purchased get to your previously created wallet through a QR code. 

A more favorable way to buy is to do so through an exchange.

One of the most well-known and safest is Binance, but some other big names include Coinbase, Bitstamp, OKEx and Kraken or Crypto.com. In these cases, we can buy Bitcoin either by bank transfer or by credit card purchase. The latter is a faster, but mostly more costly, solution. Some exchanges accept PayPal or you can buy cryptocurrency with Paypal itself.

STORING OUR DIGITAL CURRENCIES

The other extremely important question is where to keep the cryptocurrency that you have purchased. If we bought it on the stock market, it is perfectly reasonable to store it there for certain periods. However, if someone isn’t actively trade these tokens, it isn’t recommended to keep them on the stock exchange for a long time. Even with market leaders users have fallen victim to hackers, or a stock market provider has simply been shut down. Therefore, it is recommended to store the purchased Bitcoin, or other cryptocurrency, in a suitable individual wallet.

Essentially, the crypto wallet is intended to connect the user to the blockchain through it. They don’t actually store money, they just keep information and thus provide a means to receive the cryptocurrency. This information includes public and private keys. The portfolio therefore contains an address that is an alphanumeric identifier, generated from public and private keys. Money can be sent to this address, but the money does not actually remain on the blockchain, it is only transferred from one address to another.

There are several types of crypto wallets based on these. Hot wallets are connected to the Internet and cold wallets aren’t, these “Offline” wallets are obviously significantly safer. But wallets can be software on your computer or smartphone, or it could be a wallet with a piece of paper. The point is, in the case that we buy, we are responsible for our own safe storage. It is important to note that the only way our money will actually be ours is if we also control the private key.

WHAT YOU NEED TO KNOW ABOUT BITCOIN AND CRYPTOCURRENCY MINING?

Cryptocurrency mining is the process by which transactions between users are checked and added to the public ledger of the blockchain. The task of the mining process is to introduce new coins into the stock that is already in circulation. A network of distributed computers and mining allows cryptocurrencies to function as peer-to-peer decentralized networks without the central control of a third party.

That is, miners operate transactions on the network of cryptocurrencies and verify their authenticity. To do this, they solve complicated mathematical tasks with the help of their machines, in exchange for which they receive digital currency, this is known as block closure. To do this, they provide strong computer hardware and energy supply, in exchange for which they receive digital currency (Bitcoin, Ethereum, etc.).

BITCOIN MINING THEN AND NOW

In the beginning, it was enough to have a traditional laptop or an average computer with which bitcoin (BTC) could be mined. Due to the low competition between miners at that time, the computer’s processor was used to solve the operations. Nowadays, however, the level of difficulty has increased so much that it requires some much more serious hardware. If you have more powerful computers, the more digital currencies you can get. Therefore, in countless parts of the world, huge mining farms have been created, whose function is to specifically specialize in the mining of cryptocurrencies.

The cheaper someone can get their electricity supply, the more profit they can make from cryptocurrency mining. For this very reason, mining activity is usually concentrated in areas where miners can get electricity cheaply. The combined resources of the many distributed computers ultimately make the Bitcoin network extremely secure. Because in order to cheat and manipulate mining, you would need to have more computers and power than all available resources combined.

Mining capacity has already grown to such an all-time high that it is now almost impossible to be able to achieve such levels of personal resource. Another beauty of the matter is that the otherwise huge energy consumption is covered by renewable energy sources due to efficiency and higher profits. Nevertheless, there are many attacks on Bitcoin mining questioning the extent of how environmentally friendly it is.

SO, HOW GREEN IS BITCOIN MINING NOW? 

Higher energy consumption does not automatically mean that the user has a negative environmental impact, just as lower energy consumption is not necessarily environmentally friendly. With this in mind, the question isn’t how much energy should be used to run and operate the system, but instead what is the source from which the energy comes from and how efficiently is it used. However, based on the importance of the mining activity as detailed above, the following relationship can be observed. Miners are in constant competition with each other, which in economic terms could mean perfect competition.

FIGHTING FOR COST-CUTTING

On this basis, everyone is looking for ways to gain a competitive advantage over others. There are basically three ways of doing this, and this leads us towards positive environmental impacts. One way to increase your profit is to increase the price of Bitcoin. However, this is not influenced by miners and does not represent a different competitive advantage for individual miners.

The other solution is to use and develop more efficient tools. This is partly due to physical constraints, as development is slowing down today. Increasing the number of transistors in chips is becoming more difficult and costly over time, and thus the rate of development of more efficient devices is slowing down. Technically speaking, the only solution is to use more efficient cooling solutions to reduce the power consumption of devices.

Because it is common for data center cooling to reach 30-40 percent of the total energy cost, there is a legitimate need to reduce power consumption in this way; for example, by moving to colder, more northern areas. The third option for a competitive advantage is to explore cheaper energy sources and operate the system on this basis. This is where environmentally friendly, renewable energy sources such as water, solar or wind power plants come into view.

It is clear from the past that the energy cost is what miners can save the most on, so in both the medium and long term they are definitely forced to constantly seek out and operate on cheaper solutions.

WHAT DOES ‘DEFI’ MEAN?

The simple answer to this question is that ‘DeFi’ is purely a broken down rendition of the term ‘decentralized finance’.

A more broad explanation to this would be that DeFi projects first exploded in 2020 and, in a sense, Bitcoin was also born from a DeFi project. The aim was not to have a centrally regulated financial system, but to work with the help of a decentralized, open source program. Decentralization means that there is no central manager, but instead the community resolves the important decisions together.

Today, DeFi is more about the opportunities offered by smart contracts than it is just about the meanings of the words.  Smart contracts include, in addition to interest on deposits and borrowings, insurance, yield farming and decentralized exchanges. This list is actually almost endless and is constantly expanding from month to month.

BITCOIN AND ETHEREUM: THE BASICS OF DEFI 

With the advent of Bitcoin, global money transfer became available without any central organization, company or government having a say in the movement and properties of money. This was not possible before, it was the first decentralised digital payment option.

A big fan of Bitcoin was Vitalik Buterin, who later created Ethereum in 2015. This attracted even more programmers, as many saw potential in it. The new network was programmable, smart contracts and decentralised applications (DApps) were created. DApps are essentially based on Ethereum’s network, consist of smart contracts and have a web user interface.

Decentralised financial services also require decentralised exchanges. Decentralized exchanges (DEXs) are online exchanges that allow users to exchange a particular currency for another cryptocurrency. DEX connects users directly, so they can trade cryptocurrencies without leaving their money to an intermediary.

WHAT DOES THE FUTURE OF DEFI HOLD?

 The market capitalisation of the DeFi sector is currently somewhere around $157 billion, and its future has a lot to offer. Innovation is spreading rapidly, programmers are looking for opportunities every day, developing their software. Ethereum 2.0 will also have a positive impact on the market, with a faster, cheaper network and even more opportunities. 

In the long term, DeFi can compete with the banking sector, the problem lies in the complexity of technology. It cannot reach a wide range of users for this reason, and the unregulated market is also a part of it.

WHAT GOOD IS NFT?

With the creation of Bitcoin, blockchain technology has taken practical meaning, and the natural result of its development is the discovering of new uses. In 2021, more attention was paid to Non-Fungible Tokens (NFTs), i.e. “Non-Replaceable Tokens”.  

Digital products have existed before. You can send email, e-book, or mp3 files. However, the principle of digital scarcity could only be understood with the creation of Bitcoin. A product has been developed that, through blockchain technology, guarantees that the ownership of the data (money, works of art, etc.) sent from user A to user B will actually be transferred to the other user and that user A will no longer have any copies left. Moreover, this did not require a third party, as blockchain became the intermediary medium between the seller and the buyer.

The concept of NFT goes one step further than the above idea. While for cryptocurrencies tokens may have finite numbers (see BTC), all tokens are the same. Until then, for NFTs, each token is unique and finite in number. Naturally, this feature has stirred the imaginations of professionals in many sectors and is being experimented with in areas such as the toy industry, digital identity or even art. Due to the nature of the technology, it is even possible to buy a share in higher value works. Based on the above, NFT can be a fully digital device or even a digitized version of a physically existing product.

HOW DO NFTs WORK? 

To answer this, let us first explain what ‘NFT’ means; this stands for Non-Fungible Token. In short, this can be broken down to mean something that cannot be officially replicated or replaced. When it comes comes the initial creation of NFTs, there are several operational frameworks that can define the creation and publishing of individual Non-Fungible Tokens.

One of the most popular is the ERC-721 standard which features on the Ethereum blockchain. It differs from ERC-20 standard in that each token is unique and non-substitutable as mentioned above. The ERC-1155 standard represents an improved framework in the same area. As a multi token standard, it is possible to place tokens that can be replaced and not substitutable in the same smart contract. This greatly facilitates the transmission of NFTs between different applications.  Recently, in addition to Ethereum, Solana and Polygon have been providing technology funds to an increasing number of NFTs.

NFT tokens are becoming more and more popular in crypto communities. Prices are rising rapidly, with the most sought-after NFT collections selling for millions of dollars. Recently, the five largest NFT projects collectively generated more than $300 million in revenue. Like any unique work of art, NFTs usually carry cultural significance and social value. Another reason for NFTs becoming so popular is because returns made from the sale are paid directly to the respective creators. Not only this but creators can also continue to earn revenue from their works after the primary sale if they choose to apply creator royalties on their pieces.

EL SALVADOR IS AN AMBASSADOR FOR BITCOIN!

One of the most important milestones in Bitcoin’s history is likely to be 7th September 2021. Why you asking, this is because it was on this day that the digital currency became an accepted legal tender of a country for the first time in the world. Nayib Bukele, the president of the central American country El Salvador, announced his ambitious plans at the Bitcoin conference that was held in Miami in June 2021.  In a prerecorded video, he said he would present to Congress a bill recognizing Bitcoin as legal tender in his country. The second half of the statement could hardly be understood by the rousing applause and ovation that ensued after.

NAYIB BUKELE, A BITCOIN BELIEVER?

The President of El Salvador has always been committed to becoming the first official country to have Bitcoin accepted as true currency. Although analysts and experts have warned the government that the move could lead to economic bankruptcy, the country’s first man was irrefutable. Among the benefits, he said, residents will have the opportunity to instantly switch their cryptocurrencies once Bitcoin is recognized as legal tender.

However, it was said in a statement on Twitter that 4.5 million adult citizens will have the opportunity to hold or withdraw cash (USD) from any of 200 ATMs placed around the country. According to the president, there will also be 50 accounts that can convert fiat currency into Bitcoin to keep residents’ savings in the cryptocurrency.

Presumably, apart from a few enthusiastic foreign journalists and a small number of locals, there is no mass demand to pay with Bitcoin yet. The Lightning Network, which handles payments, was also set up to speed up transactions. However, as the years go by, it looks like while the leading cryptocurrency may have become an excellent safe depository, it has remained limited in its ability to make everyday payments – even if Nakamoto’s original idea was to think of it as electronic money. 

But if we think of El Salvador as a kind of “pilot country,” then the situation is certainly more than remarkable. There is no precedent for such widespread acceptance anywhere else and, in the very least, it will be a true example of how it works in practice. This will be likely to lead the whole sector to new innovative solutions. Either way, the country’s dedication and commitment to cryptocurrency is exemplary, for example it is true to say that 500 BTC were purchased in preparation for the mass release.

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What is PANCAKESWAP and CAKE good for? A Complete Guide

6 minutes to read
pancakeswap

Despite the frivolous name, PancakeSwap and Cake is no joke; the platform is one of the most significant dApps of all time and regularly attracts $100 million worth of daily traffic. In less than a year, it became the largest DEX on the Binance Smart Chain, beating Binance DEX. Not only this but its native token, CAKE, is keeping itself stable among the top DEX coins.

WHAT IS PANCAKESWAP COIN (CAKE)?

KEY DETAILS*:

Available at: PancakeSwap, Binance, KuCoin.

Competitors: Biswap, UNI; BAKE; SUSHI

Highest price: $42 / $0.00033 BTC

Lowest price: $0.5/ $0.0000135 BTC

*information correct at the time of writing and research

CAKE IS PANCAKESWAP’S OWN COIN

PancakeSwap is the Binance smartchain’s most popular decentralized exchange. Over the past year, PancakeSwap has made an amazing run-up to the blockchain world, building a huge user base with its extensive toolkit being a great attraction to users. The advantage of BSC in DEX compared to Ethereum-based platforms is the low network fee, so it is more economical to immerse oneself into DeFi on PancakeSwap with less money than, for example, UniSwap.

The platform allows you to trade Binance Coin (BNB), and other BEP-20 tokens, directly from the wallet in a peer-to-peer manner. The trades completed by PancakeSwap are finalized and executed by a smart contract without a stock exchange or other traders. The team behind PancakeSwap are completely anonymous, but the smart contract and platform have audits from Certik and Slowmist.

Since its launch in September 2020, PancakeSwap has incorporated all major DeFi trends into its system. There’s token farming, pools, NFTs, sweepstakes, and all you need is one thing – some of the native CAKE token. CAKE is also a governance token, so important Pancakeswap related improvements and decisions are also the collective responsibility and voting rights of token owners.

WHAT HAPPENS ON PANCAKESWAP?

One type of decentralized exchange is AMM (Automated Market Maker), where trading is not conducted directly between buyers and sellers, but customers buy tokens from one (or more) pools and send the other token to the same place to pay for it. There are two tokens in a pool, just as currency pairs consist of two currencies. Without the offer book, there are no opposing offers to buy and sell.

Tokens sold (submitted) and purchased (withdrawn) during trading will shift the ratio of the two tokens in the pool, and the exchange rate that moves in the opposite direction balances the pool in value from both directions. This mechanism is very similar to a depth chart of trading on centralized exchanges, where the relative differences between bids and offers move the exchange rate.

The tokens available in the pool are provided to traders who have temporarily exchanged their BSC-based tokens for liquidity provider (LP) tokens. It requires two different tokens, both of which must be sent to the pool, and the total value of the two is given an LP token that channels the pool’s profits to the LP holders in proportion to their tokens. The profit here is a fixed 0.25% fee for pool-related trades, which is spread among those who allow AMM trading.

pancakeswap and cake

For it to be accessible, PancakeSwap requires a Web3 supported wallet. The most popular ones being Metamask, TrustWallet, or WalletConnect. All you have to do is reconfigure the network on these wallets, besides BSC we can connect to similar DEX’s on other blockchains, such as Ethereum, Polygon and AVAX this way. The revenues and costs of the development are all publicly shared, 15% of the trading fees go to a treasury, which is a fund for the cover of expenses, maintenance of the platform, etc.

PancakeSwap has undergone a lot of innovations in a very short space of time, respectively. V2 developed the syrup pools that are now accessible and also introduced their referral program. At the same time, the trading fee jumped from 0.2% to 0.25% – 0.05% of which is then used to repurchase the CAKE token on the open market, these purchased tokens are then burned, thus reducing inventory. Currently there is no specific roadmap that has been released, instead though there is a publicly published to-do-list which doesn’t feature any deadlines. These to-dos include a tied staking product, a loan facility, and NFT prizes for completing tasks and leveling up.

HOW DOES THE CAKE TOKEN RELATE TO DEX?

Like Binance, PancakeSwap has platforms linked to popular forms of investments. DEX links them in some form to the spending or possession of CAKE tokens, thus generating traffic to their own cryptocurrency.

YIELD FARMS

The liquidity shown above is provided with LP (Liquidity Provider) tokens, on PancakeSwap we can also stake these LP tokens and receive a CAKE token as a reward. During stakes, the transaction fee earnings for LP tokens will continue to be retained. Annual interest varies from farm to farm, and, in some places, it can certainly reach several hundred per cent. There is always another side to yield, especially if it looks unrealistically high, in the case of yield farm-to-farm interest, this is the impermanent loss that you can read more about in our other article.

SYRUP POOLS

The Syrup pool at PancakeSwap is the stakes corner. A wide range of BEP-20 tokens can be staked here as a community. Reward can be that token, or it can be CAKE. The interest rate on the stake is variable according to the rules of the given token, and the exchange rate movements of the tokens converted to stakes are included in the actual investment result.

LOTTERY V2

Tickets can be purchased with CAKE token, which is discounted in large batches, and the prize pot is made up of even more CAKE.  40% of ticket revenue will be allocated by the smart contract to ticket holders with all six matching numbers.

BET ON EXCHANGE RATE

It is also a simple feature. The price of the BNB coin can be accepted in a five-minute perspective. The returns made from those who lost the bet is distributed among those betting on the winning side.

NETWORK MANAGEMENT WITH CAKE TOKEN

Also on PancakeSwap is the site where the votes on important issues affecting the ecosystem take place. The right to vote is linked to the CAKE token or indirectly to its owner. Like a board meeting of a public limited company, most CAKE tokens are implemented here.

The proposals can be published by anyone who undertakes to promote their idea, not just the founders and leading developers. The community thus seeks, at its discretion, to introduce changes that benefit everyone because they depend on each other. Liquidity insurers will not vote for unrealistic trading fees, because if traders turn away from the pools, there will be no trading fees to share.

The fate of 2022 could be determined by the battle of two global giants United states and China.

2 minutes to read
the two super power flags

Strained relations between the United States and China over Taiwan could be one of the biggest challenges in Asia in 2022, CNBC writes.

One reason, according to the head of longview global advisors, is that Beijing treats every single American manifestation in Taiwan as if it were harming its interests.

An expert directly compared the relationship between the two great powers United States and China to the conditions of The Cold War.

United States and China
United States and China

This was only made worse by the National Defense Authorization Act passed late last year (2021) which set aside, among other things, $7.1 billion for the Pacific deterrent. They also adopted a congressional declaration expressing U.S. support for Taiwan. China considers the island, which has had its own self-government for decades, as part of its own territory and its often stated goal is to unify the country.

In the midst of the rivalry between Washington and Beijing, the most difficult situation will be those Asian countries that seek to balance the two major powers. The big question from this point of view is what the scales of this year’s Winter Olympics in Beijing will look like. The United States has already indicated that it will boycott the event at a diplomatic level, meaning that its athletes will be present, but no one will represent Washington in an official capacity. It is not yet clear whether other countries can follow the example of the United States, but the Chinese advance in recent years has infuriated several countries in the region.

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CAN CAPITAL MARKETS SAVE THE EARTH FROM THE CLIMATE CATASTROPHE?

4 minutes to read
green sustainable environment

In the vast majority, capital markets have not yet taken into account the risks of climate catastrophe, and only 14 percent of the experts surveyed believe that the risks are integrated into prices. The rise of green portfolios is also slowed by regulatory inconsistencies. However, the catalyst for change could be the recently concluded COP26 conference and government green programmes, according to recent research by KPMG.

What Research was Carried Out?

KPMG, CREATE-Research and the CAIA Association compiled a global survey entitled “Can capital markets save the planet?” based on interviews with almost 100 managers of investment firms and pension funds that manage $34.5 trillion.

What Were The Research Findings?

The research found that while capital markets attract a lot of capital, they cannot effectively price in the risks of climate change due to political, regulatory contradictions and insufficiently transparent financial impacts – and only 14 percent of those surveyed believe otherwise. For alternative investments, this figure is 11 per cent and for bonds it is only 8 per cent..

It is important to note that pricing climate risks is more clearly visible within the energy sector than it is noticeable in projects that are more capital intensive. This is because market access takes a long time.

Does Anything Affect The Research?

The biggest obstacle seems to be that, due to the nature of climate research, the impact of climate change on GDP is difficult to predict. The fundamental reason for this is that there is no similar historical history or experience of how our economic and financial systems can or will respond to these effects. The problem is compounded by the fact that governments and authorities that are supposed to support reducing CARBON emissions often do not move on a ‘trajectory’.

“For the time being, real action is well behind the definitions, so the potential and risks of climate change remain difficult to price

– Gergő Wieder, senior manager at KPMG.

To date, no country has introduced rules that adequately integrate environmental and social costs into companies’ financial reports, especially in a way that supports the pricing of climate risks. For this reason, the financing of market-based incentives and technologies to reduce CO2 emissions is progressing slowly. Development is also hampered by the lack of uniform pricing of emission quotas, which continue to play an important role in addressing the effects of climate change.

A Green Ray Of Hope

However, two events could be a turning point in this area. One is the green turnaround of the world’s major economies, which includes, among other things, the adoption of clean energy standards, the mandatory reporting of the carbon footprint for stock market companies, and the review of pension fund investments on the basis of ESG (environmental, social and governance) aspects. The other is the COP26 conference organised by the UNITED NATIONS.

What Changes Are Likely To Happen to avoid a climate catastrophe?

84 per cent of those surveyed said the Glasgow meeting would be followed by more coordinated intergovernmental measures and capital markets were preparing for expected progress in the three key areas – output pricing, alternative energy production and mandatory reporting.

When asked whether capital markets would start pricing in climate risks at a higher rate, 42 percent of respondents said yes, while 30 percent said they might, while 28 percent did not believe. More than 60 percent of respondents expect a shift towards pricing climate risks in all asset classes over the next three years.

The Drawback

The research notes that it requires huge, coordinated political efforts and support to steer trillions of dollars of investment towards carbon-reducing technologies. Some respondents fear that, in the absence of concerted action, current political trends will continue to allow risks to recover in the global financial system, at which point the ‘Minsky moment’ may occur – i.e. the price of securities may suddenly collapse as a result of a panic.

GDP = gross domestic product:

Gross domestic product (GDP) is a measurement that seeks to capture a country’s economic output. Countries with larger GDPs will have a greater amount of goods and services generated within them, and will generally have a higher standard of living.- www.investopedia.com

climate catastrophe
CLIMATE CATASTROPHE

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