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The Narrative for Passive Index Investing - DeFi vs CryptoIn today's post I’m going to discuss passive index investing and list out why I see it as one of the best ways to gain exposure to sectors within crypto as well as crypto as an emerging asset class. Active investing requires a hands-on-approach, typically executed by a portfolio manager of a fund, although, within the cryptocurrency space, it's more likely an individual. To execute this strategy, you have to be confident in each position you hold, maintaining a deep understanding of each investment and the overall sectors you have exposure to. For those managers that can accomplish this, the rewards are lucrative with returns that outpace the benchmark indices. However, it is often difficult to maintain these excess returns over a long period of time due to several factors. The first is assets under management. As successful managers attract additional capital their funds can become too large to deploy into the existing strategies that brought them excess returns. As a result, fund managers are forced into more liquid underlyings which tend to make up large parts of the benchmark index and thus the funds performance converges with that of the index. The second factor is the fund manager. Successful fund managers are sought after and often poached away by other funds offering illustrious compensation packages. Naturally, due to the scarcity of such a skillset the funds performance typically suffers, losing its excess returns, after the departure of a successful manager. The third factor is the use of leverage. Leverage can exacerbate returns in good times but can equally destroy value in bad times. This creates a larger variance of returns, increasing the portfolio’s standard deviation and reducing the risk adjusted return. This thesis has largely proven to be true over recent history with actively managed large cap funds continuing to lag behind the S&P 500 for the ninth consecutive year. In fact, the longer the time horizon, the fewer funds that have outperformed the S&P 500, with only 8% of large cap actively managed funds beating the index. Passive investing involves a longer-term investment strategy that looks to increase returns by minimizing active buying and selling on a day-to-day basis. In traditional finance, passive investing is very popular with 18% of total equity exposure represented by index-type products. Passive index investing solves the problem of not knowing which investments are the right ones to choose. This is particularly useful when viewed through the lens of decentralized finance ‘Defi’ or any other crypto asset sector. Chiefly, this is due to the rate of innovation that exists in the cryptocurrency landscape. For example, the recent Defi sector expansion brought a slurry of projects to the market of varying quality. It would require a full time commitment to ensure investment into only the best projects whilst avoiding the many scams and contract vulnerabilities. Continuing with the Defi example, a non-passive approach would have to consider what the top Defi projects will be in 5 years time? Will they be the same projects I see today or will new entrants come to the market? Ultimately, no one knows and through passive investing institutional or individual investors don't really need to care either. With an index tracking the 'Top 10 Defi Projects' by market cap will guarantee ownership of those top 10 projects in 5 years time; represented with one single token which can be redeemed or exchanged on the open market. If you, the investor, have a long-term view on decentralized exchanges or believe crypto-insurance will play a bigger role within the cryptocurrency space as it continually grows. Then investing into an index product might be the most efficient method of gaining exposure. It provides easy access to sectors without having to purchase all underlying assets individually, and offers exposure to an asset class without requiring deep technical knowledge. At this early stage in the development, decentralized indexes will disrupt traditional finance. Building this upon a Web 3.0 infrastructure. Ultimately, index technology hasn't changed since its inception in 1975. If you look at traditional crypto exchanges, they suffer from having to list all the individual assets, with a crypto index maintained by the exchange, they wouldn’t have to go through this laborious procedure. I believe as time goes on, this will be a growing trend. In summary, for investors with long time horizons, seeking access to a sector or asset class, an index remains the best vehicle for obtaining, expressing, and managing that outlook. Someone I’m following in the space is PhutureDAO, they provide a range of benchmark, programmatic indexes with real underlying assets, auto rebalancing functionality, and a non-custodial architecture. Essentially, the closest comparison would be a user first, Vanguard type Index provider, built upon a Web 3.0 foundation. Open for all to build upon. Through their platform they provide the facilities for investing into a range of benchmark indexes. More importantly, they empower you to create your own index that others can invest into; allowing for the creation and dissemination of your own investment strategy. With this model, indices will always iterate with the fast pace of innovation in the cryptocurrency ecosystem ensuring a plethora of investment vehicles. Whilst, index creators can benefit from investor interest in the latest cryptocurrency segments/sectors. Best regards EXCAVO
by EXCAVO
5
What is the Wyckoff Method? #2 Distribution SchematicDistribution Schematic In essence, the Distribution Schematics works in the opposite way of the Accumulation, but with slightly different terminology. Wyckoff method distribution schematic Phase A The first phase occurs when an established uptrend starts to slow down due to decreasing demand. The Preliminary Supply (PSY) suggests that the selling force is showing up, although still not strong enough to stop the upward movement. The Buying Climax (BC) is then formed by an intense buying activity. This is usually caused by inexperienced traders that buy out of emotions. Next, the strong move up causes an Automatic Reaction (AR), as the excessive demand is absorbed by the market makers. In other words, the Composite Man starts distributing his holdings to the late buyers. The Secondary Test (ST) occurs when the market revisits the BC region, often forming a lower high. Phase B Phase B of a Distribution acts as the consolidation zone (Cause) that precedes a downtrend (Effect). During this phase, the Composite Man gradually sells his assets, absorbing and weakening market demand. Usually, the upper and lower bands of the trading range are tested multiple times, which may include short-term bear and bull traps. Sometimes, the market will move above the resistance level created by the BC, resulting in an ST that can also be called an Upthrust (UT). Phase C In some cases, the market will present one last bull trap after the consolidation period. It’s called UTAD or Upthrust After Distribution. It is, basically, the opposite of an Accumulation Spring. Phase D The Phase D of a Distribution is pretty much a mirror image of the Accumulation one. It usually has a Last Point of Supply (LPSY) in the middle of the range, creating a lower high. From this point, new LPSYs is created - either around or below the support zone. An evident Sign of Weakness (SOW) appears when the market breaks below the support lines. Phase E The last stage of a Distribution marks the beginning of a downtrend, with an evident break below the trading range, caused by a strong dominance of supply over demand. Outcome: Naturally, the market doesn’t always follow these models accurately. In practice, the Accumulation and Distribution Schematics can occur in varying ways. There may be delays in some phases. Still, Wyckoff’s work offers a wide range of reliable techniques, which are based on his many theories and principles. It is certainly much more than a TA indicator. In essence, the Wyckoff Method allows investors to make more logical decisions rather than acting out of emotions. The extensive work of Wyckoff provides traders and investors a series of tools for reducing risks and increasing their chances of success. Still, there is no foolproof technique when it comes to investing. One should always be wary of the risks. Best regards EXCAVO
BEducation
by EXCAVO
18
What is the Wyckoff Method? Accumulation schematic #1 Wyckoff Event and Phases The Wyckoff Method was developed by Richard Wyckoff in the early 1930s. It consists of a series of principles and strategies initially designed for traders and investors. Wyckoff dedicated a significant part of his life teaching, and his work impacts much of modern technical analysis (TA). While the Wyckoff Method was originally focused on stocks, it is now applied to all sorts of financial markets. The three laws of Wyckoff The Law of Supply and Demand The first law states that prices rise when demand is greater than supply, and drop when the opposite is true. This is one of the most basic principles of financial markets and is certainly not exclusive to Wyckoff’s work. We may represent the first law with three simple equations: Demand > Supply = Price rises Demand < Supply = Price drops Demand = Supply = No significant price change (low volatility) In other words, the first Wyckoff law suggests that an excess of demand over supply causes prices to go up because more people are buying than selling. But, in a situation where there is more selling than buying, the supply exceeds demand, causing the price to drop. Many investors who follow the Wyckoff Method compare price action and volume bars as a way to better visualize the relation between supply and demand. This often provides insights into the next market movements. The Law of Cause and Effect The second law states that the differences between supply and demand are not random. Instead, they come after periods of preparation, as a result of specific events. In Wyckoff's terms, a period of accumulation (cause) eventually leads to an uptrend (effect). In contrast, a period of distribution (cause) eventually results in a downtrend (effect). Wyckoff applied a unique charting technique to estimate the potential effects of a cause. In other terms, he created methods of defining trading targets based on the periods of accumulation and distribution. This allowed him to estimate the probable extension of a market trend after breaking out of a consolidation zone or trading range (TR). The Law of Effort vs. Result The third Wyckoff law states that the changes in an asset’s price are a result of an effort, which is represented by the trading volume. If the price action is in harmony with the volume, there is a good chance the trend will continue. But, if the volume and price diverge significantly, the market trend is likely to stop or change direction. For instance, imagine that the Bitcoin market starts to consolidate with a very high volume after a long bearish trend. The high volume indicates a big effort, but the sideways movement (low volatility) suggests a small result. So, there is a lot of Bitcoins changing hands, but no more significant price drops. Such a situation could indicate that the downtrend may be over, and a reversal is near. Wyckoff’s Schematics The Accumulation and Distribution Schematics are likely the most popular part of Wyckoff’s work - at least within the cryptocurrency community. These models break down the Accumulation and Distribution phases into smaller sections. The sections are divided into five Phases (A to E), along with multiple Wyckoff Events, which are briefly described below. Accumulation Schematic Wyckoff method accumulation schematic Phase A The selling force decreases, and the downtrend starts to slow down. This phase is usually marked by an increase in trading volume. The Preliminary Support (PS) indicates that some buyers are showing up, but still not enough to stop the downward move. The Selling Climax (SC) is formed by an intense selling activity as investors capitulate. This is often a point of high volatility, where panic selling creates big candlesticks and wicks. The strong drop quickly reverts into a bounce or Automatic Rally (AR), as the excess supply is absorbed by the buyers. In general, the trading range (TR) of an Accumulation Schematic is defined by the space between the SC low and the AR high. As the name suggests, the Secondary Test (ST) happens when the market drops near the SC region, testing whether the downtrend is really over or not. At this point, the trading volume and market volatility tend to be lower. While the ST often forms a higher low in relation to the SC, that may not always be the case. Phase B Based on Wyckoff’s Law of Cause and Effect, Phase B may be seen as the Cause that leads to an Effect. Essentially, Phase B is the consolidation stage, in which the Composite Man accumulates the highest number of assets. During this stage, the market tends to test both resistance and support levels of the trading range. There may be numerous Secondary Tests (ST) during Phase B. In some cases, they may produce higher highs (bull traps) and lower lows (bear traps) in relation to the SC and AR of Phase A. Phase C A typical Accumulation Phase C contains what is called a Spring. It often acts as the last bear trap before the market starts making higher lows. During Phase C, the Composite Man ensures that there is little supply left in the market, i.e., the ones that were to sell already did. The Spring often breaks the support levels to stop out traders and mislead investors. We may describe it as a final attempt to buy shares at a lower price before the uptrend starts. The bear trap induces retail investors to give up their holdings. In some cases, however, the support levels manage to hold, and the Spring simply does not occur. In other words, there may be Accumulation Schematics that present all other elements but not the Spring. Still, the overall scheme continues to be valid. Phase D Phase D represents the transition between Cause and Effect. It stands between the Accumulation zone (Phase C) and the breakout of the trading range (Phase E). Typically, Phase D shows a significant increase in trading volume and volatility. It usually has a Last Point Support (LPS), making a higher low before the market moves higher. The LPS often precedes a breakout of the resistance levels, which in turn creates higher highs. This indicates Signs of Strength (SOS), as previous resistances become brand new supports. Despite the somewhat confusing terminology, there may be more than one LPS during Phase D. They often have increased trading volume while testing the new support lines. In some cases, the price may create a small consolidation zone before effectively breaking the bigger trading range and moving to Phase E. Phase E Phase E is the last stage of an Accumulation Schematic. It is marked by an evident breakout of the trading range, caused by increased market demand. This is when the trading range is effectively broken, and the uptrend starts. Best regards EXCAVO
Editors' picks
BITSTAMP:BTCUSDEducation
by EXCAVO
52
BitcoinBitcoin had reached $12000 , then we saw a 20% dropdown. Then there had been a rebound (growth) to the mirror level, from which we made another move down to the lower support line of the upward channel. Triangle has formed with an upper resistance line (mirror level) and a support line (channel's support line). As a rule, such patterns (triangles) signal about continuation of a given trend. The next horizontal level is near $9500 (there is also a 38.2% Fibonacci level). There is another scenario: if we do not break the support line of the upward channel and we will continue an uptrend. At the top, we have a resistance of $12000. Best regards EXCAVO
by EXCAVO
53