July 21, 2022

Cryptocurrency Terms every Investor should know

In our previous post, we highlighted a few terms you need to know as a participant or player in the crypto space. But, that was indeed not the end, we have some extra goodies; our ultimate goal is to always keep you ahead in this space. This article will spotlight a few more crypto terms every investor should know.

Let’s begin!

APY

Annual Percentage Yield is the rate of return gained on an investment in a year, taking into account the compounding interest. It is often used to compare investment options over a similar compounding period. APY is not to be confused with APR, which does not account for compounding interest. In addition, investment firms often use APY while lenders use APR.

APY is calculated as;  (1 + r/n )n – 1 

Where r =period rate

n =number of compounding periods i.e. quarterly is 4, while yearly is 12

APR

The Annual Percentage Rate is the yearly interest on a sum charged to borrowers or paid to investors. APR uses Simple interest without factoring in the compound interest and may often underestimate the real cost of a loan or borrowing. Also, APR values are usually smaller than APY, so lenders may brandish lower APRs to attract borrowers.

APR is calculated as A = (P(1+rt))

Where 

P =Principal amount

r =interest rate

T =time period

AUM

Asset Under Management is the total market value of funds or investments managed by an entity or individual on behalf of their clients. It may include cash, mutual funds, and bank deposits. AUM is a popular metric in evaluating an Investment firm or company as higher AUM signals stronger investment flow, quality, and experience. Companies often brandish high AUM to attract investors. Some of these investment firms include venture capitals, brokerage houses, and portfolio managers.

CBDC

Central Bank Digital Currencies; are digital currencies or electronic records representing a country’s official currency issued by its central bank. CBDC may be a digital currency but should not be confused with cryptos; they are managed by the government, hence not decentralized. They do not have a fixed supply and are regulated by a nation’s central bank; therefore, they may not be free from censorship. 

The advantage CBDC gives is that it extends financial services to the unbanked, provides some degree of anonymity, lower transaction fees, accessibility, and convenience as they can be easily accessed via digital wallets. 

Many countries have already launched their CBDCs, including the Bahamas, Eastern Caribbean Currency Union, Grenada, Dominica, and Nigeria. Other countries like the US, Jamaica, India, and China are also working on launching their own CBDC.

Burn

Of course, this has nothing to do with smoke. Burning in crypto is the removal of a certain amount of tokens from the circulating supply to increase the value of the remaining ones. Reduced supply and scarcity often increase the value of the available tokens; burnt crypto is sent to an unowned or a Burn address, lost forever, and cannot be recovered.

Flash loan

They allow the borrowing of crypto without collateral and are repaid within a single transaction.  Flash loans are enforced via a smart contract, repaid quickly, and facilitated by the atomicity of Ethereum transactions- either all or none of the transaction executes. 

Flash loans are most applicable for arbitrage, where traders try to profit from small price differences in token prices across different markets. A trader may spot an arbitrage opportunity and utilize flash loans available on DeFi protocols like Aave and DYDX to enter a position.

Impermanent Loss

A temporary loss experienced by investors due to volatility or reduction in the price of a trading pair. They are often caused by the volatility of the trading pair in Yield Farming, where investors are required to deposit two instead of a single token into a liquidity pool. 

Although the user earns transaction fees depending on his contribution to the pool, his assets may be worth less than if he had just held them. Impermanent loss tries to compare how much more funds an investor would have if he held on to his tokens rather than providing liquidity. 

Margin Call

A notification to deposit additional capital or security when the margin account is low on funds. When an investor is Margin-called, the securities in his trading account have decreased below a set threshold, so he has to deposit additional capital or securities to meet the minimum value; otherwise, his securities in the margin account will be liquidated.

Just like in traditional finance, a margin account is used to borrow additional capital from a broker to purchase stocks. The investor deposits securities or cash as collateral in the margin account, and the leverage allows the investor to magnify potential profits or losses.

Margin Trading

This involves using borrowed funds from an exchange or broker to trade. Margin trading multiplies the potential profit and even losses by giving the trader access to more capital to enter positions. Margin trades may be leveraged by 5:1, 2:1, and 10:1 ratios which are often represented as 5x, 2x, and 10x on Margin trading platforms. Traders can long or short but will get margin-called if their deposited capital depreciates below the liquidation margin, and failure to deposit additional capital will result in the liquidation of the margin account to cover the losses.

Oracles

These are entities that connect the blockchain to real-world data. Since Smart contracts work on-chain, they do not have access to data outside of the network, so they rely on Oracles to access key data like asset prices, market data, weather information, and much more. These oracles generally work as on-chain API (Application programming interface)- essentially code that allows two applications to share information. Chainlink and Band Protocols are some of the leading blockchain oracles.

Overbought and Oversold

While Overbought is a situation where an asset is trading above its fair market price and is expected to fall, Oversold is a situation where an asset is selling below its market price and is expected to rise. Overbought and oversold levels are often part of a crypto trader’s strategy with the RSI (Relative strength index), a technical indicator showing the possible overbought and oversold zones.

Futures and Perpetual Contracts

A  futures contract is an agreement to trade a given asset at a stated price and date in the future. They may be classified as a derivative financial instruments as they depend on an underlying asset. Leverage opportunities are often incorporated in Futures, so traders can use borrowed funds to get into positions, and settlements can be either physical or cash.

What about Perpetual contracts?

While futures trading often involves a preset date for settlement, perpetual contracts do not have a settlement date, as it extends an indefinite period but will have a pre-set price. 

A Perpetual contract is a type of futures contract without an expiry date.  A premium payment “Funding” is used to balance the price with that of the spot market and is exchanged between long and short traders periodically, for example, every 8 hours.

Slippage

The difference between the expected price and the execution price of a trade is termed Slippage. In the crypto market, trades are often not executed at the expected price due to price movement, from the time a user places an order to that when the order is completed. Slippage is common in decentralized exchanges and also applies to stocks and the Forex market. 

However, slippage can go in either direction, as there is positive and negative slippage; for positive slippage, an order is executed at a lower price, while orders are executed at a higher price in negative slippage. Usually, a slippage of 0.1% to 0.5% is often preferred, and they are common during periods of high market volatility.

Web 3.0

The Read, Write and Own version of the internet, where applications are built on blockchains and decentralized. Unlike earlier versions of the internet, Web 1(Read-only) and Web 2 (Read and write), Web 3.0 allows users not only to read and write content but to own them.

In web 2, platforms like Facebook, Twitter, and Youtube allowed users to contribute content that is often distributed for free. Web 3.0 has brought ownership, allowing users to control and monetize content.

Key features include permissionless, trustless, native crypto payments and decentralization as opposed to centralization in Web2. Decentralized autonomous organizations (DAOs) and NFTs are also vital ingredients of Web 3.0, allowing governance and content to be democratized.

Whale

These are Investors with huge funds, enough to manipulate the market. We all wish to become Whales one day, even though the odds may be against us already. Whales control an enormous amount of cryptocurrency, enough to affect the valuation or price of a token, particularly illiquid tokens. Of course, in crypto, Whales are actually wallet addresses as these funds are managed anonymously.

How can you become a crypto whale? Well, if you own 10% of the total tokens in a protocol, you will be considered a Whale. Easy right? Investors often pay attention to the activities of whales due to their ability to influence crypto prices and create market distortions. WHALESTATS analyzes the top whale wallets on numerous chains. In addition, FTX founder Sam Bankman-Fried, and Brian Armstrong are some of the Whales in the crypto space.

Hard and Soft Cap

During an ICO, the project team often specifies the minimum and the maximum amount of funds they plan to raise in exchange for their tokens; these are referred to as Soft and Hard Cap. While Soft Cap is the minimum amount a project plans to raise through fundraising, a Hard cap is the maximum funds they intend to collect. A project may return collected funds to investors if the Soft Cap is not reached. Additionally, project teams are expected to disclose what they intend to do with a stated amount to investors.

Lastly,

WAGMI and NGMI

These are popular terms in Crypto Discord and Twitter communities, each with different sentiments, and they both started as memes. WAGMI means “We’re all gonna make it”-  to encourage the community and build confidence. In contrast, NGMI means “Not going to make it”- a negative sentiment used to describe a situation where an investor may have made a poor decision by ignoring market data or professional advice.

However, WAGMI and NGMI both have meme tokens, just like Dogecoin.

Closing thoughts

Have we covered all the crypto terms and buzzwords? Surely not, there are a lot more words in crypto, but some are more important than others. However, in future posts, we may dig a little deeper to broaden your knowledge about these terms. 

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