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The outlook for the crypto market looked bleak on Tuesday following a brief rally on Monday that sent Bitcoin above the $31,000 level for the first time in six days. 

In the past 24 hours, the combined market cap of all crypto assets has dropped by $90 billion to just over $1.2 trillion. Bitcoin is now trading at approximately $29,500, down 5% in just one day.

However,  analysts have recognised recent institutional investor interest in Bitcoin exchange-traded products as a sign of long-term strength in the crypto market. 

"It's largely institutional, and to a degree retail investors, recognising that the pain is already endured, and we're closer to the bottom than we are to the top,” Chief investment officer of Arizona-based IDX Digital Assets, Ben McMillan, told Reuters.

"If you're getting into crypto at these levels, a little near-term volatility could be worth a long-term payoff.”

The threat is becoming increasingly clear. It’s a massive threat to markets, society and economic growth. Expect to read a lot about it.

The big news in December is Jerome Powell, Fed Chair, finally admitting the post-COVID inflation we’ve seen building over the past 18 months is anything but “transitory”. It’s here to stay. That’s come as something of a surprise to many analysts who went with the central bankers dismissing inflation as a likely short-lived issue, a mere post-pandemic hurdle that would swiftly be passed by. Over the coming weeks, sentiment is likely to shift towards new long-term inflation scenarios as the inflation numbers remain stubbornly high. It’s difficult to imagine an inflationary scenario that’s positive.

Inflation is currently running a shocking 5-6% across the Western Economies – for how much longer, or how much higher is a “how long is a piece of string question.” We don’t know. Inflation is now in a spiral of supply chain hick-ups, wages, earnings and contradictory expectations. Inflation may ease tomorrow. It may not. Be a boy scout… Prepare for a rough ride.

Unexpected consequences include fears that inflation will boost rising pandemic populism, leading to protectionism and the end of globalisation – a less connected global economy is likely to prove inflationary, especially in terms of increased tariffs.

What is, perhaps, most frightening, is how little financial professionals – from central bankers, investors and traders – really understand what inflation is and how it emerges. It is overly simplistic to state inflation is “everywhere a monetary phenomenon” as the uber-monetarists proclaim. That fundamental ignorance could create massive policy mistakes and market uncertainty.

Unexpected consequences include fears that inflation will boost rising pandemic populism, leading to protectionism and the end of globalisation – a less connected global economy is likely to prove inflationary, especially in terms of increased tariffs.

The next time some “expert” tells you inflation is all the fault of Governments borrowing too much, ask them to explain how and why. What a vast number of market participants don’t get is inflation doesn’t follow rules – it follows sentiment. Governments and central banks have been stuffing the global economy with liquidity for the last decade, but it's only in the last few months the pandemic shock has crystalised real inflation. Why… Because suddenly people fear inflation.

Let me coin a new mantra on inflation: “Inflation is everywhere what people fear it might become…”

Conventional wisdom assumes inflation can be mitigated inflation by cutting liquidity; central banks raising interest rates (tightening), while governments can raise taxes and cut spending programmes (austerity). These monetary arguments are logical but also highly simplistic and create largely erroneous hopes and expectations. Hope should never be a strategy. Conventional wisdom is cheap.

The confusing reality of the system of multiple demand and supply transactions we call the global economy is it’s anything but a series of binary questions. It’s unfeasibly complex. If you raise interest rates that may cause a rise in the relative value of the currency, thus reducing inflation from imported goods, but it will equally create a series of shocks through the economy in terms of more expensive loans, impacts on retail jobs and services and rebalance the whole demand/supply equation as a trillion new decisions will be made by economic participants.

Hope should never be a strategy. Conventional wisdom is cheap.

Financial markets work because participants are constantly evaluating every nuance of information to determine future prices. Prices are a reflection of the market putting together everyone’s perception like some enormous voting machine. Inflation is just a particularly important part of the economic picture influencing the market vote at present. Should we let it panic us?

Maybe not - we’ve just undergone a period of unmatched and sustained global monetary creation through the past 12 years – since 2009. Stock prices have tripled – posting massively higher gains than the relatively lacklustre economic growth we saw over the same period. It’s financial asset inflation, pure and simple. It’s happened because stocks look relatively cheap to ultra-low interest rates, and central banks have been pumping liquidity into the financial system (in the hope of creating economic activity) via QE.

The result is massive financial asset inflation on a cause and effect basis: make money cheap and financial assets will rise. (Conversely, that’s why everyone predicts a stock market crash when rates (the price of money) rise!)

But long-term Financial Asset Inflation since 2009 has created a whole series of massively destabilising consequences. The rich have become phenomenally richer – buoyed by soaring stock prices. Generally, they are exactly the same people saying governments are borrowing too much, taxing them too much and it’s time to cut spending! Expectations that markets will only keep going higher have sucked in legions of retail investors convinced they’ll get rich (only if they stay lucky). The results of chronic inequality, political blindness and insane financial optimism make for a hopeless unbalanced and unfocused economy.

The real value of the global economy is not the market cap of an electric car company worth trillions, but the number of electric cars being produced and sold. (These are very different metrics – one is perceived future value, the other real value.)

What a vast number of market participants don’t get is inflation doesn’t follow rules – it follows sentiment

Inflation in the real economy is not cause and effect. It’s a constantly evolving perception and expectations led threat. It changes as the votes with the markets change and the behaviours of economic participants change.

The supply chain crisis as the global economy reopened triggered a host of consequences around the globe. What’s happened has been complex and spawned a host of unforeseen knock-on effects. The coronavirus and successive lockdowns are still throwing new shocks into the system – as a result, the system is becoming increasingly chaotic and impossible to predict as the threat board keeps changing.

This is roughly how it worked:

Economies around the globe shuttered themselves through lockdowns and working from home. Goods become scarce – from construction lumber to microchips at both micro and macro level, from local shortages to national level. Prices of scarce goods rocket – often temporarily till new supply leaven shortages. However, workers perceive higher prices and demand higher wages to compensate – triggering wage inflation. Prices become elastic to the upside and sticky to adjust downwards. Companies raise margins and prices to meet wage demands, fuelling further wage demands and declining demand. The intricate balances between demand and supply become increasingly chaotic, and more so when new COVID lockdowns raise new supply chain threats. Throw in an energy inflation spike and you create a recipe for disaster.

The key thing is not that inflation is simply due to the consequences of too-low interest rates (the monetary phenomenon) or rising government indebtedness (pumping money into the economy) but is due to the expectations of crowds towards perceptions of rising costs.

In a crisis, human behaviour tends to become increasingly difficult and fractious to predict. The unpredictable behaviour of crowds makes Central Bankers policy choices fraught. Traditional inflation responses like austerity, raising taxes, tighter monetary policy, are as likely to cause market instability and generate increased expectations to push inflation as to ease it.

The time to cut liquidity, the amount of money sloshing around the financial system was a long time ago. That money – that’s fuelled financial asset inflation – is now pouring into the real economy in terms of buying real assets like property, pushing up real inflation.

Complex eh? But don’t panic… yet.

What Are Stablecoins?

Stablecoins are a digital currency pegged to a “stable” reserve asset such as the US dollar or gold, designed to reduce volatility relative to unpegged cryptocurrencies such as bitcoin. Because the price of stablecoins is pegged to a reserve asset, they bridge the worlds of crypto and fiat currency, such as the pound sterling, the euro, or the US dollar, significantly lowering the volatility of stablecoin when compared to a cryptocurrency such as bitcoin. Consequently, some consider stablecoins to be better suited to almost everything, including everyday commerce and making transfers between exchanges. 

How do stablecoins work?

As the name suggests, stablecoins are designed to function with stability. Multiple sources back stablecoins, including fiat currency, but also other cryptocurrencies, precious metals and algorithmic functions. However, a crypto’s backing source can influence its risk level. For example, a fiat-backed stablecoin may have greater stability because it is linked to a centralised financial system that has an authority figure, such as a central bank, that can control prices when valuations become volatile. However, a stablecoin that isn’t linked to a centralised financial system, such as a bitcoin-backed stablecoin, may change dramatically because, in part, there isn’t a regulating body to control what the coin is pegged to. 

Fiat-backed stablecoins: Investors use their fiat currency, whether it be US dollars or euros, to buy stablecoins that they are later able to redeem for their original currency. Unlike other cryptocurrencies that can fluctuate dramatically, fiat-backed stablecoins aim to have limited price fluctuations. However, this does not mean that there is no risk involved. It’s important to note that they are still relatively new and have a limited track record. 

Crypto-backed stablecoins: This type of stablecoin is backed by other crypto assets, and because this backing asset can be volatile, crypto-backed stablecoins are overcollateralized to ensure the coin’s value. These assets are more volatile than fiat-backed stablecoins. Consequently, as an investor, it’s wise to keep an eye on how the coin’s underlying crypto asset is performing.  

Precious metal-backed stablecoins: These coins use precious metals, such as gold, to help maintain their value. They are centralised, which may be considered a disadvantage by some. However, this also protects the coins from crypto volatility

Algorithmic stablecoins: Algorithmic stablecoins are often considered to be the most difficult to understand as they aren’t backed by any asset. Instead, they use a computer algorithm to prevent the coins’ value from over-fluctuating. For example, if the price of an algorithmic stablecoin is pegged to $1 but the stablecoin becomes higher, then the algorithm would release more tokens automatically to bring the price back down.  Similarly, if the value drops below $1, then the algorithm would reduce the supply to bring the price up again. 

The benefits of stablecoin

As well as reduced volatility, there are several benefits to stablecoins:

What are the risks of stablecoin?

Despite the benefits of stablecoin, there are nonetheless several risks to be aware of:

While there are many great benefits to stablecoin, there are also significant risks that need to be thoroughly researched and considered. Additionally, there are also many different issuers of stablecoins, with each offering its own policy and varying degrees of transparency. Stablecoin may be highly appealing, but it’s important to tread as carefully as you would with any other type of investment. 

This article does not constitute financial advice. The author and Universal Media Ltd. are not qualified financial advisers. All investments are made at the reader’s own risk.

There are a number of important things that you need to consider when you decide to make an investment in Bitcoin. It is important that you first do your research about cryptocurrency before you decide to put your money into it. Bitcoin may have made quite a few waves in the past decade, but it’s important that you don’t think of it as an investment vehicle. There are plenty of things to keep in mind before you decide to buy Bitcoin. Here are seven important things to know.

1. Do Your Research

Have you looked at the past trends of how Bitcoin has evolved? You have to understand that research is critical before you decide to purchase Bitcoin. At the end of the day, it’s a cryptocurrency, so the first thing that you need to do is research its prospects and how cryptocurrencies have evolved over the past few years. It’s imperative that you do your research about the different cryptocurrencies that are in circulation, check the whitepaper, and then decide whether to put your money into it or not.

2. Find a Suitable Exchange

Cryptocurrency such as Bitcoin is generally available from a number of different crypto exchanges. It is important for you to find a reputable and reliable crypto exchange from where you can buy the coin. Ideally, when it comes to investing in crypto, there are plenty of different exchanges from where you can buy it. When you are able to exchange your fiat currency with crypto, you have to make sure that you get a good rate too.

3. How Much Do You Want to Invest?

Another important thing that you need to consider is the maximum amount that you are willing to put in. You have to be very particular about the maximum amount of money that you decide to put in because there is a big chance that the values are likely to plummet in the future. It is important for you to make sure that you decide how much money to put into crypto. You need to understand that Bitcoin is obviously not as liquid as other currencies, so it’s going to be difficult for you to use Bitcoin freely.

4. Bitcoin Is Decentralised

One very important thing that you should know before you buy Bitcoin is that it is a decentralised currency. One of the biggest advantages that you get for buying this currency is that it can’t be seized by a central authority. They can’t be devalued either. The con of decentralisation is that there is no backing for the government, so the currency is actually quite volatile and liable to fluctuate in the future.

5. You Will Have Limited Options

If you own Bitcoin and are looking to invest your money into different things, you should know that the number of options available to you will be limited. Most government organisations have repeatedly denied applications for funds that are operated using Bitcoin, and you won’t have many decent options available for investment. So, if you were thinking of putting your money into Bitcoin simply because you want to invest it in other places, this might not be such a good idea.

6. It's Very Volatile

Volatility is not something that you would want when it comes to making a long-term investment. One of the main reasons why so many people tend to steer clear of Bitcoin and other cryptocurrencies is simply because they tend to fluctuate and move around in value quite a bit. For instance, Bitcoin has been around since 2008, but it wasn’t until 2017 when the currency really rose in value.

By the end of 2017, one Bitcoin was retailing around the $20,000 mark. Many Bitcoin millionaires rose to the fore because of that, and it wasn’t long before people realised that there was quite a lot of money to be made. But then, the value of Bitcoin crashed rapidly, and it even went down all the way to $4,000 within a couple of years. As you can understand, this indicates major volatility, and it just means that you will have to be very particular about where you put your money.

7. Deals Are Anonymous

You can easily buy Bitcoin online and transfer it to a crypto wallet with minimal hassle. Furthermore, you should know that the deals you make on crypto are simply traceable through a TRX ID and nothing else. No one will know who sent the money, and no one will know who received it. That is one of the main reasons why you have to be so particular about where you put your Bitcoin. It’s important that you choose a safe wallet. 

The price of gold reached a historic high on Wednesday, changing hands at $2,040 per ounce XAU= in early trading. The overnight surge means that the price of gold has now risen by more than 30% since the beginning of the year.

Gold has been boosted throughout 2020 by a combination of a weakening US dollar and mounting investor uncertainty in the health of the economy as the COVID-19 pandemic continues to push countries into recession.

Giles Coghlan, Chief Currency Analyst at HYCM, pointed to this investor uncertainty as a key reason for the surge in gold prices. “We know that investors rally to gold in times of uncertainty,” he explained. “The reason for this is simple – gold is a safe haven asset that is able to maintain, and indeed increase, its value during volatile periods.”

Investors and wealth managers have been buying up gold due to their concerns over the global economy’s ability to effectively recover from the COVID-19 pandemic. The fact that private banks are encouraging their clients to buy gold as a means of hedging against inflation and currency fluctuations shows that the market is not confident that we have witnessed the end of the coronavirus outbreak.”

Coghlan also advised investors eyeing gold to be aware of the Volatility Index, which provides a 30-day projection of the volatility likely to be experienced by major gold markets. Drops in the VIX are normally followed by a rise in gold prices, and vice versa.

Well, all too often these processes utilise simplistic methods, such as spreadsheets. This ignores the multiple benefits that more technologically advanced processes can bring, most notably far greater accuracy. More accurate forecasts will help businesses in many ways, from securing funding from banks or investors to identifying future shortfalls. While rethinking how to approach cash flow forecasting will always be relevant and beneficial for businesses, in today’s uncertain climate of business instability due to COVID-19, it is especially important. 

In fact, cash flow forecasts are almost useless if they are inaccurate and it is only the businesses with accurate forecasts that will flourish. Accurate forecasts allow businesses to run predictably, generate funding and make informed decisions on capital investment. In contrast, inaccurate forecasts can lead to potentially devastating outcomes. At the lighter end of the scale, an inaccurate cash flow forecast can result in missed opportunities while the business had surplus cash in the bank. Whereas, at the heavier end, an inaccurate forecast could lead to overtrading and the end of the business. It is clear that this must be avoided and remedied, but how? Andy Campbell, Global Solution Evangelist at FinancialForce, shares an alternative method with Finance Monthly.

The Difficulties

Although popular, the spreadsheet presents many issues as a tool for cash flow forecasting. The first of these is that future income and future expenses are typically completed in monthly increments. This is an issue because it means that the future is generated using data from the past so by the time the forecast has been generated, the data is out of date and, therefore, no longer accurate. Another issue is that it takes a lot of time to assimilate data from the many different sources required for this process which causes further delays. A solution to this problem is that all data from each department be made visible to the finance teams so that they can create an accurate and real-time data set.

A well-built data set will become the foundation for accurate forecasting, so it must be able to process the variety of data produced by each department. This is because companies generally process a combination of both product and service-based revenues. Therefore, the data set must be able to manage both of these sources and their different payment structures.

Although popular, the spreadsheet presents many issues as a tool for cash flow forecasting.

Volatility presents another difficulty to be reckoned with. As the current pandemic has shown, volatility can come in unexpected forms and not all can be protected against. However, preparation is key, and some volatility is more predictable. For example, businesses themselves are volatile by their very nature with the changing of business models in line with the latest developments. Therefore, it is to be expected that business revenues would also be prone to volatility. This can be mitigated against by ensuring that all data has human oversight and is regularly reviewed. Doing so will ensure that any projection is in line with the company’s strategy and should prevent unexpected outcomes.

Cash flow forecasting comes hand in hand with revenue forecasting, which is the greatest of all these challenges. Revenue generation crosses all departments: starting in marketing, it is then delivered by sales, realised by operations and, finally, measured by finance. As already stated, the collating of data from multiple departments is tricky, revenue generation crosses all departments so presents a tangible difficulty here. Currently, the typical finance department addresses this using a complicated interlinking system of spreadsheets which often presents further problems. Another issue is that there can be disconnect between departments where a lack of trust means that data is not readily shared. To solve this, businesses must remove the culture where each department treats its goals separately rather than looking at one overarching goal and working together.

How to Overcome These Difficulties

The problems can be broken down into two main categories – technology and people. In terms of people, this comes down to the business culture and only a business that can successfully change its culture will be able to successfully implement new technologies. It is very important that employees are properly briefed and trained in the new processes or technologies that businesses want to implement so that they feel part of the processes and are adequately prepared. Simply enforcing a new process and expecting it to be a success will not work and there will be no visible improvements to the business.  Successful change to a business culture, at all levels of seniority and across all departments, will result in more tangible improvements.

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In regards to technology, the days of spreadsheets are over, it is time to retire them and let new technology take over. Finance needs to have clear and direct visibility into active opportunities to be able to generate accurate cash flow forecasts. A simple way to do this is to integrate the CRM with finance which will give a window directly into the required processes. The data set can be further strengthened using data from the past, for example past win rates and payments can indicate what the future may hold. AI can analyse historic data sets to identify customers who were slow to pay in the past and, therefore, are likely to be slow to pay in the future.

Ultimately, the more integrated a business is, both in terms of people and technology, the more smoothly it will run and the better its outcomes will be. Having a finance team that can produce accurate cash flow forecasting and a business reaping the rewards is not as difficult as it may seem. There are tools and technologies to help along the way. It is time to say goodbye to spreadsheets and to embrace the new way to approach cash flow forecasting.

The opening months of 2020 have presented a unique challenge for traders, with markets regularly making sharp and often unpredictable shifts in value. Disruption to international trade and geopolitical tensions dramatically influenced market sentiment during the first quarter of the calendar year, making it difficult to produce long-term market forecasts with any degree of confidence.

When volatility reigns, the need to minimise the risk of investments becomes greater than ever. This has prompted investors to consider the advantages of trading CFDs, and the benefits of subsequently hedging CFDs to reduce their market exposure if needed.

What Are CFDs?

CFD stands for 'contract for difference', with these contracts available for trade on stocks, shares, currencies, and commodities. Traders never assume ownership of the underlying asset, instead speculating on the increase or decrease of that asset throughout the duration of the contract. The difference in the asset's price between the start and end of the contract determines whether a trader is in profit.

Going long on a CFD position is when the trader anticipates the asset will rise in value. Conversely, going short is where the investor forecasts a decline in market price, sealing a profit if the asset does shed value during the contract period. A short position is sensible when markets are reeling from major world events, while going long is suited to more prosperous times for industries.

Why CFDs Are Suited to Difficult Conditions

Buying shares, purchasing a currency, or investing in a commodity is usually done in the hope that the asset will increase in value. During times when there is limited upward mobility for markets, traditional investment routes lose their appeal. CFDs are ideal for difficult times, as an investor can speculate on a rise or, crucially, a fall in the value of an asset.

Tough market conditions may restrict investment capital, but leverage in CFD trading ensures that a comparatively small proportion of capital is required to open up a large position on a market. While the CFD trader is liable for any losses accrued by the CFD, leverage allows investors to establish substantial positions that may otherwise be unattainable.

CFDs are ideal for difficult times, as an investor can speculate on a rise or, crucially, a fall in the value of an asset.

Further expenditure is saved through stamp duty; CFD traders aren't required to pay this tax, as they never have ownership of the asset. CFD investors can make their money go further during difficult trading conditions, but it is the ability to hedge CFDs that reduces the risk of being compromised by dramatic market shifts.

How Hedging CFDs Works

An investor has the option to hedge their CFD trade by opening the opposing position on an asset. For example, the trader may have a long position on an asset that is declining in value. By shorting that same asset, a trader can then earn money from that price decline and compensate for some of the losses from going long.

That asset may prove resurgent and end up with an overall rise in value once the contract ends, with the hedged position diminishing a trader's profits in this situation. While a hedge reduces the profit that can be made from a trade, it reduces the amount of capital that can be lost.

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This is why hedging CFDs is attractive during times of market volatility. A trader can research their CFD down to the minutest detail, but unforeseeable developments can turn a good position into a bad one. Hedging mitigates a trader's losses on a failing CFD, delivering a degree of compensation when the market moves in an unfavourable direction.

CFDs can be purchased on major financial markets, use leverage to reduce investors' initial outlay, and enable traders to speculate on movements in either direction. These factors make CFDs suitable as a trading strategy during difficult conditions, while the potential to hedge minimises traders' exposure to market volatility.

This begs the question – is there a formula that traders rely upon to effectively manage their investment portfolios?

According to Giles Coghlan, Chief Currency Analyst at HYCM, in short, the answer is no. Below he explains why the size and complexity of financial markets means it is virtually impossible to stay on top of every major and minor trade occurring across the world’s key markets.

Investors can consult with online tools that provide live updates and succinct summaries of asset price movements; however, having access to this knowledge will only go so far. The big challenge is understanding how to use this information to inform trades and investment strategies.

With the US-China trade war, the US Presidential election, the spread of the coronavirus, and the UK’s withdrawal from the EU just a few of the major events likely to shape 2020, now is an important time to understand the techniques regularly used by traders and investors when confronted by certain political and economic conditions.

The stock market is all about cause and effect

Staying on top of market movements can best be achieved by first understanding the basic principle of causality. By this, I mean that one event, trend or market movement will inevitably contribute to another, leading to a constant hive of activity.

For example, decades’ worth of quantitative evidence indicates that during volatile trading periods (often brought on by an unforeseen political or economic event), investors rally to hard assets like gold and oil. This model was played out in the opening weeks of 2020. With military tensions between the US and Iran rising, market demand for gold surged considerably. As a result, its price per ounce reached $1,600 USD on 7th January 2020 – its highest price in nearly seven years.

In the above scenario, investors rallied to gold due to its ability to retain or increase its value in times of market turbulence. This is why it dubbed a ‘safe haven asset’. What’s more, a similar observation can be made when confronted with the opposite scenario.

History regularly demonstrates that during periods of market stability, investors tend to look to stocks and shares. While much more sensitive to sudden movements and shifts, these soft assets also allow investors to leverage growth in different sectors by actively investing in different companies. Investing in stocks and shares can also bring with it the added benefit of dividend and stock repayments.

History regularly demonstrates that during periods of market stability, investors tend to look to stocks and shares. While much more sensitive to sudden movements and shifts, these soft assets also allow investors to leverage growth in different sectors by actively investing in different companies.

Understand what type of investor you are

For early-stage investors, there is a tendency to think that acting fast when reacting to a sudden market movement can deliver significantly higher returns. While this is true to an extent, it also fails to consider the huge level of risk involved with such a tactic. Professional traders and seasoned investors understand this, which is why they are prepared to take on any losses that could be incurred as a result.

Alternatively, for those using the financial markets as a way of building up solid, long-term returns, engaging in short-term trades is a very high-risk strategy that could incur significant loses. Not accounting for these loses might then result in an investor having to restructure his or her investment portfolio and ultimately change their financial strategy.

There is no right or wrong answer here. High risk, high return investors approach the markets in a completely different manner than low risk, low return investors. Regardless, it is important to identify what type of strategy you’re adhering to and stick with it.

For example, renowned investor Warren Buffet stayed committed to his value-orientated strategy during the 1990s by deciding not to invest in the dot-com boom. In the short-term, he did lose out on immediate gains from tech companies that were increasing in value and size. Yet in the long-term, he also avoided the dot-com crash, where many of the online companies that initially emerged began to crumble.

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The same can be said when faced with a sudden market shock. The key rule to remember here is not to panic but rather trust the financial strategy you have in place. Acting with your heart instead of your mind is never a good idea in the world of investing.

Use the market to your advantage

There is ultimately no perfect formula or strategy that is universally applicable to all investors. However, by learning about past events and understanding how different asset prices reacted, there are plenty of underlying lessons that can be taken onboard.

Above all else, creating and adhering to an investment strategy that aligns closely to your financial goals cannot be overlooked. And if you are ever in doubt, be sure to speak with a financial professional.

High Risk Investment Warning: CFDs are complex instruments and come with a high risk of losing money
rapidly due to leverage. 67% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk
of losing your money. For more information please refer to HYCM’s Risk Disclosure.

There are some hedge funds, however, that exist purely for the purpose of tail risk hedging and this creates consistent demand for various derivative products which in turn effects their pricing in the market. Since the 2008 financial crisis, there have been a number of ‘tail events’ which some market commentators say have been happening with increasing frequency across multiple asset classes. Some examples of such extraordinarily volatile events include, 2010 SPX Flash Crash, 2015 EURCHF peg break, GBPUSD on 2016 Brexit Referendum, 2018 VIX ETN blow up and Summer 2018 Italian BTP 2Y yields spike.

A potential cause of this apparent increase in ‘Black Swan’ events might be the amount of central bank liquidity being poured into certain markets, distorting the market structure and encouraging many liquidity providers to stop taking risk or move into other products or asset classes. Consequently, when a real market-moving event occurs, the distorted asset will gap in price due to the lack of market makers with sufficient balance sheets or risk appetite to absorb any natural volatility.

‘Flash crashes’ are another type of tail event. Stocks, bonds, or commodities may all fall victim to “flash crashes” where their value rapidly plummets before suddenly recovering. They are a phenomenon that is not fully understood but can be attributed to human or computer error.

Algorithmic trading and Flash Crashes

It has become increasingly popular to lay the blame for such volatility on algorithmic trading. This is a form of trading that utilises sophisticated and powerful computer programmes to make trades, which are governed by complex algorithms. Within the last two decades, algorithmic trading has become increasingly popular with global stock markets and institutional investors such as investment banks, pension funds and hedge funds.

A potential cause of this apparent increase in ‘Black Swan’ events might be the amount of central bank liquidity being poured into certain markets, distorting the market structure and encouraging many liquidity providers to stop taking risk or move into other products or asset classes.

Handing trading decisions to an automated system means that decisions can be made at a speed and frequency that is impossible for a human trader. Algorithms are not subject to the human emotions that can impact decision making, so decisions adhere to a consistent plan based on an underlying set of assumptions about prevailing market conditions. If market conditions change dramatically, this can trigger circuit breakers that tell the algorithm to cease trading. Alternatively, automatic stop orders could be executed in huge volume in a short amount of time, having a disproportionate market impact, particularly in less liquid market hours.

Despite the use of sophisticated artificial intelligence and machine learning to develop these systematic trading algorithms, they are not infallible. Software glitches can prevent exchanges communicating critical market data, which can result in inaccurate prices being applied to a security. For example, a glitch at the New York Stock Exchange impacted market pricing data last month, resulting in data providers showing incorrect closing prices. Similarly, the London Stock Exchange (LSE) suffers its worst outage in eight years as a technical software issue prevented some of the world’s most reputable blue-chip companies from trading for over an hour. This is the second such outage to occur at the LSE in 14 months.

In the algorithmic trading world, data is everything and if that gets compromised then that can have serious market-moving consequences.

What is the potential risk to your portfolio?

The increased use of algorithmic trading in market making has meant that a significant amount of the liquidity in markets is being provided by high-frequency trading systems. These systems are calibrated using certain assumptions on market volatility and asset class correlations. In the absence of any significant news-flow, this tends to dampen market volatility and increase mean reversion creating somewhat of an illusion of market depth and liquidity. If, however, an extreme exogenous shock were to occur in the market, it is reasonable to assume much of this fictitious depth in the order book will disappear, resulting in large gaps in market prices as no-one is willing to step in and provide liquidity due to the increased risk. In the broader context, as correlations between securities go up and diversification benefits decrease, all portfolios will incur losses at the same time, which in turn triggers further liquidation and helps fuel the market-wide ‘tail event’.

With a market that has become increasingly reliant on such high levels of liquidity, this leaves us with a very unstable equilibrium and an environment that is susceptible to flash crashes and adverse multi-sigma moves.

There is essentially an unknown tipping point that exists where the ‘algos’ effectively switch off and leave the market to fend for itself until it is ‘safe’ to re-engage. With a market that has become increasingly reliant on such high levels of liquidity, this leaves us with a very unstable equilibrium and an environment that is susceptible to flash crashes and adverse multi-sigma moves.

Mitigating the risk

Regulation is being adapted to monitor trading algorithms, given they now account for such a large part of the trading volume in many markets. Ensuring that automated trading is being implemented prudently and helping to improve market liquidity rather than create fragilities, is an important role in today’s market surveillance.

In conclusion, blaming algorithmic trading solely for the existence of excess market volatility is probably too harsh and other market factors have surely played their part. I suggest that liquidity providers using automated trading algorithms are made subject to certain constraints that protect the integrity of the market and ensure that the liquidity being offered is robust and more persistent. However, completely eliminating the possibility of crashes (whether algo driven or not) is unlikely and so investors should be aware of the risks and allocate some part of their portfolios to hedging these type of ‘tail’ scenarios.

Nassim Taleb, author of ‘The Black Swan’ and ‘Antifragile’, defines the term Antifragility in the context of investments to mean that they will benefit from unexpected market volatility, arguing that they are an essential component to a robust investment portfolio. Such assets typically include long-term treasury bonds and precious metals. Also, systematic buying of deep out of the money stock index put options is another commonly used strategy to hedge against such unforeseeable events.

 

 

 

 

After spending a year and a half in the bear market, the price of Bitcoin has recently increased and the bull run is in full force. Although there are certain factors that may have a negative impact on the value of Bitcoin, it is likely that in the long term it will transform into a safe asset due to its rarity. However, the uncertainties of its future can make the price fluctuate daily.

Following a report that Gate.io’s research team launched looking at the fluctuation of the currency, Marie Tatibouet, CMO at Gate.io, teams up with Finance Monthly to take a look at a number of factors that can influence the price of Bitcoin.

User Adoption

One factor that can influence the price of Bitcoin is user adoption of the asset. Popularity of the currency can drive prices up, whereas if the demand for the currency is low, it can decrease the value. Individuals, governments, institutional investors and multinational corporations are adopting Bitcoin, therefore it is evident that the price will be pushed to a new high.

Findings from the report underlined that from 2012 and 2018, the number of Bitcoin addresses with 100 to 1000 BTC gradually increased, accounting for a considerable portion of the Bitcoin in circulation. Additionally, during 2012 and 2015, the price of Bitcoin fluctuated, with it becoming more affordable whist the mining difficulty decreased, and then increasing again. Between 2016 and 2017, Bitcoin became more expensive and the difficulty of mining increased, therefore the growth of Bitcoin slowed down considerably.

Bitcoin Reward Halving

In addition, Bitcoin reward halving is a contributor to the fluctuating price of the cryptocurrency. Bitcoin has a fixed amount of 21 million, unlike fiat money which can be inflated by the centralised authority. It is intended that when 210,000 blocks are generated, the reward from Bitcoin mining will half. Since this was introduced, it has happened twice where the reward has halved - resulting in a fall from 50 BTC to 12.5 BTC. On average this happens every four years.

As a result of Bitcoin reward halving, there is a significant impact on the mining industry. Following the first and second halving, the hash rate decreased, but recovered quickly. Throughout 2018, when the price of Bitcoin was falling, a number of miners decided to leave the practice as well as a few mining pools closing down. This highlights the effect the changing price of Bitcoin has on the industry. However, with this being said, there seems to be a wider acceptance of Bitcoin today. The hash rate began to stabilise at the beginning of 2019, suggesting an optimistic market.

Cryptocurrency Regulations

Cryptocurrency regulations is another factor that can affect the price of Bitcoin. As the cryptocurrency industry has experienced rapid acceleration, regulatory bodies have started to pay more attention to the industry. Governements are now taking note of money laundering, terrorism financing and other criminal activities that can be linked with cryptocurrencies. An example of this is in Canada where amendments to the ‘Proceeds of Crime and Terrorist Financing Act’ now require businesses dealing with virtual currencies to register with the Federal Financial Intelligence Unit.

The development of Bitcoin in most countries is unrestricted, with the report highlighting that among 126 countries, 67% of them consider Bitcoin as legal, whilst 19% of them remain neutral. On the other hand, only 8% the 126 countries deem Bitcoin illegal. The response from regulatory bodies can cause the value of Bitcoin to go up or down.

The Future

Although the future of individual cryptocurrencies are uncertain, the industry is growing as a whole. Predicting the price of individual cryptocurrencies is nearly impossible, but Bitcoin’s recent Strength Indicator shows clearly that Bitcoin is here to stay, at least for the next few years. With additional certainty, we should expect a price increase and stabilization. Bitcoin has created vast opportunities and possibilities and its full potential is yet to be reached. Bitcoin has come so far in the past 10 years, so it will be interesting to see where it will be in the next 10 years and the true value it will offer.

Politicians have a widespread and long term impact on so many things every time they speak or do anything. But to what extent do they affect currency volatility?

Forex market experts DailyFX have created a guide that looks at 59 key dates in 2017/18 where world leaders may have had significant influence on currencies. The lists of key dates includes US President Donald Trump, UK Prime Minister Theresa May, Japanese Prime Minister Shinzo Abe, Canadian Prime Minister Justin Trudeau, Australian Prime Minister Malcolm Turnbull and the President of the European Commission Jean-Claude Juncker.

Brought to you by DailyFX

While the uncertain impact of volatile market conditions, and of course Brexit, remain to be seen, businesses of all sizes are having to adapt to become more flexible than ever before. Even the most well-established businesses with enough capital to sustain sudden expenses, are reviewing what were previously assured and predictable growth plans. Philip Sugden, Operations Director at Portal Group UK, explains more for Finance Monthly below.

A business’s property profile is one of the most costly financial investments to be made and over the years the associated fixed rental rates are amongst the standard steps taken in establishing a solid presence for your business.

That cost certainty however, came at a price of the flexibility that is now critical in the modern and reactionary market place.

New businesses are growing at an entirely unpredictable rate while some large established businesses are seeking the autonomy to customize a workspace to better respond to supply and demand. However, with office space at a premium, both large and SME businesses are finding it harder to find a premises that can fill their present and future without breaking the bank.

The possibility that you might need to expand, reduce, reallocate or relocate your workforce at the speed required, particularly for example in the contact centre environment, is extremely costly and entirely impractical under the traditional office lease.

Whether a business is expanding or simply relocating due to success or commercial needs, budgets can no longer be front-loaded into capital expenditure laden construction or leasing of properties.

When considering the growing need to balance financial flexibility with cost certainty in the UK, it’s also interesting to note that our leasing habits differ vastly from the norm abroad. For example, while companies here have traditionally committed to the surety of long 10, 15 or even 20 year leases, the average is closer to three years in the US or India.

While these short-term lets would be at odds with the business growth plans of most UK businesses, more and more businesses of all sizes are increasingly exploring more flexible yet capex-free models.

The likes of managed office solutions (MOS) financial packages, which combine property acquisition, workspace design, fit out, facilities management and supporting services, reflect the emphasis now being placed on financial flexibility and the more expansive use of fluid operating costs (opex).

With simple, streamlined systems and structured terms, business owners can invest their time, effort and money into their businesses, not bricks and mortar.

Simply put, the new wave of shared offices options are allowing start-ups and multinational businesses alike to not only access all the amenities they need at a cost-certain price, but to work within a flexible financial model that fosters their own unique growth and culture.

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