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Cryptocurrency Collateralized Debt Positions Are Growing in Popularity

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collateralized debt position

While Bitcoin (BTC) continues to hover around the magical 10,000 price level, altcoins continue to fight an uphill battle.  Simply put, hopes of a future bull run continue to diminish as Bitcoin maintains its dominance.  One school of thought is that a few altcoins will survive and flourish, but which ones are anyone’s guess.  That being said, it’s hard to go wrong picking against the top coins like Ethereum (ETH), Ripple (XRP), Litecoin (LTC), and EOS.  These projects have managed to find a foothold in the market and have a better chance than most of staying there.  While traders wait for their positions to increase in value, one opportunity that may be worth looking at is initiating a collateralized debt position.

What is a Cryptocurrency CDP?

In traditional terms, a CDP is essentially putting up collateral in order to receive a loan against the deposited amount.  There are several examples of this in our day to day lives.  Auto title loans from large companies like TitleMax are extremely popular with consumers.  Consumers are essentially able to use their car as collateral in exchange for a cash payment which can then be used for whatever needs the consumer has.  The consumer can continue using their car as long as debt payments are made.

The same concept applies to cryptocurrency CDPs.  Consumers are able to put up crypto tokens, such as ETH or stablecoins like DAI or USDC, in exchange for a loan at a specified borrow rate.  A consumer would make this trade if they feel like ETH will appreciate at a higher rate of return than what they’re paying against the loan.  A trader could use the loan to purchase more ETH, other altcoins, or simply take a vacation.  The choice is completely up to them.

Current Platforms Offering CDPs

Since crypto CDPs are still relatively new, there are only a few platforms that offer it.  A few of those platforms include dYdX and Compound.  As of this writing, the current borrow rates at Compound are as follows:

  • ETH – Approximately 2.5%
  • DAI – Approximately 13.5%
  • USDC – Approximately 10%

Traders may also see a lending rate.  The lending rate will offer traders the opportunity to supply a coin like DAI or USDC in exchange for an interest payment.  Traders would essentially serve as the banker.  Giving the lending rates on DAI and USDC of 10% and 5.5%, respectively, it appears to be a worthwhile opportunity for those who are holding stablecoins in cold storage.

Be Aware of the Risks

“There is no doubt that CDPs will be seen as a really intriguing opportunity by some traders” says Ted Foxworth, President of CryptoRocket, “However, a CDP is not for the faint of heart and involves a rather significant risk depending on one’s risk appetite.”

Given the borrow rates shown above, traders will likely be inclined to borrow against their ETH position.  2.5% is fairly manageable and ETH likely has the most room for price appreciation.  But what if the price of ETH goes down?

Since the loan was generated against the ETH position at the price of the loan, CDP holders need to be aware that a significant price drop in ETH could result in the position being liquidated.  This is why it is recommended and sometimes even required, that a CDP position be initiated with a liquidation ratio over 150%.  This allows flexibility in ETH price fluctuations without resulting in constant liquidations.  And, as always, traders should only expose a small % of their overall portfolio to this type of strategy.

Conclusion

It’s great that innovation continues to occur within the crypto space.  As more opportunities arise, there are likely to be more and more participants over the coming years.  CDPs certainly aren’t for everyone and will likely appeal to traders with the largest risk appetite.  It will be fascinating to watch whether more platforms begin to offer CDPs as the market matures.

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Disclaimer: This article should not be taken as, and is not intended to provide, investment advice. Global Coin Report and/or its affiliates, employees, writers, and subcontractors are cryptocurrency investors and from time to time may or may not have holdings in some of the coins or tokens they cover. Please conduct your own thorough research before investing in any cryptocurrency and read our full disclaimer.

Image by kalhh from Pixabay

Altcoins

GDA Capital in Conversation About the Future of Digital Assets at Global Family Office Summit

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GDA Capital organized the quarterly Global Family Office Summit this week. The event was held virtually with a number of technology leaders and high net worth investors who discussed issues such as education, trust and responsibility to give back. Among these were insightful conversations with Dubai-based Dalma Capital’s CEO Zachari Cefaratti, Holt Fintech Accelerator founder Brendan Hold Dunn, Global Data Sentinel CEO and White City Ventures Chairman of the Board Shahal Khan, and Elitium CEO Raoul Milhado, among others. Participants were also given access to off-market opportunities to invest in novel technologies.

Will Bartlett, GDA Capital’s Director of Research, headlined the event by focusing on tech in the modern economy, and identifying six sectors where new technologies can make a lasting impact: robotics, space, biotech, machine learning, quantum computing, and blockchain. In the context of blockchain, he discussed how digital assets are a hedge against traditional financial markets. “Cryptocurrencies have no exposure to stock market returns, macroeconomic factors, or returns of currencies and commodities,” Bartlett said.

More so, Bartlett believes that new models for digital assets such as DigitalBits’ branded stablecoins are key to the development of the field. These currencies replace traditional rewards and loyalty point systems that are commonly used by household brands by porting them to the blockchain. Meanwhile, they rely on brand…

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Chainwire Launches Blockchain-Focused Automated Press Release Distribution Service

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TEL AVIV, Israel, 13th October, 2020, // ChainWire //

MarketAcross, a world leader in blockchain public relations and marketing services, is pleased to announce the launch of Chainwire, an automated press release distribution service which provides guaranteed coverage and in-depth reports. Chainwire will be a one-stop-shop for the distribution of press releases in the cryptocurrency and blockchain sector. The launch marks the first time that advertisers can reach leading publications in the crypto media with the click of a button. 

While most industries have some kind of PR newswire service, the cryptocurrency sector has become a victim of its own rapid pace of growth over recent years. Since the ICO boom of 2017, there has been a proliferation of blockchain and crypto-focused projects, exchanges, investment firms, and marketing agencies, along with niche news and informational content sites. 

However, the infrastructure to connect this complex ecosystem has been slow to come up to speed, meaning that existing newswire services don’t reach their target audience. It’s estimated that one in five people own cryptocurrencies, so there is currently a significant missed opportunity to reach a massive global readership. 

As a newswire service dedicated to the crypto and blockchain space, Chainwire aims to address this gap. Press releases are distributed to leading publications, offering guaranteed coverage to reach audiences worldwide. The system is integrated with publishers and blogs, enabling accurate reporting via a user-friendly dashboard. It also…

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Messari Adds DigitalBits (XDB) & Branded Currencies to its Registry

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One of the top providers of crypto data and research tools on digital assets Messari has announced the addition of DigitalBits (XDB) to the Messari Registry. As a participant, DigitalBits governing body, the XDB Foundation will be providing regular updates and commit to transparency. The DigitalBits blockchain was built to support consumer digital assets – branded currencies.  As the company stated, “a global, legacy digital asset class, branded currencies play a vital role in consumer-brand interactions, and account for billions of dollars in value.  Branded currencies issued on the DigitalBits blockchain will also be included within the Messari Registry.”

Additionally, Messari and the XDB Foundation “may explore the buildout of a novel registry to accommodate branded currencies tokenized on DigitalBits. This registry would address issues consumers face when determining the legitimacy of branded currencies and their respective organizations,” the announcement said today.  The goal is to provide a standardized framework for organizations leveraging branded currencies, certifying asset legitimacy, and clearly outlining characteristics including but not limited to asset issuance and organization identity.

Commenting on the news, Messari representatives said they recognize the potential for the use of branded currencies to grow in the future as more enterprises embrace blockchain technology. Ben O’Neill, Vice President, BD & Operations at Messari said the Registry will help all…

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