BAFI3182-FINANCIAL MARKETS Assignment 3

Research Paper
Table of content.

Part A: Crypto-derivative market.

I. Introduction.

II. Crypto-derivatives market.

III. Conclusion.

Part B: Reflection on Industry talk.

Part C. Appendices

Part D. Reference list.

Part A: Crypto-derivative market.

Abstract.

In recent decades, it is unquestionable to say that Blockchain technology in the financial

industry, especially the derivatives market, has driven an exponential surge in

cryptocurrencies. This article examines cryptocurrencies' nature and attributes to evaluate

the spread of these notorious coins in the derivative markets, opportunities and the related

disadvantages.

I. Introduction.
When individuals trust to store their money in a bank as a deposit or savings, the bank can

invest the money in particular projects or lend it to others on demand, this is referred to as

a simple banking system. However, the Financial Crisis, which began in 2008, provided a

response to the question, "What if the bank loses these trusted funds?" by exposing major

flaws in the banking system and other financial organizations (Sahil B 2017). People began

seeking for a new monetary system after the crisis that was not regulated by the

government and did not have the same risks as traditional currencies. Cryptocurrencies

were born as a result (Saifedean, A 2018).

Players have been encouraged to build and migrate to a new system of financial services as

a result of the crisis and the development of technological transactions. Bitcoin was the first

cryptocurrency to be launched in 2009. (Tal Y 2018). Bitcoin is the first verified scarce digital

commodity, secured on an e - wallet and necessitating no intermediaries, meaning no

trading fees and zero delay. It has grown marketable since it does not have the drawbacks of

traditional 3rd party transactions (Saifedean, A 2018).

Over 2015, rising demand propelled major crypto exchanges, particularly CME Group Inc

and Cboe Global Markets, to drastically increase crypto prices (Hunain N 2020). Many

traders have been drawn to digital currencies because they can be traded through

derivative contracts, allowing them to profit from their potential (Elijah B 2019). This report

will analyse if crypto derivatives are a prospective or multi-flow market.

II. Crypto-derivatives market.

1. Cryptocurrency definition
Cryptocurrencies are virtual currencies that exist exclusively on the internet and record

transactions between users, all of which are protected by blockchain technology (James R,

Ph.D, Kevin V 2021). a decentralized platform that is constantly impartial and regulates the

quantity of token units (Merriam 2021).

To prove this point, these digital currencies are an incentive for "crypto miners" who

encrypt algorithms to safeguard a currency and create a new Block of Transactions each

time they do that (Jake F. 2020).

2. Value determination.

Miners must build up an effective computer engine that specializes in solving constant-fee

algorithms in order to get one Bitcoin (Tal Y 2018). As a result, the mining effort contributes

to the coin's value. Accessing the Crypto-block system or tracking back user information is

nearly impossible. and though it is simple to get 10 from any respectable number, Consider

the following scenario: 2 + 7 + 1 = 10, it is tough to keep track of where 10s come from.

Furthermore, as bitcoin transactions do not require the use of intermediaries, there are no

additional fees and they may be completed in a short amount of time. While coins are not a

tangible object managed by any financial institution, they are not subject to fraud, which

has attracted a large number of merchants (Tal Y 2018). As a result of their great

convenience, privacy, and ideally safe transactions, cryptocurrencies were chosen as the

transaction solution (European Business Journal 2020).

Apart from real products or other currencies, cryptocurrencies cannot be valued using the

discounted cash flow approach since they are not formed of real elements and do not

generate cash flows. throughout the market (Lyn A 2020). The value of Cryptocurrencies is
influenced by the quantity of coins on offer, digital currencies, other competition, number

of transactions, and market demand, since 80 percent of users acquire Cryptocurrencies not

for their worth but for the possibility to benefit (Richard K 2018).

Bitcoin has the most digital currency transactions in early 2021(Statista 2021). It was valued

just under $1 when it was originally established in 2009, but strong demand swiftly pushed

it up to approximately $15,000 in Q4 2018 and peak at over $63000 in April 13th, 2021

(Tradingview 2021). (Figure 1).

3. The derivatives market.

The Derivatives Market Theory identifies a market in which the price fluctuations of the

underlying asset affect the value of financial commodities (Joshua K 2020). Derivatives are

contracts between two or more parties, or they can simply be corporate loans or stock in

the form of commodities, valuable gems, or currencies (Joshua K 2020).

riskier, drawing a big number of global investors and traders. (International Banker 2020)

Crypto derivatives, like many other derivative products, are predicated on the anticipation

of a price rise or decline, which is likewise extremely dangerous and impossible to forecast.

Because the market is aware of the disappearance, many players invest in "miners," trade,

or speculate on the currency, leading its price to climb quicker than it has in the past. As a

result, an increasing number of traders desire to profit from its (Elijah B 2019).

In 2017, future trade proved to be an important instrument for investors since it enabled

them to insure and speculate in the future of a coin without having to purchase the

underlying asset. By engaging into a contract that defines a price related to the underlying

price of a cryptocurrency, traders can limit the risk of indeterminacy (The International

Banker 2020).

4. Opportunities.

According to CFI 2021, The most common tactics in the underlying derivatives market are

Go Long (signing a contract to purchase an asset at an acceptable price when the contract

expires) and Go Short (selling an asset at an acceptable price when the contract expires)

(signing a contract to sell the asset in the future).

A “Longing ” in the Cryptocurrency Derivatives market is when Another technique is when

the trader agrees to acquire Bitcoins for a given amount at a specific period in the future, in

the hopes that the price of Bitcoins will have plummeted by then.
“Shorting” which is a technique to profit while the market is moving downward. The trader

agrees to sell Bitcoins for a reasonable number at a specific period in the future, in the

hopes that the price of Bitcoins will have decreased by then.

While the potential of cryptocurrencies is to increase in value, the opposite may also apply.

It may be stated the same thing for regular equities, but equities have long been there,

whereas cryptocurrency is a novel notion with far higher potential for speculation.Bitcoin

has been designed to be a worldwide money that can be used by anyone with Internet

connection. Though it is technically unlimited by borders, like other cryptocurrencies, the

legality of investors should not be neglected. Lawful things in one area may not be legal in

the other, as rules continuously change with regulatory agencies attempting to keep up-to-

date.

5. Disadvantages.

Crypto-coins, like many other derivative markets, generally indicate a certain amount of risk,

particularly in a sector with an overregulation and financial firms. Unpredictability and

volatility are the two most common issues that traders confront (Tyler C 2020).

Bitcoin's image as a tool for immoral activities has altered over time as more individuals

acquire it. However, its application has not fully gone into illicit operations. Investors search

for pure coins that have no history tainted. It is therefore crucial to choose suppliers who

can fulfill this promise. We now have state-of-the-art cryptanalysis technology to verify that

coins are not related to illegal conduct.

randomly; it must be "extracted." Unlike gold, which must be removed from the soil, bitcoin

must be "mined" by computing methods.

Bitcoin is similarly obliged to have a constraint of a restricted and limited quantity in its

source code. As a consequence, only 21 million bitcoins will ever be produced. These bitcoin

are added every 10 minutes to the Bitcoin supply at a set pace. In addition, in each of the

aforementioned blocks the amount of bitcoins is reduced by half each four years.

It's worth a mention that the Bitcoin network is expected to take more than 100 years to

create its final token.In reality, miners are likely to spend years receiving rewards which only

a portion of the latest bitcoin to be produced. Due to the large decline in the premium, the

mining method might be changed by the 2140 deadline totally.

Cryptocurrencies are one of the market's newest credit derivatives; people have been and

continue to rush to own the coins, leading their price to skyrocket, perhaps producing a

bubble bust in the 90s. In relation to Bitcoin's two most significant bursts in 2011 and 2018,

another is expected by the end of 2021. (Ryan B 2021).However, faster than expected, it

happened about a month ago when bitcoin plummeted, hitting an all-time record. On May
13, Bitcoin was at $50,477, evaporating 11.27% within 24 hours.

Due to the lack of financial firms and participants' failure to understand the product's

nature, it is difficult to regulate or forecast Crypto's result, with over 90% of Crypto-coin

forecasts failing (Andrew F 2018).

However, Digital currencies essentially cannot produce surplus or have any real value.

Except selling it to someone else, you can do nothing with it, but then the person has

difficulties. It's only speculation, investors purchase and sell because they think the price will

fluctuate wildly.
In addition, cryptocurrencies, like actual stuff, are generated by people and may potentially

be manipulated. But if other makers of cryptocurrency generate more than their restriction,

they may be inflated to cause more complicated issues, although cryptocurrency coins are

meant to prevent inflation. (Stephen S 2020).

In addition, legislation may also be taken into account because various nations take caution

and rules concerning crypto trading and associated contracts (Elijah B 2019).

III. Conclusion.

Crypto currencies is an appealing and hazardous market. Crypto coins are the product of

technology and companies looking for a new currency system that does not have the same

limitations as traditional transactions, such as "face to face" and "third-party transactions"

(Saifedean A, 2018).

Cryptocurrencies are becoming more popular than ever due to their ease as a secured chain

system by constantly updating algorithms, no transaction charge, and no congestion,no

middle man. As a result of its high profit potential, it has drawn a large number of

participants to its derivatives market. The market, however, is particularly dangerous when

compared to others because of the high volatility.

In response to Warren Buffett's worries about cryptocurrencies, I believe that digital

currencies, by definition, cannot provide surplus for the economy on a large scale. People

continue to exchange these coins because they either do not grasp their nature or

anticipate to profit from price volatility.

either recognize the non-surplus character of these coins and stop utilizing them, or the

converse can occur. We can see that they still trade the token or market inexperienced

traders for their own advantage (Alexandra C 2017).

However, it is an undisputed fact that the Crypto-derivatives market is both exciting and

dangerous for anyone looking to profit from it. The market is a ferocious beast, a serial

killer. Due to the volatility that can drive traders like a cyclone, mistakes can be extremely

costly (Elijah B 2019).

Nonetheless , it is critical to completely grasp the qualities that a derivative platform may

provide, to be cautious and to achieve a comprehensive process in mind before making any

critical decisions.

Part B. Reflection.

Mr Beat Schuerch, President and CEO ofDragonCapital, is invited to impart in-depth

knowledge of global economy with RMIT students during the Covid19 epidemic, with

extensive expertise in the fields of economics and finance.

At the beginning of the speech, Mr Beat delivered some basic information about the Global

industry today, including the priorities and its prospects. He indicated how Covid-19 had

turned the world upside down and reshuffled priorities across the global economy. Then, he

helped the audience have a better understanding of the fiscal and monetary experiment,

the speaker provided the unprecedented levels of fiscal stimulus and easy monetary policy.

He also showed that there will be no end in sight for historically low interest rates

prompting investors to take ever more risk in their search for yield. After that, he talked
about the prospects of the global economy. These were strongly clear and helpful that the

recovery will be uneven across sectors, countries and income levels and also a synchronized

push for green infrastructure. Then Mr. Beat showed that even as we entered the decade of

transition, the pandemic already accelerated numerous processes. It supplied more unequal

knowledge of the negative impacts on the nature of knowledge work by employment and

less trained employees, which can be done from home, and the successful performance of

financial markets benefited high income and the wealthy. In view of the pandemic,

consumption patterns tend toward sustainability, and new technology which allows

localized manufacturing, the world's local production, was also discussed. The latter are

expected to expand the wealth gap more.Finally, he informed us how the Covid-19 outbreak

spurred digital adoption considerably quicker and broke established standards. The

industrial revolution 4.0 has altered several industries and merged them with the expanding

effects. A more digital society will also generate its fair number of losses on the reverse side.

Before finishing the talk, Mr Beat had some implications for RMIT graduates and he gave

some career advice for the students.

Mr Beat gave us a marvelous vision regarding the status of the Global Markets during the

BAFI 3182 Financial Markets course at RMIT University. During the guest lecture, I encounter

a combination of technology and financial flows with new elements of both components.

However, I look forward to receiving more specific information on other global economy

forecasts. Finally, it would be fantastic if he could offer more about a certain road towards

becoming a good investor, such as needed commanders, essential experiences or a general

agenda. The lecture gives the public remarkable knowledge and makes understanding of the

global economy reasonably easy.Due to these dynamic encounters, together with Mr Beat's
industry conversation, they displayed to me successfully how exciting and fascinating the

finance industry is.

Part C. Appendices.

Part D. Reference list.

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