The third episode of "Mining Coins News" is a full review: Ten minutes to help you understand blockchain finance

Hello, fellow miners and coin lovers, I am Zhang Yuan, editor-in-chief of CoinWalker. Welcome to CoinWalker again. The theme of this issue is: Understanding blockchain finance in ten minutes

Our guest today is PCoin Business Director Kang Wenbo .

Thank you Mr. Kang for visiting the live broadcast room of mining coins. Today's media observer is from the Bitao community: Mr. Liu (say hello). In the next AMA session, Mr. Liu will represent the media supporting this event: Golden Finance, Lieyun Finance, Liandede, Star World, Deep Chain Finance, Babbitt, Mining Vision, Bitang International, Changqing Finance, Pika Finance, Bitao, Evangelism Finance, Bitcoin Home, Milin Finance, Mokr Headlines, Chain World, Chain Finance, FN.COM, Miyou Finance, Bipu, Qun TV, Shilian Finance, Bolian Finance, Niubiquan, Bibi NEWS, Ostrich Blockchain, Deep Cloud Finance, BITCOIN86, Gyro Finance, Gyro Q&A, Niushi Finance, Beibo, Zhongben Finance, Block Network, and ask questions to Mr. Kang.

Zhang Yuan

First, please let Mr. Kang introduce himself and the PCoin team.

Kang Wenbo

First of all, I would like to thank the organizer for inviting me and giving me the opportunity to share and discuss with you. I am very happy to meet you online. I am Wenbo, the business manager of PCoin.

PCoin is one of the early arbitrage teams in the cryptocurrency circle. Our core team has been doing mathematical model arbitrage in the cryptocurrency circle since 2013. In 2013, we only had cross-exchange spot arbitrage strategies, and later we gradually added period-to-period, futures-to-spot, triangle, and multi-angle strategies. In the past 7 years, we have experienced various bear-bull transitions, and also experienced many black swan events such as the Mentougou theft, the 796 delivery accident, the bitvc liquidation, and the OKex rollback. However, our team and strategy were not affected, and the income has remained stable.

In April 2018, we added the mortgage coin loan business, which should be regarded as the earliest lending business in the industry. Mainstream currencies can be easily mortgaged for loans, solving the funding problem for miners and coin holders. In short, what we do is the banking business in the cryptocurrency circle, providing a complete set of financial solutions for coin holders to make them rich!

Zhang Yuan

When it comes to the word "quantification", we often hear it, but not many people really understand what quantitative analysis is and what is the difference between it and cryptocurrency trading. Mr. Kang, can you tell us about it?

Kang Wenbo

Okay, statistical arbitrage is one of the traditional quantitative trading methods, and another common method is algorithmic trading.

Algorithmic trading is a strategy commonly used by quantitative teams on the market. In essence, it uses machines instead of people to conduct unilateral transactions of buying low and selling high, which actually involves considerable risk exposure.

Statistical arbitrage is called absolute return in traditional transactions, such as the common "arbitrage", because buying low and selling high are done at almost the same time, so the return is relatively certain. Due to the high professional requirements at the financial level, currently only the top quantitative teams in the currency circle will do pure arbitrage strategies.

Quantitative arbitrage is a trading method that uses computer programming and probability statistics to achieve arbitrage. Unlike traditional arbitrage trading, quantitative arbitrage is assisted by computer programs, which is more responsive than traders, more efficient, and not affected by traders' emotions, so it can achieve transactions more objectively and reasonably. Moreover, after the quantitative trading model matures, it can achieve 24-hour uninterrupted monitoring and trading, and will not miss any market opportunities. The introduction of probability statistics methods can more scientifically and reasonably calculate the thresholds for opening and closing positions, find a balance between trading frequency and arbitrage space, and achieve the best expected returns.

Let me give you an example, as shown below:

The figure shows the price difference of BTC in two active markets over a period of time. When the price difference rises above the red line, a short signal is triggered. At this time, the program automatically enters the market to place a short order, and when the price difference falls back to the black line, the position is closed with profit. On the contrary, when the price difference falls below the light green line, a long signal is triggered. At this time, the program automatically enters the market to place a long order, and when the price difference rises back to the black line, the position is closed with profit. It can be seen from the figure that in a short period of time, multiple "buy low and sell high" can be achieved, and stable profits can be repeatedly made. The simple arbitrage opportunities shown in the figure are rarely seen in the digital currency market now. They only exist in individual highly speculative and active currencies.

Statistical arbitrage can be divided into four categories:

1. Spot trading mainly earns profits by earning spot price differences on different trading platforms. Because the trading partners on different platforms are generally not the same group of people, the market prices on both sides are sometimes inconsistent.

2. Futures and spot trading mainly uses the premium between futures prices and spot prices to make profits. Because futures are a long-term commodity, leverage can be used, and the market is not so rational, so the price of futures will fluctuate between the spot price.

3. Futures trading is mainly to earn the price difference between the futures market and the futures market. In this case, special attention should be paid to the delivery rules of different futures and whether there is a situation where the price does not return.

4. Multi-angle arbitrage. If you first buy BTC with USDT, then buy ETH with BTC, and then exchange ETH back to USDT, the profit gained from this operation is called triangular arbitrage. If other trading pairs are added, it is called multi-angle arbitrage.

Therefore, it is not difficult to see that the characteristics of the arbitrage model are that the income is certain and stable, and has no direct relationship with the trend of the currency price. At the same time, because arbitrage reduces the price difference between different currencies, different exchanges, and different financial products, it plays a vital role in the fairness of transactions in the entire digital currency market.

The algorithmic trading mentioned above is more of a trend-based trading, which is uncertain. The characteristics of this type of trading are that it earns uncertain profits, but it may also result in significant losses. As for cryptocurrency trading, as we all know, it is more of a trend-based trading, and it is easy to make subjective wrong decisions due to panic and greed. Because human nature has some weaknesses that are difficult to overcome.

Zhang Yuan

We know that there are other quantitative companies in the industry. What is the difference between PCion’s quantitative products and those of other companies?

Kang Wenbo

When we invest, we generally consider two factors, namely risk and return. When we first invest, we may be easily attracted by some financial products with high returns, but in fact, in addition to paying attention to returns, we should be more concerned about how this return is earned? Here I will talk to you about a concept, the Sharpe index. It reflects the degree to which the net value growth rate of the unit risk fund exceeds the risk-free rate of return. Simply put, it is the risk we take for the returns we earn. The higher the Sharpe index, the higher the risk return we get. On the contrary, it means that we take a high risk but get very little return. In layman's terms, it means that we are selling drugs with the heart of selling white powder and earning money from selling cabbage. Such an investment target is obviously not cost-effective. So while paying attention to the rate of return, we must also pay attention to the Sharpe index and the maximum drawdown. The maximum drawdown refers to the maximum loss in historical transactions. Some teams may have good daily data, but they will suffer huge losses in extreme market conditions, so this is also a very critical point.

Our team has been engaged in the field of digital currency for many years, and we have rich digital currency resources. We can enter the battlefield at the first time, which is difficult for many quantitative teams that entered the field of digital currency later to match. In addition, the team's years of accumulation can construct a stable sequence similar to the one in the previous figure through multiple trading pairs on multiple platforms, and conduct quantitative transactions on the constructed stable sequence as described above to obtain benefits. After many rounds of bull and bear and black swan events, we still maintain a maximum retracement of no more than 2%. And the Sharpe index is as high as 11.21. In addition, due to years of accumulation in the circle, we have also maintained a deep cooperative relationship with exchanges, wallets, and project parties, and have relatively large advantages in terms of handling fees and risk avoidance.

Zhang Yuan

Let's analyze PCoin's coin loan business. When it comes to coin loans, the first thing that comes to mind is how to avoid risks or how to identify product compliance. Mr. Kang will analyze this issue for you.

Kang Wenbo

When it comes to collateralized currency loans, the biggest concern is probably the risk. For example, what if you can’t get your currency back after you put it on the platform? What if you don’t pay attention to the liquidation of your position? And so on.

Let me briefly talk about a few aspects that should be paid attention to. The first is the flexibility of coin collateral. Let me take our product as an example. The BTC collateral rate for loans is basically around 70%. When the collateral rate decreases (when the coin price rises), the lender can increase the loan (or return the coin). Therefore, the coin pledged by the lender is only about 20% more than the loan amount on a daily basis. Therefore, the coin price will not rise several times, but the lender only has a small amount of money in his hand, while the coins are all on the platform. This flexibility reduces the risk of the lender to a great extent.

Another point is about covering and closing positions. Some platforms may only send SMS reminders when the currency price plummets, and it is a pity that the lender has to close the position because he did not see it in time. Therefore, when taking out a loan, you must first understand the covering price and closing price of your loan. It is convenient to pay attention to covering positions in time when the currency price falls. Secondly, it is best to let the platform provide a more direct way of telephone reminders. We will have a dedicated person to make telephone reminders to ensure that the lender is notified to avoid passive closing of the lender to the greatest extent. In addition, it is also necessary to pay attention to whether the setting of the closing line of the loan platform is reasonable, and whether the closing line is too low.

There are also a few points like the timeliness of the payment. For example, if you are in a hurry to pay the electricity bill, you have not received the money after transferring the currency. In terms of the pledge period, if the loan is used for short-term turnover, if the platform sets a longer pledge period, you will pay a few more months of interest. Whether the interest rate is in line with your budget, and how the interest rate is calculated, etc., these issues also need to be consulted in detail before taking out a loan.

Finally, when choosing a company, you also need to consider the company's background, loan risk control system, and more importantly, the industry's reputation. So before you take out a loan, you must understand it in detail and then sign the contract. Don't be fooled by "routine loan".

Zhang Yuan

As far as I understand, users who need to do currency loans, or recognize the currency loan model, should be users who tend to hold coins for a long time, or loyal believers in Bitcoin. What do you think, Mr. Kang?

Kang Wenbo

That's right. Generally, clients who do currency loans are long-term currency holders. We started in April 2018, so the loan business has also experienced a bear-bull cycle. We also witnessed that many of our clients in 2018 were determined to cover their positions from more than 3,000 dollars. There were also customers who quickly sold out when the currency price rebounded a little bit in the bear market. It was a pity that they lost money and did not hold on. When the currency price broke 10,000 dollars in 2019, everyone was very emotional. The bear market was really grinding. When it just started to fall, everyone would discuss bottom-fishing, but if it continued to fall, confidence would be greatly hit.

Firm holders must have a certain understanding and belief in Bitcoin. They must also hold a certain proportion (or at least a certain amount) of cash in both bull and bear markets. Because falling is not scary, but being unable to do anything about it is scary. Therefore, risk reserves must be prepared by holders of coin loans.

The real trend often needs more cycles (at least 2) to show up, so you need to improve your patience and strength at the same time - that is, to have a long-term stable low-cost cash flow. Then be a loyal believer in Bitcoin.

The following questions are for this issue's media observer, Mr. Liu from the BiTao community. Mr. Liu is invited to continue asking questions on behalf of the media.

Zhang Yuan

For retail investors who are new to the industry, they are often confused when choosing blockchain investment products. They don’t have a deep understanding and there are too many choices. Can Mr. Kang give this type of users some investment advice?

Kang Wenbo

For investors who have just entered the industry, you can invest a small amount of money at the beginning. You can buy one or two or two or three targets with the largest trading volume. Control your position at the beginning. A terrible mistake is to spend all your money as soon as you enter the market. The butt determines the head. After investing money, your attention will definitely increase significantly. After making some money, you must understand the source of the money. Get more first-hand information, so invest more money after strengthening your confidence. Keep investing and keep learning. Try to play less leveraged futures and short-term bands at the beginning, and seriously stock up on spot goods, waiting for them to double. How happy you are~

Zhang Yuan

The recent topic is definitely the Bitcoin halving. In this special period, what new opportunities do the quantitative business and currency loan business mean to users?

Kang Wenbo

The coin loan business is actually a low-risk leverage for coin holders. Before the halving, you can use this leverage to buy at every low point to increase your coins or use this tool to at least avoid reducing your coins due to temporary capital turnover. Quantitative business allows coin holders to have a stable income while hoarding coins, improve the utilization rate of their funds, and get more chips before the halving.

Zhang Yuan

The following questions are for this issue's media observer, Mr. Liu from the BiTao community. Mr. Liu is invited to continue asking questions on behalf of the media.

Mr. Liu from BiTao Community

For retail investors who are new to the industry, they are often confused when choosing blockchain investment products. They don’t have a deep understanding and there are too many choices. Can Mr. Kang give this type of users some investment advice?

Kang Wenbo

For investors who have just entered the industry, they can invest a small amount of money at the beginning. They can buy one or two or two or three targets with the largest trading volume. They should control their positions at the beginning. A terrible mistake is to spend all their money as soon as they enter the market.

The butt determines the head. After investing money, your attention will definitely increase significantly. After making some money, you should figure out the source of the money. Get more first-hand information, so invest more money after you have confidence. The main thing is to keep the position, and then continue to invest and learn. At the beginning, try to play less leveraged futures and short-term bands, and seriously stock up on spot goods, waiting for them to double. How happy you are~

Mr. Liu from BiTao Community

The recent topic is definitely the Bitcoin halving. In this special period, what new opportunities do the quantitative business and currency loan business mean to users?

Kang Wenbo

The coin loan business is actually a low-risk leverage for coin holders. Before the halving, you can use this leverage to buy at every low point to increase your coins or use this tool to at least avoid reducing your coins due to temporary capital turnover. Quantitative business allows coin holders to have a stable income while hoarding coins, improve the utilization rate of their funds, and get more chips before the halving.

Today's AMA ends here. Thank you Mr. Kang for your in-depth explanation, I hope it will be helpful to everyone.