Tag: Securities

Categories
Forex Fundamental Analysis

The Importance of ‘Loan Growth’ as a Forex Macro Economic Indicator

Introduction Loan Growth is a suitable parameter for us to check whether the monetary strategies implemented by the Central Authorities are coming into play yet or not. Loan Growth also helps us to gauge the health of the economy in terms of liquidity. Loan Growth percentage serves as a litmus test, especially in a capitalist […]

Introduction Loan Growth is a suitable parameter for us to check whether the monetary strategies implemented by the Central Authorities are coming into play yet or not. Loan Growth also helps us to gauge the health of the economy in terms of liquidity. Loan Growth percentage serves as a litmus test, especially in a capitalist […]

Introduction

Loan Growth is a suitable parameter for us to check whether the monetary strategies implemented by the Central Authorities are coming into play yet or not. Loan Growth also helps us to gauge the health of the economy in terms of liquidity. Loan Growth percentage serves as a litmus test, especially in a capitalist economy, where credit and inflation primarily drive the economy forward.

What is Loan Growth?

Loan: It is a debt incurred by an individual or entity. The lender is generally a bank, financial institution, or the Government. The lender credits the borrower a sum of money. The borrower agrees to specific terms and conditions that can include finance charges, interest payments, due dates, and other conditions.

Loans can be secured or unsecured. In secured loans, the loan is given out against collateral with a financial value like a property, mortgages, or securities, etc.

Loan Growth: Loan Growth refers to the percentage increase in the number of loans issued overall by banks in a particular region over a particular time frame. The time frame can be monthly, semi-annual, or annual.

Most modern economies today we see are capitalist economies, i.e., they grow through capitalism. A capitalist economy requires money to expand and grow. Hence, credit is an inevitable fuel required for economic growth.

How can the Loan Growth numbers be used for analysis?

A healthy increase in the percentage of Loans is suitable for a stable and healthy economy. But as with any case, there is no perfect economy, and there are two sides of analysis to Loan Growth.

First Scenario

A healthy economy means it is growing at a stable rate year over year with mild inflation each year. Credit fuels economic growth in this type of economy. In this type of economy, an increase in the number of loans taken can be considered a positive sign for the economy.

Businesses can grow beyond just cash in hand. Householders can purchase homes without saving the entire cost before purchase. Governments can meet their spending needs without relying solely on tax revenues. Be it a business, householder, or a Government can smoothen out their economic activities in terms of money. They will take credit when in deficit and payback when in surplus.

An increase in Loan Growth can imply that more people are creditworthy, and more businesses are taking credit to expand and grow. Both of these scenarios are good for the GDP and is a good sign for the economy.

Second Scenario

The first scenario takes into the assumption that the economy is strong and stable. In reality, currently, most of the developed nations are struggling to maintain their economic growth. For example, the United States debt to GDP ratio is above 100%, which indicates that even if the entire GDP were given out to repay the debt, it would still be in some debt. Most of the developed nations have taken substantial credits to keep the economy from ticking over.

Keeping economic growth and global competency in mind, most countries have invested heavily in overgrowing in the short-term. By taking on more and more debts, countries may have achieved the necessary growth and needs now but have pushed their problems to the future.

Economists argue that eventually, there would be a time when countries cannot afford any more debt and would be backed into a corner. The only way out then would be at a considerable cost of losing out more than what they had made. Studies also show that rapid loan growth than the long term average also has seen an increase in underperforming or bad loans.

It is also essential to know that increase in Loan Growth should be accompanied by the fact that no bad loans are given out. Giving loans to people and businesses who do not have the eligibility but just because money is lying around is also a problem.

In the United States itself, the Government has been injecting money into the economy since the financial crisis in the form of Money Supply and Quantitative Easing programs to inflate their way out of depression or recession. Until now, the Government has not been able to reduce debt and is only taking on more debt to sustain the current growth.

An increase in loans is good or bad for the economy remains debatable for many. Without credit, sector growth is almost unimaginable in present times. For our analysis, we can use the Loan Growth rate as a litmus test to see whether the injected money from the Central Authorities has started reaching the public and businesses.

When the Central Authorities want to inflate the economy, they reduce interest rates by injecting money into the interbank market. The injected money takes time to get into the economy, and loans are one form in which this money gets circulated.

Overall, for our analysis, once Loan Growth shows increasing numbers, we can assume that the injected money is reaching the intended sectors, and consequent effects could be predicted on businesses and consumers. Loan Growth is indicative of a growing economy in general and is more prominent in developing countries.

Impact on Currency

Loan Growth is a by-product of a reduction in interest rates from the Central Banks of the country and an increase in employment and business growth. An increase in Loans indicates that money is “cheaper” to borrow. It is inflationary for the economy and is given out to induce growth (which may or may not happen).

An increase in Loan Growth depreciates currency as more money is competing against the same set of goods and services. A decrease in Loan growth appreciates the currency as the reduced liquidity forces goods and services to come at reduced prices.

Overall, Loan Growth is a low-impact indicator, as the Central Bank’s interest rates are the leading indicators, and the desired effect from increased loans can be traced from other leading indicators like Consumer and Business surveys.

Economic Reports

Since Loan Growth is not a significant economic indicator, official publications for significant countries are not explicitly published but can be obtained through reports analysis. For our reference, the Trading Economics website consolidates the Credit Growth in different sectors for data available countries on its official website. Since it is a consolidation, frequency and time of publication vary from country to country.

Sources of Loan Growth

Loan Growth consolidated available data for different countries are available here.

“The impact of bank lending on Palestine economic growth: an econometric analysis of time series data” has been referenced for this article.

How Loan Growth Affects The Price Charts

Loan growth is not a statistic. Most forex traders keep an eye when making their trades. The lack of interest is because it is considered a their-tier leading indicator. It is, however, essential to know how the release of this fundamental economic indicator affects the forex price charts.

In the EU, loan growth data is released monthly by the European Central Bank about 28 days after the month ends. It represents the change in the total value of new loans issued to consumers and businesses in the private sector. The most recent release was on July 27, 2020, 8.00 AM GMT can be accessed here. A more in-depth review of the economic news release can be accessed at the ECB website.

Below is a screengrab of the Forex Factory website. On the right, we can see a legend that indicates the level of impact the Fundamental Indicator has on the EUR.

As can be seen, low impact is expected on the EUR.

The screengrab below is of the most recent change in the loan growth in the EU. In June 2020, private loans grew by 3% as compared to the same period in 2019. This change represented a flat growth from the previous release. Based on our fundamental analysis, this should be positive for the EUR.

Now, let’s see how this positive news release made an impact on the Forex price charts.

EUR/USD: Before Loan Growth release on July 27, 2020, 
Just Before 8.00 AM GMT

From the above chart, the EUR/USD pair is trading on a neutral trend before the data release. The candles are forming around the flattening 20-period Moving Average. This trend is an indication of relative market inactivity.

EUR/USD: After Loan Growth release on July 27, 
2020, 8.00 AM GMT

After the news release, the pair forms a 15-minute bullish candle as EUR becomes stronger as expected. However, the news release was not strong enough to cause a shift in the pair’s trend since the pair continued to trade in the previously observed neutral trend.

Now let’s see how this news release impacted other major currency pairs.

EUR/JPY: Before Loan Growth release on July 27, 2020, 
Just Before 8.00 AM GMT

Before the news release, EUR/JPY traded in a similar neutral trend as observed with the EUR/USD with the candles forming around a flattening 20-period Moving Average.

EUR/JPY: After Loan Growth release on July 27, 
2020, 8.00 AM GMT

As observed with the EUR/USD pair, EUR/JPY formed a 15-minute bullish candle after the news release as expected. The subsequent trend does now significantly shift.

EUR/CAD: Before Loan Growth release on July 27, 2020, 
Just Before 8.00 AM GMT

EUR/CAD: After Loan Growth release on July 27, 2020, 
8.00 AM GMT

The EUR/CAD pair shows a similar neutral trading pattern as the EUR/USD and EUR/JPY pair before the news release. After the news release, the pair forms a 15-minute bullish candle but later continued trading in the earlier observed neutral trend as the 20-period Moving Average flattens.

The release of the loan growth data has an instant short-term effect on the EUR. The data is, however, not significant enough to cause any relevant shift in the prevailing market trend.

Categories
Crypto Guides

What Are The Different Business Models Based On Blockchain Technology?

Introduction

Introduction

Introduction

With the invention of bitcoin, Blockchain has become mainstream. Industry experts in almost all industries are exploring Blockchain to change their business models to make use of decentralization to achieve more transparency, thereby gaining more profits. The business model is nothing but how the business is operated to make money ultimately.

With features like immutability, transparency, and decentralization, Blockchain can create ripples in any industry that haven’t seen much change for some decades. Blockchain’s mainstream application has been in finance, which has seen rapid changes though Blockchain hasn’t been implemented to a considerable extent yet.

Implementing Blockchain isn’t an easy task. Hence, one should consider all the available technologies first and implement Blockchain only if any other current technology doesn’t make the same impact of Blockchain if implemented. The technology shouldn’t be useful not only for the business but for the end-users as well.

Let us look at some of the blockchain business models below:

Blockchain as a Service (BaaS)

The days are gone where the businesses try to host everything on their own. Investing in large servers, hiring staff to maintain them is a costly process, and no one wants to do it anymore unless they have large amounts of money to burn. Hence everyone wants to move to the cloud. When it comes to Blockchain, if one has to set up a blockchain network, they must search for blockchain experts who are rare and costly to obtain the talent, if any.

Train your existing staff, which is again time-consuming; hence BaaS plays a vital role in implementing Blockchain in any business. Blockchain as a Service is also provided by cloud providers where a lot of scary backend stuff can be set up and maintained by them while the business can only focus on their business. Large cloud providers like AWS, Microsoft Azure, IBM, Oracle are already offering BaaS services.

Securities

Securities is one of the exact innovational models which didn’t exist before Blockchain. Security tokens offer ownership of an asset. A token can be classified as a security token if a profit is expected from the primary asset linked to the digital asset.

For example, a piece of gold bar say 1kg can be owned by multiple people in the form of security tokens as the price of the gold increases the value of the security token increases and vice versa. If the ICO of such tokens is adequately implemented with all the rules abided, the security tokens have immense opportunities.

Utility Tokens

Whenever we buy some material things, we look at the utility of the material to gauge our satisfaction. Utility tokens do the same thing in the businesses they use. Each utility tokens have a purpose, role, and features in the environment they are used to. In our articles, we have seen DAO’s, which can be accumulated to deserve the voting rights for the DAPPs to be developed.

DAO’s are a perfect example of Utility tokens. Ripple acts as a utility token in the banks involved with the Ripple ecosystem. The tokens can be used as a currency as well in the confined environment. The value of the utility tokens increases depending on the number of roles and purposes it has in the intended environment.

Development Platforms

Development platforms like Ethereum, Hyperledger, Tron play a vital role in the augmentation of blockchain technology. The development of DAPPs on these platforms is secure in implementing the technology as, by default, they offer Blockchain’s fundamental properties. The more DAPP’s in the network, the more influential the platform will be as more people will be using the same.

The deployment of DAPPs in the Ethereum platform needs the payment in terms of Gas, the platform’s local currency, which allows one to use it. In the same way, to use the Neo platform, users have to pay in Gas, the platform’s local currency. Even the DAPPs may collect a nominal fee in terms of Gas again to use the apps, thus improving the functionality continuously.

Categories
Crypto Daily Topic

How Can Capital Markets Benefit From Blockchain Technology?

Ever since cryptocurrency and blockchain first captured mainstream attention, the entire space has been met with a lot of skepticism and hostility. Much of the distrust has come from governments and central bank regulators who are afraid of losing influence over their economies, particularly the financial sector. 

Capital Martket_Forex Academy

Ever since cryptocurrency and blockchain first captured mainstream attention, the entire space has been met with a lot of skepticism and hostility. Much of the distrust has come from governments and central bank regulators who are afraid of losing influence over their economies, particularly the financial sector. 

Ever since cryptocurrency and blockchain first captured mainstream attention, the entire space has been met with a lot of skepticism and hostility. Much of the distrust has come from governments and central bank regulators who are afraid of losing influence over their economies, particularly the financial sector. 

They have, therefore, moved to exert regulations on the sector. Despite the cold reception, blockchain’s numerous benefits and decentralized nature have made it hard to censor for the government.

Capital markets, being a complex system where transactions involve buyers, sellers, brokers, and additional third parties such as liquidity providers, can benefit immensely from the blockchain as a distributed ledger system. Besides securing data, the technology also supports smart contracts that allow for the automation of processes such as payments and moving of collateral. 

Benefits of blockchain solutions in the Capital Markets Trade Cycle 

Capital Markets | Financial Markets - pascal-bernardon-zt0HWquGXlQ-unsplash

Financial institutions are the direct beneficiaries of blockchain solutions in the capital market since they are the most significant players in the industry. At the same time, these benefits have a ripple effect on the entire capital markets ecosystem, and so does the improved efficiency it brings along.

Here are some of the most significant benefits: 

I) Streamlined Trade Settlements

Trade settlement in the current capital markets’ ecosystem is considerably technical, as evidenced by the swap contract transactions between banks in international trader settlements. 

Blockchain-based smart contracts can help to automate trades by releasing settlements only on the condition that the financial details of the banks involved match. Its adoption will help reduce costly errors from the manual processing of settlement instructions. 

In the case of transferring securities from seller to buyer, smart contracts act as a more advanced ‘if-then’ statement from Excel. As such, the transaction will only be completed if certain conditions within the agreed-upon contract are satisfied. Blockchain not only eliminates the broker fees involved in the process but also protects the two parties from fraud risks. Moreover, the sheer accuracy of smart contracts eliminates reconcilement issues that often arise when transactions aren’t properly executed. 

II) Reduce Trade Limit Violations

Trade between financial institutions, also known as swaps, consists of trading limits placed by the government mainly for taxation purposes. A limit can also be placed on trades involving other assets such as derivatives, options, and debt capital markets transactions. 

Violation of these trading limits often results in costly fines, as was the case with JP Morgan Chase Bank in the infamous London whale trade. The bank was fined $920 million, which caused its stock to fall from $45 to $31 before eventually recovering. 

While the bank didn’t intentionally violate the trade limit, lack of effective internal risk and accounting controls allowed traders to take larger trade positions without the consent of senior managers. 

With a distributed ledger and a series of smart contracts, the bank could have maintained compliance with the trade limit laws. Trades over the pre-determined limit could be reversed or blocked if and when they threaten to violate the terms of the smart contracts. The trade infringements could then be detected and reported early enough – saving the bank the subsequent fines and reputation damage. 

III) Credit Risk Management

Assessing a clients’ creditworthiness is essential in ascertaining whether or not they can be approved to trade the capital markets with a financial institution. The same applies to loan issuance processes where an individual’s credit rating determines such aspects as their eligibility and interest rates. 

The use of blockchain in this niche could help create a shared ledger that acts as a central database that is accessible to authorized institutions. Blockchain could facilitate a near real-time communication system, allowing involved parties to take appropriate actions. 

For instance, if the credit rating of a client deteriorated while having an open financial contract with a capital markets trading desk, an instant notification will be communicated between the trading desk team and credit risk officers. As a result, the shared ledger would eliminate the current inefficiencies associated with traditional credit risk assessments – improving the overall business processes. Additionally, the combination of blockchain as an immutable database and machine learning for automated risk assessment would greatly improve the accuracy of credit score ratings. 

IV) Improve Trading Integrity

Trade malpractices, especially in the securities market, can sabotage the growth of the entire market if left unchecked. Currently, the traditional measures put in place by security exchanges to curb illegal trades such as insider trading are not effective and cannot detect these illegal activities before they happen.

The use of blockchain solutions brings in transparency in equity trading. As such, it makes it easier for market regulators to detect irregularities such as artificial pattern trading, thus safeguarding the integrity of the entire equity market. 

V) Maintain KYC and AML Compliance

All financial institutions are required by law to have an in-depth knowledge of their customers’ personal details before offering any services to them. This concept is known as know your customer (KYC) and is closely related to anti-money laundering (AML) – with both designed to curb financial crimes such as tax evasion. 

The cumbersome paperwork and long durations involved in the process could be reduced or eliminated using a decentralized and immutable database. Additionally, this ledger system can help tie investors’ real-world identity to an on-chain wallet address, which in turn can help institutions restrict security/IPO trading to investors who have not been properly vetted. 

  • Asset tokenization

Asset tokenization is the creation of decentralized digital assets that can later be traded. Both tangible assets, such as property, automobiles, and paintings, as well as less tangible assets such as bonds and securities, can be tokenized on a blockchain network to maintain an immutable record of ownership.

Tokenized assets are faster to trade at more affordable transaction costs thanks to the automation process of smart contracts. Moreover, assets in a tokenized form are more accessible and liquid, making it easier for financial service providers to facilitate efficient asset trading. 

Takeaway

It’s evident that blockchain has a lot in store for the capital markets and the financial sector as a whole. Of course, the adoption and implementation of this technology will be a gradual process owing to the intricate nature of capital markets. It will require financial service providers to define the technology’s entry point based on adoption feasibility and cost-benefit analysis. 

Categories
Crypto Daily Topic Crypto Guides

What Are Pump and Dump Schemes in Cryptocurrency?

Introduction

Introduction

Introduction

Cryptocurrencies and the blockchain technology are relatively new to the financial markets. This makes them vulnerable to the traditional scams that used to take place on stock and some new ones. Since cryptocurrencies are not regulated by the exchange board, it makes them more prone to scam and schemes than regulated securities.

Out of the many scams around, the most common scam is the so-called pump-and-dump. It originated from the stock market, but the issue was rectified and made illegal on regulated exchanges. However, the cryptocurrency market is not immune to it.

The pump-and-dump schemes are such that they put every rise or fall in the market a question mark. So, a genuine investor would be unaware of the rise was being pumped or was shooting up for real.

The working of Pump-and-dump schemes

The actors behind the scene of pump-and-dump schemes are well-organized groups working over some private messenger. They are referred to as the inner core investors, who basically shoot up the volume of a coin by targeting a single exchange. To do so, they even take the help of whales as well. The coin under target must be of low volume so that the core can lock up as much liquidity at the price they intend. Moreover, they make sure that liquidity is relatively small.

By this, most part of the inner core investor is done. And that’s when the outer core investors kick in. These are the investors who have no clue of the planned pump-and-dump. Once the pump is implanted, all the actors in the scene, mostly the outer core investors, get buying. There are also unaware flocks who see a drastic rise and began to buy as a cause of FOMO. This drives the prices much higher and more swiftly.

Once the price anticipated by the inner core actors is reached, they step back into the business. In other terms, they initiate their dumping. Since they are the first ones to short sell, they get the best price available. Then there are the outer investors who were left scammed, sitting with huge positions looking to sell at higher prices. But the dumping brings it down. Hence, this leaves the investors harmed as well as the integrity of the coin been pumped and dumped.

The pump-and-dump has been annihilated from the stock market and other regulated exchanges. However, the haunting in cryptocurrencies or non-regulated exchanges is still in existence. With this into account, the U.S Commodity Futures Trading Commission warned people about these schemes in virtual currencies. Click the image to learn more.

Conclusion

Pump-and-dump are schemes that cannot be put to a stop in the cryptocurrency space due to its non-regulated nature. The only way to get away with it is to avoid trading cryptos with very low liquidity and low volume. Or you may research the coin on its rise and fall and predict if the move is real or just an illusion.