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The rising popularity of the term “Proof of Reserves” can be attributed to the recent crash of FTX. This was due to the leverage and solvency concerns involving FTX-affiliated trading firm Alameda Research. 

Multiple experts say that it would have prevented the crash. This is because FTX would then be warier in how they utilize their assets. Customers would also then have the ability to withdraw gradually depending on how they are comfortable with FTX’s insolvency.

But what is Proof of Reserves? How critical would they be in today’s age of digital finances? How would it benefit me as a trader/investor? Let’s find out!

What is Proof of Reserves?

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All crypto exchanges should do merkle-tree proof-of-reserves.

Banks run on fractional reserves.
Crypto exchanges should not.@Binance will start to do proof-of-reserves soon. Full transparency.

— CZ 🔶 Binance (@cz_binance) November 8, 2022

Proof of Reserves indicates an institution’s capability to always honor withdrawals from its platform. Cryptocurrency exchanges use this to establish that they have sufficient assets. This is used to cover the quantities of each coin guaranteed to its consumers. The investor community uses it as a method of ensuring that a trading platform has 1:1 backing across all digital assets. It serves as a tracker that audits active cryptocurrency exchanges for transparency on liquidity at a given moment.

Why is it important to know the status of an institution’s assets and its capability to honor withdrawals?

Because in doing so, confidence and transparency between the exchange and its users are fostered. Trust is critical in institutions/exchanges because it can help to build confidence in the markets and the financial system as a whole. This would lead to an increase in investments and economic growth. The consequences of distrust were the major catalyst in the fall of FTX. Lack of trust resulted in mass withdrawals. This was further even emphasized as CEO Bankman-Fried admitted that the company didn’t have sufficient assets in reserve to meet customer demand. 

How Proof of Reserves build user’s trust

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#VisbankingInsights | Do you agree?

Let us know in the comments!#banking #USBanks #Investments #Finances pic.twitter.com/vrX2CJP3Kt

— Visbanking (@visbanking) January 7, 2023

Proof of Reserves allows exchanges and other various other financial products that are inside and outside the blockchain industry to prove solvency on a real-time basis. The users of the exchanges may then use the Proof of Reserves as an instrument to gauge how solvent institutions can be. Furthermore, evidence of reserves can aid in preventing fraud and other financial crimes. This is because it makes it difficult for organizations to misrepresent their financial position. Proof of Reserves builds users’ trust by allowing users to validate an exchange’s capability to serve them and how well and legit the exchange is utilizing their assets. 

Concerns revolving around Proof of Reserves

Indeed, Proof of Reserves is a step in the right direction. However, it may also provide customers with a false feeling of security. Concerns about it include the risk of data tampering, a lack of transparency, and the exchange retaining fractional reserves. Furthermore, there is a chance that the exchange will be hacked or go bankrupt, causing users to lose their funds. With this in mind, we must still always be vigilant in the exchanges we interact and invest with. Nevertheless, Proof of Reserves is certainly a factor that we need to consider in managing the risks of investing in a crypto exchange. 

How to track an exchange’s Proof of Reserve

Verifying Proof of Reserve can easily be done on CoinMarketCap. Exchanges that have made their reserve status public will feature a section under “Financial reserves,” which will offer a detailed analysis of their reserves if they are publicly available.

In summary, Proof of reserves is important to verify that a company has enough assets to satisfy its financial obligations. This is especially important in the context of cryptocurrency exchanges, where any form of transparency can assist in ensuring consumers that the exchange has enough cryptocurrency on hand to honor withdrawal requests. In addition, users may lose faith in the exchange and be less inclined to utilize its services if there is no verification of reserves, which might harm the exchange’s business. 

Proof of Reserves: Trust by means of Transparency – Proof of Reserves is a legitimate way of validating an institution’s capabilities. 

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@gandydancer takes the spotlight for this week’s featured trader! 

As Lance Armstrong said, “knowledge is power, community is strength, and positive attitude is everything.” With his entertaining charts, insightful shared posts, and consistency in uplifting the community’s well-being, @gandydancer has proven himself to be a community member that fosters positivity, talent, and an overall sense of harmony within the Investa trading community. 

Truly deserving of this week’s feature! Let’s take a deeper look at @gandydancer as a member of the community.

COMMUNITY CHART ARTIST

@gandydancer is known for his “Chartoons” series, wherein he posts his rendition of charts with creative artistical twists to keep his followers engaged and entertained regardless of the state of the market. Doodling in charts may not be uncommon in the trading community, but @gandydancer’s consistent posts would keep you entertained with drawings ranging from fun doodles to mind-blowing illustrations that integrate the charts. Joining the community on early March 2020, his consistent postings and generally positive outlook earned him steadily increasing followers in the Investagrams social space. 

BEYOND THE ART

Besides his art posts, he is also seen to be sharing investing knowledge that is a great help to his fellow members of the community. It also encourages and fosters a culture of growth where people are encouraged to ask questions and learn from the input of their fellow members. 

He can also be seen commenting on posts, helping fellow community members, and even sharing posts that harbor knowledge and harmony in the community. 

He also makes sure to keep the community updated by constantly sharing relevant news that helps inform and educate people and the general public about current events and topics. Indeed, it is crucial to stay up to date on current events because it can help make educated decisions and take action on topics that matter to them. By doing so, he sparks insightful conversations that help attain multiple perspectives of other traders. This ensures that decisions that materialize from these conversations are more likely to be well-informed and practical.

OTHER CONTENT FROM @gandydancer

@gandydancer ups the ante on entertaining the community by establishing a new series of posts that revolve around comedic news and memes for the Filipino investing community. He can also be seen sharing inspirational quotes and experiences that promote not only a positive mindset but also makes sure to motivate the Investa trading community. 

In the end, what makes @gandydancer deserving of being our featured trader for this week are his entertaining content which makes sure to be relevant and bring people together, his way of fostering a culture of growth by always sharing learning experiences and knowledge, and his overall dedication in bringing value to the community by always making sure to help those who want to grow further, inspire fellow traders to strive for their goals, and delight the community with his entertaining posts and drawings. 

Once again, KUDOS to @gandydancer for being this week’s featured trader! Enjoy your 14-day InvestaPrime Access and continue to be an inspiration to the trading community.

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Test the viability of your trading ideas and strategies through historical data to generate results and analyze risk with InvestaBacktest.

Manually practice, master, and backtest your strategy in the local and global markets.

The golden cross is a widely known technical analysis pattern. It’s usually used as a signal that bulls are now in control of the long-term trend. The pattern is formed when the 50-day moving average crosses above the 200-day moving average. As the short-term average rises above the long-term average, the signal signifies that demand has come back into the market. 

Some use this pattern as a buy signal. Others use it as a confirmation of their overall market bias. This begs the question, how well does the golden cross signal?

WHY IS BACKTESTING IMPORTANT?

Traders often backtest their strategies to evaluate the performance of the signals used. By simulating the strategy on historical data, you can get an idea of how the strategy would have performed. You’ll also find insights into the strategy’s weaknesses as well as its strengths.

Keep in mind that for backtests to provide insightful results, they should be run through different market conditions and should have a substantial amount of trades. It should also be noted that backtests are not indicative of future results. Market dynamics are always changing, which is why there are too many factors to consider to run a perfect backtest, even with the help of automation. 

Nonetheless, backtests will still be able to provide insights to help guide your system in the right direction.

GOLDEN CROSS BACKTEST APPROACH

For this backtest, we covered the U.S. and PH stock markets. We chose various liquid stocks at random, with historical data starting from December 1, 2018.

The parameters for each trade are as follows:

• Buy: At the close when the MA50 crosses above the MA200

• Sell: At the close when the MA50 crosses below the MA200

For simplicity’s sake, we only recorded the edge and hit ratio.

RESULTS USING THE GOLDEN CROSS SIGNAL

Across roughly 40 trades, the signal achieved a hit rate of 47.22% and an edge ratio of 11.23. It was noticeable that a big factor in the unrealistic performance of the backtest came from just 3 trades. These three came from $TSLA, $AAPL, and $NIO. 

When taken out, however, the backtest would’ve still achieved a hit rate of 38.89% and an edge ratio of 3.78 – still very solid numbers. 

Another finding was that most losses didn’t stem from bear markets and downtrends. The signal usually lost money when stocks were in a sideways trend. 

INSIGHTS

Here are some key insights that can be taken from the test done:

1. Holding on to strong market leaders can produce astounding results

Most of the best trades in the test conducted came from holding on to leaders in the strongest sectors. These trades usually lasted more than a year.

2. A sideways market does more damage compared to a market that trends in whichever direction

Across the different trades conducted, it was noticeable that losses appeared more often in a sideways trend. 

3. Stock selection is a very important aspect of trading

Being able to distinguish which stocks and sectors are set up for the most success can have a profound impact on a trading system’s performance. While the U.S. stock market as a whole was strong during the testing period, trades in key sectors produced results that greatly outperformed those in other sectors. 

LAST THOUGHTS

While the backtest produced stellar results, remember that there are still a lot of factors to take into account. There are still questions to be answered. How should the stock selection criteria be built? Given the volatility to be expected, what should be the ideal position sizing strategy to use? Is it alright for me to have long holding periods?

Forward testing or actual trading performance usually has worse results compared to backtests due to a wide variety of factorsEvenen the backtest conducted leaves a lot to be desired in terms of the number of trades tested and the stock selection criteria used. Certain tweaks could make it more realistic and could provide more insights. 

Stay tuned as we’ll aim to provide more valuable content moving forward.

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Test the viability of your trading ideas and strategies through historical data to generate results and analyze risk with InvestaBacktest.

Manually practice, master, and backtest your strategy in the local and global markets.

Phantom, a.k.a @shadowshammgod, takes the spotlight for this week’s featured trader as he shared his chart for a potential breakout of $PSE:BALAI using simple support and resistances paired with the 50 EMA.

Simplicity is a key principle in trading with technical analysis. Technical analysis aims to identify trends and patterns in financial markets, but this can be a complex task given the vast amount of data available. By keeping his analysis simple,  @shadowshammgod was able to see the overall picture and spot a potential breakout that could hit and retest the higher resistance of $PSE:BALAI in a one-day timeframe. 

Let’s take a look at how @shadowshammgod uses this to his advantage.

@shadowshammgod used S/R (or support and resistance) to spot $PSE:BALAI about to break out and flip its previous resistance at the 0.6000 level. Still using S/R, he identified the next resistance at the 0.7000 level, where the momentum of the breakout could die down. $PSE:BALAI broke out the same day and four days later went on to hit the 0.70 resistance and peak at 0.71, resulting in an increase of around 16%. 

TECHNICALS OF THE TRADE

After its downtrend since August of last year, $PSE:BALAI has been ranging sideways over the following months after. Since November of last year, the 0.6100 level has served as a strong resistance, denying breakouts over four times until finally being flipped this past January 10, 2023. 

Alongside the use of proper S/R, @shadowshammgod also utilized the 50-day EMA, which is significant because it may be used to identify major levels of support and resistance, as well as to show the current trend’s direction. With no additional indicators required, he was able to execute and profit from the trade.

FUNDAMENTALS OF THE TRADE

In order to reach its goal of 130 stores by the end of 2023, Balai Ni Fruitas Inc., the company that owns the Balai Pandesal brand, announced its plan to start an aggressive expansion strategy.

The business intends to extend this to 200 locations by the end of 2026, according to Calvin Chua, director, and financial adviser at Fruitas Holdings Inc., the company’s publicly traded parent company.

The ongoing store network expansion of the Balai Pandesal brand has contributed to the significant increase in its revenues; As of October 2022, BALAI currently has 91 active stores nationwide, of which 43 stores are Balai Pandesal, 39 are Buko Ni Fruitas stores, and 9 are Fruitas House of Desserts stores.

WHAT SHOULD BE MY NEXT MOVE

Since the $PSE:BALAI is still currently ranging and is now hovering around the 0.6000 level again, it’s advisable to wait and see if the level would successfully flip and serve as the new support or if it would continue to decline. If it does continue to decline, the previous breakout would only be a false breakout and would mean that there was a lack of buying or selling momentum or there has been a sudden change in market sentiment.

Once again, KUDOS to @shadowshammgod for being this week’s featured trader! Enjoy your 14-day InvestaPrime Access and continue to be an inspiration to the trading community.

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The tulip mania happened during the 1600s in the Netherlands. The Dutch were so entranced with the beauty of tulips that it led to a speculative frenzy. Historically, this was the first-ever speculative bubble. The tulip mania was the forefather of the dot-com bubble, the housing bubble, and all the meme stocks that soared to the moon of late.

The Makings of the Tulip Mania

It all started when tulips first came to the Dutch. Tulips were imported to the Netherlands from the Ottoman Empire. From the get-go, tulips became widely popular. The exoticness of the flowers caused them to immediately become a must-have luxury among the rich. It was “proof of bad taste” among the wealthy and noble to not have a collection of tulips.

Of course, the merchants had to follow the trend. As they sought to be like the upper class, they also brought more demand for tulips to the table. The Dutch heavily bought tulips. However it’s important to note that tulips were only merely purchased as a status symbol. Although a beautiful flower, much of the demand for it was due ironically to the big price tag.

While the flower was already priced very high, the tulip mania hasn’t even started yet. What triggered the prices to rampage was the discovery of “broken bulb” tulips. Since the demand for tulips was high, locals started learning how to nurture and cultivate tulips. Soon producers discovered a new kind of tulip. Whereas usually tulips had single solid colors, broken bulb tulips had striped multicolor designs. This specific variation caused market prices to go up in a frenzy. 

The Market in a State of Frenzy

The demand for tulips quickly outpaced the supply, causing prices to shoot upwards. Of course, this caught the attention of traders and speculators who then came into the markets – providing more fuel to the flame. While an exact value is hard to precisely calculate, estimates pegged some of the rarest tulips to cost up to $1,000,000 by today’s standards. On average, tulips traded for around $50,000 to $150,000. The market for tulips was very active to the point that a market was set up for contracts.

“Many who, for a brief season, had emerged from the humbler walks of life, were cast back into their original obscurity. Substantial merchants were reduced almost to beggary, and many a representative of a noble line saw the fortunes of his house ruined beyond redemption.”

– charles mackay

By this time, everyone now wanted to own tulips. According to Mackay’s account of the event in his book Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, different people from different walks of life took part in the trade of tulips. From nobles to farmers and even servants. However, everything that glitters doesn’t always turn out to be gold. Similar to the bubbles that followed in history, tulip prices plummeted. Many were left with contracts worth nothing, and the tulip mania was considered to be the first recorded bubble. 

While the market crash wasn’t as economically devastating as depicted in tales (thankfully no, the tulip mania did not cause a depression), there was still real economic damage done. Nobles drew in losses worth millions in dollars by today’s standards. Business relationships built on trust were destroyed. A cultural shock was felt in a society with complex credit systems for their time.

Similarities to the Markets Today

“I can calculate the movement of stars, but not the madness of men.”

– Isaac newton

The tulip mania has many traits similar to more modern market bubbles. One of the main driving forces of bubbles is the nature of human behavior. Despite financial literacy becoming more widely taught, the same old patterns of behavior are still prevalent in the markets. In any market, speculation can be a strong force that pushes prices higher. 

As prices keep going higher, herd mentality can take place where investors follow the actions of others in the market rather than making their own informed decisions. Similar to the tulip mania, people invest in certain assets just because other people are making money doing so. Likewise, the ending is always the same for bubbles – an abrupt and unsightly market crash.

Usually, market bubbles have some telltale signs, including rapid price increases, widespread speculation, and a disconnect between underlying fundamentals. Although different speculative bubbles have different characteristics, there is one unifying trait that can be noticed. In bubbles, investors are often in a state of euphoria. When things seem too good to be true for everyone, that’s usually indicative of a bubble getting ready to burst.

Moving Forward

While we will never know what will exactly happen in the future, we can often use history as a reference. The tulip mania was just one of the bubbles in history – we can read about the many others to get a grasp of the dynamics involved in these peculiar situations and gain an edge in the process.

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Have we learned the lessons from the dot com bust?

1) careful financial planning and due diligence
2) the dangers of over inflated valuations
3) need to focus on long term sustainability
4) need for stronger regulation of financial markets to prevent bubbles pic.twitter.com/PlicYiqqaw

— Eze Vidra (@ediggs) December 9, 2022

As always, the markets often don’t reward the smart or the wealthy. The markets reward those who show up and take the time to understand the recurring behaviors of market participants.

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@virgelbong24 takes the spotlight for this week’s featured trader! He shared some of his thoughts on certain trades recently, and one of them was his view on $BTC.

While $BTC had a rough 2022, it has started to regain strength these past couple of weeks. Bitcoin has now rallied by more than 10% this year and is looking to test the 19,000 resistance level.

TECHNICALS OF THE TRADE

Bitcoin was and still is, in a long-term downtrend. After the crypto markets crashed weeks ago, demand hasn’t come back into the cryptocurrency. However, as prices stabilized recently, @virgelbong24 saw an opportunity.

Since $BTC was forming higher lows, he figured that maybe a quick swing trade can be taken. The immediate target would of course be the upper end of the range. Keep in mind that overall, the asset is still in a downtrend so profits and stop losses need to be taken quicker. With no other indicators needed, just support and resistance, @virgelbong24 was able to profit from a good risk-to-reward trade.

FUNDAMENTALS OF THE TRADE

$BTC and the overall crypto market had a gloomy investor sentiment for the past couple of weeks. However, developments across the web3 industry continued to shine through. Different traditional institutions have partnered with various blockchains to bring forth revolutionary features and products that look to create a positive impact on the world.

This, coupled with the positive economic data recently reported, could have been factors that helped push Bitcoin higher.

WHAT SHOULD BE MY NEXT MOVE

Currently, $BTC is testing the 19,000 resistance level. Although there has been strong momentum, it’s advisable for buyers to wait and see if Bitcoin can break past this level. Otherwise, the cryptocurrency could just be experiencing a counter-trend move within its long-term downtrend.

Lastly, you should wait for a continuation pattern to form as well before jumping into Bitcoin if you’re bullish. Ideally, you’d want a good risk-to-reward ratio regardless of where you see the asset heading.

Once again, KUDOS to @virgelbong24 for being this week’s featured trader! Enjoy your 14-day InvestaPrime Access and continue to be an inspiration to the trading community.

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As the financial markets have evolved over the years, market correlations among different assets has become more and more pronounced. To put it in simple terms, it is the measure of how two different assets move depending on the price action of the other. 

This concept is widely used by both institutions and even discretionary traders. When used in a quantitative model, correlation is signified through values between -1 and 1. The value -1 signifies a perfectly negative correlation. Here you’d see that the two assets move perfectly away from each other. On the other hand, a value of 1 signifies a perfect correlation. This means that the two assets move in perfect tandem with each other. 

How market correlations happen

Market correlations are often established due to the inherent nature of different assets. For example, two chip manufacturers might both experience a strong correlation with each other if there is increased demand for the whole industry. Since they both benefit from higher demand for chips, both might gain attention from investors. 

Another cause could be that one asset is a commodity, while the other is the stock of a mining company. For example, if the prices of nickel rise, it would make sense that nickel miners and producers stand to benefit as well. 

Real-world examples

While it might seem like market correlations are straightforward, there’s another factor you have to consider. In the real world, assets usually aren’t perfectly synced with each other. The global financial system has many different macro and micro factors that affect the buying and selling of different assets. Usually, you’ll encounter one asset following the path of the other asset, but only after a delay. 

Take $TAN, for instance. During the early days of the lockdown, the U.S. stock market rallied strongly. The solar energy industry was one of the sectors that investors favored. For a period of time, renewable energy across the world became an increasingly talked about topic. As such, investors flocked towards not just solar stocks, but a wide variety of companies that do business in renewable energy. 

$ACEN is one of the premier renewable energy companies in the Philippines. However, the stock didn’t gain momentum until after a whole month compared to the others. While there was good reason $ACEN would benefit from the trend, there were other factors in play. 

One possible factor could’ve been the weak Philippine market. During this time, the Philippine index was still in a downward channel. $ACEN only started rallying once the $PSEi broke out of the mentioned channel. 

This scenario also presents a key insight: stocks often have a good correlation with their respective market indices. Often called the beta of the stock, you’ll notice that even non-blue chip companies can become heavily affected by the swings of the Philippine market index. The reason for this is related to how money flows in the markets. Essentially, the market’s liquidity gets sucked out if investors are bearish overall. This would become a strong headwind that can hinder mid-caps and even third-liners.

How knowing about market correlations helps your trades

 What we’re sharing here is a snippet from our recent research done on gold miners. As the commodity has been strong recently, we wanted to find out who would benefit the most. By just simply looking at how different assets behave in relation to each other, you can find insights that can greatly aid your trading decisions.

Aside from commodities, this form of market research can be done across a whole range of asset classes. While the start of 2022 has been rough for almost all markets, there was a niche market that sprung to life. Some traders were early to figure out that there were profits to be made in derivatives related to treasuries. It’s widely known that inflation rates and interest rates have a strong correlation with each other. For them, it was as simple as finding which derivatives or instruments to trade in order to benefit from the macroeconomic situation.

Last Remarks

Overall, understanding that the market correlations are becoming more pronounced today can be a good added edge to your trading system. By taking into account what certain scenarios can do to other assets, you can research and find interesting past market behaviors that you can take advantage of. However, just remember that correlation does not always equate to causation. Most of the time old correlations can die down and new ones can form. 

In the end, it all boils down to being diligent and keeping up with the forever-changing market dynamics.

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