The Difference between Debt Financing and Equity Financing: Which Is Right For You?

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Getting the capital you need to run your business can be a struggle for any business owner. You need money for operations, but most importantly, you need money to grow. When you’re looking for extra funds, there are typically two options: debt financing and equity financing.

It’s important to understand the difference between debt financing and equity financing so when it comes time to get additional funding, you know which is the right fit for your business and how to get it.

Debt Financing.

Debt financing involves borrowing money from a lender outside of your business. You have to pay the money back with interest over a specified period of time. Banks, private lenders, family, and friends are all considered sources of debt financing. Lenders offering this type of funding don’t have a say in your business decisions or day-to-day operations.

Commercial Loans.

Banks offer commercial loans for businesses but they can be difficult to get for startups. They are for established businesses. You have to have a viable business plan with a good credit score and collateral to qualify. Different banks have different payment terms and rates so shop around before making a decision.

Working Capital Loans.

These are short-term loans that can help with everyday operations. You can’t use working capital loans to buy equipment or assets, but it does work really well for months with slow cash flow, especially if your business is seasonal, allowing you to pay them back when your sales improve.

Equipment Loans.

If you operate a business that uses large and expensive equipment, like a doctor’s office or auto repair shop, you may need to take advantage of equipment loans. They’re like commercial loans, but you use them to lease equipment. At the end of your lease, you can buy the equipment if you want to.

Equity Financing.

Equity financing is provided by an investor instead of a lender. This is still an entity outside of your business, but these investments don’t require you to make payments. In exchange for supplying your business with money, the investor owns a portion of your business and may have a say in your daily operations or business decisions.

The investor puts money into your business because they have faith in its success and expect their investment to grow substantially over time. They may be entitled to dividends or regular payments out of your profits as well as a large payout if you ever sell.

Private Investors.

Anyone who wants to invest in your business that is not part of a bank or alternative lender is a private investor. These investors come from many different sources like employees, suppliers, friends and family, or other local investment groups. You can find these types of investors by networking within your community.

Private investors could also be angel investors who form a small group of high net worth individuals, focused on investing in local businesses and offering services to help build your business up and see it succeed. They have a vested interest in providing assistance because they stand to make money off of your success, too.

Venture Capital.

Venture capitalists have more stringent requirements for investing, and small businesses often don’t qualify. They usually only invest in new or rapidly growing companies who pose higher risks to the investors but stand to offer a larger return.

Employees.

You may choose to sell part of your company to your employees via a stock ownership plan. This gives your employees ownership, meaning they have a vested interest in its success, but it can be expensive to maintain these plans, and you have to be in business for at least three years before you can establish an ESOP.

A Look at the Differences.

By examining the pros and cons, you can determine which may be right for you in the long run.

Debt financing pros:

  • You maintain full ownership of your company without having to give voting rights to another party.
  • Once the loan is paid off, you have no other obligations to the lender.
  • Your loan interest is tax deductible.
  • You have short-term or long-term loan options.
  • You can establish a budget based on what you know the principal and interest will cost.
  • Alternative lenders now provide more flexible lending options than traditional banks. For more details, click here.

Debt financing cons:

  • You have a payment plan and must adhere to the time period in which the payments are due.
  • These loans could cause or increase your cash flow issues instead of solving them.
  • You have to offer collateral to qualify.

Equity financing pros:

  • There is less risk associated with equity financing than with debt financing.
  • You don’t have to pay your investors back right away.
  • You can use your investor network to gain credibility or additional investment.
  • Investors don’t expect payment or return on investment right away.
  • You have access to more cash on hand.

Equity financing cons:

  • You may pay more to your investors in the long run than you will a bank loan, depending on your level of success or how much investment you take.
  • The investor owns a portion of your business and could potentially have decision-making power.

The right choice is different for every business. Established business with more proven sales and a viable business model have more financing options. While small business and new businesses struggle more, there are still options out there.

For most investors and lenders, they determine whether the risk is worth the reward. You may choose one solution that works for you or combine several options to take advantage of the benefits of each. The choice is yours.

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Common Digital Marketing Mistakes Small Businesses Should Avoid 

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It is so much easier to start a business when you have resources that do not require a lot of money to use. For instance, nowadays digital marketing has enabled small business owners to compete with even big brand names in the online landscape. On the Internet, it is fair game, what matters are the strategies you implement to get people’s attention.

Digital marketing, search engine optimization – these are things that you can learn if you take the time to read all the helpful resources from websites like HubSpot or Neil Patel’s blog.  However, digital marketing evolves so fast that anyone can get overwhelmed with the strategies they need to implement to cope with these changes. And when people get overwhelmed, they tend to forget some of the basic best practices the make up the foundation of their online efforts.

These missteps may cost your business so much, so here are some of the digital marketing mistakes you should keep in mind and try to avoid.

Over complicated website design and layout.

The problem with prioritizing aesthetic on websites is that usability suffers. You might want to put one too many colors or put flash graphics because you think it might get people’s attention. It will, but it might not have the effect you want.

A website, especially in an age where users access the Internet more on their mobile, must be simple. Simplicity does not mean barebones – it means it is practical. Upon loading, a user must know how to navigate your website after a glance. Make it too complicated and it will surely turn off a lot of potential customers.

Over complicated websites will mean slower performance and no chance of being mobile adaptive. After redesigning your website, make sure your hosting can give you optimum website speed, test out the new layout for its navigability, and then launch it.

Not offering promos and discounts.

As a business owner, you cannot settle for a steady number of buyers. What you want is for that number to grow and encourage buyers to keep shopping in your store. You can do this by offering promos and discounts to new and return buyers.

Do not think that offering discounts might mean they will not purchase anything at full price. Remember that what you want, especially for new visitors, is to go to your website and check out your shop. While browsing, they may be more willing to buy more products other than your discounted items.

No blog on the website.

A blog is a surefire way to increase your website’s traffic. Not only can you target your keywords in various ways other than your website copy, but you can provide relevant information to your customers and become a go-to resource for their needs. In addition, 97% of inbound links your blog gets gives your website even more traffic.

Use a blog to interact with your customers by encouraging them to share and comment. You can also use your blog to ask your customers for feedback on your products.

Inconsistent social media posting.

These days, if you are not active on social media, you are not maximizing the online platforms available to you. Most of your customers, both existing and potential, are on social media. It is another way to engage with your market in a platform that is free to make.

Of course, if you have promos and discounts, do not hesitate to pay for promotions. On Facebook, you can set the market demographic you want your ad to target and see the results within activation.

To find out the best times to post on social media, just look at the analytics. You can see specific time intervals of when your market is active and which posts get the most engagement.

These form the basic best practices in digital marketing. Make sure you practice all of these and improve upon it so you can benefit from the opportunities the digital landscape has offered businesses big and small.

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4 Improv Hacks From Second City That Shaped My Entrepreneurialism

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by Scott Kitun, CEO of Technori 

No matter what audiences think, improv isn’t about being funny — though it’s a relief when people react positively. It’s about handling a million things at once, working with a team, accepting failures, and moving forward despite the beads of sweat trickling down your back.

In other words, it’s a lot like being a corporate leader.

In 2009, feeling dissatisfied with my career and ready to take on a new challenge, I joined the Second City Conservatory in Chicago to study improv. When I signed up, I had no expectations that it would do anything other than help me be happier — laughter, I believe, is the best remedy for nearly all of life’s problems.

Learning improv instead taught me more about running companies than any riveting TED Talk or MBA course. On the improv stage, I learned how to deal with pressure, juggle stress, and gel with teammates whose brains are going in completely different directions than mine. Most importantly, I learned how to be comfortable with failure.

Own Your Stage as a Leader.

Whether you’ve studied improv or not (and I suggest you do!), any business leader can adopt some time-honored improv hacks that will pay off tenfold when you pitch to investors, hire top talent, and lead your organization.

1. Say ‘Yes, and’ enthusiastically.

Improv pros consistently use a strategy that can be condensed to two words: “Yes, and.” This simple phrase keeps the scene moving, and I’ve found myself applying the idea to business strategy as well.

It works like this: When someone presents an idea — say, introducing an invisible gnome into the scene or trying a new marketing tactic — everyone involved should start with a baseline of agreement (that’s the “yes” part). Then, you build on it (hence, the “and”).

A lot of times in the business world, the knee-jerk reaction to something new is an immediate “no.” Instead of shutting down the idea, pretend like you’re lifting a couch in a stairwell, and pivot. Try thinking about how to make it work. Agree to the basis of it, and then build on it.

I promise you’ll end up with much more fruitful discussions and ideas with “Yes, and” than if your company culture is “No, but.”

2. Embrace the struggle.

During my Second City days, I got very comfortable with criticism very quickly. Resilience goes a long way when you’re an entrepreneur who just made a face-palm decision. Just like one ill-fated joke won’t derail an entire show, one error usually doesn’t mean the end of your company’s momentum.

Improvisation teaches the art of loving struggles, as well as finding joy in wins and defeats. Too many entrepreneurs surrender to rejection the first time they hit a big challenge. Instead, think of each instance as a chance to improve your performance. Accept the criticism, learn from it, and come back ready to hit the stage again armed with newfound tricks.

3. Set your team up for success.

Improv is a team sport, and business should be, too. When I studied at Second City, I was forced to accept that I wasn’t the star of the show. Without the support of the others on stage with me, I would have tanked every single time. Truthfully, they often shined without me.

It was humbling at first, but I grew to accept that sometimes I would have to play second fiddle in order for a scene to truly work. With time, I embraced that without shame, guilt, or surprise in my businesses, as well.

This is a hard lesson to learn for business owners or those in leadership roles. Be especially cognizant of supporting your team members; help them up when they stumble, and let them shine when it’s their turn to do so. Trust me, when you inevitably fail, they’ll be there for you, too.

4. Lighten up, for Python’s sake.

Stop taking yourself seriously. I know you’re investing in something that you believe is going to change humankind. Great! Yet if you can’t accept others’ feedback or opinions, your groundbreaking invention will remain a pipe dream.

Taking improv allowed me to accept rejection without letting it alter my mental state. Today, someone could tell me that my baby is ugly, and I won’t miss a beat. Staying grounded and consistent as a decision maker and CEO is a piece of cake when you’ve been confronted by a silent crowd.

As a leader, you’ll always have the opportunity to fall flat on your face, so make sure you’re going about it the right way. With strong team members to support you and “Yes, and” on the top of your mind, you’ll set yourself up to be a nimble, resilient leader.

 

Scott Kitun is the CEO of Technori and host of The Startup Showcase on WGN Radio. Technori is Chicago’s largest and most diverse startup community that helps its startups gain traction by engaging with thousands of would-be investors, partners, and customers through highly curated events, shows, and the Technori co-op.

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What Is a Balance Sheet and How Can It Help Your Business?

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As a small business owner, you know how important it is to make the most of every tool that’s available to run a better business. That’s why every entrepreneur should be taking advantage of the balance sheet. What is a balance sheet and why should you care?

A balance sheet is one of the three financial statements that, taken together, give you a picture of the overall financial health of your business. (The other two financial statements are the cash flow statement and the profit and loss statement, sometimes called the income statement.)

Why is a balance sheet important?

It may help to think of your business’s balance sheet as a scorecard or report card that shows the status of your business’s finances at a given moment in time. The balance sheet records your business’s assets, its liabilities, and the owners’ equity (also called shareholders’ equity) in the business.

What is a balance sheet’s purpose? It can do several valuable things for a small business owner.

  • A balance sheet shows you the big picture. When you’re running a business today, it’s easy to get focused on whether cash is coming in or not, whether you can pay your bills, and if you’re making payroll. A balance sheets goes beyond this short-term view to show your business’s progress over time.
  • A balance sheet helps you measure the value of your business. You may not be planning to sell your business anytime soon, but having an idea of its value (that is, the owners’ equity) can give you insight into your options for its future.
  • A balance sheet can serve as an early warning system. Between the beginning and the end of the year, is your owners’ equity growing or shrinking? A well-run business should produce growing equity. If your business isn’t doing this, looking at the specific assets and liabilities on your balance sheet can help you find out why. For example, if most of your assets are inventory, that’s risky. Inventory that doesn’t sell quickly becomes a liability.

Components of the balance sheet

A balance sheet has three sections: assets (what the business owns), liabilities (what the business owes, both now and in the future), and owners’ equity (assets + liabilities). Let’s take a closer look at each.

1. Assets

Assets include current assets, fixed assets and other assets. Current assets include:

  • Cash
  • Accounts Receivable
  • Inventory
  • Assets that can quickly be converted to cash such as certificates of deposit

Fixed assets are long-term assets that your business will have for more than 12 months. They include:

  • Equipment
  • Buildings
  • Land
  • Vehicles

You may also have intangible assets, such as trademarks or patents.

Other Articles From AllBusiness.com:

  • The Complete 35-Step Guide for Entrepreneurs Starting a Business
  • 25 Frequently Asked Questions on Starting a Business
  • 50 Questions Angel Investors Will Ask Entrepreneurs
  • 17 Key Lessons for Entrepreneurs Starting A Business

2. Liabilities

Current liabilities are those that need to be paid within the next 12 months, such as:

  • Accounts payable
  • Taxes
  • Payroll
  • Debt service
  • Credit card payments

Long-term liabilities will not be paid within the next 12 months. These include:

  • Outstanding loans (minus the current portion of these debts)
  • Mortgages

3. Owners’ or shareholders’ equity

Add together assets and liabilities to arrive at your owners’ equity or shareholders’ equity. Ideally, this should be a positive figure, but if things aren’t going well, it could be a negative number.

If your owners’ equity remains negative, it will affect not only your profitability, but also your ability to get capital from lenders or investors. Financing sources want to see that a business is doing well enough financially to service its debt or make a profit for investors before they will put any money into your business.

So, what is a balance sheet?

While it may sound like overkill if you are a one-person company or a very small business, a balance sheet is actually a valuable tool for businesses of all sizes to monitor their progress and see how they’re doing.

RELATED: 5 Financial Mistakes to Avoid in Your Small Business

The post What Is a Balance Sheet and How Can It Help Your Business? appeared first on AllBusiness.com

The post What Is a Balance Sheet and How Can It Help Your Business? appeared first on AllBusiness.com. Click for more information about Rieva Lesonsky.

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How the Electric Vehicle Industry Could Drive Cryptocurrency Forward

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Bitcoin’s technology combined with the power of the Internet of Things and artificial intelligence are intersecting with self-driving vehicles. And they are confronting a common problem: Talent shortage. In this regard, the experience gained by the electric vehicle industry might help.


Limited Talent

A Korn Ferry Institute study concludes that a major world crisis is imminent, because, by 2030, demand for skilled workers will outstrip supply, resulting in a global talent shortage of more than 85.2 million people. Moreover, the study forecasts that talent shortages could slow the ongoing digital revolution.

For example, right now, the talent shortage of programmers capable of working with COBOL is acutely affecting the banking, fintech, and most emerging industries.

Demand for Bitcoin Jobs Surging as Price Continues to Climb

According to David Silver, self-driving car team leader at Udacity, limited talent hinders the development of driverless cars. Specifically, Silver points out, “very few people know how to program driverless cars.”

The same problem is distressing the crypto industry. Forbes contributor Maria Peretz remarks that few people are cognizant about blockchain and cryptocurrencies,

Executives who are approached to work for these startups have usually heard of Bitcoin, the most well-known cryptocurrency, and they may vaguely know blockchain has something to do with securing digital currency. However, they often have a fleeting grasp of the nuances and possibilities of this dynamic industry. Their haziness and lack of knowledge can be a formidable challenge to startups that want to land key talent in a competitive hiring market.

E-Car Roadmap Could Help Solve the Shortage of Talent

In August 2018, in the U.S., a record high of 7.14 million positions remained unfilled. Regarding the crypto space, statistics provided by Glassdoor show that for the last twelve months, there has been a 300 percent increase in the number of jobs linked to Bitcoin, the blockchain, and other cryptocurrencies. Forbes reports,

As of August 2018, there were 1,775 bitcoin and blockchain-related job openings in the U.S. — up from 693 at the beginning of the year and 446 at this time last year.

Although in sectors such as life sciences, the percentage of professionals using blockchain has tripled since 2017, the shortage of programmers and blockchain professionals continues to increase.

In this regard, Peretz seems to suggest that the electric vehicle (EV) industry is ahead of the crypto industry. Thus, she suggests that crypto companies could benefit from the model the EV industry applied a decade ago, when “Like with bitcoin and cryptocurrency today, exactly what talent the EV needed in 2010 was unclear.”

“This strategy requires a delicate balance of simplicity and sermonizing, clarity and passion. Fortunately, there is a roadmap for how to do it well: Follow the electric car down the highway to success,” Peretz adds.

Do you think the experience gained by coping with the talent shortage in the electric vehicle industry could help the crypto industry? Let us know in the comments below!


Images courtesy of Shutterstock

The post How the Electric Vehicle Industry Could Drive Cryptocurrency Forward appeared first on Bitcoinist.com.

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SEC to create a new crypto division

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The U.S. Securities Exchange Commission will open its new division aiming to lighten fintech startups, including ICO running to help with legal issues. Announced on Thursday, Strategic Hub for Innovation and Financial Technology (FinHub) will act for the securities regulator as a liaison between entrepreneurs and developers in the fintech field, incuding DLT oriented groups, […]
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Japan to develop blockchain system for electricity suppliers

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In the framework of a four-way partnership between large Japanese companies a research on possible Blockchain use in distributed electricity supply is going to be made. Kansai Electric Power Co. (Kepco) will work with Mitsubishi, UFJ Bank, IТ service management company Nihon Unisys and University of Tokyo to work out a project which considers a […]
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Coinbase Transaction Explained

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Coinbase Transaction Explained

Transactions that are executed on networks such as Bitcoin are batched together to form a block. These blocks are then included on the blockchain to form an immutable and tamper-resistant record of all transactions that are made on the network. Each block added to the blockchain must include one or more transactions, and the first transaction required in that block is called the coinbase transaction, which is also known as the generation transaction.

Coinbase transactions are always constructed by a miner and will contain a reward for efforts expended during the proof of work mining process. The total amount of reward that a miner will collect is the sum of the block reward and the transaction fees taken from all the transactions that have been included in the block. To create a coinbase transaction, the miner will calculate the total amount of transaction fees for transactions that are included in a block, which is calculated as the following:

Total fees = sum(inputs) – sum(outputs)

Blocks are not required to include any non-coinbase transactions, but miners will almost always include additional transactions in order to collect the fees that are attached to these transactions.

The miner will then calculate the block reward for the newly created block, which is calculated based on its block height. The height of a block is simply the number of blocks in the chain between it and the first block in blockchain. The very first block included in a blockchain is known as the genesis block, which has a block height of zero. With the Bitcoin protocol, the block reward started at 50 bitcoins per block and is then reduced by half every 210,000 blocks, which can otherwise be interpreted as being approximately every 4 years. There have thus far been two instances in which the Bitcoin block reward has been halved. The next Bitcoin halving event will occur sometime in 2020, which will see block rewards reduced from their current level of 12.5 bitcoins per block to 6.25 bitcoins per block.

As it is the miner that constructs the coinbase transaction, there was the possibility that a miner could simply reward themselves in excess of the correct block reward and total transaction fee. However, a miner that rewarded themselves incorrectly, would find that block being deemed invalid by other participants in the network. Thus, that block would not be included in the blockchain and that miner would not be able to recoup the financial costs taken on during the proof of work mining process.

Another important feature of a coinbase transaction is that bitcoins involved in the transaction cannot be spent until they have received at least 100 block confirmations. The rationale behind this is to prevent a miner from spending a block reward and transaction fees from a block that may later be regarded as being a stale block after a fork in the blockchain.

The Coinbase Data

Usually, transactions on networks such as Bitcoin consume an unspent transaction output (UTXO) to form an input as part of a transaction on the network. However, this is not the case for a coinbase transaction. Instead, a coinbase transaction possesses only one input, called the coinbase, which effectively creates bitcoins from nothing. Whilst the coinbase data forms the input of a coinbase transaction, the coinbase transaction has only one output, which is payable to a miner’s cryptocurrency address. Thus, the output of the coinbase transaction is the value of the block reward and total transaction fees attached to transactions that have been included in the block.

The coinbase data provides for up to 100 bytes of data, and except for the first few bytes, the remainder of the coinbase data can be used by miners in any way they wish. In other words, the rest of the coinbase data can effectively be regarded as being arbitrary data. For example, on the Bitcoin blockchain, Satoshi Nakamoto famously included the following text in the coinbase data of the genesis block:

‘The Times 03/Jan/2009 Chancellor on brink of second bailout for banks’

Whilst the first few bytes of the coinbase data was initially arbitrary, this was changed with the adoption of BIP-34, which required that the height of the block be included in the first few bytes of the coinbase data.

The post Coinbase Transaction Explained appeared first on Mycryptopedia.

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How crypto market making protects multi-million dollar token market cap values

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Target Audience

The primary audience for this paper is executives who run a blockchain/crypto company and who are planning to run an Initial Coin Offering (ICO), a Securitized Token Offering (STO) or who have already listed a digital asset on an exchange. Secondary audiences are those providing services and support to blockchain projects such as consultants, marketing agencies, exchanges, and crypto venture capitalists.

Purpose

To elucidate the concept of market making in the crypto world and to outline several market making strategies so that the reader can be better informed as how to manage their digital asset in market with the long-term goal of raising and protecting capital to fund business operations.

Market Making Overview

In the early phases of a digital security (currency, token, securitized token) the market is in a phase of price discovery. Price discovery is the process of market participants sorting out what the market price of the new asset is.

A single currency, token or security is often traded on multiple exchanges concurrently. Exchanges provide an electronic order book to maintain the collection of bids and offers and a matching engine to match buyers with sellers and execute trades.

In the crypto markets, there is a shortage of buyers and sellers in the market to create sufficient liquidity. A liquid traded asset can be frequently bought or sold without causing major swings in the price because there are lots of buyers and sellers trading the asset. The market maker is there to provide price stability and initial liquidity so the natural market price can be discovered without the noise of irrational price swings. Over time a successful asset builds organic liquidity (sufficient investors on the buy and sell side creating tight price spreads and numerous orders on each side of the order book).

Crypto Volatility

In crypto markets volatility is extreme. There are many new tokens on the market and relatively few buyers and sellers across all cryptocurrencies and tokens compared to what is needed to establish a natural state of organic market liquidity.

At the time of this article, there are about 3300 stocks traded on the NASDAQ with a daily trade volume of $140 Bill. In crypto, there are 1600 active tokens and currencies with a daily trade volume of $11 bill, some percentage of which is known not to be real trading. Assuming all reporting crypto volume consists of real trades, this equates to 93% less volume across 50% fewer securities = high, if not extreme, volatility.

As a result, market making is a critical service for any cryptocurrency, token or crypto asset. Much more so than in traditional markets.

Execution

State of the art market making requires a combination of technology and market trading sophistication. The technology must be cutting edge, low-latency, capable of scaling to tens of thousands of orders, numerous concurrent pairs (ETH/BTC/USDT for example) and many crypto exchanges. It needs a disciplined approach to trading and risk management. It requires quantitative and math finesse to build financial models and analytics and to use data and statistics to drive innovation and new strategies. It needs market expertise and ingenuity.

Execution strategies must be formed in the context of companies businesses activities and priorities. Market making should be thought of as a partnership that requires close communication so that adaptation to the rapidly changing world of crypto assets and company business context can be navigated.

Companies deploying effective market making as a core component of their digital asset financing strategy realize a larger initial capital raise and maintain a stronger long-term market position resulting in resources to finance operations, outlast the competition and win.

Unhealthy Order Book

Investors are dissuaded from purchasing a digital asset when the price spread is large (the difference between the highest bid and the lowest offer price). In the image below, buying the asset at the minimum price offered for sale ($2.12) means an immediate loss of about 40% in case the buyer wants to immediately sell it back at market price ($1.32).

In this example, there are not enough orders (or funds within the orders) on the order book to let an investor sell out of their entire position when they want to. This asset will be met with investor reluctance

Healthy Order Book

An order book is healthy if the number of bids and offers is large, and the price spread is small. Market making closes the price gap and thickens the order books with bid and offer/ask orders.

ICO investors as part of their diligence process will eventually review the order book before deciding to invest. The order book below is healthy and more likely to attract the investment. In this case, the asset trades at 0.5% spread and there are enough orders such that the investor has the ability to unwind their positions (sell) at any time.

A spread in the range of 0.5%-0.8% is generally considered healthy. Sophisticated market making algorithms automate this process and provide a high degree of configurability to support a range of strategies and market situations.

Optimal Use Of Market Making Funds

Assume the ticker symbol for our New Digital Asset is NDT and that we are trading this asset against multiple currencies. For each pair, NDT/ETH, for example, an equivalent funding amount is placed on each exchange where the pair is traded. For example $50k USD equivalent in NDT and $50k USD equivalent in ETH.

As bid and offer orders are executed the amount of funds on each side of the pair goes up and down depending on the volume of buying vs selling happening in the market. In a down market when there are more sellers than buyers, the ETH funds may be used to place and execute orders which buy NDT tokens. Over time this creates an imbalance between ETH and NDT. The market making algorithms seek to rebalance by selling back NDT if and when the opportunity arises.

An exciting element of the crypto world is that crypto assets can be more freely exchanged than traditional securities. Many vendors, for example, accept payment in a projects token. This means accumulating a token can be viewed as increasing capital that can be used by the project in the short or long term. As an example at Efficient Frontier, we accept the majority of our compensation in the form of a projects token.

Outside the market makers fees, the only cost to operate the market making algorithms are the fees charged by exchanges. Note: This can vary by the pricing model of the market making firm.

Newly Listed Assets

The point of lowest order book health is when an asset is newly listed on an exchange. This is arguably when market making is needed most. During the early trading periods, the market making algorithms may have a difficult time keeping funds balanced. If early investors are selling off their tokens it is important that enough funds are available and that the order refresh rate in the algorithms is high enough to provide the stability needed in the market of that asset. During this phase rebalancing of funds through trading may not be possible. Additional funds will likely be required.

Hedging Maturing Assets

As assets mature organic liquidity is increasingly provided by investors. Unlike traditional markets, in crypto, it is very common to list an asset on multiple exchanges. Often times projects will add multiple exchanges over time and increase the number of traded pairs. Each new exchange and new pair will require market making funds. Trade volume on each pair will be different. As volume for a given pair on a given exchange increases the ability to hedge that pair across all exchanges and keep market making funds in balance presents itself.

As in our earlier example when investors are selling more NDT will accumulate than funds on the other side of the pair and funds become imbalanced. As this happens NDT can be sold on the high volume exchange and done intelligently so that the NDT price is not materially impacted. Funds can then be rebalanced across the exchange accounts. In an ideal state market making can operate in a balanced way across all exchange-traded pairs. Refreshing funds at this state is not required and in many cases, market making can become profitable.

Exchange Volume Balancing

When the conditions are there to support hedging it becomes cost-effective to balance price differences between large and smaller exchanges. This allows smaller exchanges to better compete with the larger exchanges by elimination inferior asset pricing increasing volumes on smaller exchanges. It is important for the project that no single exchange has too large a portion of the total volume.

Sigma Events

Each of the red dots in the image below represents a sigma event. A sigma event occurs when an order book becomes thin such that a single small order will cause a dramatic price swing, that may trigger other bots and traders to join and subsequently amplify a downward trend.

The image below represents a real-life client case study. A series of sigma events lead to large and avoidable price drops triggering investors and trading bots to begin selling. These sigma events drove what became a long-term 50% reduction in market cap and token price. You can see the period where no sigma events are present. This is where Efficient Frontier was engaged.

Efficient Frontier sigma event prevention algorithms can be configured to inject orders only at the instant when the order books become unusually thin and can be set up to protect from a range of order standard deviations.

Technology

The Efficient Frontier Trading Platform is hardened from over 12 years high-frequency trading in the traditional markets. The platform has been adapted to take advantage of the unique data and opportunities in the crypto markets where work began in early 2017. The Efficient Frontier Trading Platform is best in class cutting technology.

  • Blockchain — Transaction data is captured from the blockchain and fed into the token intelligence database. The token intelligence database can detect when a large number of tokens have moved onto an exchange. This triggers Trading Algorithms and subsequently the Order Execution engine to manage the order books such that a single large order does not cause a price crash.
  • Order Book Consolidation — Data for all order books across all exchanges and traded pairs are consolidated into the Order Book Database. Price prediction algorithms leverage current and historical data to understand market price and price behaviors.
  • Historical Exchange Database — Because exchange data has been unreliable we began storing all historical exchange data in early 2017. This reference data set is the ground from which trade algorithm simulation is operated.
  • Real Time — In traditional markets, the competitive edge comes from the speed of the complete loop from data ingestion to order execution. The Efficient Frontier Platform is state of the art in this regard.
  • 24/7/365 — Unlike traditional markets, crypto markets operate continuously. The technology and support structures must be adapted to support 24-hour global operations.
  • Internal Dashboards — Efficient Frontier Technical Traders monitor the system 24/7 watching for anomalies and potential dramatic market shifts.
  • Customer Dashboards — Every customer is provided with a personal dashboard giving complete visibility into all activities of the Efficient Frontier platform.

Return On Investment

Return on investment can be significant. It is not uncommon for Efficient Frontier to protect a $10 million dollar value in market cap with a total market making expense of few hundred thousands dollars. Effective market making delivers a long-lasting impact on the capital position of the project and its ability to fund operations over time.

About Efficient Frontier

Our mission is to help our customers build blockchain companies that win in the long run. We do that by providing financial products and services (Market Making, Liquidity Provision, Exchange Integration, Treasury Management, Analytics) that optimize the long-term value of the ICO capital raise freeing more time for the executive team to do what they do best and are most passionate about — build winning companies.

We are serial entrepreneurs, bitcoin ambassadors, physicists, traders, investors, computer scientists, mathematicians, and business professionals.

  • Over 12 years experience — algorithmic high-frequency trading
  • Crypto — two years experience building products in support of providing financial services purpose-built for digital assets
  • Regulated members — of the Tel Aviv and Frankfurt, Korean and Hong Kong stock exchanges
  • Global 24/7 — operations with locations in Tel Aviv, San Francisco and Gibraltar with over 20 employees capable of providing unparalleled service

If you would like to learn more do not hesitate to reach out to me at chris@efrontier.io


How crypto market making protects multi-million dollar token market cap values was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.

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