CPT Cryptocurrency & Digital Assets 3 — Questions and Answers
Question 1: A trader notices that a DeFi token's price on DEX A is $50 while on DEX B it is $52. What strategy would a professional trader employ?
- Momentum trading by buying on both exchanges simultaneously
- Arbitrage by buying on DEX A and selling on DEX B to capture the spread (Correct answer)
- Short selling the token on the more expensive exchange only
- Waiting for the price discrepancy to widen before acting
Correct answer: Arbitrage by buying on DEX A and selling on DEX B to capture the spread
Cross-exchange arbitrage exploits price inefficiencies by simultaneously buying the cheaper asset and selling it where it trades higher, minus transaction costs.
Question 2: What does 'TVL' (Total Value Locked) measure in the DeFi ecosystem?
- The total market capitalization of all DeFi tokens combined
- The aggregate value of crypto assets deposited into DeFi protocols (Correct answer)
- The number of unique wallet addresses interacting with DeFi platforms
- The total transaction volume processed by DeFi protocols in 24 hours
Correct answer: The aggregate value of crypto assets deposited into DeFi protocols
TVL represents the total USD value of crypto assets currently deposited as liquidity or collateral across DeFi protocols, used as a measure of ecosystem health.
Question 3: In a crypto options market, what does a trader achieve by buying a 'put option' on Bitcoin?
- The right to purchase Bitcoin at a specified price before expiration
- The right to sell Bitcoin at a specified strike price before expiration (Correct answer)
- The obligation to deliver Bitcoin at the current spot price on expiration
- A guaranteed profit if Bitcoin rises above the strike price
Correct answer: The right to sell Bitcoin at a specified strike price before expiration
A put option gives the holder the right, but not the obligation, to sell the underlying asset at the strike price, profiting when the asset's price falls below the strike.
Question 4: What is 'impermanent loss' in the context of providing liquidity on automated market makers (AMMs)?
- Losses from paying excessive gas fees on Ethereum transactions
- The temporary reduction in value compared to simply holding assets, caused by price divergence in a liquidity pool (Correct answer)
- Permanent losses incurred when a smart contract is exploited by hackers
- The loss of staking rewards when a validator is slashed for misbehavior
Correct answer: The temporary reduction in value compared to simply holding assets, caused by price divergence in a liquidity pool
Impermanent loss occurs when the price ratio of pooled assets changes from deposit time, causing LP holdings to be worth less than simply holding the assets outside the pool.
Question 5: Under the Howey Test, which element is NOT required to classify a crypto asset as a security?
- Investment of money
- Common enterprise
- Expectation of profits
- Decentralized governance structure (Correct answer)
Correct answer: Decentralized governance structure
The Howey Test requires (1) investment of money, (2) in a common enterprise, (3) with expectation of profits, (4) derived from efforts of others — decentralization is not one of the four prongs.
Question 6: What is the primary risk of using high leverage (e.g., 100x) when trading crypto perpetual futures?
- Being subject to additional regulatory reporting requirements
- Liquidation of the entire position from a small adverse price movement (Correct answer)
- Slower order execution due to higher computational requirements
- Forced conversion of the position into spot holdings at expiry
Correct answer: Liquidation of the entire position from a small adverse price movement
At 100x leverage, a price move of just 1% against the position can trigger forced liquidation, wiping out the entire margin deposited as collateral.
Question 7: What does 'proof of reserves' provide to cryptocurrency exchange customers?
- A government guarantee that customer funds are insured up to $250,000
- Cryptographic verification that an exchange holds sufficient assets to cover all customer balances (Correct answer)
- Confirmation that an exchange complies with KYC and AML regulations
- A legal audit certifying that an exchange operates as a registered broker-dealer
Correct answer: Cryptographic verification that an exchange holds sufficient assets to cover all customer balances
Proof of reserves uses Merkle trees and cryptographic attestations to let users independently verify that an exchange holds 1:1 backing for all customer deposits.
CPT Cryptocurrency & Digital Assets 3
A trader notices that a DeFi token's price on DEX A is $50 while on DEX B it is $52.
What strategy would a professional trader employ?