The Gateway to Algorithmic and Automated Trading

Dr. Strangecoin or: How I learned to stop worrying and love the blockchain

Published in Automated Trader Magazine Issue 38 Autumn 2015

Who is trying to shape the future of bitcoin infrastructure adoption? Augustin Eden reports.

Richard Olsen, CEO, Olsen Invest

Richard Olsen, CEO, Olsen Invest

In its short life, bitcoin has become the longest established and most closely followed cryptocurrency, with a flourishing industry built up around it.

By 2014, the brokering and buying of bitcoins from merchants had given birth to exchanges on which derivatives could be traded by hedgers and speculators while arbitrageurs were able to take advantage of sometimes large discrepancies between exchanges battling to keep up with a volatile bitcoin price.

Its value as a tradable asset meanwhile has been punctuated by being classified as a commodity by US regulator, the CFTC.

But as volatility has subsided into 2015, so too have the opportunities.

Options and non-deliverable futures now dominate, still relevant in institutional structured products and another string in the bow of the retail sector. Yet, with the plunging bitcoin price and general reduction in the computer resource-intensive mining activity that brings bitcoins into being, the cryptocurrency finds itself drifting out of fashion.

When the Bank of England addressed bitcoin, it concluded that the cryptocurrency 'does not pose a threat to the UK's financial stability'. Of course, bitcoin's designers and developers never had that sort of intent. What they do want to do, however, is present a new system that doesn't rely on one trusted entity to ensure the execution of transactions.

Bitcoin is dead. Long live the blockchain...

And just as bitcoin is down, this new system, the underlying protocol, is on its way up - the blockchain.

Processing transactions requires protocols or payment systems. The most basic transaction is walking into a shop and exchanging goods for cash. For anything more complicated, like cross border deliveries paid for with a note, there needs to be a means of recording the transfer of ownership at each stage, a ledger.

What bitcoin has brought to the table is a ledger-based system that does not rely on the authority of the central bank. It is decentralised and, crucially, based on just the right amount of mistrust.

The blockchain essentially flips the trust model on its head by creating community-wide scrutiny of the individual user.

This makes it possible to consider a new kind of financial marketplace in which batch-based clearing and settlement is eliminated. It could even make intra-day interest rates for intra-day trade positions possible.

Richard Olsen, co-founder of FX market making firm Oanda and founder of hedge fund Olsen Invest, said the inefficiencies of batch-based processes drive up transaction costs and hinder the timely transfer of ownership, while day traders avoid any penalties for going short in the markets.

Why, then, with the advent of the enabler that is the blockchain, has this not gone global? Olsen hasn't the foggiest. "No other platform enables second by second interest rate payments, or the same terms for any deal size… and I haven't a clue why. I literally don't understand. This infrastructure enables lower spreads and a lower average ticket size, which is vastly beneficial to the trader."

He thinks the problem could be one of 'paradigm shift.' It's such a big idea that it's bound to be met with a kind of defensive scepticism both from those wary of its open-source nature giving rise to security concerns, and arguably those who would write it off as merely idealistic.

"People don't understand," Olsen said. "But if you explain the mechanics to them then maybe their outlook will change. If you talk to some very senior people in the banking sector...they also would like to do work which is beneficial to everyone but they don't know how."

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