CryptoCurrency Trading

Contest Article by Deathop P.

Task: Outline your position regarding the role of crytocurrencies in the Forex market and their future or influence on the market dynamics.

Bitcoin is a fundamental innovation, and presents a new and interesting solution to problems by acting as both cash for the internet and a payment network. As a digital currency it can update the financial system while making it secure for everyone. It presents many innovations to the field of trading. 

With a digital, pseudonymous currency you should be able to engage in transactions with no organization or institution able to violate your privacy or steal your money, in line with David Chaum’s idea of E-cash as a method of payment. In essence, you are able to protect yourself and your financial transactions safely through Bitcoin using a variety of methods such as cold storage, or by pushing transactions securely through the network alongside other means creating choice rather than having to trust others (like Central banks) to manage your assets. This in turn puts more power into the hands of consumers who can provide and maintain their own financial security.

This can be applied to the Forex market by considering how Satoshi created a system that combined the aspects of all these precursor technologies and ideas into a unified system. This was done by creating a payment network for the internet, where each piece of digital information has value as long as no one else knows that information belongs to you. Satoshi solved the double spending problem which is how you can prevent a transaction from being sent to two different people at the same time. This is done through secure cryptography that prevents double spending through different nodes relaying a transaction through the Bitcoin network.

Diagram of a Digital Transaction:

https://bitcoin.org/bitcoin.pdf (Free to Use)

If information is digital in theory it is easy to copy and change, however Satoshi made it so that everyone notices when this is done. If one transaction is noticed and relayed, the other is just ignored preventing a double spend. In Forex the development of (DACs) Distributed Autonomous Corporations or Decentralized Autonomous Companies has the potential to revolutionize the Forex market and the market dynamics.

A DAC pays for its services (like computer resources and bandwidth) and they do this by issuing shares of their own company “stock”.  By doing this DAC’s can charge for their services using those same shares creating a closed ecosystem of transactions where one’s own contributions to the network can then be used to pay for their own services. Finally, a DAC allows the transfer of all profits they earn to their shareholders denominated in those same shares due to the closed ecosystem it is built upon.  With this in mind as long as their corporation or companies services are in demand, those same shares will be in demand. Just like a brick and mortar company in the physical world they are able to transact entirely in a digital ecosystem and provide services in a digital economy.

When viewed by outsiders a DAC is nothing but a crypto-currency backed by the value of the services it provides.  But to the owners of shares in a DAC, they are part of and entitled to a share of the profits that a DAC earns from providing those services giving them a greater incentive to participate in its ecosystems. In the future Forex trading of multiple DAC’s can provide new markets and allow for safe low cost transmission of digital assets to each user in the system.  Within the current Forex system, traditional firms have run into trouble offering CFDS with restrictions due to the fact that it was very difficult to short cryptocurrencies and hedge positions. 

This has resulted in brokers’ decision to offer cryptocurrency derivatives that keep spreads wide when trading digital currencies in order to avoid the creation of fractional reserves in Bitcoin which brokers could not cover and has led to restrictive contract terms. This meant it was not exactly perfect for those wishing to speculate on these cryptocurrencies as shorting is extremely difficult to do when there is not a significant store of Bitcoins held by traders due to the spread restrictions.

Crytocurrencies however have thought about this problem and offer a solution through an idea known as a contract for difference. These are a type of financial instrument that allow speculating the price of financial instruments without owning the underlying asset in question. This allows trading without a need to worry about the spread. A speculator can enter into a Contract with a CFD brokerage that is based on the price of the underlying asset and in doing so allow people to discard the price risk in favor of any asset that has a value that can then be tracked, helping to reduce spreads by using a separate mechanism to transact trades.

This is known as Smart property which allows assets to be represented by tokens and allows companies to raise further capital for their projects by reducing the fees associated with legal, banking transfer, contract fees and other miscellaneous costs associated with traditional banking and trading systems.  The IPO of Maidsafe is a best example. It is a project that was built to create a decentralized means of storage; and to address concerns about the increasing costs of high density data infrastructure as more people connect to the internet and begin using data storage, concerns about data-center capacity and its costs are becoming a serious concern to the internet and its infrastructure.

Maidsafe seeks to resolve this by offering tokens of value in their ecosystem for users that help contribute memory to the network; while no user has a full copy of the information in the network there will be multiple copies of that data secured in the network among its many users which will then have a value as people trade storage property for assets. This is an example of how technologies develop in crytocurrencies to meet new applications. By being able to fund private companies and trade crytocurrency pairs through a contract for difference this can directly influence the market dynamics and the future of Forex exchanges.

With this in mind we can consider Bitcoin 2.0 Projects which are summarized into systems that are built onto the bitcoin network such as sidechains, systems that are independent of the Bitcoin network such as Mastercoin and Maidsafe but still use the Bitcoin network by extension and now systems that use the Bitcoin network but act separately from it such as Ethereum, Darkcoin or NXT. Each of these systems can directly impact the future market dynamics and the Forex trading.

The development of Bitcoin based technologies and the future of Bitcoin 2.0 based systems are something that is currently being developed and is in a constant technological shift, as new ideas and innovations based on Bitcoin technologies occur and spread, and crytocurrencies increase in usage and popularity. New technologies based on Bitcoin will lead towards new innovations that will influence market dynamics. However, it is still something to be seen how these technologies will perform in the future and be applied to market dynamics and trading.

Disclosure: the author of this article is the founder and Chief Scientist of the Ethereum project

The Diagram is used with implied permission as Ethereum is an open source project work under the Creative Commons License.

The article is written by Deathop P. and is participating in the Forex Article Contest. Good luck!