How Crypto Changed Investing

Back to Insights

The New York Stock Exchange came to be in 1792. The Chicago Mercantile Exchange began in 1898. Since then, traders have learned their craft from the previous generation.

Mt. Gox started supporting Bitcoin transactions in 2010. From here, a new generation of traders and investments arrived. Instead of following the rules of the past, they created new ones.

Sure there are cryptocurrency exchanges, and market makers exist. However, the market is fair for everyone. A person buying a percent of one coin or millions of them transact on the same platform.

My Crypto Experience

Sometime in 2013, I was working at a hedge fund, when a trader came to my desk and asked if I knew anything about Bitcoin. Being a Software Engineer, he assumed I understood this new asset class. I was not aware of it then. However, within a few weeks, I was using a spare trading workstation to mine Bitcoin from my desk.

A few years later and another hedge fund approached me about creating an automated trading strategy for cryptocurrency. That system made them 30,000 Euros on the first trade due to a multi-step arbitrage opportunity. If I remember correctly, that trade used USD to purchase BTC and then BTC to buy LTC and the LTC to acquire Euros at less cost than a direct EUR/USD pair.

One of my graduate interns developed a machine-learning algorithm to enhance the system further. This addition discovered the highest probability of selling off the resulting currency back to dollars. It worked great for several months until the market corrected the errors we were exploiting.

After the opportunities vanished, it occurred to me that we were trying to use this new asset class the same way we use old ones. However, cryptocurrency is not FOREX.

Crypto vs. FOREX

Thanks, Richard Nixon (note sarcasm). Before removing most world currencies from the gold standard in 1971, there was no benefit to trading foreign currency. Since then, each country issued fiat currency that resulted in discrepancies of perceived value. Thus at times, one countries money is more valuable than another - leading to speculation and a market for foreign exchange.

Fiat currency is legal tender backed by government promise with no underlying ties to physical assets. Instead of gold, its value comes from supply, demand, and market anticipation. Private Central Banks print money then issues it to governments with interest, leaving the citizens to pay the bill. As a result, the money in your wallet is continually changing in value.

In 2008, a mysterious entity known as Satoshi Nakamoto released Bitcoin. They or it created currency without a central bank or government entity using a central ledger that anyone can view. The supply is limited, with each round of mining more complicated than the last. Am I leaving anything out?

Anyway, Litecoin followed in 2011 with new ones like Ethereum, Bitcoin Cash, and many others to follow. Around the same time, the exchanges appeared. Mt. Gox was the first, but due to legal and security issues was replaced with the more mainstream markets we have today. You know your favorite.

The most significant difference between Crypto and FOREX is that I can take my Crypto earnings and spend them. A EUR/USD pair in a FOREX exchange has to be converted back to dollars for me to take it out. In actuality, I never owned the Euros my dollars “purchased.” Instead, I borrowed them from the broker.

Equality Rules

Unlike many exchange-traded assets, crypto is an equal rights investment. Everyone buying and selling currency is operating under the same rules of the central ledger. Regardless if they trade one-tenth or millions of coins.

There have been numerous advantages given to big players in the 200 plus year history of equity trading. Professional traders have pre-release news, overnight trading, priority trades, lower fees, and fewer legal restrictions than those with a brokerage account - not so with crypto.

Dark Ties

Crypto is a decentralized currency with no single entity controlling it, and that scares authorities. Donald Trump goes so far as to tweet, "I am not a fan of Bitcoin and other Cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air."

However, the sensationalized news media often hits the hardest. A side effect of payments with privacy built-in is the ability to use it for evil. From ransom demands to dark web use of unimaginable horrors, crypto is the payment of choice for some shady deals.

The USD is used for some unsavory business too. They say that 90% of currency has drug residue. However, it is not under the same scrutiny. Regardless, crypto is being taken seriously by big-name investors.

Going Mainstream

Bloomberg reports that "Billionaire hedge fund manager Paul Tudor Jones is buying bitcoin." Jones explained that he believes bitcoin will serve as "protection against a jump in inflation." Reminding him of the role gold played in the 1970s.

Business Insider states, "There is a growing belief that bitcoin will serve as an effective hedge against a potential rise in inflation." According to CoinMarketCap, "The entire cryptocurrency market is worth a combined $267 billion." Giving it real potential as a haven for funds.

Share with a friend:

© 2020 Todd Moses

The strategies discussed are for illustrative and educational purposes and are not a recommendation, offer, or solicitation to buy or sell any currency or to adopt any investment strategy. There is no guarantee that any strategies discussed will be useful. Todd Moses is not a licensed securities dealer, broker, or US investment adviser or investment bank.