EXANTE: Practical aspects of algorithmic trading. Bitcoin hedge fund. SSE Riga lecture 23.01.2014. Part3.
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Lecture of Sergey Troshin, Ph.D., Director at EXANTE, covers history, technology and market of bitcoin, an innovative payment network and a new kind of money, which is usually called cryptocurrency. The recording is available at the following link: https://www.youtube.com/watch?v=8JToXHeqElA. Enjoy and share the video!
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EXANTE: Practical aspects of algorithmic trading. Bitcoin hedge fund. SSE Riga lecture 23.01.2014. Part3.
- 1. Practical aspects of algorithmic trading. Bitcoin hedge fund. Gatis Eglitis, Managing Partner Sergey Troshin, Ph.D., Head of IT Strategy and Operations Part 3: Bitcoin fund
- 2. EXANTE 1. 2010 - EXANTE ATP & BO, strong IT focus 2. 2011 - Maltese brokerage licence 3. 2012 - Hedge fund platform & bitcoin fund
- 3. The use of money is all the advantage there is in having money. Benjamin Franklin
- 4. Money 1.Durable 2.Portable 3.Fungible 4.Intrinsic value 1.Store of value 2.Medium of exchange 3.Unit of account Aristotle IV BC W.S. Jevons XIX AD
- 5. Money history 1. before XI BC - barter 2. XI BC, China - bronze knives and spades 3. VI BC, Lydia - electrum coins 4. XI AD, China - paper money 5. XXIX AD, Europe - gold standard 6. 1944, USA - Bretton Woods system 7. 1971, USA - fiat currencies
- 6. Value? FAITH
- 7. Value! FAITH
- 9. Businesses Bitcoin 2008 SaToshi NakaMoto http://bitcoin.org/bitcoin.pdf Crypto currencies Exchanges
- 12. Mining
- 13. Market 7 day average from http://bitcoinity.org/markets/list 4 day average from http://blockchain.info/pools
- 15. Risks Legal Technology Market Gov’t regulation 51% attack Manipulation Undefined status Scalability Volatility Anonymity DDOS attacks Clearing http://bitcoin.it
- 16. State of the art Money Tulips Fiat Gold Bitcoin Store of value * **** ***** **** Medium of exchange **** **** *** ***** Unit of account * **** ** ** http://bitcoin.org
- 18. Although some of the enthusiasm for bitcoin is driven by a distrust of state-issued currency, it is hard to imagine a world where the main currency is based on an extremely complex code understood by only a few and controlled by even fewer, without accountability, arbitration, or recourse. Francois R. Velde, senior economist (Chicago Fed Letter) Yep, sounds like the dollar. Reddit commentor
- 19. Questions? Gatis Eglitis, Managing Partner +356 2015 0000, ge@exante.eu 19
Editor's Notes
- 2010 - distributed multi-currency multi-instrument trading platform with real-time pre-trade risks and execution, world coverage, etc, etc. 2011 - MFSA regulated broker with focus on online DMA. IB. 2012 - Start selling funds directly to customers. Some of the funds are Exante customers. BTCF - wrap up fund for customers, 100% legal, seen on balance sheet. 2013 - Over 20 counter parties (brokers and exchanges), start development of matching for funds secondary market and direct execution. subsription/redemption => buy/sell. I’m a mathematician and software developer graduate from MSU and was responsible for the IT development and infrastructure. So no wonder I make a bit laugh out of economists.
- What a nice thought by one of the founding farthers! Unfortunately for Franklin, they put him on a 100 dollar bill, later on to become a hero of Puff Daddy song it’s all about the Benjamins “comma” baby; or the one by swedish singer Meja it’s all about the money.
- So what is money? As the student of Plato, the teacher of Alexander the Great, Plato put it beautifully 25 centuries ago - … Thanks to modern economics science and british W.S. Jevons we move from properties to goals. Durable => store of value Portability, fungibility, divisibility => medium of exchange Divisibility - ruble story. Important, modern XIX economists thought! Does it really need intrinsic value? No. But it should be adopted and appreciated or simply marketed.=> Unit of account.
- It is a strange thought but no money until 3200 years ago. Barter worked just fine. Anatolians used obsidian 12000 BC Shekel (sacks of cereal grain) is dated back 3000 BC. cowry shells by ancient China, India and Africa. Later on turned into minting. Lydia, Electrum (natural alloy of silver and gold), King Alyattes, 650 BC Ming and Yuan dynasties introduce paper money (Marco Polo). Unlike US bills “In god we trust” chinese gov’t was more straightforward “The counterfeiters will be decapitated” Tally sticks by Henry I for collecting taxes, tallies (similar to futures) => and of course when out of resources they sold future tallies to creditors. => early bills of exchange XVII+ England control over colonies => no right to mint coins Massachusets (1652) 1775 revolutionary war England vs US (“continentals”) 1860 greenbacks for civil war between south and north 1821 gold standard in England (1871-1914) 1871 Germany 1900 USA WWI broke it all. 1932 England suspends gold standard, 1934 US goes from 20 to 35 $ per oz. 1968 gold is traded freely on the market. 1971 Nixon shock. Dollar isn’t dictated anymore by storage of gold but by health of American economy. There were many experiments in between. My favorite is Silvio Gesell freigeld theory and Worgl experiment in Austria in 1932.
- Important, post-modern economics XX-XXI century economists thought again! short hint. works for all types of assets. Twitter with 2013 revenue around 1 billion and -60m profit, gets 38b estimation by the market. To trade fx for you need - interest rate manipulations (hey Keysians!), GDP rates, unemployment rates, gov’t budget structure. The most nontransparent market in the world is FOREX!
- The biggest problem with any money. Once it loses credibility its value (read price) falls dramatically. In modern economics it’s called hyperinflation.
- So! The internet era!! E-gold (US oncologist Douglas Jackson). Used myself, to pay outsource designers in late 90s in Russia. Backed by gold coins stored in safe deposit box in Melbourne California! ended 2006 under US patriot act (9/11). Money transmitter under US patriot act. So recent Dwolla case was an easy task for US government. Paypal (Max Levchin, Peter Thiel, Elon Musk x.com). Max - mobile exchange of currency. But turned into online payment processor. LR - founded by Arthur Budovsky and Vladimir Kats (suspicious russian names!) in Costa Rica, 2006. Name, e-mail, birth date only transfers. Tied to $, euros or gold.. LR shut down in may 2013 under US patriot act with money laundering etc etc. Russia and CIS is a totally different story with WebMoney, yandex.money and modern QIWI. Hackers got tired! So here comes the bitcoin. One of the motives is world financial crisis led by subprime mortgage crisis in US.
- Samsung Toshiba Nakamichi Motorola or I like it better anagram of Ma, I took NSA oath. one S is dropped for conspiracy purposes. Quote in network transaction DB by SN: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks” The original paper and prototype led to a whole bunch of other crypto currencies, p2pcoin, novacoin, terracoin, freicoin etc. SHA256 hashing algorithm for scrypt. Average block generation time. Difficulty. Anonymity issues. The exchanges and payment processors (combined wallet and exchange) evolved. Business evolved.
- The turtle of bitcoins stands on three whales. Decentralization + p2p. No central authority! Everyone can be a wholesome participant!! Assymetric cryptography, used and proved in RSA, PGP, TLS/SSL, HTTPS. The major point is that algorithmically except for brute force private key can’t be found for public key. Open-source, MIT license. Which means you can always check the code. Keepass example, very popular. Keychain though works as well.
- Let’s dig deeper with some real-life example, haha. Google how a bitcoin transaction works. Nice infographics. Alice wants to pay Bob from existing wallet to a new one. Each wallet can an encrypted combination of several public keys. Each public key has an 32-alphanumerical address (64 bytes). Each address has a different value of specified coins. Alice decides how much she wants to transact. Signs it with private key. Public key can be used to find out the initial transaction. Miners decide which transactions they want to include. They use previous hash code plus current block + nonce (each nonce produce drastically different hash results that’s definition of a good hash function) + plus hashing algorithm (sha256 for bitcoin, script for litecoin) The one who found the right hash function (yields a value less than X) gets the prize (50 btw -> 25 btw -> 12.5 btw -> 0 btw in 2016) The initial transaction slowly gets buried all alone in the block chain (list of confirmed blocks). As computing mining power grows network is aware of and adjust accordingly difficulty by lowering the desired hash (= increasing difficulty).
- Biggest evolution and threat for bitcoin. CPUs => GPUs => FPGAs => ASIC => Datacenters. BIG GAME!
- Exchanges distribution is even more or less equal and changing. Many new players. More than 10 major players under 9%. Mining pools hash rate distribution is more or less even. No threats for 51% attacks.
- Watch price and market cap. Watch number of transactions, exchange, real economy and total trade volume. Velocity in quarter is 2-3 times market cap. Which is good for Velocity of $ equals 10 money supply. Quantum theory of money. Money supply <-> price level.
- Scalability - Mastercard - ~50 mio transactions (1000 times more) Visa 2000 tps. BTC ~ 1tps. Current DB is around 15gb. Manipulation - sometimes 1 mio (around 300-400 btc) at current level price to make a 5-10% change. Volatility - big issue for becoming a unit of account. No clearing procedures. We don’t how current exchanges clear and settle if they do it at all.
- Tulipomania in Netherlands in 1630s. Gold unlikely will be easily found or dramatically cheaper to mine. Can’t make a 5-star store of value like gold due to technological risks. Gold still is bad unit of account, bitcoin has potential. But medium of exchange is more important. It’s easy to change perspective we know as travelers. So unit of account is not a big issue.
- When pension funds come the game is usually over. We move from cowry shells to metal coins to paper money to paper debt/loans to backed-up currencies to free market fiat to digital card, chips, money. Enjoy the experiment!
- I would say sounds like fiat. For more information visit bitcoin.org It’s actually quiet good. bitcoin.it for deeper understanding.