Will Bitcoin Trading Disrupt the Financial Market?
Let’s piggyback to years after the deployment of the internet, a lot of people believed that it was still a fad. Definitely, the net has since become a major influence on our lives, from the way we socialize with families and friends, to how we buy services and goods, to the United States Presidential election, even to the Arab Spring. But still, in the ‘90s, the mainstream press scoffed when Nicholas Negroponte made a prediction that a lot of us would soon begin reading news from the net rather than from the local newspaper.
Comparing Bitcoin to the Internet
Now fast forward to two decades into the deployment of the internet, we are noticing a similar impact from cryptocurrencies, especially Bitcoin. Though there are many parallels in considering how substantial this impact is. Similar to the net, bitcoin is driven by advances in core technologies coupled with an open, modern architecture known as the Bitcoin blockchain.
Also, just like the net, this technology is designed in such a way that it is decentralized and incorporated with layers, where each individual layer is defined by an interoperable open protocol on top of which individuals, as well as companies, can build services and products.
Just like the net also, in the early stages of development there are many technologies competing with bitcoin, so it is quite essential to identify the blockchain you are referring to. And finally, like the net, blockchain technology is at its strongest when a lot of people are on the same network, so in the nearest future we might be discussing about “the” blockchain technology.
Though the internet, as well as its layers, took a while to develop, where each technical layer unlocked a wave of entrepreneurial and creative activities. Before then, Ethernet had already standardized the way in which computers were transmitting bits over wires, and companies like 3Com were now able to construct empires on their network switching products.
The TCP/IP protocol was utilised in controlling and addressing the way packets of data were being transferred between computers. This led to Cisco building products such as network protocol that capitalized on said protocol, and by March of 2000, Cisco became the most expensive company in the world.
HTTP was developed by Tim Berners-Lee in 1989, which is another permissionless, and opem protocol, and the web was able to support businesses like Amazon, Google, and eBay.
Bitcoin has rapidly gained momentum over the past few years, but there is still much room for immense impact. Each day, the total amount of bitcoins traded is approximately equal to only about 0.7% of the transactions made by credit card users in the United States alone.
However, to truly understand how bitcoin can mess up the financial market, we need to adequately both entities.
Bitcoin versus the Financial Market
To best understand bitcoin let us look at it as a microcosm of how a decentralized, automated, and new financial could operate. Thought its current capabilities are quite limited, for instance there is lower level of transaction occurring with bitcoin than in the traditional financial systems, it still supports a compelling vision of a possible future because the codes adequately describes both an economic and regulatory system.
For instance, transactions are expected to satisfy certain regulations and rules before they can be accepted into the Bitcoin blockchain. Instead of stating regulations and appointing a regulator to be on the lookout for breaches, which is exactly how the financial system is set up, Bitcoin’s code fixes the regulations and the network itself checks for compliance and breaches.
In the financial market, whenever a huge joint fund or an investment bank trades in a large stock block, it’s mandatory that they report to the SEC. This alone alerts the rest of the trading world. The financial market hates big surprises. But, there are currently no regulations of the sort for bitcoin traders. Only about 100 Bitcoin addresses control some 20% of the market. Now, that is an enormous share.
Picture this, what if the trading desks of Citibank, Goldman, and Bank of America all decide to sell off their Apple holding? A ripple effect will be felt in the bitcoin market. This ‘Spillover Effect” could disrupt many other markets. Assuming a big bank amasses a big stand in bitcoin and decides to ditch it. Such bank is under no obligation to notify any market watch dog, so it just unloads it, which triggers a massive price decline.
Let’s also assume that some other mostly-standardized banks follow suit just to avoid heavy forfeitures. To try to counterweigh the losses, they might unload bonds and stocks which could trigger a series of sell-offs in those markets.
Fine, there is no evidence showing that huge banks have acquired huge stands in Bitcoin, but the existing financial market ruling system oversees only derivatives, bonds, and stocks. Cryptocurrencies, like bitcoin, are on their own radar screen, but it may take a while before they catch up.
Finally, you might want to play the downside of Bitcoin. Most people who buy cryptocurrencies hope that bitcoin will continue to rise, but they can also make some money even if it loses value. On the other hand, what if a couple of big players also decide to short the currency at the same time? This could trigger an enormous decline. The digital currency is under no exact market policies, hence there are no regulations limiting this decision. This might cause short sellers to buy-in at the lower value and still gain on the turnaround.
When and how this will happen is uncertain. But it has happened a in the past, like the short-selling of railroad shares in the 1880s to a few traders shorting mortgage collaterals in 2008. It is like a cycle, so it will happen again.
With the constant surge of bitcoin, and the amount of businesses and stores that support trading with bitcoin, it has every possibility to disrupt the financial system substantially.