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Blockchain Technology: The Future of Financial Trading

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Written by: Heather Neves

Bitcoin and its underlying blockchain technology are things that have really taken off over the past year. Although many people are of the opinion that the bitcoin price right now is just going to continue lower after its massive slide earlier in 2018, it doesn’t change the potential of its underlying technology – the blockchain– and what it can do for the future of financial trading.

The blockchain is, simply put, a form of public ledger that anyone can download on his or her own computer, and thus become a node in the network that makes up the blockchain. This ledger is updated every time someone makes a transaction, and the transaction gets verified by all the other nodes in the network.

If the nodes don’t agree that a change is valid, it will be rejected by the entire network. It’s thanks to this mechanism that no single participant in the network can ever create a false transaction.

The advantage of having a decentralized system like this is that it is one of the most secure ways we know of to process and store transaction data. If anyone were to try and hack the network, it wouldn’t be enough to just hack a single server. Instead, one would have to hack all of the thousands of computers that make up the network, all at the same time. In other words, it is a near impossible task, at least with current technology.

It is, however, important to point out that blockchain technology can be used for more than just keeping track of bitcoin and other cryptocurrency transactions. In fact,it can keep track of any kind of transaction in a secure way, for example waybills or documents for tracing the origin of food in a supply chain, or certain registries that are deemed too important to be entrusted to a single entity.

The person reading these documents can then be absolutely certain that they are 100% correct and that no one has tampered with them.

Traders embracing the crypto market

Already, blockchain technology has revolutionized parts of the financial system for wealth creation. Today, there is a large ecosystem of digital wallets, cryptocurrency exchanges, and over-the-counter (OTC) trading desks that exclusively deals in cryptocurrencies.

Related: Cryptocurrencies and Blockchain; What’s the Reality?

Related: Will Blockchain Technology Boost Collaboration Among Corporates?

The crypto market is also being embraced by an increasing number of independent traders every day. There are different reasons for this, but the one big thing that is probably drawing in the most traders is the high volatility that the crypto market has become known for. For traders, volatility, whether it’s up or down, means more opportunities to profit in a big way, with or without leverage.

Other reasons of course include the relative anonymity that this market offers, and the possibility to circumvent rules and regulations pertaining to certain types of financial activities in some countries.

Crypto as a free market

An interesting think to note is that bitcoin and the overall cryptocurrency space in general, falls outside of the asset classes that central banks keep an eye on and feel they have an obligation to support through unlimited quantitative easing and buying of securities in times of market turmoil.

This means that bitcoin may indeed be one of very few instruments where old fashioned supply and demand still matters to its full extent. In fact, we have to go all the way back to the “dot-com” boom around the year 2000 to see anything like it!

This is how the markets used to work in the old days. It was up to buyers and sellers to find the value of an asset through supply and demand. No central banks were standing by 24/7 to save speculators who had become overconfident.

The markets were allowed to fluctuate in a natural way, which also ensured that people who were skilled at picking the right investments, and knew how to manage risks, were handsomely rewarded by the market.

The future

A trend that we have already seen unfolding in the cryptocurrency space is the “tokenization” of real assets. By this, we refer to the process of turning real assets such as a stock, a currency, or even a commodity into a crypto token that is tradeable and can be stored in digital wallets.

Already, this has happened with several currencies through specialized crypto tokens known as “stablecoins.” Essentially, this is done by issuing new tokens that are backed up by certain assets that the issuer holds in its reserves, thus guaranteeing that the exchange rate between the underlying asset and the crypto token remains one to one.

The same trend can be seen in the stock market, and there are already companies that are offering tokenized derivatives based on the stocks of public companies.

What the future holds for the blockchain and cryptocurrency universe is still unknown, but it’s likely that it will reach a level of popularity never seen before when stocks, forex, and commodities all get linked together within the same seamless universe, open and accessible for everyone in the world to participate.

 

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