The following Bitcoin trading article on Blockchain technology is the opinion of Matt Zimberg, President and CEO of Optimus Futures.
Regardless of which contract you trade, it is important to understand the underlying asset, even if that asset happens to be Bitcoins. Bitcoin Futures, like any other futures product, is a contract that you should trade with a strong set of technical analysis tools. However, because it is an evolving technology, you should also get familiar with the fundamental side (news) owing to the massive fluctuations it can cause on the price of Bitcoins itself. Once you understand the scope of this technology, you will see it’s potential scope in fundamentally disrupting entire industries by eliminating inefficiency and human error
Please note that I will try to explain the technology behind Blockchains in layman’s terms. This is a very sophisticated field and if you are a seasoned Crypto enthusiast and/or professional, we welcome your additional insight in the comments section below to complement our simplified narrative.
First off, you do not need to know everything about Bitcoin, Blockchains and Smart Contracts. However, we believe anyone interested in this space should at least be comfortable with the basic concepts fueling the technology. Think of it this way; Even though you may not know the exact programming language and web script that allowed me to publish this article and make it available to you on your computer screen, you do realize that it is the internet.
Please note that understanding the fundamental side of Bitcoins is not necessarily going to help you predict the price of Bitcoin on a day to day basis, but rather help you follow wider industry trends that may affect the price of crypto-currencies in general in the long run. In fact, traders should always make an effort to understand the background of the underlying asset they are trading as it adds another component to their analysis of the risks and rewards associated.
Bitcoin runs on a technology called Blockchain, and in my opinion, it is the next evolution of trust. Which is essentially “trust no one”! Technological evolution can be viewed as a mechanism to simplify, organize and codify complicated processes, and Blockchain is no different in that regard.
In short, Blockchain is a ledger that keeps track of transactions or activities that has occurred between two parties. What is the difference between Blockchain and current ledgers? The Blockchain ledger is a decentralized, meaning these transactions are visible to everyone and no one party can ever destroy the evidence. Once a Blockchain captures the data, no one can change, edit, modify or delete it. All records are permanent. The data does not reside within one organization or individual but rather stored on thousands of computers, with each computer getting a copy. Essentially, each time you buy a Bitcoin, a transaction is recorded in mere seconds or milliseconds which is visible publicly on the chain of transactions, and each transaction is a block.
Let us use a few examples where this technology can be used in traditional businesses.
Just like the internet eliminated the middleman, intermediary’s and other components, Blockchain’s affect may have similar, if not bigger impacts on everything from finance, shipping, trading, legal etc. Imagine that in order to buy a piece of land, all you need to do is simply transact with the landowner once. You pay for the land and then you get the ownership immediately. The transaction is recorded in the Blockchain ledger and now it has been “sealed” that you are the owner. Now imagine the legal process that you have to go through in order to receive a title to a piece of land in today’s world.
Another important concept you should get familiarized with is the idea of Decentralization: As discussed above, this is a concept that establishes a network of users with access to the same data sitting on many computers, as opposed to one central place. Every change to the database is recorded on a number of computers within the entire network. Therefore, you do not rely on one central place for the record. Although this technology started with Bitcoin for the recording of transactions, it could be applied to a number of fields in the future. Think of patient records for example. How long does it take to get one doctor to update another doctor? Now imagine a doctor that can load your records to a decentralized place and another doctor can simply retrieve it in real time when they need it.
This brings us to the concept of speed. The updating of records is done in real time and that concept is why Blockchains will change the way we do business and transactions in the years to come. It is important to mention that we will not always see how blockchains are integrated behind the scenes. Similar to servers, security and other variables that we take for granted on a daily basis, Blockchains will form of the backbone of everyday business processes.
Beware of ICO’s
Please note that this is a gross oversimplification of the concepts behind Blockchain. You could potentially expand your knowledge online, however, the technical side of this is rather overwhelming. One word of caution: Initial Coin Offerings (ICO’s). Essentially, companies have realized the potential behind raising funds with buzz words such as “crypto”, “Blockchains”, etc. They offer solutions to different industries where Blockchain can potentially work. But, NOT all Blockchain solutions need a cryptocurrency to operate. Further, some have raised substantial funds by luring investors with the hopes that it will be the next “Bitcoin”. And while there are many projects that are genuinely working towards achieving truly impressive goals, a lot of these companies have raised so much money that we do not see how such small operations could potentially use the funds in areas where real-world disruption would be slow and at times impossible to implement in the short run. There is no accountability, and these companies are located in different areas of the world, some with no regulation or oversight. We strongly suggest doing the highest level of due diligence if you ever decide to venture there.
However, if you decide to speculate in Bitcoin, you can do so now via Bitcoin Futures on the CBOE or the CME. For your convenience, here are the links to the CBOE and CME contracts. The day to day fluctuations that occur in Bitcoin or Bitcoin futures is not always a result of the fundamentals in the marketplace. However, we feel that knowing the fundamentals behind the product is always essential to deciding whether you wish to participate in such markets.
Disclaimer: Virtual currencies including Bitcoins experience significant price volatility and fluctuations in the underlying virtual currency’s value. The time you place a trade for a virtual currency futures contract and the time you attempt to liquidate it will affect the value of your futures contract and the potential profit and losses related to it. Be very cautious and monitor any investments that you make. There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.
Please be aware, however, that just because futures on virtual currencies, including Bitcoin, are traded on regulated futures exchanges does not mean that the underlying virtual currency markets are regulated in any manner. What occurs in a virtual currency’s underlying market will impact the price of a virtual currency’s futures contract.