Bites Of Trading Knowledge #7
What is Bitcoin and from where did it originate? –
Bitcoin is a digital form of a medium of exchange with no central bank control which issues fiat currencies. Instead, the financial system involving bitcoin is managed by thousands of computers distributed around the world, a decentralised ledger, where anyone can participate by downloading open-source software and connecting to the ecosystem.
The invention and implementation of bitcoin is credited to the person or persons known Satoshi Nakamoto in 2009. The white paper “Bitcoin: A Peer-to-Peer Electronic Cash System“ states that bitcoin was to be, “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”
What is the Blockchain? –
The Blockchain is a decentralised ledger that is append-only meaning that data can only be added to it. Once information is added, it is extremely difficult to modify or delete it. The Blockchain enforces this by including a pointer to the previous Block in every subsequent Block.
The pointer is a Hash of the previous block. Hashing involves passing data through a one-way function to produce a unique Fingerprint of the input. If the input is modified even slightly, the Fingerprint will look completely different. Since the Blocks are linked in a Chain, there is no way for someone to edit an old entry without invalidating the Blocks that follow, allowing a secure structure.
What is Mining? –
Mining is the process in which transactions between users are verified and added to the decentralised ledger. The process of mining bitcoin is responsible for introducing new coins into the existing circulating supply and is one of the key elements that allows bitcoin to work within the peer-to-peer decentralized network, without the need for a third party central authority.
What Is a Blockchain Consensus Algorithm? –
A consensus algorithm is a mechanism that allows users or machines to coordinate the agreement of what is a valid block in the Blockchain in a distributed setting. It needs to ensure that all participants in the system can agree on a single source of truth. Types of consensus algorithms include Proof of Work (PoW) and Proof of Stake (PoS).
What is Proof of Work? –
Proof of Work (PoW) is a mechanism for preventing the same bitcoin funds from being spent more than once. Proof of Work consists of a consensus algorithm which is a protocol that sets out the conditions for what makes a block in the Blockchain valid. It ensures the security and integrity of bitcoin’s distributed ledger.
RISKS AND OPPORTUNITIES FOR CORPORATES AND INDIVIDUAL INVESTORS –
Diversification: Portfolio Focused on Pairs Trading Strategies –
Many individual investors use a pairs trade as a trading strategy that involves matching a long position with a short position in two markets with a high correlation.
In currency trading, the most economically and politically stable and liquid currencies are commonly the focus of market participants as the focus for currency pairs trading like these eight most traded currencies: U.S. dollar (USD), euro (EUR), Japanese yen (JPY), British pound (GBP), Australian dollar (AUD), Canadian dollar (CAD), Swiss franc (CHF), and Chinese Yuan (CNY).
If an individual investor is pairing EUR with CHF as part of their pairs trading portfolio, they could use common technical indicators like moving averages as part of their analysis in forming a trade decision.
For example, EURUSD on 4th May had crossed the moving average, but USDCHF had not shown similar price action, which could indicate the potential for follow through failure in the EURUSD to the downside. Contrast this with the 16th June where both EURUSD and USDCHF had both crossed the moving average and had clear follow through subsequently.
Investors would need to analyze their expected returns with and without currency eThe investor could alternatively consider trading the Mini US Dollar Index ® Futures given that the analysis could point to an opportunity being in the U.S. Dollar, which had been removed as a factor in this pairing.
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TRADDICTIV · Research Team