Bitcoin and the Bots - The Myopia of Regulation
Originally Published: 21 May 2019 06:38 ET then reprinted on Alt Coin Magazine
http://www.selfishinvesting.com
Dr. K's Crypto-Corner
by Dr. Chris Kacher
Riding the Revolutionary Rocket with Cryptotechnologies... Entirely Evolutionary™
Myopic
I was sent this Financial Times article which concludes that decentralized crypto exchanges are no better than centralized ones on the basis of "fairness" where bots are deployed in decentralized exchanges to exploit inefficiencies: https://www.ft.com/content/d379f2f8-6b9d-11e9-80c7-60ee53e6681d
But so what? This has been standard in any speculative pursuit, and is yet another glimpse into the myopia from which much trade-crippling regulation has been born. Anyone remember 1/8 spreads which then were reduced to 1/16 or "teenies" which then were decimalized, all in the attempts to get smaller spreads which presumed fairer prices for the average retail investor. In reality, economics which rules all caused many market makers to leave since their profitability dried up. The net effect was far worse order execution for all. Back in 1996, one could easily by 10% of the average daily trade of a stock without moving the price by much whether small or big cap. Try doing that today.
Enter Smart Contracts
A smart contract is autonomous software with the ability to self-verify so can make financial decisions on the fly. It’s a written contract that has been translated into code that consists of if-then statements. It can therefore self-execute certain actions such as releasing payments.
These contracts can be used for pretty much anything, from exchange of physical goods (that have digital signatures) to exchange of information or money. They do not need to be financial in nature.
Smart contracts which live within the blockchain ecosystem will live or die based on economic advantage. Those that provide superior advantage to users within the platform (ICO, STO, cryptocurrency, cryptocompany, DAO, DAPP, etc) on which they sit will thrive. Those that do not will get weeded out. The future is cryptoeconomics via the blockchain.
[Sidebar: According to the Founder of The Control, Nick Tomaino, cryptoeconomics is “The study of economic interaction in adversarial environments. In decentralized P2P systems that do not give control to any third party, one must assume that there will be bad actors looking to disrupt the system. Cryptoeconomic approaches combine cryptography and economics to create robust decentralized P2P networks that thrive over time despite adversaries attempting to disrupt the network.” The Ethereum Wiki defines cryptoeconomics as “The combinations of cryptography, computer networks and game theory which provide secure systems exhibiting some set of economic dis/incentives.”]
Equalization of Talent vs. Equality for All
At any rate, the FT article above misses the point. Of course there will always be exploitation of inefficiencies in free markets. That’s what makes them free. What govt intervention tries to achieve is the equalization of talent for all when it should be equality for all that is the end goal.
In any competition, poker for example, the weaker players get weeded out. This is why the top poker players end up in the final rounds again and again. Same with speculation and trading. Bots are yet another technique to squeeze profits from the inefficiencies, ie, human fallibility. The reason chart patterns work over time is because they are human nature on parade. They exploit human emotional tendencies. Since human nature hasn't changed, patterns repeat.
Those who are less capable lose money. Those who are slaves to their emotions lose money. This is why I published this piece on how the big money is made in crypto trading- not through day or swing type trades.
Big money is made through an O’Neil-Buffett-Livermore approach. Even though Buffett was value oriented, O'Neil and Livermore were both true quantamentals (technofundamental hybrids), their holding patterns when sitting on a winner were similar. As Livermore had said, the big money is made in the sitting, not the trading. That said, O’Neil trounced Buffett’s returns over the years through his use of technical chart patterns since Buffett does not use charts. Buffett is strictly fundamental.