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How bitcoin changes all of finance

August 29, 2015

One problem with being used to a system is that you don’t realize the limitations.  There is one interesting fact about bitcoin which that bitcoin is the only financial asset in the world which is traded 24/7 on a single exchange. The other interesting fact about bitcoin is that it is the only financial asset which people can trade directly with each other on an exchange.  You don’t have to go through a broker.

The closest things are forex which are traded via a decentralized system.  But stocks, bonds and everything else are still traded through brokers and don’t have 24/7 exchange.  And this is this is where bitcoin really becomes revolutionary.

The thing about stocks and bonds is that when you buy and sell stocks, nothing is in fact being transferred.  What happens is that the brokers issue you an IOU and they issue IOU’s with each other.  When the market closes, people look at the days trades and then the actual transfers start taking place. People complain about it taking 10 minutes to transfer bitcoin when in fact it takes two days to transfer stocks.

The other interesting thing about stocks and bonds is that the most important thing that your broker does is to keep track of the fact that you own the stock and bond.  There is a record that the broker holds X amount of stock, and it’s at the broker where the record exists that Y shares belongs to you.  This means that you have to go through a broker to trade stocks, because there is no other way of recording that Y shares belongs to you.  You *could* in theory have the company send you a stock certificate, but then you’ll find that it will be painful to sell that stock because, remember it takes several days to sell stock, and brokers let you deal with IOU’s so you have the illusion of instant sales.

The process of actually moving stocks back and forth is called settlement.  There is another problem called reconciliation.  Settlement is when you get your credit card statement.  Reconciliation is when you find that there is a charge that you didn’t expect.  This happens when you have transfers of stocks and bonds.  Brokers have their own database.  It’s frequently the case that at the end of the day, the databases don’t match at which point people will be calling each other trying to figure out what happened.  This is very painful.  This also why brokers don’t want to touch small transactions.  If you mess up a USD 10 million trade, it’s worth staying late in the office to see what happened.  If you run the numbers and they are off by USD 10k, you are still forced to spend hours staying late figuring out what happened, but you are making less money.

At this point you should see the problem with the current system.  You cannot do settlement and reconcilation while the market is live.  You have to turn off the market for a few hours.  The blockchain is why you can’t trade stocks 24/7 while you can trade bitcoin.  But eventually, people will want to trade financial assets 24/7, and so things will move to the blockchain.

Now, I’m thinking one step beyond that.  The main reason I’m trading bitcoin and bitcoin futures, is that I want to understand what it means to trade something that never sleeps.  I need to sleep, and so I’ve had to invent various techniques to deal with a 24/7 market, and this is likely to be very useful once everything goes 24/7.

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