EXANTE: Practical aspects of algorithmic trading. Bitcoin hedge fund. SSE Riga lecture 23.01.2014....

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Practical aspects of algorithmic trading.Bitcoin hedge fund.Gatis Eglitis, Managing PartnerSergey Troshin, Ph.D., Head of IT Strategy and OperationsPart 3: Bitcoin fundEXANTE2010 - EXANTE ATP & BO, strong IT focus2011 - Maltese brokerage licence2012 - Hedge fund platform & bitcoin fund2010 - distributed multi-currency multi-instrument trading platform with real-time pre-trade risks and execution, world coverage, etc, etc.2011 - MFSA regulated broker with focus on online DMA. IB.2012 - Start selling funds directly to customers. Some of the funds are Exante customers. BTCF - wrap up fund for customers, 100% legal, seen on balance sheet.2013 - Over 20 counter parties (brokers and exchanges), start development of matching for funds secondary market and direct execution. subsription/redemption => buy/sell.Im a mathematician and software developer graduate from MSU and was responsible for the IT development and infrastructure. So no wonder I make a bit laugh out of economists.The use of money is all the advantage there is in having money.

Benjamin FranklinWhat a nice thought by one of the founding farthers!Unfortunately for Franklin, they put him on a 100 dollar bill, later on to become a hero of Puff Daddy song its all about the Benjamins comma baby; or the one by swedish singer Meja its all about the money.MoneyDurablePortableFungibleIntrinsic valueStore of valueMedium of exchangeUnit of account

Aristotle IV BC

W.S. Jevons XIX ADSo what is money?As the student of Plato, the teacher of Alexander the Great, Plato put it beautifully 25 centuries ago - Thanks to modern economics science and british W.S. Jevons we move from properties to goals.Durable => store of valuePortability, fungibility, divisibility => medium of exchangeDivisibility - ruble story.Important, modern XIX economists thought! Does it really need intrinsic value? No. But it should be adopted and appreciated or simply marketed.=> Unit of account.Money historybefore XI BC - barterXI BC, China - bronze knives and spadesVI BC, Lydia - electrum coinsXI AD, China - paper moneyXXIX AD, Europe - gold standard1944, USA - Bretton Woods system1971, USA - fiat currenciesIt is a strange thought but no money until 3200 years ago. Barter worked just fine. Anatolians used obsidian 12000 BCShekel (sacks of cereal grain) is dated back 3000 BC. cowry shells by ancient China, India and Africa.Later on turned into minting.Lydia, Electrum (natural alloy of silver and gold), King Alyattes, 650 BCMing and Yuan dynasties introduce paper money (Marco Polo). Unlike US bills In god we trust chinese govt was more straightforward The counterfeiters will be decapitatedTally sticks by Henry I for collecting taxes, tallies (similar to futures) => and of course when out of resources they sold future tallies to creditors.=> early bills of exchangeXVII+ England control over colonies => no right to mint coinsMassachusets (1652)1775 revolutionary war England vs US (continentals)1860 greenbacks for civil war between south and north1821 gold standard in England (1871-1914)1871 Germany1900 USAWWI broke it all. 1932 England suspends gold standard, 1934 US goes from 20 to 35 $ per oz.1968 gold is traded freely on the market.1971 Nixon shock. Dollar isnt dictated anymore by storage of gold but by health of American economy. There were many experiments in between. My favorite is Silvio Gesell freigeld theory and Worgl experiment in Austria in 1932.Value?FAITHImportant, post-modern economics XX-XXI century economists thought again!

short hint. works for all types of assets.Twitter with 2013 revenue around 1 billion and -60m profit, gets 38b estimation by the market.To trade fx for you need - interest rate manipulations (hey Keysians!), GDP rates, unemployment rates, govt budget structure.The most nontransparent market in the world is FOREX!Value!FAITHThe biggest problem with any money. Once it loses credibility its value (read price) falls dramatically.In modern economics its called hyperinflation.Digital currencies

1996

1998

2000

2008So! The internet era!!E-gold (US oncologist Douglas Jackson). Used myself, to pay outsource designers in late 90s in Russia. Backed by gold coins stored in safe deposit box in Melbourne California! ended 2006 under US patriot act (9/11).Money transmitter under US patriot act. So recent Dwolla case was an easy task for US government.Paypal (Max Levchin, Peter Thiel, Elon Musk x.com). Max - mobile exchange of currency. But turned into online payment processor.LR - founded by Arthur Budovsky and Vladimir Kats (suspicious russian names!) in Costa Rica, 2006. Name, e-mail, birth date only transfers. Tied to $, euros or gold.. LR shut down in may 2013 under US patriot act with money laundering etc etc.Russia and CIS is a totally different story with WebMoney, yandex.money and modern QIWI.Hackers got tired! So here comes the bitcoin. One of the motives is world financial crisis led by subprime mortgage crisis in US.

Businesses

Bitcoin

2008 SaToshi NakaMotohttp://bitcoin.org/bitcoin.pdf

Crypto currencies

Exchanges

Samsung Toshiba Nakamichi Motorola or I like it better anagram of Ma, I took NSA oath. one S is dropped for conspiracy purposes.Quote in network transaction DB by SN: The Times 03/Jan/2009 Chancellor on brink of second bailout for banksThe original paper and prototype led to a whole bunch of other crypto currencies, p2pcoin, novacoin, terracoin, freicoin etc. SHA256 hashing algorithm for scrypt. Average block generation time. Difficulty.Anonymity issues.The exchanges and payment processors (combined wallet and exchange) evolved.Business evolved.

TechnologyPublic-keyCryptography

Open-source

Decentralization

The turtle of bitcoins stands on three whales.Decentralization + p2p. No central authority! Everyone can be a wholesome participant!!Assymetric cryptography, used and proved in RSA, PGP, TLS/SSL, HTTPS. The major point is that algorithmically except for brute force private key cant be found for public key.Open-source, MIT license. Which means you can always check the code.Keepass example, very popular. Keychain though works as well.Technologyhttp://visual.ly/bitcoin-infographic

1PC9aZC4hNX2rmmrt7uHTfYAS3hRbph4UN

public keyprivate key

Lets dig deeper with some real-life example, haha.Google how a bitcoin transaction works. Nice infographics.Alice wants to pay Bob from existing wallet to a new one.Each wallet can an encrypted combination of several public keys.Each public key has an 32-alphanumerical address (64 bytes).Each address has a different value of specified coins.Alice decides how much she wants to transact.Signs it with private key. Public key can be used to find out the initial transaction.Miners decide which transactions they want to include.They use previous hash code plus current block + nonce (each nonce produce drastically different hash results thats definition of a good hash function) + plus hashing algorithm (sha256 for bitcoin, script for litecoin)The one who found the right hash function (yields a value less than X) gets the prize (50 btw -> 25 btw -> 12.5 btw -> 0 btw in 2016) The initial transaction slowly gets buried all alone in the block chain (list of confirmed blocks).As computing mining power grows network is aware of and adjust accordingly difficulty by lowering the desired hash (= increasing difficulty).Mining

Biggest evolution and threat for bitcoin. CPUs => GPUs => FPGAs => ASIC => Datacenters. BIG GAME!Market

7 day average fromhttp://bitcoinity.org/markets/list

4 day average fromhttp://blockchain.info/poolsExchanges distribution is even more or less equal and changing. Many new players. More than 10 major players under 9%. Mining pools hash rate distribution is more or less even. No threats for 51% attacks.Market

Quaterly average fromhttp://blockchain.info/charts

Watch price and market cap.Watch number of transactions, exchange, real economy and total trade volume.Velocity in quarter is 2-3 times market cap. Which is good for Velocity of $ equals 10 money supply. Quantum theory of money. Money supply price level.RisksLegalTechnologyMarketGovt regulation51% attackManipulationUndefined statusScalabilityVolatilityAnonymityDDOS attacksClearinghttp://bitcoin.itScalability - Mastercard - ~50 mio transactions (1000 times more) Visa 2000 tps. BTC ~ 1tps. Current DB is around 15gb.Manipulation - sometimes 1 mio (around 300-400 btc) at current level price to make a 5-10% change.Volatility - big issue for becoming a unit of account.No clearing procedures. We dont how current exchanges clear and settle if they do it at all.State of the artMoneyTulipsFiatGoldBitcoinStore of value**************Medium of exchange****************Unit of account*********http://bitcoin.orgTulipomania in Netherlands in 1630s.Gold unlikely will be easily found or dramatically cheaper to mine.Cant make a 5-star store of value like gold due to technological risks.Gold still is bad unit of account, bitcoin has potential. But medium of exchange is more important. Its easy to change perspective we know as travelers. So unit of account is not a big issue.

FutureMiningTechnologyExchangeBusinessCommodityDebts &LoansCurrencyPension fundsDerivativesWhen pension funds come the game is usually over.We move from cowry shells to metal coins to paper money to paper debt/loans to backed-up currencies to free market fiat to digital card, chips, money.Enjoy the experiment!Although some of the enthusiasm for bitcoin is driven by a distrust of state-issued currency, it is hard to imagine a world where the main currency is based on an extremely complex code understood by only a few and controlled by even fewer, without accountability, arbitration, or recourse.Francois R. Velde, senior economist (Chicago Fe