Trading. I love it and much of my professional background has come from electronic trading of more traditional securities.

The problem for cryptocurrencies is that many of the systems and processes of control which exist in the traditional financial world, don’t particularly exist in the crypto world, so we’re going to take a step back for this article in our crypto conundrum series and look at some of the basic elements of electronic trading which perhaps are lacking when it comes to trading cryptos. Unsurprisingly, the trading of cryptocurrencies themselves has arisen in somewhat traditionally organised exchanges where buyers and sellers come together to trade with one another.

From a traditional perspective however, this is kind of as far as the comparison goes. Clearing (intermediaries who guarantee trades) doesn’t really exist for cryptos.

What this means is that the degree of risk involved in any given transaction is significantly higher than it would be if you went to your broker to buy Intel stock for example as clearers typically sit between parties to reduce settlement, operational and counterparty risk associated with trading (the legally binding contract to trade) and settlement (the actual cashing out of the positions associated with a trade). This means that the parties who are buying and selling on any given crypto exchange are somewhat beholden to the exchange itself to facilitate the transaction and the underlying coin/currency which sits there.

In a traditional commodity such as gold, this is potentially backed by physical bullion in for example the Comex vault (although in recent years, this is a massively insignificant fraction of the total possible paper claims against the bullion itself), which is at least part of the reason why crypto exchanges are significantly exposed to hacks since they effectively hold the settlement of any given trade hostage. Clearing isn’t necessarily required to the degree that it is in traditional markets because for example in cryptocurrencies trading you can take out smart contracts to guarantee the terms of the trade which takes place. Read more from wccftech.com…

thumbnail courtesy of wccftech.com