What Crypto Investors Can Learn from Billionaire George Soros
Recent news that George Soros’ $26 billion family office is entering the cryptocurrency market has many investors speculating about the likely impact.
But one of the billionaire’s most famous ideas might be even more important to understanding how the market functions, with or without his participation.
For those unfamiliar with this powerful palindrome: In the world of economics and finance, Soros is feared and known as “the man who broke the Bank of England” when he made $1 billion in one day, September 16th, 1992 (known as Black Wednesday). This is one institutional player with the ability to go large and make or break a currency … even a digital one.
Soros has attributed his success in part to his understanding of what he calls reflexivity. In simple terms, this theory states that investors base their decisions not on reality but on their “perception” of reality.
According to reflexivity theory, there are two realities: the objective and subjective. Soros explains that the subjective aspect covers what takes place in the mind and the objective aspect is what takes place in external reality.
Reflexivity connects any two or more aspects of reality, setting up two-way feedback loops between them. In this way, actions resulting from each reality, the objective and the subjective, will affect investors’ perceptions, and therefore prices. Soros has cited the global financial crisis of 2008 as an illustration of the theory.
Markets, he reckons, are in a constant state of divergence from reality and far from accurately reflecting all the available knowledge, instead representing almost a distorted view of reality.
“The degree of distortion may vary from time to time,” Soros once wrote, adding:
“Sometimes it’s quite insignificant, at other times it is quite pronounced. Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend.”
He goes onto explain that when positive feedback develops between the trend and the misconception, “a boom-bust process is set in motion.” This is tested by negative feedback along the way, and if it is strong enough to survive these tests, both the trend and the misconception will be reinforced.
So, how does his theory apply to the crypto market? For starters, we do see these feedback loops.
The more people form a positive view on bitcoin, the more the price will soar, and vice versa. This is what happened late last year: when the price of bitcoin jumped, it attracted more users, which further juiced the price, which brought in more people.
Crypto markets are just as prone to the phenomena of irrational exuberance, bias or opinionated actors as any other market, said Omri Ross, assistant professor at the University of Copenhagen and CEO of Firmo Network, a smart-contract startup.
Further, the community’s famous cultishness amplifies these effects, he said.
“The reflexivity of economic actors is confirmed by the proliferation of subcultures and fan groups emerging around various projects,” Ross said. “In the young and volatile crypto markets, near-religious beliefs about price appreciation with references to various intrinsic valuation models can be observed daily.”
Another area where reflexivity applied, for a time, is in the initial coin offering (ICO) sector, where momentum drove up prices, said Shane Brett, co-founder and CEO of GECKO Governance, a regtech startup. But it lasted only so long.
“Recently, however, discussions around compliance, not to mention fraudulent ICOs, have caused some investors to retreat,” Brett said. “Conversely, institutional investors are keen to invest in the market, but in the absence of compliance, are remaining on the sidelines, contradicting this theory.”
Nobody really knows what the long-term effect will be of Soros’ entry into the crypto markets, only months after he joined other elites at Davos in calling bitcoin a bubble. Things are about to get more interesting.
But we can learn from his insights about the circular relationship between cause and effect, and the role of cognitive function in a new, developing and volatile market.
George Soros image via Shutterstock.
Written by CoinDesk.com
Sony Eyes Blockchain Use for Digital Rights Data
Japanese technology giant Sony is looking at using blockchain to store digital rights data.
In an application published Thursday by the U.S. Patent and Trademark Office, Sony explains that current digital rights management (DRM) solutions that aim for interoperability “may not be very reliable and rely on one unique point of failure. If the rights locker provider or system goes out of business or otherwise fails, the user loses all the acquired content.”
A blockchain could store the required identification information to ensure users could watch the products they purchase, according to the filing.
DRM systems refer to technologies that limit access to copyrighted materials only to those who purchase access. Sony cites UltraViolet, a cloud-based locker for digital rights, as one example.
The application was filed jointly by Sony and subsidiary Sony Pictures Entertainment, and the document specifically cites movies as an example of the type of media the system could be applied to.
However, Sony also argues the blockchain-based system could manage rights to “various types of content or other data, such as movies, television, video, music, audio, games, scientific data, medical data, etc.”
The application describes several potential implementations of the technology. In one, each user’s rights are encoded on a dedicated blockchain. This ledger begins with a genesis block, which stores identifying information about that user. When the user acquires rights to certain content – by purchasing a movie download, for example – those rights are committed to the blockchain.
Concurrently, a “DRM computer system would verify the rights in the blockchain and then decrypt the media when needed. This computer system can take different forms, including a “DRM agent” residing on a user’s device, according to Sony.
As previously reported, Sony has been looking at other applications of the technology, including as a means to authenticate user data and manage education data.
Image Credit: testing / Shutterstock.com
Written by CoinDesk.com
Bitcoin Was the Ninth Most Popular Wikipedia Article Last Year
Bitcoin Article on Wikipedia Was the Ninth Most Popular Last Year
Last year lots of people were inquiring about the cryptocurrency bitcoin and the word itself was one of the topmost trending words searched in 2017 according to Google Trends data. Another area where bitcoin was searched frequently was the website Wikipedia. The website hosts a free encyclopedia that is openly editable, while educational resources are also provided in 299 different languages. Wikipedia recently published its “Annual Top 50 Report” which includes a curated list of the top fifty most popular articles on Wikipedia throughout 2017.
According to Wiki’s data, the ‘Bitcoin’ article was the ninth most popular encyclopedia post last year just below the ‘United States’ articles and just above the Netflix drama series ‘13 Reasons Why.’ Bitcoin stands among other top ten editorials documenting Donald Trump, Game of Thrones, and Queen Elizabeth II. The introduction in the Wiki Bitcoin article states:
Bitcoin is a cryptocurrency and worldwide payment system. It is the first decentralized digital currency, as the system works without a central bank or single administrator. The network is peer-to-peer and transactions take place between users directly, without an intermediary.
Wiki Senior Editor: ‘Bitcoin the Much-Hyped “Future of Money”’
Last year the ‘Bitcoin’ article accumulated over 15 million views and the page peaked in traffic on December 8, 2017. In the annual report Wiki Senior Editor JFG gives the article a bit of an odd introduction.
“For our dear readers who can’t make heads or tails of this novelty: Bitcoin is as good as gold, shinier than lead, bubblier than tulips, held deep in the mines, and driving people nuts,” explains the Wiki editor.
Gold has enriched adventurers and bitcoin has held fools to ransom. You may dive in a pool of gold, but lose it all at war. Strangely, while you can still buy gold today and forget about it until your great-grandchildren cash it out, the much-hyped “future of money” has turned into the most speculative intangible asset of all time, while proving totally unsuitable as a means of payment.
Within the archives of 5,000 most popular articles from last week according to the Wiki page ‘User:west.andrew.g/popular pages,’ Bitcoin ranks at number 354. The page is aggregated from raw data which displays articles with at least 1,000 hits in a seven day period and only the most popular are published through the feed. Ethereum just makes the cut at 3710, Cryptocurrency 1273, and Blockchain slides ahead at 312. All of the data showing how popular digital currencies are on Wiki is derived from the company’s content consumption metrics which shows datasets of raw dump files and page views.
Written by Bitcoin.com
Barclays, Goldman Champion ISDA Standard for Blockchain Derivatives
Blockchains and smart contracts were supposed to fix the inefficiencies and slash the costs of derivatives trading, but two years since such promises came in vogue, a foundational issue has yet to be ironed out.
Before banks and traders can rely on a distributed ledger technology as the vaunted “single record of truth,” there first needs to be better standardization. Yet as it stands, they use a hodgepodge of data structures and formats to track the life cycle of trades, reflecting in part the variety of regulatory requirements imposed after the 2008 financial crisis.
Simply put, without a common language, there’s not much to be gained from having a common ledger.
Now, the financial world’s blockchain evangelists are pinning their hopes on a broader industry effort to harmonize the way data is presented and reported, regardless of the platform used. Known as the common domain model (CDM), it was proposed by the International Swaps and Derivatives Association (ISDA) in May of last year and has the support of blockchain tech startups such as R3 and Axoni.
But perhaps the biggest champion of CDM as the key to making blockchain a reality in the derivatives space is Barclays.
The U.K.-based bank recently set up an internal CDM adoption working group, and will be presenting its vision for how smart contracts can be combined with the concept Thursday at ISDA’s annual meeting in Miami, Florida.
It’s a pivotal time for the project, as ISDA is expected to release the first iteration of the blockchain-compatible version of CDM early this summer.
Sunil Challa from the business architect team at Barclays was emphatic about hitting the reset button.
“There is a shiny new technology promising to be a panacea for fixing many post-trade processing issues. So, now is an opportune moment to re-engineer our processes,” Challa told CoinDesk, adding:
“Simply replicating the existing fragmented state would be a colossal missed opportunity.”
A common tongue
Stepping back, Barclays has played a central role in the convergence of DLT, smart contracts and common data standards.
Two years ago the bank showcased a prototype of how smart contracts could be used throughout the lifecycle of a derivatives trade, including negotiating an ISDA master agreement, entering individual trades and performing the trades on a distributed ledger.
While the concept has caught on, the standards challenge remains in the way of adoption, according to Dr. Lee Braine, a member of the investment bank CTO Office at Barclays. On the one hand, distributed ledger platforms are now reaching acceptance by some of the most systemically important market infrastructure incumbents, Braine said.
“But what we haven’t yet seen is adoption of common standards by the industry,” he said. “What we ultimately need in the derivatives space is multiple market infrastructures, including multiple clearing houses, adopting a common standard for data formats, reference data, transactional data, and business processes.”
That’s where Barclays and others believe the CDM comes in.
Traditionally, banks have worked to standardize the format of messages between them, but kept their own idiosyncratic ways of communicating data internally – like a country with a national language but numerous local dialects.
But, as Braine pointed out, the CDM and DLT share a common goal in going further and standardizing data within institutions. (Speaking the national language at home, as it were.)
In this way, the CDM could provide an alternative route for addressing the looming challenge of interoperability between different blockchain platforms. At present you often hear industry participants talk about being “blockchain-agnostic” because it’s too risky to bet on just one platform provider.
To illustrate this point, Braine described a future scenario in which banks are trading with each other on different distributed ledgers. If there are some counterparties on one network and other counterparties on other networks, then does that mean you would need to host a node on every network? Or are they going to be genuinely interoperable?
“A simplistic solution would be to revert to the traditional model of silos with messaging between them, but that risks replicating the fragmentation of the past,” said Braine.
“If you instead transition to the CDM, then at least there is opportunity to standardize on data structures, lifecycle events etc.”
And if that isn’t persuasive enough, Barclays estimates significant cost savings to the derivatives market. Its working group projected around 25 percent efficiency gains from adopting CDM just in the clearing space, and around $2.5 billion in annual run costs.
Barclays isn’t alone among financial in advocating for the CDM, of course.
Goldman Sachs is also a supporter, and sees the common data standard, when combined with shared ledgers, as a way to alleviate some of the pressure created by the increased reporting requirements under regulations like the European Union’s MiFID 2.
Ayaz Haji, the technical architect for the MiFID 2 program at Goldman Sachs, said a common representation of product terms and lifecycle events should not only reduce inconsistencies but also provide a platform for further efficiencies.
The investment bank won’t rule out alternatives to blockchain in adopting the standard, however.
“Those who are closest to the CDM project recognize that a persistent shared implementation such as DLT would be the most optimal way to use the model,” said Haji. “That said we are also open minded about potential implementations and look forward to vendor feedback to the version of the model which is due to be published by ISDA shortly.”
Less equivocal than Goldman, Barclays is making a forceful case for using DLT in conjunction with the common standard.
For example, Braine also pointed out a way that a common data standard could amplify another benefit of blockchain.
A commonly pitched use case for the tech is the streamlining of regulatory reporting – the regulator can operate a node on the blockchain and pull data directly from it. The U.K.’s Financial Conduct Authority has already tried this out, participating in a proof-of-concept for regulatory reporting of mortgage transaction data using R3’s Corda platform.
The problem is that in the current world, banks have their main trading data, and their risk models basically duplicate that and perform a simulation.
“If we were able to use a common domain model, we would be able to use exactly that same data. We wouldn’t need to write two versions of what’s going on, one just for the risk model,” said Braine.
Ultimately, though, reaching common standards, like implementing blockchains, is a team sport, and the game is still far from won.
Clive Ansell, head of market infrastructure and technology at ISDA, concluded:
“There is a fantastic opportunity … but the level of success will depend on the industry operating to a common data and processing model.”
Barclays image via Shutterstock.
Written by CoinDesk.com