Blockchain Trading

Blockchain and cryptocurrency trading has boomed in the last decade owing to the decentralised, secure and efficient nature of the new technology. Arguably it all began with Bitcoin, but today there are hundreds of crypto coins with investing potential. In this guide, we explore how blockchain works, the pros and cons, plus alternative blockchain trading options.

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What Is A Blockchain?

In the last few years, blockchain-based trading has been the talk of the financial markets. However, the concept of how a blockchain works can be complicated, so we’ve broken down the key components below.

Blocks

Blockchain in its simplest form is a database; a collection of data stored electronically on a system. Most databases store data in a tabular format so that users can search and report on relevant information. On a blockchain, data is stored in groups, known as blocks.

Chains

Each block holds a certain amount of data and once full is connected to the previous block. This process is continuous and eventually creates a chain. Once each block is connected to the chain it is timestamped and cannot be modified. This creates a secure record of every transaction that has ever occurred.

Decentralisation

A defining characteristic of blockchains is that they are decentralised. The data in traditional databases is held and stored on powerful servers which are usually owned by one entity. For example, stock trading is always completed via a central exchange. Blockchain data requires the same amount of server power but instead, sources this from a multitude of computers with different owners, known as nodes. For changes to be executed on the blockchain (either creating new blocks or changing existing blocks) this must be agreed upon by a majority of the nodes in the blockchain. The nodes work together to manage the blockchain and there is no single owner of the data.

It is by nature decentralised, which means no single entity can control the ledger or influence trades. It is this node approval process that has driven the popularity of blockchains and the emergence of DeFi platforms.

Decentralised Finance (DeFi)

DeFi utilises blockchain technology to provide financial services without the control of a central bank. For example, by enabling users to profit from lending their capital through smart contracts in the same way a bank would. Once integrated into the blockchains, smart contracts cannot be amended by an individual user, ensuring that the transaction remains secure.

DeFi projects are less likely to be impacted by fraud or hackers because it is more difficult to steal money and information across multiple sources versus a central location like a bank. The emergence of DeFi projects has resulted in increased trading of blockchain-based assets, such as cryptocurrencies and NFTs.

History Of Blockchain

Although blockchain technology has risen to fame in the last decade, the concept has been around for much longer. The timeline below shows how it has evolved.

• 1991 – Haber and Stornetta’s “How to time-stamp a digital document” refers to a chain of blocks for the first time
• 1998 – Nick Szabo develops the first decentralised digital currency named “Bit Gold”
• 2008 – 10 years later, the enigma, Satoshi Nakamoto, releases the first blockchain white paper which details how the software should be modelled
• 2009 – Nakamoto creates the first blockchain public ledger where transactions can be made with Bitcoin. Although not the first digital currency developed, it solved the failings of its predecessors. The Bitcoin blockchain that was released in 2009 is still in operation today
• 2010 – The first Bitcoin transaction occurred – the purchase of two pizzas for 10,000 BTC, regarded as the most expensive pizza in the world with a current market value of over £300m
• 2013 – Bitcoin’s market cap exceeds $1 billion with the coin trading at $100/BTC. In the same year, new cryptocurrencies, such as Ethereum, release their white papers
• 2014 – Ethereum raises over $18m of Bitcoin. Blockchain 2.0 is released, separating the blockchain and the coin. BTC begins to be accepted by merchants as a form of payment
• 2015 – Over 100,000 merchants accept Bitcoin as a payment method
• 2017 – The number of Bitcoins in circulation reaches 16.5m. The coin exceeds $1,000/BTC for the first time in three years. Japan recognises Bitcoin as an official currency
• 2018 – Dogecoin market cap exceeds $1 billion

Blockchain Trading Options

Cryptocurrencies

Cryptocurrencies and blockchain trading go hand-in-hand. Since Bitcoin’s emergence in 2009, the crypto space has grown into a multi-billion pound industry with hundreds of tokens available for trading.

In 2024, most brokers and exchanges offer cryptocurrency trading alongside other traditional asset classes, such as forex, stocks, and commodities (e.g gold or oil), meaning clients can benefit from a diverse portfolio. Popular platforms, such as MetaTrader 5, now offer the ability to trade cryptos on both desktop and mobile app.

Fees vary by broker, so investors should shop around for the best deals. Some brokers now also accept Bitcoin as a form of payment, however, this is usually limited to crypto exchanges.

NFTs

Another type of digital token born out of the development of blockchain technology is the non-fungible token or NFT. Exchanging NFTs on a blockchain is similar to trading cryptocurrencies, but has some distinct differences. Cryptos are fungible, meaning they are completely indistinguishable from one another. If I lend you 10 BTC, when you pay me back I’m not concerned whether I receive the same 10 BTC or different ones. In fact, I wouldn’t be able to tell if they were different.

NFTs on the other hand, are non-fungible, meaning they are completely unique. The first-ever signed copy of the Wolf of Wall Street would not have the same value as the millions of blank copies or duplicated fakes. It would be a one-of-a-kind, just like NFTs.

These digital tokens come in all shapes and sizes and can be anything from music to gaming software. Like cryptos, all NFTs benefit from the secure and transparent nature of blockchains.

Emissions Trading

In addition to trading assets, blockchain technology can be used to solve issues related to emission targets. Large businesses that emit high levels of carbon emissions must purchase government-issued pollution permits to avoid fines. This is particularly applicable in the oil and gas sector where trading is under constant public and government scrutiny. Any company wishing to increase their pollution levels must have the correct permits. These are purposefully kept in short supply and so some firms elect to manage their emissions with permit derivatives which are available on most trading platforms.

Blockchain technology facilitates the buying and selling of these permits by better connecting the supplier and those in demand. It increases transaction transparency while reducing fees and the risk of fraud. There is also no requirement to negotiate the issuance of permits with a central governing body, so it becomes totally decentralised.

P2P Energy Trading

Blockchain technology can also be used to solve household energy wastage issues. Blockchain-oriented energy markets or peer-to-peer (P2P) trading enables customers to sell excess electricity to other customers. Typically, only trading of solar energy is possible and users must be on the same grid, but usage is expanding rapidly. The first example of this was in 2018 when a neighbour of a renewable energy source creator bought excess power using Ethereum (ETH).

This type of blockchain trading can increase resource efficiency across the world, particularly in countries with high energy consumption, such as China, the USA, and India. Rather than consumers paying large energy companies a fixed amount of their income each month, control is given back to the consumer, with the option to start trading their excess energy.

Bitcoin Blockchain

Exchange Structures

Blockchain technology is increasingly becoming integrated with other trading markets in an attempt to increase the efficiency and transparency of the exchange. Some commodity exchanges still validate their transactions by manually recording purchases and sales – an outdated and risky approach. By integrating a blockchain commodity trading platform, transactions would be validated instantly, providing a higher degree of security and transparency.

There are already examples of businesses developing a blockchain oil and gas trading system, with Vakt and OneOffice leading the way in the design of such software. As the revolution against traditional trading exchanges grows, there is an expectation that exchanges for other asset classes, such as bonds, equity and securities, will be upgraded using blockchain technology.

Getting Started

The number of blockchain trading users is growing daily. This has resulted in a catalogue of advice and support for people looking to get into the blockchain trading game. It is always advisable to do your research before putting your capital at risk.

Key resources include the Blockchain Trading Alliance and Blockchain Academy, where users will find in-depth reviews, technical analysis, and trading forums. Here, a range of topics will be covered, including how to implement a trading bot, how to adjust your trading view, and which is the best blockchain trading platform. All of which will aid the implementation of a successful trading strategy. Traders should also make use of any demo accounts before risking their capital.

Pros Of Blockchain Trading

Now we’ve explored the trading options, how does blockchain improve trading? The benefits are explained below:

• Highly secure – Any transaction or amendment in a blockchain must be validated by nodes in the chain. This can help reduce the risk of insider trading, as unauthorised amendments would be noticeable.
• Increased accuracy – Due to the advanced technology behind blockchain trading and the multi-node approval process, there is a reduced risk of human error. There is still a slight risk of computer error but this would need to be verified by all nodes, making it highly unlikely.
• Growing support – It was 10 years ago when the first Bitcoin transaction was executed. Today there are hundreds of tradable coins and many other ways to get involved with blockchain trading. This rise is expected to continue as users prioritise the decentralised and secure nature of blockchain trading over traditional methods.
• Improved transparency – The development of each blockchain trading platform is accessible through open-source software. This means information such as how the blockchain operates, how it was built and its history, is available for all members of the public to review, including other developers and auditors.
• Increased accessibility – Traditional trading exchanges do not operate on the weekends and have specific trading hours during the week. Blockchain trading is available 24/7 every day of the year, meaning traders can access the market at any time. The decentralised nature of blockchain trading also removes the involvement of an overseeing third party, which makes trading more efficient.

Cons Of Blockchain Trading

Despite the strong features of blockchain trading, there are some drawbacks:

• Complicated – Blockchain trading is much more difficult to understand compared to other asset classes or methods. Traders may resist entering the blockchain world due to its complexity.
• In development – Blockchain trading is still a relatively new concept. With the exception of cryptocurrency and NFT trading, most aren’t widely available. However, there is a strong probability that blockchain technology will be further integrated into society in the future.
• UK regulation – In 2020, the FCA tightened regulations on crypto trading. In particular, crypto derivatives and leveraged trading is no longer available. This may have slowed the expansion of blockchain trading to traditional asset brokers.
• Energy-intensive – Blockchain technology requires vast amounts of energy to validate transactions, making it potentially damaging to the environment.

Blockchain Trading Summary

The potential for blockchain trading is massive. This has been demonstrated in the digital currency sector with the expansion of Bitcoin to a multi-billion-dollar industry in just over a decade. The key features of blockchain technology make it an attractive concept for a variety of industries, and many, such as energy and financial services, are already beginning to utilise it.

Despite this, increased regulation on blockchain technologies by governments and other bodies poses a threat to its development. This regulatory control also devalues the decentralised nature of blockchains which may further hinder the level of user interaction. Regardless of these potential barriers to entry, the future for blockchain remains bright.

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