Banking-the-Unbanked with Algorithmic Trading

One of the core promises of Blockchain technology is the democratization of financial markets. While the early focus in Blockchain has been on topics such as payments, banking access for the unbanked and censorship-proof digital currency, one huge elephant in the room has gone unnoticed: “In today’s equities markets, at least 65-70% of trading volumes come from algorithmic trading. Most of this trading comes from large quantitative hedge funds running advanced trading strategies to which retail investors have no access.”

At the same time, we live in a time of growing economic inequality with fewer and fewer young people participating in stock markets or being able to afford a home. Cryptocurrencies have given millennials the opportunity to re-think the meaning of money, to deconstruct the banking system from scratch – from enabling simple peer-to-peer transactions to exploring the many logistical hurdles involved in trusting others while preserving asset value. Now, a few years into the blockchain revolution, we are facing a step-up typical of the life cycle of new technologies: big players are coming into the market. They are doing it with bots performing rapid algorithmic trades that, inevitably, are pushing back all the mass of new traders that fell in love with trading.

Enter Coinrule: placing the power back into the hands of the ‘regulars’ in the world of trading.

It has become a truth that in today’s technology driven markets, algorithmic traders win. Emotions and feelings, otherwise also known as human nature, can be the worst enemies for a new trader. Every trader can experience fear, euphoria, greed and disillusion when experiencing market movements and that will have a negative effect on his or her capability to make rational decisions.

Algorithm trading strategies on the other hand build on patterns, and the ability to recognize these patterns quickly. The best algorithmic trading strategies are designed to improve as they learn. ‘Algos’, as they are called, also command perfect discipline, rationality within the boundaries set to them and do not tire, a critical quality in the 24/7 crypto markets. To put it differently, Algos are relentless machines that do not get attached to hodling the wrong coin but execute according to the original framework designed for them. Finally, their sheer speed in execution allows traders to be in multiple places at the same time when needed, not something your regular trader is capable of doing.

The increasingly widespread use of algorithmic trading impacts society more than many would acknowledge.
The ability of the richest parts of society to access financial products that are not available to any of the other groups is a key driver of growing wealth inequality.  As economists Moritz Kuhn, Moritz Schularick and Ulrike Steins from the University of Bonn recently wrote, in the 38 years between 1975 and 2013, a $100 in the S&P 500 would have grown to approximately $1,600, compared to significantly more meagre returns in asset classes such as real estate (5x over the same period). These S&P 500 gains are of course only the tip of the iceberg. As sophisticated investors have access to advanced products, markets and hedging solutions to protect themselves against risks such as inflation or the current historically low interest rate environment. It is once again the retail investors who suffer the most.

If Blockchain technology has set out to disrupt every aspect of the financial world, access to financial returns from investing, not just for a small group of elite investors but for the mainstream, is a major part of it. Today, 3 out of 5 Millennials don’t invest in stocks and the holdings of the other 2 are lower relative to the previous generation.

For many Coinrule users, Cryptocurrency has been the first asset class they have ever traded. The numbers show one thing: this is a structural issue.

Equities markets are part of an ‘old’ financial world happening both at a slower pace and in systems and tools still designed for a time before the internet. If you are between 20–35, chances are you are significantly more likely to trade crypto in a 24/7 market that feels at times like a Computer Game than stocks of ‘slow’ companies on legacy stock platforms such as Charles Schwab et al. Millennials, already financially struggling with student debt, housing prices and job markets, see crypto trading not as a risk but as an opportunity to join the ‘financial party’ to which they had previously not been invited. According to Oleg Giberstein, COO and Co-Founder of Coinrule:

” It is hugely indicative that Coinbase now has more user accounts than the stock trading giant Charles Schwab, a company founded in 1971”.

But even in Crypto trading, the playing field is starting to shift. Those traders familiar with the intricacies of Technical Analysis and some of the more specialized trading language and interfaces are able to draw on a pool of sophisticated trading instruments from platforms such as Coinigy down to programming their own Trading Bots with libraries such as Catalyst.

The average user on the other hand will neither have the time nor technical skill to enter this game against the professionals. In fact, at the moment, it is impossible to structure automatic trading strategies to fight these quant bots unless you have access to similar advanced tools. The implications of this cannot be overstated – yet again in the ‘new’ world of Crypto, an elite class is taking over the driving seat. Many users would remain excluded from the more promising market opportunities.

This is where Coinrule is coming into the picture.

Coinrule is the first and most simple way to create trading strategies based around an “If-this-then-that” logic.
The entire user experience is geared towards regulars who are not trained programmers or traders. Coinrule is a ‘sandbox’ for regular traders to build their own trading algorithms, test them based on historical data and then let them automatically run on connected Crypto exchanges such as Binance, HitBTC, etc. Traders can review the performance of their trading rules in real-time and tweak and adjust the rules as they wish, both on web and mobile.

Algorithmic trading can work for everyone.

The principles are simple: not every casual crypto investor will become the next Wolf of Wall Street. Unless a trader is willing to commit hundreds of hours of work and studies, a strategy focused on ‘Alpha’, meaning an outperformance of the market, is probably not the right approach. But between passively hodling and hoping for the best and active trading of markets with all the risks that come along, strategies focused on tracking markets and ‘Beta’, meaning low-ish volatility vis-a-vis the overall market performance, will work best for most traders.
Such strategies allow mainstream investors to build up significant portfolio returns over time at reduced risk, without having to pay the premium for being part of a fund or taking the risk and complexity of buying off-the-shelf trading bots. Traders looking for Alpha can still use Coinrule but opt for more advanced trading strategies.

But unlike platforms that only provide advanced trading tools for traders seeking lucrative Alpha, most Retail traders will be satisfied with a Beta trading strategy that allows them to manage their risk professionally and occasionally receive a reward. Among the challenges for today’s retail traders are emotions, the idea that one can outperform the market or the opposite idea that pure hodling will inevitably lead to riches. On both ends, traders end up losing significantly if they either overestimate themselves and end up ‘gambling’ on coins or end up hodling the wrong assets. An algotrading solution for the masses must therefore achieve two goals: make trading extremely simple and provide access to low-risk strategies that still allow traders to profit from their crypto holdings without having to commit significant amounts of time to learning the game.

How will this work in practice? By changing the rules of the game! Trading interfaces do not have to overwhelm users with graphs, blinking lights and complex systems. The terminology in play can be commonsensical and not just understandable for an experienced trader. The experiment of Coinrule is that it is truly a platform being built by hobby traders for hobby traders. For example, traders can set up rules to automatically sell small amounts of their holdings as markets go up and buy small amounts as markets dip – swing-trading without any emotional attachments and with minimal time involvement. Analysing how a Trading Strategy would work when different patterns emerge in the market will be fast and simple with Coinrule. For instance, the Backtesting permits users to personalize the time horizon of their interest and in a matter of seconds, check how that strategy would have performed. It will be interesting and surprisingly insightful to observe how the same strategy will yield different results just by changing the starting and ending dates of the back test. Similarly, users can easily create index funds consisting of whatever coin combinations they would like to hold and choose what rebalancing periods they prefer – over time they can continue to fine-tune the strategy, rather than having to trade ad-hoc based on immediate price movements.

Coinrule takes these concepts a step further: it will soon be decentralized. Being a DApp will allow Coinrule to better protect the privacy of its users’ trading strategies and allow to plugin to other decentralized protocols and platforms whose users will benefit from trading via Coinrule, which will also open the system to improvements by third parties. Unlike social-trading platforms such as eToro with questionable privacy or some of the existing systems with centralized access by the operator, a user’s trading strategies on Coinrule will be stored in a trustless, inaccessible location on the Blockchain.

As Naval Ravikant said, “Bitcoin is a tool for freeing humanity from oligarchs and tyrants, dressed up as a get-rich-quick scheme.” Quietly yet in plain sight, cryptocurrency trading has become one of the killer apps of Blockchain that we have been waiting for. Scaling of technology and wider adoption are unstoppable developments and only a question of time at this point, but the ability to add liquidity to previously illiquid asset classes such as startup investments, real estate, organizational governance and so much more, not to mention the fact that these ‘assets’ are globally tradable 24/7.

Cryptocurrency trading allows anyone from a family in India to an Investment Banker in New York City to play in the same markets with significantly lower barriers to entry for anyone involved. It is no doubt extremely risky, highly speculative and dangerous, especially for those who fail to do their research. But much of these issues are growing pains. As new liquidity will gradually enter the markets, volatility will drop. Opportunities like Masternodes or dividend tokens are adding additional avenues for investors to earn safer returns. Everyone, not just the usual privileged suspects, can win on an unprecedented scale.

Yet this can only become a game-changer in the financial system if the gains are accessible to everyone. Blockchain enthusiasts like to talk about ‘Banking the Unbanked’ as a core Blockchain use-case. But no matter how important this use-case is, financial exclusion comes wearing many hats and does not only impact citizens of developing countries. As many indebted millennials will confirm, financial exclusion is not only a problem in the developing world but can happen anywhere. If Blockchain technology is to make a difference here, tools like Coinrule will need to succeed in their mission to democratize algorithmic trading of Cryptocurrency.

Ultimately, cryptocurrency can become a market that is likely to be significantly more accessible, transparent and democratic in terms of participation than anything that Wall Street or the ‘old’ financial system have ever produced. Retail investors will gain access to returns and opportunities that have never been available to them. Today, thanks to cryptocurrency trading, literally anyone could be the investor into the next Facebook or Google. This trading aspect of Cryptos is therefore not a small, undesirable side-aspect of a bigger list of Blockchain innovations, but literally a game-changer for millions of people.

As Gabriele Musella, CEO and Co-Founder of Coinrule said recently:

“Coinrule is all about giving extensive access to the tools that have previously only been available for big banks and corporations. That’s what we are doing with Coinrule. Our vision is to invert the system, in favour of a bottom up approach. Power to the people, without sounding too idealistic.”

If regular people could invest in technological innovation, all supported by a vast and extensive information and education industry that prepares them for it and with access to easy-to-use trading systems, the playing field between the rich and the rest would begin to level. In a time of growing opportunities but also growing economic risks for many, the number of individuals choosing to trade any type of asset for a living will only increase. With greater flexibility, location independence and an ever-wider range of tradable assets, this does not have to be a nightmare scenario.

With trading systems like allowing more and more traders to compete with professionals and trading bots on a level playing field, the future really could be bright for regular traders and the Blockchain space as a whole.

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