IBKR Quant Blog


The Continuous Evolution of Bitcoin and Blockchain

By Dan Gramza

When most people think of cryptocurrencies, they think of bitcoin.  Although it is one of the most popular cryptocurrencies, there are over 1,600 cryptocurrencies. The applications of bitcoin and the other cryptocurrencies are constantly evolving. 

Bitcoin is being recognized as legal tender by some governments.  For example, Japan recognized bitcoin as legal tender in April 2017.  Bitcoin is illegal as a payment tool in some countries, such as Iceland.  Indonesia, India and Bangladesh.   

Cryptocurrencies continue to develop as a lifeline for undeveloped countries plagued with hyperinflation and failed government monetary policy. There are number of countries or organizations that are using cryptocurrencies as a tool to try to solve economic issues.  Examples of countries that are currently using a cryptocurrency or are contemplating using cryptocurrencies are Ecuador, Argentina, Palestine, Marshall Islands, Dubai, Zimbabwe, Senegal and Venezuela.

These special use cryptocurrencies are typically identified as that country’s currency. On the surface, the use of cryptocurrencies in this fashion may seem to alleviate some of the challenges that country may be facing on the local and global market. Some countries are considering cryptocurrency based crude oil transactions to eliminate potential control by the US government of US dollars used in crude oil transactions.  However, new challenges can arise. Just because a country has created a cryptocurrency it does not mean the global marketplace will accept it.  For example: Venezuelan President Nicolás Maduro announced the creation of a virtual currency in an effort to ease the country's economic crisis and the Trump administration prohibits US purchases of the Venezuelan Petro Cryptocurrency.

Another evolutionary trend is the backing of a cryptocurrencies with hard assets, such as diamonds and gold, as a way to create a feeling that there is something supporting the cryptocurrency other than the hope that someone else will be willing to pay a higher price for the cryptocurrency. The Israel Diamond Exchange is launching diamond-backed cryptocurrency. 

A potentially hazardous evolution is when the price of a bitcoin is used as a basis to determine the price of another cryptocurrency.  An example of this is the use of bitcoin prices in the valuation of Tether which is supposed to be back by US dollars.  The movement of Tether could have the potential to artificially inflate bitcoin’s price and any other cryptocurrency that is basing its price on the bitcoin’s price.

Bitcoin is a worldwide payment system which verifies bitcoin transactions by recording a transaction in a record system (distributed ledger) called a blockchain. Blockchain is a network of peer-to-peer connected computers. The bitcoin network of peer to peer computers use software to connect them to each other over the internet to the other computers running the same software.  This software creates a network of computers that can communicates with each other, relaying information about and recording new transactions to the bitcoin blockchain.  Once a new a block of valid transactions is confirmed it is distributed to all of the computers on the network.  Bitcoin ownership is followed in the Bitcoin Blockchain through Bitcoin addresses.  

Blockchain architecture is being used to explore non-cryptocurrency applications.   Here are a few examples of blockchain applications that are currently being used or being considered: fighting art forgers, tracking ownership and royalty payments in the music industry, DeBeers tracking diamonds production cycle, land and marine shipping industries tracking shipments, restaurant loyalty programs, Coca Cola certifying suppliers, clearing of stock trades on the Australian Stock Exchange, Dubi recording local real estate contracts, Hong Kong tracking trade financing and  Kodak looking to protect  registered images or photographs.

Blockchain is also going through an evolution.  Hashgraph, like blockchain, is a distributed ledger, with the expectation that hashgraph could be a faster and cheaper alternative to the blockchain.

Hashgraph, and the similar IOTA and ByteBall, rely on Directed Acyclic Graphs (DAG) to follow transactional information flow. Hashgraph’s DAG records information in a timed series. This means that the record of each transaction is dependent upon the order of all the previous transactions in the series.

This also means this new network can efficiently operate with massive amounts of data such as stock trades. It is the users of the DAG that confirm transactions for one another instead of relying on blockchains outside “miners.” Bitcoin blockchain requires transactions to be assembled in 1 megabyte blocks which can throttle back its capability of handling large amounts of data quickly. Hashgraph’s ledger does not bundle transactions which increases its efficiency and speed. Since every hashgraph user participates in confirming transactions, transactions are processed as they come in, meaning large amounts of data can be processed in a second compared to the Bitcoin blockchain which is much slower.

With the learning curve and technology enhancements for cryptocurrencies and distributed ledgers increasing at an exponential rate with no sign of slowing down means that it is important for investors and traders to stay up-to-date by monitoring the evolution of these markets.



Dan at Gramza is President of Gramza Capital Management Inc. and DMG Advisors, LLC. He provides daily market updates from around the globe on subjects ranging from the Nasdaq and currencies to crude oil and grains dangramza.com.


Click here to learn more about Gramza Capital Management, Inc.


This article is from Dan Gramza and is being posted with Dan Gramza’s permission. The views expressed in this article are solely those of the author and/or Dan Gramza and IB is not endorsing or recommending any investment or trading discussed in the video. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


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