Quantum Shifts in Cryptocurrency Investing

For as long as there have been markets, there have been investors trying to get an edge in them, and quantum computing is the latest shiny tool that is being touted, but can it work?

Patrick Tan
Jan 4 · 7 min read

Meaghan Carter couldn’t put a finger on what was ailing her fourteen-year-old daughter Peggy. A cheerful, happy child, Peggy had blossomed into a “tweenager” yet had never manifested any of the predictable maladies that that age was supposed to have ushered in.

But of late, Carter noticed that her typically bubbly and sociable daughter was turning petulant, and was concerned about cyberbullying or other things that could be happening to her at school.

Determined to get to the bottom of the mystery, Carter, who enjoyed an extremely close relationship with her eldest child, broached the topic in the gentlest way possible.

Fortunately, Peggy’s problems weren’t social or psychological, they were physiological,

“I don’t know Mom, it’s nothing at school. Friends are great and I’m doing well, it’s just that I feel everything sometimes, and all at once.”

Carter heaved a sigh of relief that only another parent could heave — Peggy was simply experiencing puberty in all its hormonal and emotion-conflicting glory.

As teenagers undergo puberty, chemical changes in their body can cause them to experience a plethora of emotions, often at conflict with one another and almost always all at once.

And typically, most parents can do nothing more than to stand back and helplessly respond as best as they can as their once balanced child becomes unpredictable and moves through various state changes.

But what if there was a way to not only predict those simultaneous state changes, but to respond to them as well?

What sorcery is this I hear you ask?

If it’s to be believed, that witchcraft is none other than quantum computing.

Quantum Statements

Over the decades, advances in computing have been directly related to increasing the number of calculations or state changes that a processor can manage.

But the problem with state computing is that it is by definition exclusionary — if you prosecute one state, you immediately exclude the other possibility.

And this limits the number of calculations and processes that a traditional computer can handle.

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Hall of the great computers had interesting lighting choices. (Photo by Lorenzo Herrera on Unsplash)

Engineers of course have tried to increase the number of calculations by running processes in parallel and by adding processors and processing channels, but the core is still binary — on or off.

Enter quantum computing.

A derivative branch of theoretical physics, the concept behind quantum computing is to process multiple states simultaneously, and especially when under normal binary conditions, the selection of one state precludes the pursuit of another.

At the atomic level, theoretical physicists had long postulated that atoms could exist in states simultaneously, but were very unstable at those states.

Recent advances in technology have proved those theories correct and are now making it possible to develop early quantum computers.

The potential application of such technology, particularly in the realm of financial markets would provide unprecedented advantages for traders looking to eke out what little advantages remain.

But is quantum computing all that it’s “stated” to be?

What witchcraft is this?

An early adopter of computing and artificial intelligence, over the past decade, more trades have been executed by computers relying on complex algorithms, than humans.

The bustling roar of the trading floor with its shouting, paper order slips and baseball-style hand signals, have largely been replaced by the high-pitched whir of computers.

And now Wall Street is looking to advances in quantum computing, to provide its traders with an edge over the competition.

Once thought to be in the realm of science fiction, IBM, Google and a handful of smaller upstarts are making significant leaps in the realm of quantum computing, refining their hardware and increasing throughput and speed.

And while quantum computers are unlikely to beat non-quantum computers at everything — there are some processes that just don’t need to be run as quantum states, the math which they do excel in is of great interest to traders.

You Don’t Have to Choose

Quantum computers would in theory enable traders to boost profits by speeding up asset pricing and identifying mispricing (where the bulk of profits are made) and run the Monte Carlo simulations that most trading algorithms are tested against.

The implications are huge — imagine a quantum computer that could in an instant calculate every single possibility in a financial market for a particular mix of assets and execute those orders automatically in milliseconds — and it immediately becomes clear the sort of advantage this technology would provide.

And the effect that could have on cryptocurrency trading could be enormous.

For now, the digital asset markets are not worth enough for traditional bankers and traders to deploy such quantum advantages.

The total market cap of all cryptocurrencies currently stands at around US$770 billion, versus the daily value of derivatives traded in the financial markets which is estimated at around US$4 trillion.

Yet digital asset markets are particularly suited for quantum computing and the edge they would provide.

Unlike traditional financial assets, there are somewhat less variables to cater for when it comes to cryptocurrencies.

With the vast majority of cryptocurrencies not backed by any physical asset, they are largely subject to narrative, investor sentiment and market forces — which means that they’re particularly susceptible to FOMO (fear of missing out) and the market emotions of greed and fear.

That also means that cryptocurrencies are more prone to herd behavior than other financial instruments, an area which quantum computing is best suited to process.

Because the blockchain on which cryptocurrencies are built provides transparency as to flow information — an inflow of cryptocurrencies into exchanges suggests that investors are looking to sell, whereas an outflow suggests the opposite, that data can be fed into quantum computers to calculate a myriad of states and the outcomes that they could provide.

Quantum computers would also provide a distinct advantage to the cryptocurrency trader in that the vast bulk of cryptocurrency trading is automated.

Whereas 20% of trading in financial markets is still done by humans, that figure is estimated to drop to around 5% for cryptocurrency markets by contrast.

Because cryptocurrency markets never sleep, automated trading from the early days of cryptocurrency exchanges has been the norm, rather than the exception.

And as a growing number of traders from the traditional financial markets trickled into the cryptocurrency space, they brought with them their tool bags of algorithms and automated trading programs based on binary systems.

But quantum computing has the potential to supercharge cryptocurrency trading, yet not necessarily to provide unfair advantages to those with access to the quantum computing technology, but by making the cryptocurrency markets as a whole somewhat more efficient.

Quantum Blockchaining

But many of these resources are being made freely available because quantum computing technology is still relatively unstable.

The current state-of-art of quantum computers is that they’re not able to perform calculations at scale that would imbue them with a real world advantage in the markets.

A measure of quantum computing power is qubits, the functional equivalent of non-quantum computing bits.

And while there are many problems for which a quantum computer with thousands of qubits is provably faster than any non-quantum computer could ever be, that machine still exists in the realm of science fiction.

The main problem with quantum computing hardware is that processing myriad states makes them by design unstable — and as anyone who’s ever operated a computer will attest, stability is an important function, not feature.

For now, quantum computing needs to make do with tiny unstable machines which can perform calculations in milliseconds before their fragile quantum states break down.

One way to still glean an advantage from these ephemeral processes of course is to reduce the number of calculations that even require quantum computing processes, so-called “hybrid” quantum computing systems.

Last year, Google was the first to demonstrate “quantum supremacy” by using a 53-qubit NISQ machine to perform in minutes, a calculation that would have taken the world’s fastest supercomputer more than 10,000 years.

IBM, which has invested heavily in quantum computing suggests that it can build a 1,000 qubit quantum computer by 2023.

And both firms have spoken about quantum computers with a million qubits by the end of the decade.

If computing history is anything to go by, the odds of achieving such advances are good.

In the several decades since the invention of computers, Moore’s Law, which states that the number of transistors on a microchip doubles every two years while the cost of computers halves, has not only been observed, today, many say that it’s no longer valid, with advances in computing well exceeding such observations.

As computers get more powerful, they enable us to take on more complex processes, including building and modeling the quantum computing states needed to design and produce quantum computers.

Using basic quantum computers we could design more advanced quantum computers and use those more advanced quantum computers to design even more advanced ones ad infinitum.

The irony though is that many of those advances will most immediately trickle down into the financial markets where their application is most accessible and that could well include the cryptocurrency markets as well.

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Patrick Tan

Written by

CEO of Novum Alpha, an all-weather digital asset trading firm that uses Deep Learning tools to deliver dollar-returns in all market conditions.

The Capital

A publishing platform for professionals in business, finance, and tech

Patrick Tan

Written by

CEO of Novum Alpha, an all-weather digital asset trading firm that uses Deep Learning tools to deliver dollar-returns in all market conditions.

The Capital

A publishing platform for professionals in business, finance, and tech

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