Op-Ed: My Pair Trade - Long Bitcoin/Short Scotland

If Scotland votes to secede this should be extremely positive for Bitcoin.

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Op-Ed: My Pair Trade - Long Bitcoin/Short Scotland

If Scotland votes to secede this should be extremely positive for Bitcoin.

In chaos theory, there is a famous metaphor called the butterfly effect: it states that small changes in one place in a complex system can have large effects elsewhere. 

What is a complex system? Essentially it is a collection of decision making objects (people), competing for limited resources armed with some kind of information about the past and present. According to Neal Johnson, author of  Simply Complexity: a clear guide to complexity theory, there are 4 components which make up a complex system:

  1. The system contains a collection of many interacting objects or agents that are linked by some public information that they may share (in this case separatism and financial destiny);
  2. Those objects behavior is affected by memory or feedback-something from the past affects something in the present. As a result, you are using information from the past to influence your decision in the future (feelings of resentment and blame from the financial crisis and subjugation to central rule without a voice);
  3. The objects can adapt their strategies according to their history. In other words, the agents can adapt behavior in the hopes of improving performance (Things were better before the Eurozone when we had our own currencies. Our economies were better off);
  4. The system is typically open. This system is influenced by its environment (Clearly this is the case as the economic effects of the crisis have destroyed countries).

I believe this is apropos to the situation in the UK, Europe and the world as a whole find themselves in on the eve of this historic vote.  In this complex global financial system, the ripples of what happens in Scotland will be felt worldwide and I believe will cause bitcoin to be put in the spotlight again.  The world has never been more connected and yet more fragmented. Europe still has not recovered from the financial crisis that started in 2008 including Scotland. 

Felix Salmon stated: “And then came the final straw: with Gordon Brown — another Scot — in power, and Scotland’s very own banks (run from London) helping to fuel the craziness, the London-based UK financial system managed to precipitate a global economic crisis from which Scotland still hasn’t recovered.” 

- Felix Salmon

Another interesting aspect to this is the fact that London has already said Scotland will not be able to use the pound if they carry on plans.

Elsewhere

This recovery from the Great financial crisis has not happened in any of the periphery countries in Europe and if that’s not bad enough these countries have large separatist movements of their own.

In a nutshell, Northern Italy will want to break from Southern Italy (Veneto, Lombardy and Salento) as the North has long standing resentment for being the financial powerhouse of the country; a nationalist movement in Belgium, where the Dutch-speaking Flanders region has aspirations to break away from their considerably poorer French-speaking countrymen in Wallonia; and of course there is Northern Spain, where the Catalonians and the Basque region have been attempting to gain independence for decades. 

Countries like Greece may start to look at the Irish and Icelandic model and decide to break free of the Eurozone, take the short term pain; devalue; get their own currency back and regain some competitiveness. This is not just a European problem although they are at the forefront of it, many countries worldwide are looking to see what happens in Scotland and perhaps use it as a model of their own (e.g. the Turkish Kurds).

Referendum

If Scotland does in fact secede this will roil the currency markets and create a giant uncertainty over the whole Eurozone project. Confidence in the currencies of the UK and Europe will be shattered and if you are a citizen of Spain, Greece, Italy etc. What will you want to hold if you think you are next or at the very least parts of your country are looking to separate? 

There has been speculation that the Scottish prime Minister has been exploring bitcoin as a currency alternative. For now, these are just rumors. One would also have to wonder how the banks in these countries would react in such an event as well the debt holders of the sovereign bonds of these countries.

It would make perfect sense for citizens of these countries to be investing in bitcoin as an alternative asset class that is not subject to central bank manipulation and devaluation. Even if Scotland chooses to remain in the UK, we may now be near a tipping point and Scotland could be the butterfly.

About the author

George Samman  is the co-founder and COO of BTC.sx, the world’s first bitcoin only trading platform. He is a former Wall Street Senior Portfolio Manager and Market Strategist as well as a technical analyst. He holds the Chartered Market Technician designation (CMT). A seasoned trader, George has over 8 years of experience in the financial markets.

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