Cryptocurrency three sided market ssrn
Button, S. Cryptocurrency and Blockchains in Emerging Economies. Software Quality Professional, 20 3. Calcaterra, C. Stable Cryptocurrencies. Campbell-Verduyn, M.. In Tendulkar, S Ed. Bitcoin and Beyond, — London: Routledge.
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Miller, P. Chapter 1—The Cryptocurrency Enigma. In Sammons, J. Cryptocurrencies from an Austrian Perspective. In Godart-van der Kroon, A. Momtaz, P. The Pricing and Performance of Cryptocurrency. The European Journal of Finance, 1— Satoshi Nakamoto Institute Working Paper. The wider impact of a national cryptocurrency.
Global Policy, 1— Cryptocurrencies: Economic Benefits and Risks. Omane-Adjepong, M. Peters, G. Journal of Financial Perspectives, 3 3 , Pinna, A. The Computer Journal, 61 9 , — Platanakis, E. New users generally do not intend to spend Bitcoin currency for buying goods and services as indicated in studies by Glaser et al.
This finding is further supported by Baur et al. The author finds Bitcoin to be uncorrelated with other traditional assets. It is mostly held by users for speculative and investment purposes. This leads to another interesting insight. If the majority of users use it for speculative purposes, can there be the one influencing the Bitcoin price and returns? This has been examined by Baek and Elbeck They show that the returns are independent of external economic factors.
It is the market participants that internally drive the market returns which make it a front runner as a speculative instrument. What drives users to invest in Bitcoin or use it as a speculative instrument? It is highly volatile and some argue it to be a bubble and yet there is a huge rise in the number of users. A finance principle will tell us that high volatility implies high returns. They also find that Bitcoin is weakly correlated with other assets. Bouri et al. Thus, the inclusion of Bitcoin in the portfolio makes it well diversified.
They find that Bitcoin exhibits striking variation in terms of the diversification benefits. While analysing Bitcoin price behaviour during the recent coronavirus pandemic, Conlon and McGee find Bitcoin substantially increases portfolio downside risk, especially during market turbulence. Apart from being useful as a diversifying instrument, it is also utilized as a hedging device. Gold is a common hedging instrument used widely and Bitcoin is often studied compared to the same, in terms of hedging and volatility.
This study indicates that Bitcoin can find a good spot in the list of assets used for hedging. In a recent study, Akhtaruzzaman et al. Adding further to the literature, Fang et al. Further, Bitcoin derivative instruments are also found to be hedging effective Alexander et al. In contrast, Beneki et al. In contrast, Chan et al. Bitcoin has also been assessed against energy commodities by Bouri et al. The analysis is done in two sub-periods before and after the crash comparing Bitcoin index with energy and non-energy commodity indices.
They find that Bitcoin shows hedging as well as safe-haven capabilities for both the indices for the entire period and before the crash period but only as a diversifier in the post-crash period. The literature proposes that Bitcoin is an attractive investment choice especially, in diversification and hedging.
Symitsi and Chalvatzis observe the presence of spillover effects from Bitcoin to energy-technology companies. The study also detects bi-directional asymmetric shock spillovers. In the short run, there is a spillover from technology stocks to Bitcoin while in the longer run Bitcoin volatility affects the energy companies. The investible feature is confirmed by Dyhrberg et al.
The findings are especially in favour of retail size traders. A very recent study by Zeng et al. Social media and investor sentiment Unlike our usual currency, Bitcoin is not driven by any central monetary authority. It is free from regulatory norms and has no government intervention. Instead, the Bitcoin market is user-driven. It has a value till the users think it has some worth or can be converted to currency at a higher return.
Thus, it can be said to be driven by future expectations of the Bitcoin holders and future investors. As noted in previous sections, the Bitcoin supply and demand are independent of macroeconomic factors in contrast to standard currencies.
The supply is fixed or controlled by mathematical algorithm and demand depends on the future expectations on Bitcoin returns. Bitcoin being a digital currency cannot be isolated from the protagonist of its existence: the internet.
In this digital era, an individual feeds his curiosity through web browsing as it gives an instant answer. A high interest in Bitcoin could imply enormous web searches on the internet and this interest influences the expectations of users and thereby the Bitcoin price or demand and supply. This is a slippery road as a rational person will react positively to good news and negatively to a bad one.
Thus, a piece of false or fake news can blow out easily and thereby causing unrest in the Bitcoin market. Academicians have analyzed the role of media, social media and internet in driving the Bitcoin price or causing high volatility in the market. A bidirectional relationship between web searches Google and Wikipedia and prices of Bitcoin was examined by Kristoufek The interest of users was captured by internet searches to find that web queries influenced prices and prices, in turn, influenced the number of searches.
Another study incorporating Google searches done by Yelowitz and Wilson find that computer programming and illegal activity search terms are positively correlated with Bitcoin interest. A similar price analysis based on the popularity of Bitcoin was done by Polasik et al.
The key determinant of this result is the tone score used in the sentiment analysis. It implies that if the tone of an article is on a praising note the prices are observed to be increasing while the tone is denouncing the prices went down.
The findings also present that the return increased as Google searches increased and when the number of articles on Bitcoin in the newspaper appeared more frequently. Contributions of impacts of social media on the Bitcoin market are more broadly analyzed by Feng Mai et al. The study observes that a bullish post predicts positive returns, and a bearish post predicts negative returns.
A higher disagreement among the public reflected in the comments leads to a higher exchange trading volume. Further, transaction volumes can be predicted using the messages and comments posted online. Garcia and Schweitzer highlight the scope of profit-making through social media signals by combining statistical analysis and back setting server.
The study uses the framework to incorporate Google searches, Twitter feeds and opinion polarization to echo the emotions , and opinions to predict financial returns and derive large profits. Dastgir et al. Shen et al. In another analysis by Kim et al. The study applies static Pearson correlation methods and Granger causality test to a possible relationship between Twitter posts and Bitcoin market indicators. While the former confirms a moderate correlation, the latter test rejects any statistical significance for Twitter signals as a predictor of Bitcoin market indicators.
A link between the number of Google searches and the degree of speculation using Google Relative Search Trends was specified by Fry A recent study by Chen et al. They find Bitcoin to be impacted negatively as returns fell with high trading volume during the pandemic. Further, they argue that Bitcoin does not act as a safe haven during the pandemic. Other similar works like Shahzad et al. Regulation, legality and cybercrime Bitcoin works on a decentralized mechanism that allows it to be isolated from any intervention by a regulatory authority.
It does overcome the difficulty of transport and storage compared to standard currency. However, the latter still carries more liquidity and trust among people. Bitcoin has been endorsed to be anonymous in terms of the identity of users and each transaction is irreversible Bradbury, The literature, however, demonstrates that Bitcoin is not completely but anonymous as Bitcoin transaction history is freely available when one joins the peer-to-peer network to ensure the prevention of double-spending.
This has been explained by Reid and Harrigan also. They point this out along with other features such as several inputs and outputs and multiple public keys. Further scrutiny of the network structure used in Bitcoin transactions has led them to conclude that there is a possibility of associating several public keys with each other and thus arising a possibility of knowing the activities of users.
This semi-anonymous feature is supported in a study by Androulaki et al. A solution to this quasi, anonymity has been given by Bonneau et al. The Bitcoin exchange and its associated risk have been mentioned in studies of Moore and Christin and Li and Wang It is evident that investors face a massive exchange rate-related risk and users with a criminal intention will try to avoid popular exchanges as they are more scrutinized.
Anonymity feature has led this nascent currency in the world of the dark web in recent times and help criminals carry out illegal activities and money laundering. The infamous Silk Road incident was one such evidence. The findings of Stokes , Moser et al. A common proposition that finds a place in all these papers is to enhance the transaction-related regulations to curb money laundering and criminal activities.
All the papers recommend not to put a complete ban on Bitcoin as that could hinder the technological advancement in this IoT era. The standing of imposing regulations has been mentioned by Brito et al. Brito et al. They should rather come with measures to enhance resilience and adaptation. Similarly, Pieters and Vivanco conclude that standard financial regulations can have a quite significant impact on the Bitcoin market.
Risk model used in the study by Moser et al. This information is available to be overserved by all participants thus making the system more transparent. There has been repeated mention of two major incidents that portray the downsides, and the immense risk associated with the Bitcoin system: the crash of Mt. Gox and The Silk Road episode. These two have been discussed at length by Trautman and are valuable a read to get a grasp of these infamous events.
Given that the Bitcoin system has managed to be in constant news for defaulting, whether as a bursting bubble or dodging illicit activities, a few major countries have decided to prohibit this cryptocurrency. Therefore, the government should lead public expectation to keep the confidence to authority and help in reducing the speculation behavior of Bitcoin and other cryptocurrencies to stabilize the market Li et al.
Bitcoin is thus still in an embryonic phase and needs to evolve with time especially keeping in pace with technological advancements. Conclusion This paper systematized the growing research on Bitcoin published. It has segmented the publications on the basis of various elements of economics and finance such as price, demand and supply, market efficiency, volatility and returns, and investment prospects and regulatory aspects.
It also highlights the impact of social media on these factors. There are a few limitations to this paper. Our study only takes into account research from economics and finance perspective. Technological aspects such as blockchain and mining strategies are not considered.
The focus is only on Bitcoin. There are other cryptocurrencies that are merging in the digital market. This study can be extended later to take them into account. The study might have missed out on a few important publications for the reason that it cannot be analyzed from Economics and Finance point of view. Another reason being that new studies keep emerging very frequently and some will become available later.
Based on our research, we enumerate a few observations and recommendations on the basis of gaps observed in the existing research. We notice that most of the findings are methodology and data frequency-dependent. Variations in the results are also observed due to differences in time periods and lack of longer periods of data.
There are very few country-specific studies conducted. Further analysis can be directed to incorporate geographical boundaries and differences in Bitcoin behavior across them if any. Regulation norms also vary across different countries and can be analysed. Research focusing on regulatory and legality aspects fails to suggest suitable solutions to make Bitcoin a safer and widely acceptable cryptocurrency to avoid illegal activities.
The application of Bitcoin or cryptocurrency for the upliftment of economies and financial inclusion needs more exploration. The market for Bitcoin is very dynamic. The prices see a swift change and hence the intrinsic value also changes. Thus, the research needs to be timely updated to analyse the changing trends. The study can be extended to include other areas such as technical aspects and also take in other emerging cryptocurrencies.
Funding This study was not funded. Data availability statement This study does not use any data. Declarations Conflict of interest Parthajit Kayal declares that he has no conflict of interest. Purnima Rohilla declares that she has no conflict of interest.
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Keogh Abstract The focus on cryptocurrencies in the finance and banking sectors is gaining momentum.
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Cryptocurrencies have attracted a reputation as unstable investments, due to high investor losses as a result of scams, hacks, and bugs. Although the underlying cryptography is generally secure, the technical complexity of using and storing crypto assets can be a major hazard to new users. In addition to the market risks associated with speculative assets, cryptocurrency investors should be aware of the following risks: User risk: Unlike traditional finance, there is no way to reverse or cancel a cryptocurrency transaction after it has already been sent.
By some estimates, about a fifth of all bitcoins are now inaccessible due to lost passwords or incorrect sending addresses. Regulatory risks: The regulatory status of some cryptocurrencies is still unclear, with many governments seeking to regulate them as securities, currencies, or both. A sudden regulatory crackdown could make it difficult to sell cryptocurrencies, or cause a market-wide price drop.
Counterparty risks: Many investors and merchants rely on exchanges or other custodians to store their cryptocurrency. Theft or loss by one of these third parties could result in the loss of one's entire investment. Management risks: Due to the lack of coherent regulations, there are few protections against deceptive or unethical management practices.
Many investors have lost large sums to management teams that failed to deliver a product. Programming risks: Many investment and lending platforms use automated smart contracts to control the movement of user deposits. An investor using one of these platforms assumes the risk that a bug or exploit in these programs could cause them to lose their investment. Market Manipulation: Market manipulation remains a substantial problem in the cryptocurrency space, and some exchanges have been accused of manipulating prices or trading against their customers.
Despite the speculative nature of the asset, some have been able to create substantial fortunes by taking on the risk of investing in early-stage cryptocurrencies. Advantages and Disadvantages of Cryptocurrency Cryptocurrencies were introduced with the intent to revolutionize financial infrastructure. As with every revolution, however, there are tradeoffs involved.
At the current stage of development for cryptocurrencies, there are many differences between the theoretical ideal of a decentralized system with cryptocurrencies and its practical implementation. Some advantages and disadvantages of cryptocurrencies are as follows. Advantages Cryptocurrencies represent a new, decentralized paradigm for money. In this system, centralized intermediaries, such as banks and monetary institutions, are not necessary to enforce trust and police transactions between two parties.
Thus, a system with cryptocurrencies eliminates the possibility of a single point of failure, such as a large bank, setting off a cascade of crises around the world, such as the one that was triggered in by the failure of institutions in the United States. Cryptocurrencies promise to make it easier to transfer funds directly between two parties, without the need for a trusted third party like a bank or a credit card company. Such decentralized transfers are secured by the use of public keys and private keys and different forms of incentive systems, such as proof of work or proof of stake.
Because they do not use third-party intermediaries, cryptocurrency transfers between two transacting parties are faster as compared to standard money transfers. Flash loans in decentralized finance are a good example of such decentralized transfers. These loans, which are processed without backing collateral, can be executed within seconds and are used in trading. Cryptocurrency investments can generate profits.
The remittance economy is testing one of cryptocurrency's most prominent use cases. Currently, cryptocurrencies such as Bitcoin serve as intermediate currencies to streamline money transfers across borders. Thus, a fiat currency is converted to Bitcoin or another cryptocurrency , transferred across borders, and, subsequently, converted to the destination fiat currency.
This method streamlines the money transfer process and makes it cheaper. Disadvantages Though they claim to be an anonymous form of transaction, cryptocurrencies are actually pseudonymous. This opens up possibilities of governments or federal authorities tracking the financial transactions of ordinary citizens.
Cryptocurrencies have become a popular tool with criminals for nefarious activities such as money laundering and illicit purchases. The case of Dread Pirate Roberts , who ran a marketplace to sell drugs on the dark web, is already well known. Cryptocurrencies have also become a favorite of hackers who use them for ransomware activities.
In theory, cryptocurrencies are meant to be decentralized, their wealth distributed between many parties on a blockchain. In reality, ownership is highly concentrated. One of the conceits of cryptocurrencies is that anyone can mine them using a computer with an Internet connection. However, mining popular cryptocurrencies requires considerable energy, sometimes as much energy as entire countries consume.
The expensive energy costs coupled with the unpredictability of mining have concentrated mining among large firms whose revenues running into the billions of dollars. Though cryptocurrency blockchains are highly secure, other crypto repositories, such as exchanges and wallets, can be hacked.
Many cryptocurrency exchanges and wallets have been hacked over the years, sometimes resulting in millions of dollars worth of "coins" stolen. Cryptocurrencies traded in public markets suffer from price volatility. Some economists thus consider cryptocurrencies to be a short-lived fad or speculative bubble. How Do You Buy Cryptocurrencies? Any investor can purchase cryptocurrency from popular crypto exchanges such as Coinbase, apps such as Cash App, or through brokers. Another popular way to invest in cryptocurrencies is through financial derivatives, such as CME's Bitcoin futures, or through other instruments, such as Bitcoin trusts and Bitcoin ETFs.
What Is the Point of Cryptocurrency? Cryptocurrencies are a new paradigm for money. Their promise is to streamline existing financial architecture to make it faster and cheaper. Their technology and architecture decentralize existing monetary systems and make it possible for transacting parties to exchange value and money independently of intermediary institutions such as banks.
Can You Generate Cryptocurrency? Cryptocurrencies are generated by mining. For example, Bitcoin is generated using Bitcoin mining. The process involves downloading software that contains a partial or full history of transactions that have occurred in its network. Though anyone with a computer and an Internet connection can mine cryptocurrency, the energy- and resource-intensive nature of mining means that large firms dominate the industry.
What Are the Most Popular Cryptocurrencies? Bitcoin is by far the most popular cryptocurrency followed by other cryptocurrencies such as Ethereum, Binance Coin, Solana, and Cardano. Are Cryptocurrencies Securities? In the past, the SEC has said that Bitcoin and Ethereum, the top two cryptocurrencies by market cap, were not securities.
Corbet et al. This relationship becomes significantly tighter during the Covid period. Zaremba et al. It is documented that stringent policy responses cause a rise in return volatility. The wavelet coherence analysis indicates that there is initially a negative relationship between the number of reported cases and deaths and Bitcoin; however, the relationship becomes positive in the later period.
The findings for Ethereum and Ripple are also similar to the Bitcoin evidence, however, the interactions are weaker compared to Bitcoin. In the beginning, their pricing behaved like that of traditional assets, but it starts to become a hedge as the effect of COVID materializes. This is in line with previous studies that provide evidence on the hedging role of Bitcoin against uncertainty Demir et al.
The rest of the paper is organized as follows. Section 3 explains the data and methodology. Section 4 presents the results, and last section concludes the paper. Literature review Cryptocurrencies, especially Bitcoin, has attracted the attention of researchers and finance literature examines them in terms of efficiency, performance, hedging properties, and relationship with traditional financial assets. Likewise, studies exploring the impact of the recent pandemic on cryptocurrencies have emerged rapidly after the outbreak of COVID This leads to a doubt on the ability of Bitcoin providing shelter from turbulence.
Conlon et al. They show that Bitcoin and Ethereum cannot be considered as a safe haven as the inclusion of those cryptocurrencies in the portfolios increases the downside risk. Kristoufek argue that COVID pandemic can be considered as a period of testing the safe haven abilities of Bitcoin.
They find that cryptocurrencies are more affected by the pandemic than international stock markets. There is higher instability and higher irregularity in the cryptocurrency market compared to the equity market. Realized dynamic correlation analysis of Grobys shows that Bitcoin cannot hedge the extraordinary tail risk in US stocks. Those recent studies document that Bitcoin cannot be considered as a hedging instrument during the pandemic. In contrast to those studies, Yarovaya et al.
Descriptive statistics of the variables are reported in Table 1. There are no structural breaks. In this situation, the most efficient model is ARDL Autoregressive distributed lag since the series are not second-order stationary.
The ARDL model includes the series of autoregressive lags alongside with distributed lags and explains short and long-run relations if series are co-integrated Pesaran and Shin Wavelet analysis Wavelet frequency analysis is a statistical method that analyzes the frequency and time axes using the rescaled series Crowley, This method can be used to examine the wavelength with its frequencies and time scale.
The time scale series in different level stationary conditions can be analyzed by this technique Olayeni, Wavelet analysis is used commonly in geophysics and many other engineering branches Torrence and Compo, ; Alexandridis and Zapranis, ; Massel, , but it is also used in economics and finance in the recent years Kim and In, ; Ko and Lee, ; Bouri et al.
Cryptocurrency studies widely use wavelet analysis Kristoufek, ; Kang et al.
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