Cryptofinance

The following sections are included:

• Preface
• About the Editors
• About the Contributors
• Contents

Since the creation of Bitcoin in 2009, hundreds of cryptocurrencies have emerged, thus becoming a common fixture of financial news bulletins. With a market capitalization of the five highest-valued cryptocurrencies exceeding $140 billion at the time of writing, these alternative currencies have caught the attention of both financial institutions and central banks with their innovative technological foundations and their potential to disrupt current financial institutional structures. We provide a non-technical overview of the concept and current market structure of cryptocurrencies for researchers in economics, finance, mathematics and computer science.

Bitcoin has several features that set it aside from traditional currencies. Digital convenience ensures the safety and convenience of Bitcoin users, while decentralization also poses as a primary benefit. Not only does this specific type of cryptocurrency portray many advantages, it also positions several disadvantages as well. Extreme volatility and the impact of negative externalities on the value of Bitcoin contribute to the assessment of Bitcoin trends in the market. The recent outbreak of the coronavirus (COVID-19) has shown evidence of influencing Bitcoin prices as the virus is spread across continents, leaving the global financial environment in turmoil. The classification of Bitcoin as either a portfolio diversifier, a hedge or a safe haven is dependent on various factors, including the global economic uncertainty. Analyzing the literature on the influence of the crisis on the Bitcoin movement will provide an explanation as to why COVID-19 has had such a significant impact on the global financial markets, especially that of cryptocurrencies.

This chapter seeks to contextualize the nature of cryptocurrencies as an alternate form of capital that, while being inspired by cryptoanarchist thought, has come to embody extreme forms of inequality among its owners. The concentration of wealth produces a “whale effect” that, as the chapter argues, in fact reflects the forms of inequalities that are found in the ownership of traditional forms of capital. The chapter thus alludes to the mismatch between the professed cryptoanarchist philosophical bent of cryptocurrency owners and the reality of capital ownership in the cryptocurrency domain; while cryptoanarchism postulates autonomy, decentralization, and the spread of ownership, the whale effect suggests that cryptocurrencies are insufficiently different from traditional forms of capital in this regard. This challenges the degree to which the praxis of cryptocurrencies coheres with the philosophy of cryptoanarchism.

A cryptocurrency is a digital medium of exchange that operates independent of the central bank. It relies on cryptography to secure financial transactions and to check asset transfer. Several studies have shown that several factors play a role in inhibiting cryptocurrency spread, such as national culture, variables related to consumer psychology as well as factors related to regulation and monetary policy. Despite all the technological innovations, the inclusion of cryptocurrencies has become a challenge to governments and central banks since cryptocurrencies are often disfavored by rigorous regulation and monetary policy. On the other hand, psychological levels such as the need for human interaction, the organizational and functional barriers and many other variables related to power distance and uncertainty avoidance are the hindering factors for cryptocurrency adoption. In this chapter, we study the phenomenon of resistance to the spread of cryptocurrency. This study aims to explain how economic and psychological factors could discourage the consumer to use cryptocurrency.

The traditional asset management industry has grown substantially over the last decades with three main sectors: active asset management, passive asset management, and alternatives asset management. Crypto-assets as cryptocurrencies and tokens are a new asset growing from a small base and may move through the tokenization of individual assets into asset management.

The efficiency of the asset management industry may be substantially improved through the tokenization of existing assets. This research will discuss the implications of tokenization for passive asset management, in particular, for exchange-traded funds (ETFs) as one of the most efficient asset management products known so far.

ETFs are a success story in the asset management industry over the last two decades. The substantial growth in volume results from the low costs for clients and it’s easy handling. ETFs create a picture of a no-risk, no-frills investment product. It seems to be easily understandable, easy to handle, and transparent with limited risks.

These “obvious” advantages are only partially congruent with the results of the exercised research. Risks of ETFs are in existence and are well documented in the selling prospectuses of the ETF providers. In addition, this research finds that fees are not fully transparent. Furthermore, governance problems of passive asset management products such as ETFs do arise and have not been solved so far.

One solution to the research challenges of ETFs may be the usage of the latest technology, i.e., the tokenization of assets, which could lead to the abolition of ETFs by using crypto-asset management instead.

The question of regulation in the domain of cryptocurrencies has been tackled in various ways, exhibiting therein a desire to strike a balance between fostering innovation and promoting oversight. This chapter examines the case of BitLicense, issued by the New York Department of Financial Services (DFS), with the aim of contextualizing the relative merits of regulatory and oversight initiatives in the domain of cryptocurrencies. This includes an examination of the impact and critiques regarding BitLicense since its promulgation, along with the use of perspectives from public value theory (PVT) to contextualize the value creation efforts of the DFS using BitLicense as a regulatory instrument. The findings of the chapter suggest that contrasting views exist on the value creation of cryptocurrency regulations, and this is reflected both in a PVT approach as well as the evolving praxis of virtual currency regulatory and oversight efforts.

Cryptocurrencies are witnessing a growing interest from investors and the media. They are increasingly perceived as a new class of assets through added benefits, such as hedging capabilities and diversification. However, this does not preclude the fact that cryptocurrencies can be risky assets. Within such a context, diverse studies were carried out at various risk levels. Our chapter bridges this gap and tries to reconcile varying positions on risk across cryptocurrencies. Particularly, we provide a detailed overview on the main risks to be considered by crypto-traders, namely, technology, fraud, legal, market, liquidity, and COVID-19 pandemic risks. The main findings show that the occurrence of any technological failure tends to raise insecurity and distrust in the cryptocurrency technology. This fact can be even further spoiled through fraud schemes and fake trading volumes. Additionally, the legal framework of the cryptocurrencies is still inconclusive. In terms of market risk, these crypto-assets are riskier than fiat currencies and there is a significant risk contagion across large-cap cryptocurrencies. Then, a significant relationship exists between liquidity and efficiency in the cryptocurrency market, since price dynamics can influence the market liquidity. Finally, it sorts out that the COVID-19 pandemic heavily affected the cryptocurrency markets. This chapter underlines current challenges for investors, regulators, and policymakers.

Cryptocurrencies have gathered a lot of attention since the birth of Bitcoin in 2009. However, less is known about how the characteristics of cryptocurrencies and other factors facilitate and impede their adoption. The objective of this study is to discuss the main conceptual findings on individual and organizational adoption of an innovation and examine the factors influencing the adoption of cryptocurrencies from a holistic perspective. This study proposes two theoretical models. The first model presents the factors impacting the adoption of cryptocurrencies at the individual level. It was derived by combining the eight factors of the Innovation Diffusion Theory (IDT) model with the construct “personal innovativeness.” The second model presents the factors impacting the adoption of cryptocurrencies at the organizational level. It was developed based on the Technology–Organization–Environment (TOE) framework. This research allows a better understanding of the current outlook of the cryptocurrency system and predicts its future perspectives. Therefore, this chapter is practically useful for those cryptocurrency users, traders and merchants considering their implementation as an alternative payment method.

This chapter provides an overview of crypto-asset valuation methods. Specifically, the chapter positions existing crypto-asset valuation methods and techniques within the framework of traditional asset valuation with a particular focus on the income approach, market approach, and cost approach. This income approach considers crypto-assets’ features of medium of exchange and storage of value and applies the Quantity Theory of Money, the Crypto J-Curve, the Network Model, and Metcalfe’s Law to crypto-asset valuations. The market approach ensembles the price/earnings ratio for the equity market and emphasizes the transaction value and token utilities, with the Network Value-to-Transaction Ratio and the Price-to-Utility Ratio. Finally, the cost approach considers mining costs as the lower bound of crypto-asset valuation. This chapter also discusses empirical tests and related studies with each valuation method. For each valuation framework, this chapter discusses its shortcomings and suggests future research directions.

This primer provides a pairwise comparison of cryptocurrency characteristics with those of fiat currency and hard commodities to shed light on the nexus between cryptocurrencies, fiat currency, and hard commodities. Then, it synthesizes methods and results from empirical research that investigate the nexus. The findings reveal that the existing literature has not reached a consensus on the nature of cryptocurrencies, in particular whether they should be categorized as a currency or a commodity which indicates the research area is not yet saturated.

The following section is included:

• Index