Cryptocurrencies

                         CRYPTOCURRENCIES

              Author:- Vanshika Jain (MBA –Finance)

 

  1. “Risks and Fraud cases in Cryptocurrency”

Kerr ET all (2023).There have been a number of high-profile fraud cases associated with cryptocurrencies, such as the FTX scandal in late 2022, thereby making fraud a real concern to current and potential future investors. The study’s findings will be useful to investors, regulators, and academic researchers regarding the cryptocurrency industry. Cryptocurrency is a type of digital currency that can be purchased as an investment or used to purchase goods or services. Transactions are executed through peer-to-peer networks, and records of these transactions are maintained in a decentralized digital ledger called a block chain. The top five cryptocurrencies in terms of market capitalization as of August 2022 are Bitcoin, Ethereum, Tether, U.S. Dollar Coin, and Binance Coin. Cryptocurrencies do not have any intrinsic value and is not backed by any financial study. In 2021, 14 billion worth cryptocurrency was obtained from cybercriminals.  Chainalysis reports that losses from scamming schemes rose 82 percent in 2021 to USD 7.8 billion of cryptocurrency stolen from victims. Over 35 percent of the USD 7.8 billion stolen was the result of rug pulls, a term used to describe a relatively new type of scam involving cryptocurrency. In a rug pull, developers attract investors with promises of a lucrative new cryptocurrency venture, but then the developers pull out before the project is completed and disappear with the investors’ money. Ponzi Schemes were also used by scammers to steal cryptocurrency from investors. Some high investment companies were also involved in these scams, Finiko. They promised the investors a return of 30% and duped people across Russia and Ukraine. A financial catastrophe was created among many Dutch citizens because of the rising value of cryptocurrencies. In 2022, the RBI Governor, condemned crypto as a big threat to the country’s financial and macroeconomic stability’ as they do not have any underlying asset. Cryptocurrency fraud schemes/scams also include romance scams in which the fraudster gains a victim’s trust through a romantic relationship and uses that trust to obtain money/cryptocurrency. According to the FTC, cryptocurrency losses of USD 185 million related to romance scams were reported between January 2021 and March 2022, with a median individual loss of USD 10,000. The financial scandals, particularly, the FTX collapse and bankruptcy, have led government leaders to consider new regulations to provide oversight to the industry.

 

  1. “Cryptocurrency Market in Transition before and after COVID-19”

An Pham ET al (2022). The cryptocurrency market was characterized by exponential growth in the years leading up to the pandemic, with Bitcoin and other cryptocurrencies gaining mainstream attention and adoption. Cryptocurrencies were known for their high volatility, with prices frequently experiencing sharp fluctuations. Initial Coin Offerings (ICOs) were a popular fundraising method, enabling numerous block chain projects to raise capital. Recently, network analysis in the cryptocurrency market during the COVID-19 pandemic has been carried out, with the common result being that the pandemic, as well as the global downturn, actually caused a change in the network structure of the cryptocurrency market. Specifically, cryptocurrencies tend to form bigger groups during the downtime, i.e., the number of potential clusters found in the network decreases during the downtime, with a few cryptocurrencies acting as central nodes. The onset of the pandemic led to a global economic crisis and heightened uncertainty, impacting traditional financial markets and cryptocurrencies alike. Cryptocurrency prices experienced significant ups and downs during the pandemic, often influenced by macroeconomic factors and market sentiment. Large institutional investors, such as hedge funds and corporations, began to show increased interest in cryptocurrencies as a hedge against economic instability. Governments and regulatory bodies around the world started to take a closer look at cryptocurrency regulations, aiming to provide clarity and ensure investor protection. Decentralized Finance (DeFi) and Non-Fungible Tokens (NFTs) gained prominence, offering new investment opportunities and use cases within the crypto space. Cryptocurrencies, particularly Bitcoin, were viewed as a store of value and a hedge against inflation, attracting investors seeking to protect their assets. It offered diversification benefits, as they often exhibited low correlation with traditional financial assets. Many investors lacked sufficient knowledge and understanding of the cryptocurrency market, potentially leading to poor investment decisions. This transition brought cryptocurrency into closer alignment with the traditional financial system. As a result, the cryptocurrency market has become more integrated with global financial markets, offering new opportunities and challenges for both investors and financial institutions, with a focus on risk management and regulatory compliance becoming paramount. We analysed effect of noise and trend in cryptocurrencies on their cross-correlations and then removed these factors by using Random Matrix Theory and Market Component.

 

  1. “Crypto Revolution: Democratizing Money and Financial Inclusion”

Temperini, J., & Corsi, M. (2023) .The article proposes a critical perspective on the potential impact of the growing cryptocurrency ecosystem on the process of democratizing money. After examining the various interpretations of the term “democratization”, we focus on one interpretation: that of financial inclusion. The concept of “democratization” can take different meanings depending on the context in which it is addressed, be it economic, political, sociological, or philosophical. Within the same framework, it can refer to different processes or take on different meanings. Cryptocurrency plays a pivotal role in democratizing money by offering a decentralized and inclusive alternative to traditional financial systems. This digital innovation, exemplified by Bitcoin and Ethereum, empowers individuals across the globe by enabling peer-to-peer transactions without the need for intermediaries like banks. It offers financial access to unbanked or underbanked populations, bridging the gap of financial inclusion. Cryptocurrencies grant users more control over their assets and financial privacy, enhancing autonomy and reducing the reliance on centralized authorities. However, regulatory challenges and market volatility remain concerns. Nevertheless, the disruptive potential of cryptocurrencies is undeniable, reshaping the way we perceive and interact with money, ultimately contributing to a more equitable and accessible global financial landscape. , we have divided the cryptocurrency world into four groups: Bitcoin, stablecoins, altcoins and central bank digital currencies (CBDCs). In the cryptocurrency landscape, we believe that CBDCs, digital currencies issued directly by central banks, are the only useful tool to pursue the goal of increased accessibility of credit. CBDCs could be constructed in such a way that everyone within the economic system has an account with the central bank.

 

  1. “Analyzing the Effective Reproductive Rate”

Minutolo ET al 2022). The importance of cryptocurrency to the global economy is increasing steadily, which is evidenced by a total market capitalization of over $2.18T as of December 17, 2021 according to coinmarketcap.com (Coin, 2021). Cryptocurrencies are too confusing for laymen and require more investigation. In this study, we analyze the impact that the effective reproductive rate, an epidemiological indicator of the spread of COVID-19, has on both the price and trading volume of eight of the largest digital currencies—Bitcoin, Ethereum, Tether, Ripple, Litecoin, Bitcoin Cash, Cardano, and Binance. The intricate relationship between the global pandemic and the cryptocurrency market, seeking to understand how the post-COVID-19 landscape has influenced these digital assets. The effective reproductive rate, often borrowed from epidemiology, is employed here as a metaphor to gauge how cryptocurrencies have proliferated, evolved, and adapted in the wake of the pandemic.                          The COVID-19 pandemic brought about unprecedented challenges across the global financial system. Traditional markets experienced significant turbulence, as governments implemented various measures to mitigate the economic fallout. These extraordinary circumstances not only affected the global economy but also triggered substantial interest in cryptocurrencies, which were touted as digital assets that could potentially serve as safe havens or diversification tools in times of crisis. It takes into account various factors that have influenced the effective reproductive rate, such as market sentiment, economic conditions, regulatory changes, technological advancements, and changes in investor behaviour. As uncertainty loomed and traditional financial instruments became more volatile, cryptocurrencies garnered heightened interest as alternative investment options. The study explores whether this surge in interest has translated into increased adoption and, consequently, an uptick in the effective reproductive rate of cryptocurrencies. The economic stimulus measures, the printing of more fiat currency, and the quest for hedging against inflation have led some to view cryptocurrencies like Bitcoin as digital gold. The study seeks to quantify whether this macroeconomic environment has contributed to the growth of these digital assets. Different countries have adopted varying stances on cryptocurrency regulation, with some embracing it as a legitimate financial asset and others imposing restrictions. These regulations can significantly influence the adoption and use of cryptocurrencies, impacting their effective reproductive rate.

 

  1. “Fortifying Cryptocurrency Security: Balancing Tech and Human Factors”

  Weichbroth ET al (2023). The security of cryptocurrencies is a complex and multifaceted domain, where technological solutions and human-related factors are intertwined. On the technological front, the bedrock of cryptocurrency security is block chain technology, which offers decentralization and immutability through cryptographic principles, making it extremely resilient against tampering and fraud. Cryptographic techniques, such as public and private keys, digital signatures, and hashing functions, provide the cryptographic foundation that ensures the integrity and privacy of transactions. Proper key management, enabled by a variety of wallet solutions, is paramount in protecting assets from theft and unauthorized access. Smart contracts, prevalent in cryptocurrencies like Ethereum, necessitate rigorous code auditing to mitigate vulnerabilities. Additionally, various consensus mechanisms, like Proof of Work or Proof of Stake, must strike a balance between security, decentralization, and scalability. However, the human element is equally significant in cryptocurrency security. Education and awareness are critical, as a lack of understanding about the technology and best practices can lead to errors, like mishandling private keys or falling prey to phishing schemes. Cybercriminals often leverage human psychology through phishing and social engineering attacks, exploiting users’ trust and curiosity. Regulatory compliance varies across jurisdictions and can impact the security of cryptocurrency operations. Users themselves play a substantial role in their security, as negligence in updating software, sharing private keys, or engaging in risky behaviour can compromise digital assets. Having a well-defined incident response plan and the ability to react swiftly is crucial in mitigating losses during security breaches. Cryptocurrency security, therefore, necessitates a comprehensive approach that considers both technological defences and the human factors that shape the landscape.

 

  1. “Exploring the Cryptocurrency Effect: Company Risk, Beta, and Returns”

Cryptocurrency’s impact on company risk, beta, and returns is a multifaceted and evolving area of interest for investors and businesses alike. As digital assets, their value is known for its extreme volatility, which can affect the financial stability and risk profile of a company that holds significant amounts of cryptocurrencies on its balance sheet. The inherent price fluctuations can create substantial uncertainties regarding the valuation of these assets and may influence company-specific risks associated with financial planning and reporting. When it comes to beta, the exposure to cryptocurrencies can significantly alter a company’s beta coefficient, which is a measure of its sensitivity to market movements. Companies holding cryptocurrencies can potentially exhibit a higher beta due to the added volatility associated with these assets. Consequently, investors need to consider the cryptocurrency holdings when assessing a company’s systematic risk, and this may impact portfolio diversification and overall investment strategy. Regarding returns, the impact of cryptocurrencies on a company’s financial performance is twofold. On one hand, the appreciation of cryptocurrencies can enhance a company’s returns if they have invested wisely and the digital assets have gained value. However, on the other hand, the substantial price swings can lead to significant losses, potentially offsetting these gains. Additionally, the market perception of a company’s involvement with cryptocurrencies can influence investor sentiment and potentially attract a specific group of investors who are bullish on the digital asset class. Overall, the returns from cryptocurrency investments are highly contingent on the timing of entry and exit and the overall market conditions, making them a potentially lucrative but risky component of a company’s investment strategy. In conclusion, the impact of cryptocurrencies on a company’s risk, beta, and returns is complex and dynamic. The inclusion of cryptocurrencies in a company’s financial holdings introduces a new dimension of risk and volatility that can influence financial stability and reporting. Moreover, it can alter the company’s beta, affecting its sensitivity to market movements and potentially impacting portfolio diversification. The returns from cryptocurrency investments can be both promising and perilous, and they depend largely on market conditions and the company’s strategic timing.

 

  1. “Assessing Bitcoin’s Safe Haven Status for Indian Investors”

Murty, S., ET al (2022). This study aims to analyse the volatility dynamics of the returns of Bitcoin. An asymmetric GARCH model (EGARCH) is used to investigate whether Bitcoin may be useful in risk management and ideal for risk-averse investors in anticipation of negative shocks to the market (leverage effect). The question of whether Bitcoin can be a useful tool in risk management and an ideal investment for risk-averse Indian investors in anticipation of negative market shocks, particularly considering the leverage effect, is a pertinent one. Bitcoin has gained recognition as a potential hedge against traditional financial assets and economic uncertainties, leading some investors to consider it as a portfolio diversification tool. In the context of India, where there have been periods of economic volatility and currency fluctuations, Bitcoin may seem appealing to investors seeking to safeguard their wealth. This volatility can work both ways – while it has the potential to appreciate in times of market turmoil, it can also lead to substantial declines, amplifying the overall risk in a portfolio. For risk-averse investors in India, the suitability of Bitcoin depends on their individual risk tolerance and investment horizon. Bitcoin’s speculative nature and unpredictability may not align with the preferences of conservative investors who prioritize capital preservation. GARCH analysis offers a quantitative approach to assess Bitcoin’s role in risk management and its suitability for risk-averse Indian investors. By evaluating historical volatility and the leverage effect, this analysis provides empirical evidence that can guide investment decisions. It allows investors to make more informed choices when it comes to incorporating Bitcoin into their portfolios, taking into account its potential impact on risk and returns in anticipation of negative shocks to the market. Traditional safe-haven assets, such as gold or government bonds, have historically been favoured by risk-averse investors for their stability and reliability as stores of value. While Bitcoin’s role as a hedge is still debated, it is essential for Indian investors to carefully evaluate their financial goals, risk tolerance, and investment strategies. Diversification that includes a mix of asset classes and a focus on minimizing overall portfolio risk may be a more prudent approach, considering the unique financial landscape and regulatory considerations in India. In conclusion, Bitcoin’s utility in risk management and its suitability for risk-averse Indian investors anticipating market shocks should be considered within a broader investment strategy. While it has the potential to serve as a hedge, its inherent volatility and speculative nature may not make it the ideal choice for all investors, especially those prioritizing safety and stability.

 

  1. “Navigating the Legal and Regulatory Landscape of Cryptocurrencies in India”

Kashyap ET al (2021). With the ever-growing popularity of cryptocurrency in India as well as globally, it is potential as an agent of various illegal activities such as money laundering and cybersecurity breaches is also gaining traction in the global, national and regional debates. The legal and regulatory landscape for cryptocurrencies in India has been a subject of significant attention and evolution. India has grappled with the challenge of regulating a digital asset class that operates on decentralized block chain technology, which transcends traditional financial frameworks. The Reserve Bank of India (RBI), the country’s central bank, initially imposed a banking ban on cryptocurrencies in 2018, restricting banks and financial institutions from providing services to cryptocurrency-related businesses and individuals. However, this banking ban was subsequently lifted by the Supreme Court of India in March 2020, recognizing that the RBI’s circular lacked proportionality. Since then, India has made attempts to formalize cryptocurrency regulation. The government has introduced a bill titled the “Cryptocurrency and Regulation of Official Digital Currency Bill, 2021,” which aims to establish a framework for the creation of an official digital currency while banning or heavily regulating private cryptocurrencies. The bill has stirred significant debate and concerns within the cryptocurrency community. The legal status of cryptocurrencies in India remains uncertain. While they are not officially banned, the regulatory framework is still evolving, and there is no clarity on how cryptocurrencies will be treated in the long run. This ambiguity has left Indian cryptocurrency users, businesses, and investors in a state of limbo, and it has also created challenges for legitimate cryptocurrency-related enterprises seeking to operate within the country. Furthermore, concerns over the potential misuse of cryptocurrencies, such as for illegal activities or tax evasion, have led to calls for stricter regulation. At the same time, advocates of cryptocurrencies argue that a balanced approach is needed to encourage innovation and ensure that India does not miss out on the potential economic benefits of block chain technology and digital assets. In conclusion, the legal and regulatory perspective of cryptocurrencies in India is marked by uncertainty and ongoing debate. While the banking ban has been lifted, the proposed cryptocurrency bill has raised important questions about the future of digital assets in the country.

 

  1. “The Impact of Google Trends on Cryptocurrency: Analyzing the Connection”

Verma ET al (2023). The media exposure and reportage on cryptocurrency are frequent, and it seems that prices of cryptocurrencies could only rise higher. In today’s digital world, any individual’s first go-to information-seeking platform is the Google search engine. Numerous research studies show increasing interest in Google search volume and its predictive ability to understand investment returns and economic outcomes. Investors actively searching for information on cryptocurrency online play a pivotal role in driving the price dynamics and market activity within the cryptocurrency space. Cryptocurrency markets are heavily influenced by information dissemination, and online platforms serve as a primary source for investors to access news, analysis, and updates about digital assets. When investors are searching for information, especially regarding specific cryptocurrencies or market developments, it can create significant price movements. Positive news or sentiment can drive up demand and, subsequently, prices, while negative information can lead to sell-offs and price declines. Furthermore, the increased online activity and information-seeking behaviour of investors can push trading volumes higher. This surge in trading activity is often linked to the desire to act upon newly acquired information. As investors react to news, rumors, or analysis they come across online, they engage in buying and selling, leading to heightened trading volumes. Increased trading activity, in turn, contributes to greater market liquidity and may also influence price dynamics and volatility. The relationship between online information-seeking and cryptocurrency returns is complex. While higher information-seeking activity can lead to increased returns due to demand and trading volume, it can also introduce greater volatility. Cryptocurrency markets are known for their rapid price swings, and the influence of online information can amplify these fluctuations. The cryptocurrency market’s relative immaturity and the presence of retail investors who are highly responsive to news contribute to this phenomenon’s. This interconnected relationship underscores the critical role of information and sentiment in shaping the cryptocurrency market, which remains highly responsive to news and google searches, making it a unique and dynamic asset class within the broader financial landscape.

 

  1.  “ Unpacking Unpriced Credit Risk in US Cryptocurrency”

Levitin, A. J. (2023). Cryptocurrency exchanges play a key role in the cryptocurrency ecosystem, serving not only as central marketplaces for buyers and sellers to trade but also as custodians for their customers ‘ cryptocurrency holdings. In the unfortunate event of a cryptocurrency exchange failure in the United States, the fate of customers’ custodial holdings would largely depend on several factors, including the exchange’s specific policies, the level of regulatory oversight, and the nature of the failure. First, it’s important to note that cryptocurrency exchanges in the U.S. are subject to varying degrees of regulation depending on their business operations. Some exchanges, known as centralized exchanges, operate as custodians, holding customers’ funds on their behalf, and are typically subject to more stringent regulatory requirements. If a custodial cryptocurrency exchange were to fail, customer assets could be at risk, and the outcome may differ based on the specific circumstances. In some cases, the exchange might declare bankruptcy and engage in the process of liquidation, aiming to return customer assets to the extent possible. Regulatory oversight would play a significant role in ensuring that customer funds are protected and that the exchange follows a clear process for returning assets. Alternatively, if the exchange were involved in fraudulent activities or mismanagement, there might be legal actions taken against the individuals responsible. In such cases, a court-appointed receiver could be tasked with recovering and distributing customer funds .The security and custody practices of the exchange also matter. Reputable exchanges employ robust security measures, including cold storage for cryptocurrencies, multi-signature wallets, and insurance coverage, which could help mitigate the risk to customer holdings in the event of a failure. To further safeguard their cryptocurrency holdings, customers are encouraged to take measures into their own hands, such as transferring assets to personal wallets, reducing their reliance on exchanges for long-term storage, and conducting thorough due diligence when choosing an exchange to trade on. While regulatory safeguards are in place to protect customer interests to some extent, the cryptocurrency market is still relatively nascent, and potential risks persist. Therefore, customers should be diligent and cautious when managing their assets on cryptocurrency exchanges.

 

CONCLUSION

Cryptocurrency, characterized by its digital nature and decentralized structure, has gained immense popularity and garnered attention from investors, speculators, and enthusiasts worldwide. It has emerged as a ground breaking innovation in the world of finance, offering the promise of decentralization, financial inclusion, and enhanced security. However, this transformative technology comes with its share of risks and notorious volatility. The risk of investing in cryptocurrencies is underscored by the wild price fluctuations that can occur in a matter of hours, potentially leading to substantial gains or staggering losses. This volatility is influenced by a complex interplay of market sentiment, regulatory developments, and macroeconomic factors, making it difficult to predict. Moreover, the relative novelty of the crypto market means it remains largely unregulated in many regions, heightening the potential for fraudulent schemes and scams. Despite these challenges, cryptocurrencies continue to evolve, attracting institutional interest, and fostering innovation in various industries. As the market matures and regulatory clarity improves, managing these risks and embracing the opportunities will be crucial for individuals and institutions looking to participate in this digital financial frontier.

 

References

  1. An Pham ET al (2022). The cryptocurrency market in transition before and after COVID-19: An opportunity for investors? Entropy, 24(9), 1317. doi: https://doi.org/10.3390/e24091317

 

  1. Field, J., & A, C. I. (2023). Risk translation: How cryptocurrency impacts company risk, beta and returns. Journal of Capital Markets Studies, 7(1), 5-21. doi: https://doi.org/10.1108/JCMS-02-2023-0003
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  1. Levitin, A. J. (2023). Not your keys, not your coins: Unpriced credit risk in cryptocurrency. Texas Law Review, 101(4), 877-954. Retrieved from https://www.proquest.com/scholarly-journals/not-your-keys-coins-unpriced-credit-risk/docview/2806184882/se-2

 

 

  1. Minutolo, M. C., Werner, K., & Prakash, D. Impact of COVID-19 effective reproductive rate on cryptocurrency. Financial Innovation, 8(1) doi: https://doi.org/10.1186/s40854-022-00354-5

 

  1. Murty, S., Vijay, V., & Fekete-Farkas, M. (2022). Is bitcoin a safe haven for Indian investors? A GARCH volatility analysis. Journal of Risk and Financial Management, 15(7), 317. doi: https://doi.org/10.3390/jrfm15070317
  2. Temperini, J., & Corsi, M. (2023). Democratizing money? The role of cryptocurrencies. PSL Quarterly Review, 76(304) doi: https://doi.org/10.13133/2037-3643/17967

 

  1. Verma, R., Sam, S., & Sharma, D. (2023). Does google trend affect cryptocurrency? An application of panel data approach. SCMS Journal of Indian Management, 20(2), 124-132. Retrieved from https://www.proquest.com/scholarly-journals/does-google-trend-affect-cryptocurrency/docview/2843892539/se-2
  2. Weichbroth, P., Wereszko, K., Anacka, H., & Kowal, J. (2023). Security of cryptocurrencies: A view on the state-of-the-art research and current developments. Sensors, 23(6), 3155. doi: https://doi.org/10.3390/s23063155

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