Cryptocurrency and Blockchain Technology

Batten–Corbet–Lucey Handbooks in
Alternative Investments

Edited by
Jonathan A. Batten
Shaen Corbet
Brian M. Lucey

Volume 1
Cryptocurrency and Blockchain
Technology

Edited by
Shaen Corbet
Andrew Urquhart
Larisa Yarovaya
ISBN 9783110659436
e-ISBN (PDF) 9783110660807
e-ISBN (EPUB) 9783110659528
Bibliographic information published by the Deutsche
Nationalbibliothek
The Deutsche Nationalbibliothek lists this publication in the
Deutsche Nationalbibliografie; detailed bibliographic data are
available on the Internet at http://dnb.dnb.de.
© 2020 Walter de Gruyter GmbH, Berlin/Boston
Contents
Andrew Urquhart, Larisa Yarovaya
Introduction to cryptocurrencies
Daisuke Adachi, Jun Aoyagi
Blockchain and economic transactions
1 Introduction
2 Technical aspect of blockchain
2.1 Double spending
2.2 Decentralization
2.3 Consensus
2.4 Smart contract
2.5 Existing problem
2.6 Some applications
3 Implications to the real economic transactions
3.1 Background
3.2 Questions
3.3 Role of blockchain in economic transactions
3.4 Miner-side analysis
3.5 User-side analysis
3.6 Analysis of changes
4 Conclusion
Shaen Corbet, Brian Lucey
An analysis of the development of cryptocurrency research
 1 Introduction
2 The development of cryptocurrency research: A very
short review
3 Data selection and methods
3.1 Methods
3.2 Data
4 Results
5 Conclusions
Paraskevi Katsiampa
Financial characteristics of cryptocurrencies
1 Introduction
2 Statistical properties of cryptocurrencies
3 Cryptocurrency market efficiency
4 Bubbles
5 Volatility
6 Interdependencies of cryptocurrency markets
7 Cryptocurrencies and financial assets
8 Summary
Elie Bouri, Rangan Gupta, Chi Keung Marco Lau, David Roubaud
The predictability between Bitcoin and US technology stock
returns: Granger causality in mean, variance, and quantile
 1 Introduction
2 Literature review
3 The test of Granger causality in moments
4 Empirical results
4.1 Data
4.2 Chen’s Granger causality in moment test results
5 Conclusion
Jiri Svec, Sean Foley, Angelo Aspris
Market structure of cryptocurrencies
1 Using cryptocurrency for trade
2 Establishing an exchange
3 Trading and fees
3.1 Where do trades get reported?
3.2 What happens if the exchange gets hacked?
4 Types of exchanges
4.1 Centralized vs decentralized exchanges
4.2 Advantages of DEXs
4.3 Disadvantages of DEXs
4.4 Investability of cryptocurrencies
4.5 Cryptocurrency derivatives
5 Cryptocurrency specific trading issues
5.1 Undercutting
5.2 Short selling constraints
 5.3 Front running
5.4 Griefing
Shaen Corbet, Douglas J. Cumming
The Wild West of ICOs
1 Introduction
2 Previous literature
3 Some brief examples of cryptocurrency and ICO
irregularities
3.1 Questionable motives, criminality and ICO
disappearance
3.2 Facebook and Project Libra
3.3 Venezuela and the Petro
3.4 KodakCoin and other examples of corporate
manoeuvres
4 How has the regulation of ICOs changed over time?
5 Concluding comments
Thomas A. Hulme
The ethical and legal aspects of blockchain technology and
cryptoassets
1 Introduction
2 Previous literature
3 Blockchain technology and cryptoassets
3.1 What is blockchain
3.2 What are cryptoassets
 3.3 What are smart contracts
4 The law
4.1 Different types and current use of cryptoassets
4.2 The rights over cryptoassets
4.3 Law of property
4.4 Are cryptoassets property?
4.5 Legal interest
4.6 The Anti Money Laundering Directive & the Money
Laundering Regulations
4.7 Identifiability
4.8 Smart contracts
4.9 Tokenisation
5 Ethical considerations
5.1 Anonymous currency
5.2 Initial Coin Offerings (“ICO”)
5.3 Scams
6 Concluding remarks
Shaen Corbet, Larisa Yarovaya
The environmental effects of cryptocurrencies
1 Introduction
1.1 Why should we care about the environmental effects
of cryptocurrencies?
1.2 Technological vs ecological environmentalism
1.3 Are all cryptocurrencies equally bad for the
environment?
 2 Proof-of-work algorithm
2.1 Bitcoin mining
2.2 Ethereum
3 Previous literature
4 What does the data tell us?
5 What are the main identified issues to date?
5.1 Do cryptocurrency miners take advantage of
developing regions?
5.2 Global warming effects?
5.3 Could Bitcoin stop hinder functionality of the Internet?
6 Does there exist regulatory solutions?
7 Concluding comments
Shaen Corbet
Evaluating a decade of cryptocurrency development:
Navigating financial progress through technological and
regulatory ambiguity
1 Concluding thoughts on the benefits associated with
cryptocurrencies
2 Concluding thoughts on the issues associated with
cryptocurrencies
3 In conclusion
Introduction to cryptocurrencies
Andrew Urquhart
ICMA Centre, Henley Business School, University of Reading,
Reading, UK
Larisa Yarovaya
Southampton Business School, University of Southampton,
Southampton, UK
Today, cryptocurrencies are getting more and more attention
from investors, regulators, governments and media outlets alike,
and therefore there is a requirement for a sound understanding
of the economic and financial dynamics of these new assets. This
book offers a broad range of chapters on varying topics of
cryptocurrencies and acts as a foundation for anyone interested
in these new assets and seeks to understand the issues and
challenges of investing in these new, interesting and volatile
markets. More importantly, this book will give you a solid
understanding of important elements of cryptocurrencies, as
well as clear overview of the current academic understanding of
these assets.
Cryptocurrencies are a new form of digital money that is
shifting the paradigm and challenging the traditional financial
system. First introduced by Satoshi Nakamoto in his 2008 white
paper, Bitcoin has grown into the most popular cryptocurrency
as well as a global phenomenon. The technology behind Bitcoin
(and most cryptocurrencies) is blockchain and a recent survey by
Deloitte found that 53% of respondents say that blockchain
technology has become a critical priority for their organizations
in 2019 while 83% see compelling use cases for blockchain.1 The
Financial Times reports that business schools around the world
are racing to offer lessons in blockchain and bitcoin and
Professor Campbell Harvey stresses the need for students to
engage with popular cryptocurrencies.2
According to EY FinTech adoption Index (2019)3 adoption of
FinTech services has grown from 16% in 2015 to 33% in 2017, and
in 2019 it went as high as 64%. Furthermore, the awareness of
FinTech grown significantly, and in 2019 around 96% of
consumers are aware of at least one form of FinTech service
available. Particularly, awareness of cryptocurrency has also
increased in the recent years. The Financial Conduct Authority
(FCA) examined the reasons of the popularity of cryptocurrency
assets amongst consumers and the potential risks that this
technology can cause. In October 2018, the FCA published a joint
report with the Bank of England and HM Treasury, providing the
main definitions and description of different categories of digital
assets, and current regulatory perimeter.4 Together with
Revealing Reality research firm, the FCA published a report
based on 31 qualitative interviews with cryptocurrency
consumers shading the light on main motivations, beliefs and
attitudes of cryptocurrency users. Findings show that majority of
respondents decided to buy cryptocurrencies following advice
received from a friend or family member. It is interesting insight
that consumers relied on family advice, or in some particular
cases advice from taxi drivers, and not the advice of professional
advisors or analysts, which indicates the power of word-of-
mouth as a main channel of popularity of this investment assets.
Would consumers be encouraged to invest in ETFs, derivatives,
or other new investments assets, following family advice? Hard
to tell, but probably not. This highlights the very unique features
of the cryptocurrency phenomenon, that regardless the
complexity of technology behind it, that undoubtedly is quite
hard to understand by any regular consumer, the idea behind it
seems to be mass appealing and exciting for uniformed
investors and users. Furthermore, the role of media and social
media in disseminating information about digital currencies was
crucial.
Consumers relied on media in gathering information about
cryptocurrencies and some of the majority of consumers
indicate that social media play a key role in their decision to
purchase a digital asset. However, according to the FCA survey
conducted in December 2018 among 2,132 participants (70%)
have not heard of cryptocurrencies or did not know what are
they, and only 3% have bought cryptocurrency before. Among
those who purchased cryptocurrency 8% completed ‘deep
research’ before purchasing, while 16% conducted no research
at all before purchasing.5 The results of the survey conducted in
December 2018 by Coinbase,6 and published in June 2019,
provides evidence of increased awareness of cryptocurrencies in
the US. Particularly, 58% of Americans responded that they
heard of Bitcoin, where the word “Bitcoin” was more popular
search on Google than “royal wedding” or “election results”.7
Considering the fact that both surveys were conducted in the
same time, we can conclude that awareness of cryptocurrencies
was higher in the US than in the UK. So cryptocurrencies, what
are they? There are many definitions of cryptocurrencies are
available online, in this volume, we use the following generic
definition of cryptocurrencies:
Cryptocurrencies are decentralised digital assets, that use
cryptography to transfer of funds from one party to another
without monetary authority influence.
This generic definition is particularly applicable for the most
widely known cryptocurrency and cryptocurrency market leader
– Bitcoin. There are several unique characteristics of
cryptocurrencies that make them attractive for users and
investors. Particularly, cryptocurrencies offer many upgrades
over traditional money or fiat currencies, such as the following:
Decentralisation which means that the data is not saved
on a single computer or server but saved on millions of
computers simultaneously. This means there is no central
authority and that the blockchain cannot be tampered with
without the agreement of all the nodes (participants).
Consensus which means that the community of
participants have for anything to happen. One way to
reach this consensus is called “mining”. It is part of the
proof-of-work-system.
Transparency which means that all transactions can
tracked and users can see at all times who has added
blocks.
Replacement of intermediaries which means that there
is no need for financial intermediaries (such as banks) to
act as a “middleman” between two individuals wanting to
exchange money. Also cryptocurrencies can transfer large
sums of money across international borders in a matter of
minutes while most banks take at least one business day.
Limited supply which means that unlike fiat currencies,
only a limited number will ever be produced which means
it is not affected by inflation and is a scare asset that’s
unlikely to depreciate
These innovative features, combined with it’s ability to be easily
converted into traditional currencies, makes cryptocurrencies
very attractive for investors around the globe. There are several
types of cryptocurrencies that can be distinguished. According to
above mentioned Cryptoassets Taskforce report by FCA, Bank of
England, and HM Treasury, cryptoassets include: (i) exchange
tokens; (ii) security tokens; and (iii) utility tokens, where
cryptocurrencies like Bitcoin belong to the first group of the
exchange tokens, and are primarily being used as a means of
exchange or as an investment. Different categorisations is
provided by →Corbet et al. (→2020) who allocated all digital
assets into three categories: (i) currencies; (ii)
blockchains/protocols; (iii) decentralised apps, where
cryptocurrencies like Bitcoin also belong to the first group since
their primarily role is money transfer. Overall, we can note that
both classifications determine cryptocurrencies in the category
of digital assets that have main function, such as transfer of
funds, storage of value, and investment opportunities. One of
the first debates in the academic literature was around the role
cryptocurrencies play in the financial system, whether
cryptocurrencies are a new form of money and can store value,
or they are a new class of highly speculative investment assets.
These debates we widely discussed in the media, and many
suggested that true value of Bitcoin is zero (e. g. →Cheah and
Fry (→2015)). However, late in 2017 when Bitcoin price
skyrocketed from $1000 to nearly $20,000, further discussion of
the true value of Bitcoin and other cryptocurrencies was
emerging (→Corbet et al., →2018a). With time, academics
started looking at cryptoassets differently, by noticing the fact
that investors who hold substantial sums of Bitcoins are not
cashing out their positrons, indicating their strong belief that
regardless of regulatory uncertainty, ethical considerations and
a variety of environmental issues, cryptocurrencies still can store
the value over time and Bitcoin especially is a valuable asset to
hold in longer term.
 The next chapter of this book focused on the current state of
cryptocurrency research. While quite a detailed literature survey
has been provided by →Corbet et al. (→2018b) already, this
chapter offers more up-to-date review of the literature in this
field, particularly, it highlights the main networks of
cryptocurrency scholars and research groups that are leading
the research in this field. Authors took into consideration several
indicators like geographic location of the research teams and
their institutions, number of published articles on
cryptocurrencies and related topics, and last but not the least,
amount of citations that each of the published manuscripts were
able to generate over relatively short period of time after
publications. This displays how rapidly cryptocurrency research
evolved in the last few years, and provides some idea how to
cryptocurrency scholars can collaborate to further advance this
innovative field of finance.
The third chapter might be most useful for those who really
want to dip into technological details of Blockchain and
distributed ledger technology that cryptocurrencies are based
on. If you just started your cryptocurrencies journey, after
reading of the next chapter you will be able to find answer on
several important questions, such as what is a double spending
problem, mining, and proof-of-work algorithm? This chapter
discussed the existing problems of Blockchain technology, such
as scalability, oracle problem, and fork. It is a new and exciting
technology, innovation that potential will destruct the financial
services and other businesses, therefore a good understanding
of Blockchain is important to successfully adopt to technological
changes and use the applications of Blockchain that might be
most relevant for your business or research. In comparison to
various previous literature that covers technological aspect of
cryptocurrencies, this chapter explains it in more accessible
manner, that makes it easier to understand the technology and
main terminology around it.
The following chapter focuses on the key issues of the Initial
Coin Offerings (ICOs), and provides insightful examples of ICOs
misusage, such as questionable motives of ICOs, criminality and
ICO disappearance. The cases considered in this chapter
received were discussed widely in the media, however, they are
also important from theoretical perspectives, and provide
interesting avenue for corporate finance researchers, and
broader range of finance and business scholars. For example,
when Kodak announced the release of their KODAKCoin, there
was an immediate and significant price rise of Kodak shares,
while after the announcement there was increased correlation
between the price of Kodak shares and Bitcoin (→Corbet et al.,
→2019). Further examples includes Facebook and Libra
cryptocurrency, as well as Venezuelan Petro. This discussion will
be particularly interesting for cryptocurrency-enthusiasts who
are dedicated to promote the potential of the new technology,
since this chapter highlights that entire sector has been
susceptible to various frauds and scams that cannot be ignored.
It concludes with comments on ICOs regulation.
Next, we provide practitioners with insights on the
regulatory and legal aspects of cryptocurrency markets. This
commentary and non-academic point of view on
cryptocurrencies adds a great value to this volume, stimulating a
dialog between practitioners and academics in the areas that are
of great importance, such as business ethics. Also, there are
regulatory issues as cryptocurrencies have been found to be
used for illegal activities and the huge price fall of Bitcoin once
the website Silk Road was taken down by the FBI 2013 →Foley et
al. (→2019). Further, the Mt.Gox collapse in 2014 with over
650,000 Bitcoins stolen with an estimated value of $450 million at
the time has led to many trust issues. A good understanding of
legal and policy implications of cryptocurrency markets is
essential for anyone who wants to participate in it as an investor
or service provider.
Another important contribution is presented in the following
chapter of this volume that focused on the market structure of
cryptocurrencies, and explains how the cryptocurrencies are
being trade. It provides details on existing types of exchanges,
highlighting the differences between centralized and
decentralized exchanges, and what can happen if the exchange
will get hacked. This chapter is important read for everyone who
is planning to invest in cryptocurrencies, or plan to conduct
research in this area, but not yet understand the cryptocurrency
exchanges mechanism. Cryptocurrency derivatives are also
discussed, as a new investment assets and growing area of
research. Furthermore, this section present an overview of the
key issues of cryptocurrency trading, such as undercutting, short
selling constraints, front running and griefing. Indeed, this is a
useful read if you want to understand cryptocurrency trading
better.
The main emphasis of the following chapter is placed on the
financial characteristics of cryptocurrencies, its statistical
properties, explosivity, volatility, and interconnectedness with
other more traditional financial markets. In this chapter
cryptocurrencies considered as an investment assets, and it is a
useful read for investors interested to include cryptocurrencies
in their investment portfolio. For instance, a recent paper by
→Platanakis and Urquhart (→2020) shows that including Bitcoin
in a well diversified portfolio consisting of bonds, stocks and
commodities significantly improves the risk-adjusted returns of
the portfolio. However cryptocurrencies are not without their
controversies such as the unstable volatility. This is a major issue
with all cryptocurrencies being accepted as a form of payment
since the price can change dramatically on any given day. This is
also an excellent direction for academic research, and
opportunity to contribute to contagion, portfolio theory and
diversification literature.
We then present a useful example of the research on the
predictability between Bitcoin and the US technology stock
returns. This paper used daily data covering the period 18
August 2011 to 15 April 2019 and Granger causality in moments
methodology providing an evidence of a relationship between
Bitcoin and US tech stock indices. This chapter is useful
particularly for students and early career researchers who want
to conduct the research in this area, since it clearly displays
methodological details and results, as well demonstrate how the
academic study should be structured and presented. This is also
useful for a broad range of practitioners, and academics working
in this area, since they are in continuous search of the methods
to predict the Bitcoin prices. As a cryptocurrency market leader
Bitcoin influence prices of other cryptocurrencies, therefore by
predicting Bitcoin price and understanding which factors
determine it investors can predict the behaviour of the
cryptocurrency markets.
The growth of cryptocurrency markets, and increased mining
difficulty of Bitcoin, caused increased of energy consumption of
this sector which might results in wider environmental
implications. The penultimate chapter discuss the environmental
aspects of cryptocurrency markets, addressing the issue
whether cryptocurrencies are a contributor to the climate
problem. It is not very popular topic among cryptocurrency-
enthusiasts, however, this issue concern public and the media,
since it become increasingly important for consumers to
understand the climate implications of the new technology
before actually using it. By including this chapter to the volume
we are making a statement that climate change issues should no
longer be ignored by finance community, and climate finance
area in general has a great importance. The impact of
cryptocurrency energy consumption and growing FinTech
adoption on environment, should be thoroughly investigated by
researchers to provide evidence for policy makers and regulators
alike to introduce necessary legislation to this area.
The final chapter summarises the findings, providing the
recommendations for future research. Cryptocurrencies are
likely here to stay and more cryptocurrencies will be developed
every year with new, exciting and innovative features in the hope
of attracting some of the attention the traditional
cryptocurrencies have since their introduction. As
cryptocurrencies fight for a level-standing in the financial
system, a strong understanding of this asset class is required.
While pioneer papers considered technological aspect of digital
assets, this volume considered cryptocurrency from a wide
range of finance and business perspectives. After reading this
book, you will be able to:
Understand the main technological aspects of
cryptocurrencies, and define the basic Blockchain and
cryptocurrency related terms and concepts.
Distinguish between different types of cryptocurrencies.
Understand where and how cryptocurrencies are traded,
and what are the specific features of decentralised
exchanges.
Acknowledge the existing challenges of Blockchain
technology and cryptocurrency trading.
Discuss the main problems of ICOs misusage, fraud, and
wide range of regulatory, ethical and legal concerns.
Analyse cryptocurrency as financial assets, and predict
behaviour of cryptocurrencies.
Acknowledge environmental impacts of cryptocurrency
energy consumption.
 Identify interesting direction for research to make
contribution to existing knowledge.

Bibliography
Cheah, E.-T., and J. Fry (2015). Speculative bubbles in bitcoin
markets? An empirical investigation into the fundamental value
of bitcoin. Economics Letters 130, 32–36. a, b
Corbet, S., C. Larkin, B. Lucey, and L. Yarovaya (2019).
KODAKCoin: A blockchain revolution or exploiting a potential
cryptocurrency bubble? Applied Economics Letters (forthcoming).
a, b
Corbet, S., C. J. Larkin, B. M. Lucey, A. Meegan, and L. Yarovaya
(2020). Cryptocurrency reaction to FOMC announcements:
Evidence of heterogeneity based on blockchain stack position.
Journal of Financial Stability 46. a, b
Corbet, S., B. Lucey, and L. Yarovaya (2018a). Datestamping the
bitcoin and ethereum bubbles. Finance Research Letters 26, 81–
88. a, b
Corbet, S., A. Meegan, C. Larkin, B. Lucey, and L. Yarovaya
(2018b). Exploring the dynamic relationships between
cryptocurrencies and other financial assets. Economics Letters
165, 28–34. a, b
Foley, S., J. R. Karlsen, and T. J. Putnins (2019). Sex, drugs, and
bitcoin: How much illegal activity is financed through
cryptocurrencies? Review of Financial Studies 32, 1789–1853. a, b
Platanakis, E., and A. Urquhart (2020). Should investors include
bitcoin in their portfolios? A portfolio theory approach. British
Accounting Review, 100837. a, b
Notes
1 →https://www2.deloitte.com/content/dam/Deloitte/se/
Documents/risk/DI_{2}019-global-blockchain-survey.pdf
2 →https://www.ft.com/content/011cf9b6-69a7-11e8-
aee1-39f3459514fd
3 see electronic version here:
→https://fintechauscensus.ey.com/2019/Documents/ey
-global-fintech-adoption-index-2019.pdf
4 see full report, and additional FCA research here:
→https://www.fca.org.uk/publications/research/consu
mer-attitudes-and-awareness-cryptoassets-research-
summary
5 see details here
→https://www.fca.org.uk/publication/research/cryptoa
ssets-ownership-attitudes-uk-consumer-survey-
research-report.pdf
6 →https://blog.coinbase.com/the-united-states-of-
crypto-55282c97855c
7 A YouGov study was conducted in December 2018 and
included 2,000 U.S. Internet users over the age of 18 in
the general population.
Blockchain and economic
transactions
Daisuke Adachi
Jun Aoyagi

1 Introduction
Cryptocurrency market values have skyrocketed, as exemplified
in the Bitcoin. In the meanwhile, the transactions based on the
cryptocurrency has also increased significantly over the last
decade. At the same time, the concept of blockchain has become
popularized since the rise of cryptocurrencies as the background
technology of the cryptocurrency. In this chapter, we will outline
the technical and economic aspects of cryptocurrencies and
blockchain. The first set of questions we attempt to answer
include, but not limited to: What is blockchain? What is the
Bitcoin mining process? What is crypto-transactions?
Moreover, the blockchain is not only about Bitcoin. We have
been observing the widened role of these new technologies in
real economic transactions, as well as financial markets.
Transactions of goods, commodity, and asset markets used to
have nothing to do with blockchain-based operations, while
nowadays, several essential products are traded with the help of
the blockchain. For instance, a consulting firm EY advisory has
oriented an empirical experiment of blockchain in a commodity
market, e. g., wine transactions. What would be the impact of the
blockchain adoption on the wine market? Why do we need
blockchain in wine transactions? How does it change the wine
market properties, such as the quality of wine, transaction
prices?
After we give a brief discussion about the technical aspects
of blockchain, we will provide thorough explanations on the role
of cryptocurrencies and blockchains on the real economic
transactions. In particular, we will focus on (i) how the
blockchain affects information frictions in transactions and (ii)
how it changes the landscape of markets, taking into account
the spillover effects to all the players.
To streamline our discussions, we will not cover the details of
cryptographic technology in blockchains.
Interested readers may refer to, for example, →Harvey
(→2016) for general cryptography-based finance and to
→Antonopoulos (→2014) for more detailed explanation on the
cryptography used in the Bitcoin.

2 Technical aspect of blockchain

We begin our main discussions with the outline of the blockchain
and related technologies, such as cryptocurrencies and the
Bitcoin, following recent financial and economics studies.

2.1 Double spending

A good starting point is to discuss the role of blockchain in the
Bitcoin trade: how and why Bitcoin differs from existing money
and digital currencies. One of the characterizing issues in this
regard is the double-spending problem. Suppose that Bob
purchases a book online by using a mobile payment system.
After the delivery of the book, he can hack into the online ledger
and rewrite his account information to pretend that the
transaction has not made and to retrieve his money. Physical
money has addressed this issue by developing sophisticated
printing technology, thereby making it difficult to forge bills.
Furthermore, cash with a physical entity (coin and paper bill)
cannot be used twice because it cannot be in Bob’s pocket if
Alice holds it in her hand.
Although it becomes increasingly hard to counterfeit
physical bills, most of our daily transactions have become digital,
e. g., debit card transactions, payment by PayPal, Venmo, Google
Pay, just to name a few. The conventional digital currencies are
subject to the double spending problem because it is vulnerable
to information manipulations. If a ledger system has a flaw, Bob
may manipulate ledger information and retrieve the money he
paid. The problem is traditionally handled by setting some
centralized agency with anti-manipulation security. Although it
can be secure, it comes with a considerable cost, and users are
concerned about the credibility issue.
What blockchain and the Bitcoin provide is a new solution to
this issue. Decentralized management with a hard-to-rollback
mechanism mitigates the problem. It distributes transaction
information to a large number of nodes of participating
computers. The data is timestamped and irreversible. A set of
transaction records are impounded into a block, encrypted, and
attached to the pre-existing chain of information. The process
repeats over and over again to generate a sequence of chained
blocks, i. e., the blockchain. As all the nodes have information
about a state of the world, there must be a consensus
mechanism that determines what is the correct state and what
should be recorded in a block.
In what follows, we detail the critical concepts,
decentralization, the consensus mechanism, and smart contracts
in order.
2.2 Decentralization
The first building block is the decentralized management of
information. Information is distributed to a large (potentially
infinite) number of computers, and each of them keeps track of
information. Firstly, this prevents a single point of failure,
meaning that even when one node of the network fails, the
system as a whole can keep track of the correct information.
Another benefit includes reducing market power and
increasing competition. If a centralized player exerts her
monopolistic power, she may have an incentive to manipulate
and distort information in favour of her. As we discuss in the
following subsection, information on the blockchain must be the
consensus of the network. Thus, even if a single record keeper
tries to manipulate information, it is almost impossible to
achieve.1
In a nutshell, a centralized record keeper in the traditional
record-keeping system is replaced by a large number of
competitive record keepers (called “miners” in Bitcoin network)
in the blockchain system. They competitively determine what
information they impound into the blockchain system by a
certain consensus mechanism, rather than a single centralized
entity makes a decision on it.

2.3 Consensus
The second building block is how to reach the consensus. The
mechanism must make the consensus hard to manupurate, and
a critical technological advance, the cryptography, kicks in here.2
A key element in reaching consensus is the selection of nodes
that chooses the legitimate information. As there is no
centralized player in the blockchain network, some terminal
node has to make a decision. The process of selecting the node
is unique to each application but, in the Bitcoin and other large
blockchains (e. g., Ethereum), the consensus mechanism called
Proof-of-Work (PoW) is employed. We focus on PoW in the
following, although there are many other possibilities of
consensus algorithm, such as Proof-of-Stake (→Saleh, →2019).
PoW is a process that (i) asks each node in the network to
solve computation-heavy cryptographic problems and (ii)
rewards the first node that successfully solves the problem by
giving the right to authorize the information and record it on the
blockchain.
The cryptographic problem relies on a hash function. The
hash function should satisfy several properties (e. g., uniformity,
universality, deterministic function, defined range) that are
desirable for the mining protocol explained below to work.
Specifically, nodes are asked to find a solution to a mathematical
problem of finding a correct value. The expected time until
finding the solution is determined by the difficulty target. At the
same time, it decreases as computing power, called hash power,
that each node devotes to the problem becomes strong. Solving
a problem requires high computation power, and this triggers a
competition among nodes, i. e., if other nodes adopt higher hash
power, you are less likely to win the race. This process of finding
the value is called mining, as it is reminiscent of finding metal
ore from a mine. When a node wins the race, the mining reward
is paid in the Bitcoin, and she is entitled to record information on
the blockchain.
This helps explain why information on the blockchain is
(almost) tamper-free. First, a malicious entity trying to rewrite
information on a chain must accumulate enormous computing
power that outrace the other participants in the network.
Second, a potential attacker must find significant benefits of
attack, i. e., returns from mining the Bitcoin must outweigh the
cost of computing power.
 Through the competition between decentralized record
keepers, the total hash rate affects the quality of consensus. As
we will discuss later, having a high hash rate may improve the
quality of the consensus, as winning the race becomes more
costly for each miner, and her incentive to manipulate
information by devoting a large power diminishes. This incentive
problem will be translated to the degree of information frictions
in economic transactions, as we will discuss in the later section.
The Bitcoin’s hash rate increased year by year from 2016 to
autumn 2018, but the hash rate continued to decrease in line
with the timing of the crash of the virtual currency market.
During these times, companies may be forced to withdraw from
the mining business. This observation will be a crucial ingredient
to our economic analysis in Section →3.

2.4 Smart contract

Smart contracts itself have been an abstract concept that existed
independent of blockchain. →Szabo (→1997) characterizes it as a
contract that is executed automatically based on specified
conditions without any centralized authorizations. Although the
cryptographic security mechanism was simply one of the
possible choices to implement the smart contract, the blockchain
grows to be the primary mechanism that guarantees secure
transactions in implementing smart contracts.
Blockchain, as the underlying technology, suits the objective
of smart contracts quite well. Firstly, the decentralized
information-keeping system with the consensus mechanism
makes the deals verifiable and thus enforceable without relying
on a centralized authority (i. e., the first condition of the smart
contract). Moreover, Ethereum has invented a blockchain system
that records information contingent on some pre-specified
conditions (i. e., the second condition of the smart contract).
That is, a transaction is verified—i. e., information on payment
and delivery is recorded as “correct” and becomes immutable—
if and only if a specified condition is satisfied.
Not only does the smart contract makes the double
spending extremely difficult, it also works as a new form of
“warranty” on goods’ quality. It is novel because information on
which the contract is contingent is managed by the
decentralized record keepers rather than a centralized authority.
In Section →3, we study the concept of smart contract, what it
entails, and the role of blockchain behind them in detail.

2.5 Existing problem

We have overviewed some of the favorable properties of
blockchains so far. Although significantly mitigated by
blockchain, there are still possible problems in an actual
implementation of blockchain and smart contracts. Among
them, we overview some technical issues. In general, thorough
consideration gives an “impossible trinity” of blockchain in
→Abadi and Brunnermeier (→2018). They compare the
characteristic features of PoW, Proof-of-Stake, and centralized
ledger. Their analysis establishes the fundamental problem
between self-sufficiency, rent-free, and resource-efficiency.

2.5.1 Scalability
Among the technical problems of blockchain, we overview
scalability and oracle problem. The problem of scalability, in
general, emerges when the number of participants of the
blockchain increase. Here, the participants include miners of the
cryptocurrency and users. On the one hand, when the size of a
miner pool increases, record-keeping becomes slow. In
particular, the speed of transmitting the latest state of the
blockchain hinges on the slowest node in the network. Since
anybody can participate in the blockchain network, a low-
performance node typically slows down the whole system.
On the other hand, if many users flood to the
cryptocurrency, loadings in the blockchain network explode,
which in many cases results in significant waiting time for
transfers and increasing transaction fees. One manifestation of
such a problem includes the congestion effect; a long queue for
transaction approval may incentivize users to pay high
transaction fees because miners work on transactions that yield
a high commission. The congestion effect rises the overall cost
of using the blockchain (→Easley et al., →2019; →Huberman et
al., →2019).

2.5.2 Oracle problem

Oracle in the blockchain refers to sending data outside the
blockchain to the blockchain. The blockchain can generate
consensus on information that is accumulated in the blockchain
system and make it immutable. However, original information
must be introduced to the blockchain from an external source.
This outside information must also be trusted to make the whole
blockchain system secure. How to guarantee the trustworthiness
is called the oracle problem.
For instance, in the wine blockchain, we want to establish
that a grape variety stored in the blockchain has not been
manipulated but nothing within the blockchain implies that the
original information injected into the system is not a lie. This
casts a doubt on the smart contract too. Suppose that you made
a transaction of wine contingent on some conditions, such as
“make payment if and only if the wine is 100% Cabernet
Sauvignon from Napa, CA.” You are (almost) sure that no
information manipulations are made after the information is
impounded into the blockchain record-keeping system, i. e., once
the blockchain guarantees that the bottle is 100% CabSau, it is
hard to mix it with Pinot Noir and still claim it as 100% CabSau.
However, you are not sure if the first-place information is
correct. The blockchain node cannot distinguish the grape in the
first place. We will come back to this issue when we analyze the
implications for real economic transactions.

2.5.3 Fork
Recall that the blockchain adds blocks to the previous chains.
Occasionally, nodes do not agree which blocks should be added
to which existing chains. In this case, the blockchain splits at a
point in the chain. The split is called fork. Forks are potentially
detrimental to the whole blockchain system because it may
undermine the consensus of the information stored in the chain.
Several existing studies tackle the problem why the fork occurs.
For example, →Biais et al. (→2019) study in the format of
repeated games under which conditions miners follow the
simple rule of Longest Chain Rule (LCR).

2.6 Some applications

Even though there is a couple of problems to be addressed as
above, we have many examples of blockchain applications,
which we will overview at this point. By so doing, we touch upon
several cases where the blockchain successfully has solved the
problems and opened new fields.
The first achievement that deserves mentioning is that the
cryptocurrencies freed part of the settlement risks that were
inherent in security markets. In this context, settlement risks
entail the failure of delivery of the security by the seller while
receiving the payment, or vice versa. A smart contract may
achieve the delivery versus payment (DvP) mechanism through
the automated blockchain infrastructure without any central
authority. In particular, →Chiu and Koeppl (→2019) argues that
the main advantage of blockchain in this case is “it can speed
settlement, both by getting rid of a fragmented post-trade
infrastructure and by implementing a more flexible settlement
cycle.”
Blockchain has also made a significant change to financial
contract designs in a dynamic environment.
Traditionally, financial contracts are contingent on the event
only, that make the contracts static. However, the blockchain
stores information in chronological order with time stamps.
Therefore, new financial contracts emerged that depend on the
event that happened, but also the timing of the event. By so
doing →Tinn (→2017) showed that the optimal contract between
the parties is the one that dynamically adjust the profit sharing
rules.
Furthermore, blockchain opened a new tension between
decentralized consensus and information distribution that are
inseparable from each other. Namely, to achieve the
decentralized consensus, the blockchain needs to have the
information verified by the participating nodes. For this purpose,
it needs to distribute (sometimes sensitive) data. →Cong and He
(→2018) take insights from this possibility and applied to the
problems of tacit collusions. They find that although the
blockchain may achieve higher competition by mitigating the
problem of incomplete contracts, it potentially induces collusion
among sellers.
We have overviewed the forefront understanding of
blockchain technologies, the problems, and applications.
Throughout the section, we constrained ourselves in the realm
of financial transactions. From now, we open ourselves to a
broader perspective, including real economic transactions. To
have a new view of the technology that we study in the next
section, consider the hash rate in a new way. In particular, one
may view the hash rate as a supply product of the Bitcoin market
since it transmits to the output, the Bitcoin tokens. For example,
→Pagnotta and Buraschi (→2018) apply the idea to analyze the
behavior of the Bitcoin’s prices and hash rates. By pushing this
idea further to the real economic transactions, we will consider
the broader potential implications of blockchain in the next
section.

3 Implications to the real economic

transactions
Another issue arises when we carefully consider how markets
and participants react to the blockchain adoption in the
environment that economists often call as general equilibrium.
By reviewing the study by →Aoyagi and Adachi (→2018), we will
go over the potential impacts of blockchains and
cryptocurrencies on the real economy beyond finance.

3.1 Background
Examples of real economic transactions under consideration
may be massive and expanding. A number of blockchain-based
platforms for trading have been launched, including those for
wine (EY Advisory and Consulting) fresh foods (Walmart), jewelry
(HyperLedger), arts and photography (Kodak), security (tZero),
and cryptocurrency (Waves, IDEX, Steller, Oasis, OKEx, Cashaa,
and more). In the following analysis, we call these goods,
commodities, and assets as “goods” or “products” collectively.
To give an idea of the real economic transactions, consider
the case of wine blockchain by EY Advisory and Consulting. The
blockchain was built as a solution to track wine origins and
quality in all ecosystems involved in wine distribution: producers,
distributors, logistics, and insurance companies. The blockchain
offers tokens for transactions. The use of the tokens enables the
tracking of a wine shipment, warehouses storage and deliveries,
and insurance compensation for the shipping process and the
buying and selling of the bottle. In other words, distributors and
consumers can order wine directly from the platform and track
shipping status, including custom clearance and storage in real-
time.
As can be seen from this example, blockchain adoption in
transactions of goods can be generalized as follows. First, the
blockchain includes cryptocurrencies that is a digital token that
works as a means of trade. Second, miners keep monitoring the
transaction that involves cryptocurrencies and blockchain.
Finally, users, including sellers and buyers, may use the tokens
to trade goods.
In the below consideration, we will give an entire economic
transaction system involving the blockchain as follows. A
cryptocurrency token is exchanged in the mining markets. The
miners join the market, and the token is given to reward their
efforts of record-keeping. The users of the token are twofold—
the buyers (Bob) of the goods (coffee) and the sellers (Alice). The
users may transact with or without the cryptocurrency. If they do
not use it, they need to resort to the traditional method of
payment. It is worthwhile to emphasize again that we separate
two types of agents, miners, and users. Given the dichotomy, the
questions are raised in the following.

3.2 Questions
Since our interest is the broad implications on the real economic
transactions, we need to be careful about posing a correct
question to ask. We begin by asking a somewhat abstract
motivation and bring ourselves down to a more particular and
precise question. This process starts by asking: what is the
general equilibrium (GE) implications to economic transactions
of blockchain adoption? In our context, GE means that we are
interested in the joint determination of economic variables,
including prices of goods, trading volume, market quality, as well
as blockchain-related variables, such as the value of
cryptocurrencies and miner pool sizes. Discussions so far have
explored the mechanism and incentive of each participant (e. g.,
miners). In the real economy, they interacts to form the overall
economic system. What do the economic outcomes of our
interest look like, such as the price and volume of the
cryptocurrency traded, the sorting of users that use
cryptocurrency, the quality of the goods traded? What will
happen when the cost of cryptocurrency mining increases?
Would the decentralized transaction space be better than the
one that is operated by a single centralized record-keeper?
These motivations lead us to a natural question–why do
users use blockchain to trade goods, beyond double-spending?
The short answer to this question is asymmetric information. To
understand this better, let us further ask ourselves: what is the
economic meaning of the blockchain? As we have seen, the
blockchain is technically a collection of technologies and
concepts that enable the decentralized information keeping
system. This defining feature is inseparably connected to the
recent flood of the applications to the goods markets. In
particular, in the real economy, there is an increasing demand
for knowledge about the source of the goods. Partly due to the
changes in the international regulations and decreases in the
shipping and communication costs, the supply chains get
complicated. For instance, the global supply chains of iPad and
Boeing 787 are prohibitively enormous. Understanding the
whole structure of the chain of these products is almost
impossible (→Antras, →2015).
Even before jumping to such extreme examples, wine
production is already sophisticated enough that the blockchain
found it useful to help the problem we discuss below. The wine
production contains at least the following steps: cultivation and
harvesting of grape and other ingredients, brewing, shipping,
vintage, and delivery. All these steps are indispensable for letting
the final consumers enjoy the quality bottle. If these steps were
done within one player in home-production and sales, there
would be a minimal problem of quality counterfeiting. However,
such an all-in-one approach of production is not scalable, and a
typical market structure involves multiple parties along the
supply chain. Furthermore, at any given stage of the production,
it is typically difficult to verify the quality of the products up to
the stage.
In this case, what economists often call as the lemon
problem arises. Namely, no buyers may verify the quality of the
inputs they purchase. Furthermore, the cost of producing low-
quality ones is typically lower (imagine counterfeiting the grape
variety by rewriting the low-quality one to the high-quality one).
Therefore, the transactions are contaminated by low-quality
goods. The lemon translates directly into the low-quality bottles
of wine and possibly leads to the collapse of high-quality wine
markets (→Akerlof, →1970). Therefore, there is a great demand
for correctly knowing the quality of the upstream goods other
parties produce.

3.3 Role of blockchain in economic transactions

The key concept in the lemon problem is information asymmetry
that only the seller knows the quality, while the buyer does not.
A potential (and historical) solution to this problem is
introducing a centralized record keeper. However, typically, the
solution is costly, as we discussed above. The blockchain has the
potential to address the problem. As we have discussed, the
blockchain’s technical aspects allow smart contracts. The
involved parties may use the pre-specified conditions under
which the transaction is completed in the contract protocol. If
the requirement stating that only the high-quality goods may be
transacted is not satisfied, either of the parties may terminate
the transaction without actual changes in the ownership of
goods and money. By doing this, we may potentially achieve that
the goods transacted under smart contracts backed by the
blockchain may be reliable to be high-quality.
The above configurations are likely. However, there is still a
margin of how reliable the information stored in the blockchain.
As we discussed in the sections above, given the oracle problem,
there is no way to guarantee the information conveyed in any
protocols is true for sure. What blockchains can do is to mitigate
the uncertainty in the information. We call the level of
uncertainty as “security” of the blockchain. When the security is
high, the uncertainty of the information stored is low, and vice
versa.
How is the security level determined? Naturally, the security
level is high when the underlying technology, such as the
program codes written to operate the blockchain, is robust and
sophisticated. However, it is not the end of the story. It is critical
to recognize and emphasize the role of miners and the size of
miner pools. The size matters because of the decentralized
property of the blockchain—the more miners participate, the
less the benefit of cheating is. We will detail the specific
mechanisms below. At this point, we only claim two. First, there
is a concept of the security level of the blockchain. Second, it has
to be determined at the end of the analysis.
3.4 Miner-side analysis
We then move on to the analysis of players in the market in
detail—miners, users of the token separated by the buyers and
sellers of the goods. We then come back to combining all the
considerations to determine the prediction of the economy.
The crucial first question regarding the miner side is: how do
the blockchain miners enter the mining pool? As we discussed in
the technical section, the miners join the pool and engage in the
mining process (most likely equipped with ASIC in case of PoW
protocol) if and only if it is profitable to do so. When is the entry
profitable? For simplification, we focus on the role of the price of
the cryptocurrency attached to the blockchain. In other words,
miners enter when the price of cryptocurrency is high. We
acknowledge, in reality, there are many aspects to be concerned
when determining profitability. Furthermore, →Aoyagi and
Adachi (→2018) show that our analysis may be extendable to the
case of blockchain without cryptocurrencies.
The second key question is: given entry, how are the security
levels of the chain achieved and maintained? To answer this
question, we look into the partially verifiable false-reporting and
reputation costs. In particular, let us consider the simplified
reporting system the miners or record keepers may tell the truth
or lie. Whenever profitable for the keeper, (s)he can tell a lie,
risking verification by a third party. In this case, (s)he would
suffer from the reputation loss due to the misreporting. This
consideration disciplines the keeper. In this situation, the
security level is determined according to the size of the mining
pool. Namely, as the mining pool gets massive, chances of
winning to add the block are lower. Hence it does not worth
risking the reputation cost for many miners. Thus, a large mining
pool increases the overall security level of the information stored
in the blockchain. Note that this resembles the positive network
effect studied in →Pagnotta and Buraschi (→2018).

3.5 User-side analysis

Although the above considerations for the miner side are
relatively common in the study of blockchains and
cryptocurrency, it is relatively understudied how the user side of
the blockchain interact with miners. In fact, users are also
expected to actively respond to the features of the blockchain,
the security level, and the price of cryptocurrencies—obviously,
the secure the blockchain is, the value for the user increases. The
cheaper the cryptocurrency price is, the more valuable it is for
buyers of the goods transacted, the less for sellers. Given the
discussions above, we consider these points in detail under the
dual markets where the products may be sold and purchased in
the traditional market where the means of payment is cash or
traditional digital currencies, and the blockchain-based market
where the transaction is done in the cryptocurrency based on
the blockchain. In particular, to participate in the blockchain-
based market and make a purchase, the buyer must hold the
cryptocurrency token beforehand. Therefore, there is a link
between the users and miners of the blockchain in the following
sense. On the one hand, the users demand cryptocurrency since
they want to purchase the goods whose quality information is
stored in the blockchain system. On the other hand, the miners
supply cryptocurrency through record keeping.
Under this situation, the non-monotonicity of the demand
for cryptocurrencies in the security level emerges as a surprising
result. Put differently, it is not always the case that as the
blockchain becomes secure the demand for the cryptocurrency
increases. Given that the higher security enhances the value of
blockchain-based market for product transactions, this may be a
surprising result. We overview why and how this result may
emerge due to the congestion effect below.
Intuitively, as the security level goes up, the demand for the
blockchain-based good increases as the chance of getting high-
quality goods is higher. This security effect increases the
demand for cryptocurrency that is needed for the transaction
therein. However, at the same time, as more buyers flood into
the blockchain-based market, the price for the cryptocurrency
goes up. The price surge drives out some of the buyers who
would have stayed otherwise. This congestion effect may reduce
the quantity of cryptocurrency demanded since the size of the
blockchain market shrinks. Therefore, there are two conflicting
forces, the positive security effect and the negative congestion
effect, that makes the prediction non-monotonic. In particular,
→Aoyagi and Adachi (→2018) discuss the further detail of the
conditions behind this finding and more specific prediction
about the non-monotonicity.
Readers should also notice that the value of cryptocurrency
here is real values rather than a bubble. The cryptocurrency and
underlying blockchain help mitigating the information friction
problem, which yields the real economic gain. The actual
economic value because of reducing the lemon problem is also a
characterizing feature of this analysis.

3.6 Analysis of changes

Combining the thorough thought experiments about both
miners and users, we can consider a rich analysis of the effect of
the change of external economic conditions on any features we
are interested in the investigation, such as cryptocurrency prices
and the security level of blockchain. This analysis is typically
useful in testing our considerations above. Although the full
details are relegated to →Aoyagi and Adachi (→2018), we give
two examples of their studies.
When is blockchain more efficient than the centralized
system? We may regard the above analysis as nesting the case
with a centralized authority. One can see this by considering the
case with only one conceptual “miner” that is allowed to enter
the token-generating system. The miner, we call as the
centralized authority, does not mine since it does not have to
keep the record in a decentralized manner anymore. Instead, it
just gives the credentials to all the transactions that come across
the system. What would the centralized authority do? Since now
it may choose the security level without the distributed
consensus mechanism, it would do so to optimize its interest, in
this case, the price of the token they would receive upon
authorization. Here, again, the non-monotonic cryptocurrency
price structure matters—the centralized authority would take
advantage of it and select the optimal security level for itself,
without considering the appropriate security levels for other
parties. →Aoyagi and Adachi (→2018) detail under which
circumstances the security level under the distributed ledger
system with blockchain is higher than that with the centralized
ledger. In this sense, our consideration is complete with
highlighting the benefit of decentralization.
The second analysis is regarding the following prediction
about the change in the cost to operate ASIC (e. g., ASIC machine
price, electricity price). When the cost increases, fewer miners
enter the mining pool. Effectively this enhances the
cryptocurrency prices because the entry must be more profitable
for miners that may cover the increased cost of mining. We
overviewed that the demand for cryptocurrency may decrease or
increase in the security level of blockchain. If it is falling, then we
expect that the cryptocurrency price increases. This prediction
confirms the intuition discussed by the previous studies. If it is
increasing, then somewhat surprisingly, the increase in the cost
of mining may potentially decrease the price of the
cryptocurrency. This prediction is first introduced by →Aoyagi
and Adachi (→2018) but is yet to be formally tested in the real-
world data.
Although not comprehensive, we have been witnessing
some supporting evidence for our story. An example comes
from the wine blockchain project outlined above. For example, a
few wine seller companies introduced the wine blockchain under
the empirical experiments conducted by EY Advisory and
Consulting. The result includes the increased unit price of the
bottle. This result is consistent with our story since the wine
blockchain is meant to improve the information stocked
throughout the supply chain tamper-free, making the average
quality of the bottles to the final consumers improved. The
higher quality translates into higher prices. More thorough
empirical studies are expected to challenge the story outlined in
this section.

4 Conclusion
In this chapter, we overviewed the technical aspects and the
potential implications for real economic transactions.
Throughout the analysis, we emphasized the role of
decentralization and smart contract for our purpose, leaving a
large set of interesting aspects blockchains unexplained. We only
begin to witness the profound real economic consequences in a
subset of economic transactions. However, as our technical
section suggested, we have sophisticated technical backgrounds
that such impacts are to come. We hope the current monograph
helps the reader to frame the blockchain and the economic
implications.
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Notes
1 These benefits in detail and the benefits of
decentralization are further discussed in →Chen et al.
(→2019).
2 For our purpose, we only discuss selective key elements
of cryptography, leaving the details in technical writings,
such as →Antonopoulos (→2014).
An analysis of the development of
cryptocurrency research
Shaen Corbet
Brian Lucey

1 Introduction
The aim of this chapter is to provide a short overview of cryptocurrency research as
of the end of 2019. We do this by means of a scientometric analysis, which has been
used across a wide-ranging number of disciplines. We do not provide here a critical
literature review per se. Rather, our ambition is to present the pathway through
which research has flowed in the past decade. To do so we draw on similar pieces of
work across other disciplines, such as that of sustainability and sustainability
development (→Olawumi and Chan (→2018)), the development of building
information systems (→Zhao (→2017), →He et al. (→2017)), food authentication
(→Danezis et al. (→2016)), biotic identification (→Ruaro and Gubiani (→2013)) and
even at the level of products, such as algae, biohydrogen and biodiesel (→Konur
(→2011, →2012a,→b)). With regards to examples as to how such research can
provide benefit to broad disciplines, →Rotolo et al. (→2015) developed a definition of
‘emerging technologies’ and linked the conceptual effort with the development of a
framework for the operationalisation of technological emergence, which could then
be used to trace the development of research over time. →Serenko et al. (→2010)
conducted a meta-analysis of prior scientometric research of the knowledge
management using 108 scientometric studies of the discipline and subjecting each
meta-analysis techniques. Further, →Corbet et al. (→2019) provides such a review as
of early 2019, what we aim for here is to analyse the development of this area of
research in terms of its intellectual structure. →Lowry et al. (→2013) investigated
journal quality and the association for information systems, specifically analysing as
to whether expert journal assessments add value? The authors conclude that
bibliometric measures provide very similar results to expert-based methods in
determining a tiered structure of IS journals, thereby suggesting that bibliometrics
can be a complete, less expensive, and more efficient substitute for expert
assessment.
The rapid development of cryptocurrencies as a financial product appears to have
taken many regulatory systems by surprise. While research to uncover the many
systemic repercussions of this digital finance evolution continues to expand at pace,
much evidence points toward substantially differing characteristics associated with
these new financial products relative to traditional financial products on which much
regulation has been honed over time. The development of cryptocurrencies and the
surrounding research associated at both the narrow-product level (namely, Bitcoin or
Ethereum individually) or at the broad-level (all cryptocurrencies) has been further
advertised by the unprecedented price appreciations that have taken place across a
number of assets, particularly that of Bitcoin. These products have therefore offered
substantial opportunities to a number of speculative investors, not to mention a
transmission vehicle through which those with illicit needs can take advantage of
regulatory circumvention. Research, beginning with such humble beginnings
through the work of →Nakamoto (→2009) has expanded to analyse technical,
sociological, legal, financial and economical aspects of the product. However, such
research has recently begun to question if this price evolution could be a symptom of
other deeper issues such as the presence of financial bubbles (→Corbet et al.
(→2018a); →Fry (→2018)), or as to whether the product is now unfortunately
overcome with illegality. In recent works to identify such illicit tactics, →Griffins and
Shams (→2018) investigated Tether’s influence in Bitcoin and other cryptocurrency
prices to find that purchases with Tether were timed following market downturns and
resulted in significant increases in the price of Bitcoin. Further, less than 1% of the
hours in which Tether experienced significant transactions is associated with 50% of
the increase in Bitcoin prices and 64% of other top cryptocurrencies, drawing the
damning conclusion that Tether was used to provide price support and manipulate
cryptocurrency prices. Along with this source of instability, cryptocurrency exchanges
as well as individual currencies have experienced several sophisticated hacking
events, further damaging the confidence in this asset class. Further, →Gandal et al.
(→2018) identified the impact of suspicious trading activity on the Mt.Gox Bitcoin
exchange theft, when approximately 600,000 Bitcoins were attained. The authors
demonstrated that the suspicious trading likely caused the spike in price in late 2013
from $150 to $1,000, most likely driven by one single actor. These two significant
pieces of research have fine-tuned the focus of regulators, policy-makers, and
academics alike, as the future growth of cryptocurrencies cannot be sustained at
pace with such significant questions of abnormality remaining unanswered.
This chapter focuses distinctly on the pathway that such cryptocurrency research
has taken. Further, we attempt to provide oversight of the key areas that appear to
have been under-resourced with academic coverage and as to where we observe
current trends to be focused. The rest of the chapter is as follows: in Section →2 we
provide a very short review of the key developments in cryptocurrency research to
date. In Section →3 we explain the data and methodologies used to analyse the
research and carry out the bibliometric analysis. In Section →4 we provide the results
of this analysis, while in Section →5 we conclude.
2 The development of cryptocurrency research: A very
short review
Since the product’s evolution through the work of →Nakamoto (→2009), Bitcoin has
developed as an investment asset that have no association with any higher authority,
specific country, tangible asset or firm, and the value of it is based on the security of
an algorithm which is able to trace all transaction (→Corbet et al. (→2020)). →Corbet
et al. (→2019) provided a thorough overview of the empirical literature based on the
major topics that have been associated with the market for cryptocurrencies since
their development as a financial asset. Anonymity and decentralisation of
cryptocurrency attracted attention from both users and investors, which caused
enormous growth of market capitalisation and price of Bitcoin. →Corbet et al.
(→2018a) while utilising the bubble identification methodology of →Phillips et al.
(→2011), found clear evidence of periods in which Bitcoin and Ethereum were
experiencing bubble phases. →Urquhart (→2016) investigated the efficiency of
Bitcoin using a battery of robustness tests to find that returns are significantly
inefficient over their selected full sample, but when dividing the same sample, Bitcoin
presented evidence of becoming more efficient. Recent findings by →Sensoy (→2018)
also report that Bitcoin prices both in terms US dollar and euros have become more
efficient. Similar research has been conducted on the newly developed Bitcoin
futures market (→Corbet et al. (→2018); →Katsiampa et al. (→2019a); →Katsiampa et
al. (→2019b)). Further research areas have developed with focus on trading rules
(→Corbet et al. (→2019c)); portfolio design (→Akhtaruzzaman et al. (→2019)); the
creation of derivatives product exchanges (→Akyildirim et al. (→2019a)); implied
volatility (→Akyildirim et al. (→2019b)); and market cross-correlations and interactive
dynamics (→Akyildirim et al. (→2019b), →Corbet et al. (→2018b, →2019a)).
In →Table 1 we observe the descriptive statistics for the data used in this bibliometric
analysis using all available between the first observation, identified as the work of
→Nakamoto (→2009) until that of November 2019. The research is separated
between two distinct types, firstly, that relating to a digital currency directly, such as
Bitcoin for example, and secondly, broad coverage of cryptocurrencies as a research
topic. →Figure 1 presents evidence of the dramatic growth in research based on this
new product during the time analysed. We clearly observe that research surrounding
individual products account for approximately twice that of broad cryptocurrency
research. There are 521 separate sources of coverage for research by product,
however, only 323 sources for that relating to the sector. With regards to citations,
product-level research focused on 10,773 other pieces of work, while topic-level
research accounted for 3,739 citations, however, product-level research has
generated 9.22 cites per document while topic-wide research generated 6.99. There is
evidence of increased multi-authorship on topic-level research, with an average of
2.65 authors per paper, substantially above the average of 1.99 for product-level
research. To date, 3,742 authors have worked on research relating to
cryptocurrencies whether narrow or broad.
Note: The above data was compiled as of November 2019.

Figure 1 Number of observations based on research designation.

Table 1 Descriptive Statistics based on the selected dataset.
Measure By product By topic Total
Documents 1,169 535 1,704
Sources (Journals, Books, etc) 521 323 844
Citations 10,773 3,739 14,512
Average citations per document 9.22 6.99 8.52
Authors 2,326 1,416 3,742
Authors of single authored documents 274 137 411
Authors of multi authored documents 2,052 1,279 3,331
Documents per author 0.50 0.38 0.46
Authors per document 1.99 2.65 2.20

Note: The above data was compiled as of November 2019.

In →Table 2 we observe the top citations sources by author as ranked by the

number of articles and associated fractional citations. In terms of both narrow and
broad areas of research, we can identify a number of authors that are prevalent
across both research-types. In →Table 3 we observe the top citations across countries
based by both narrow and broad research types. In terms of narrow-based research,
we observe that the United States have produced, to this point, the largest number of
research articles, however, in terms of quality, measured by the number of citations,
the UK possesses a far more substantial level of cites per article (12.5) in comparison
to the United States (7.2). Both Lebanon and Switzerland possess the largest number
of cites per article, but these estimates are provided with the caveat of quite a low
number of articles published (13 and 14 respectively). Considering broad-based
research, China has provided far more research articles. Again, the UK stands out
through the possession of a considerable number of cites per article, considering the
substantial number of research papers that have been published. However, both
Ireland and Lebanon lead the way in terms of citations per article (27.8 and 17.7
respectively).
Table 2 Top citation sources by author.
Narrow Product-Based Research Broad Area-Based Research

Rank Author Articles Fractional Rank Author Articles Fractional

1 Bouri E. 12 9.9 1 Bouri E. 26 15.3
2 Roubaud D. 12 9.9 2 Roubaud D. 23 17.2
3 Corbet S. 8 6.9 3 Li X. 12 8.7
4 Katsiampa P. 8 10.6 4 Liu J. 12 0.4
5 Lucey B. 8 6.9 5 Lucey B. 11 16.6
6 Li X. 7 7.7 6 Corbet S. 11 17.6
7 Urquhart A. 7 11.9 7 Gupta R. 9 21.6
8 Yarovaya L. 6 4.5 8 Li Y. 9 0.2
9 Tiwari A. K. 5 0.5 8 Katsiampa P. 8 16.8
10 Wang Y. 5 4.3 9 Mensi W. 8 13.5
11 Choo K.-K. R. 4 1.9 10 Urquhart A. 8 19.6
12 Delgado-Segura S. 4 1.3 11 Kristoufek L. 7 11.3
13 Herrera-Joancomartí 4 1.3 12 Liu X. 7 1.3
J.
14 Li H. 4 6.3 13 Luther W. J. 7 4.3
15 Li Y. 4 0.5 14 Selmi R. 7 13.6
16 Ludermir T. B. 4 1.6 15 Tiwari A. K. 7 18.4
17 Luther W. J. 4 7.9 16 Yarovaya L. 6 8.2
18 Marchesi M. 4 3.0 17 Al-Yahyaee K. H. 6 9.8
19 Shen D. 4 3.5 18 Bouoiyour J. 6 15.5
20 Stosic D./Stosic T. 4 1.6 19 Herrera-Joancomartí 6 0.0
J.

Note: The above data was compiled as of November 2019.

Table 3 Top citation sources by country.
Narrow Product-Based Research Broad Area-Based Research

Rank Country Articles Cites Cites/Article Rank Country Articles Cites Cites/Article
1 United 126 907 7.2 1 United 230 2,247 9.8
States States
2 United 70 877 12.5 2 China 152 971 6.4
Kingdom
3 China 59 434 7.4 3 United 127 2,067 16.3
Kingdom
4 Russian 35 69 2.0 4 France 76 968 12.7
Federation
5 India 33 83 2.5 5 India 68 256 3.8
6 Australia 31 173 5.6 6 Australia 65 670 10.3
7 France 31 342 11.0 7 Germany 57 816 14.3
8 Italy 29 158 5.4 8 Italy 52 386 7.4
9 Spain 28 307 11.0 9 Spain 49 716 14.6
10 South 26 309 11.9 10 South Korea 46 407 8.8
Korea
11 Germany 24 115 4.8 11 Russian 42 109 2.6
Federation
12 Ukraine 22 56 2.5 12 Canada 31 203 6.5
13 Canada 19 105 5.5 13 Lebanon 30 531 17.7
14 Brazil 18 86 4.8 14 Ireland 26 722 27.8
15 Ireland 16 42 2.6 15 Netherlands 23 132 5.7
16 Malaysia 16 11 0.7 16 Brazil 22 77 3.5
17 Japan 15 10 0.7 17 Japan 22 140 6.4
18 Switzerland 14 176 12.6 18 Switzerland 22 342 15.5
19 Lebanon 13 241 18.5 19 South Africa 21 311 14.8
20 South 12 34 2.8 20 Greece 19 155 8.2
Africa

Note: The above data was compiled as of November 2019.

Table 4 Top ten journals as defined by both broad and narrow product-based
research.
Narrow Product-Based Research Broad Area-Based Research

Rank Source Documents Citations Rank Source Documents Citations

1 Finance 66 1,005 1 Finance Research 42 287
Research Letters Letters
2 Economics 38 1,380 2 Economics Letters 20 583
Letters
3 IEEE Access 29 273 3 IEEE Access 13 161
4 Future 19 227 4 Applied Economics 7 75
Generation
Computer
Systems
5 International 17 192 5 Applied Economics 7 13
Review of Letters
Financial
Analysis
6 Applied 10 167 6 Computer Law and 6 20
Economics Security Review
Letters
7 Applied 9 242 7 Future Generation 6 97
Economics Computer Systems
8 Computer Fraud 7 62 8 Communications of 5 109
and Security the ACM
9 Financial 7 55 9 Electronic 4 19
Innovation Commerce Research
and Applications
10 Future Internet 7 185 10 Business Horizons 3 14

Note: The above data was compiled as of November 2019.

Table 5 Top ten articles as defined by both broad and narrow product-based
research.
Narrow Product-Based Research
1 Tschorsch, F. and Scheuermann, B., 2016. Bitcoin and beyond: A technical survey on decentralized digital
currencies. IEEE Communications Surveys & Tutorials, 18(3), pp. 2084–2123.
2 Yli-Huumo, J., Ko, D., Choi, S., Park, S. and Smolander, K., 2016. Where is current research on blockchain
technology? – a systematic review. PloS one, 11(10), p. e0163477.
3 Böhme, R., Christin, N., Edelman, B. and Moore, T., 2015. Bitcoin: Economics, technology, and governance.
Journal of Economic Perspectives, 29(2), pp. 213–38.
4 Urquhart, A., 2016. The inefficiency of Bitcoin. Economics Letters, 148, pp. 80–82.
5 Cheah, E. T. and Fry, J., 2015. Speculative bubbles in Bitcoin markets? An empirical investigation into the
fundamental value of Bitcoin. Economics Letters, 130, pp. 32–36.
6 Dyhrberg, A. H., 2016. Bitcoin, gold and the dollar – A GARCH volatility analysis. Finance Research Letters,
16, pp. 85–92.
7 Khan, M. A. and Salah, K., 2018. IoT security: Review, blockchain solutions, and open challenges. Future
Generation Computer Systems, 82, pp. 395–411.
8 Kristoufek, L., 2015. What are the main drivers of the Bitcoin price? Evidence from wavelet coherence
analysis. PloS one, 10(4), p. e0123923.
9 Dwyer, G. P., 2015. The economics of Bitcoin and similar private digital currencies. Journal of Financial
Stability, 17, pp. 81–91.
10 Katsiampa, P., 2017. Volatility estimation for Bitcoin: A comparison of GARCH models. Economics Letters,
158, pp. 3–6.
Broad Area-Based Research
1 Li, X., Jiang, P., Chen, T., Luo, X. and Wen, Q., 2017. A survey on the security of blockchain systems. Future
Generation Computer Systems.
2 Zheng, Z., Xie, S., Dai, H. N., Chen, X. and Wang, H., 2018. Blockchain challenges and opportunities: A
survey. International Journal of Web and Grid Services, 14(4), pp. 352–375.
3 Fernández-Caramés, T. M. and Fraga-Lamas, P., 2018. A Review on the Use of Blockchain for the Internet
of Things. IEEE Access, 6, pp. 32979–33001.
4 Fry, J. and Cheah, E. T., 2016. Negative bubbles and shocks in cryptocurrency markets. International
Review of Financial Analysis, 47, pp. 343–352.
5 Bouri, E., Molnár, P., Azzi, G., Roubaud, D. and Hagfors, L. I., 2017. On the hedge and safe haven
properties of Bitcoin: Is it really more than a diversifier?. Finance Research Letters, 20, pp. 192–198.
6 Garcia, D., Tessone, C. J., Mavrodiev, P. and Perony, N., 2014. The digital traces of bubbles: feedback cycles
between socio-economic signals in the Bitcoin economy. Journal of the Royal Society Interface, 11(99), p.
20140623.
7 Phillip, A., Chan, J. S. and Peiris, S., 2018. A new look at Cryptocurrencies. Economics Letters, 163, pp. 6–9.
8 Kim, Y. B., Kim, J. G., Kim, W., Im, J. H., Kim, T. H., Kang, S. J. and Kim, C. H., 2016. Predicting fluctuations in
cryptocurrency transactions based on user comments and replies. PloS one, 11(8), p. e0161197.
9 Dai, J. and Vasarhelyi, M. A., 2017. Toward blockchain-based accounting and assurance. Journal of
Information Systems, 31(3), pp. 5–21.
10 Kouicem, D. E., Bouabdallah, A. and Lakhlef, H., 2018. Internet of things security: A top-down survey.
Computer Networks, 141, pp. 199–221.

Note: The above data was compiled as of November 2019.

 In →Table 4, we observe the top journals in terms of research output and
citations. In terms of both narrow and broad types of research, Finance Research
Letters has published the largest number of papers and is closely followed by
Economics Letters, who possess are larger number of citations in both categories.
Both of these journals are closely followed by Applied Economics Letters and IEEE
Access. It becomes quickly evident that the letters-format of research appears to be
most popular amongst cryptocurrency researchers. This is most likely due to the fast-
moving nature of the research area and the ability to quickly disseminate research in
a reputable and visible manner. Applied Economics, Future Generation Computer
Systems and International Review of Financial Analysis are journals that would be
considered to produce more substantial pieces or work closely these short-form
research outputs. There also appears to be quite a coherent grouping of computer-
based research outputs along with both economics and finance-based research
outputs.
The top articles as defined by citations, as per late-2019 are presented in →Table
5. In terms of citations, →Tschorsch and Scheuermann (→2016) had produced the
most cited paper in terms of narrow-focused cryptocurrency research, providing a
technical survey of decentralised digital currencies in the IEEE Communications
Surveys & Tutorials. With regards to broad-based cryptocurrency research, →Li et al.
(→2017) produced a survey on the security of blockchain systems in the journal
Future Generation Computer Systems. While much of this research focuses
specifically on the technical elements of Bitcoin and cryptocurrency at large, some of
the most well known pieces of research relating directly to economics and finance
research include that of →Cheah and Fry (→2015) who provided an empirical
investigation into the fundamental value of Bitcoin; →Bouri et al. (→2017) who
investigated as to whether Bitcoin was a diversifier through its hedge and safe-haven
properties; and →Urquhart (→2016) who analysed Bitcoin in terms of its efficiency as
a product. Research from Economics Letters and Finance Research Letters appear to
be most pronounced. This is further supported in →Table 6 where we observe the
combined number of cryptocurrency-based research citations (inclusive of both
broad- and narrow-based research). In terms of broad citations, Economics Letters is
the most visible research outlet with 1,269 citations, but this is closely followed by
both Finance Research Letters and Physica A. Then follows International Review of
Financial Analysis, PLOS One, Applied Economics, Applied Economic Letters and
Econometrica. We can clearly observe broad cross-discipline coverage, with research
spanning economics, finance, physics, communications, technological, sociological
and econometric-based topics.
Table 6 Journals ranked by the number of overall cryptocurrency citations (both
broad and narrow-based).
Rank Source Citations
1 Economics Letters 1,269
2 Finance Research Letters 977
3 Physica A 706
4 international Review of Financial Analysis 399
5 PLOS One 338
6 Applied Economics 253
7 Applied Economics Letters 227
8 Econometrica 225
9 IEEE Access 204
10 Communications of the ACM 183
11 Journal of Finance 168
12 Physical Review E 154
13 Research in International Business & Finance 152
14 Journal of Financial Economics 151
15 Energy Economics 122
16 Financial Cryptography & Data Security 120
17 Review of Financial Studies 119
18 Journal of Econometrics 97
19 Journal of Finance 95
20 Quantitative Finance 91
21 American Economic Review 84
22 Expert Systems with Applications 73
23 Journal of Financial Stability 73
24 MIS Quarterly 72
25 Biometrika 71
26 Nature 71
27 Journal of Economic Perspectives 62
28 Future Internet 55
29 Economic Modelling 53
30 Journal of International Financial Markets, Institutions & Money 51

Note: The above data was compiled as of November 2019.

3 Data selection and methods
3.1 Methods
Bibliometrics, the analysis of citation and author networks, as well as its close relative
scientometrics, have had significant traction in areas outside finance. In the life
sciences, medicine and nursing especially, Cochrane Reviews, deep systemic reviews
of an area incorporating meta analyses and bibliometrics, are seen as the gold
standard for evidence. A search for “bibliometrics or scientometrics” in Scopus will
show that close to a quarter of all papers in this area are in Medicine. The next
largest lies in Library and Archival science. In the UK the 2021 Research Evaluation
Framework reference documents suggest that bibliometrics will be a major and
indeed enhanced component in both suggested submission strategies and in how
the review panels form judgements1 More critically, →Jappe et al. (→2018) provides a
(Sociologically focused) overview of the influence of bibliometrics and scientometrics
on research evaluation and funding bodies. →Levine-Clark and Gil (→2008), →Vieira
and Gomes (→2009), →Franceschet (→2010) and →Mongeon and Paul-Hus (→2016) –
which concludes that each has advantages but all should, ideally, be used.
Considerable data cleaning would be required however to create a blended database
of all. In addition, not all meta data are present in all three data bases, in particular
Google Scholar.2
Core bibliometric approaches involve surfacing the linkages between papers or
articles. Here we use, unless otherwise indicated, the number of articles to weight
collaboration and linkage. Thus linkages are stronger when say two authors
collaborate with each other on 10 papers than would be the case where another two
authors collaborate on 5. These linkages lend themselves nicely to graphical
presentation, being in essence network models. Graphic models rely on nodes and
edges (See →Kosnik (→2018)) where the nodes here are determined by the individual
units of analysis (authors, countries etc) and the edges the linkages between them. In
all cases we apply fractional counting, whereby authorship or nationality among
other characteristics are scaled to the number of occurrences. Therefore an author
appearing in a paper with five others has their linkages weighted . Linkages are,
1

unless otherwise noted, based on number of documents. The thicker the connecting
lines in the networks the higher the weight. The package VOSviewer was used for this
analysis, supplemented by Gephi3 and the R package Bibliometrix4 (→Aria and
Cuccurullo (→2017)).

3.2 Data
We use the Scopus database as our source of record. For the analysis in this paper all
data are sourced from Scopus, as this captures the widest range of papers with
complete reference sets and author/institution metadata in a consistent form. From
the authors knowledge of the area we are confident that no significant academic
source of papers was omitted. We chose 1990 as a starting point for the research as
the further back in any bibliometric database one goes the more scant becomes the
coverage. This issue is discussed in →Michels and Schmoch (→2012) and in →Harzing
and Alakangas (→2016). Finally, all citation measures, unless otherwise noted, are
inclusive of self citation. →Waltman (→2016), S5.3, contains an extensive discussion
of self citation and its effects on scientometric measures and analyses. The
conclusion of this section is that in large scale analyses self citation does not overly
bias or distort findings. Nor is there any clear finding that for authors, as opposed to
say countries or institutions, self citation should pose a problem for scientometric
analysis, overall. We break out our analyses into two categories, narrow product
based research, examining individual cryptocurrencies, and broader area based
research looking at the entirety of the research
As per →Corbet et al. (→2019b), we further estimate the applicability of Lotka’s Law
(→Chung and Cox (→1990)) to the dataset. Lotka’s law suggests that the number of
publication by authors is best described as an inverse square law. Lotka’s Law is
formulated as A = K/X , where K and n are constants. Usually n = 2 is the
n

number of authors publishing n papers and X represents the number publishing one
paper. This implies that the number of authors publishing X number of articles is a
fixed ratio, 2, to the number of authors publishing a single article. We used the R
package Bibliometrix (→Aria and Cuccurullo (→2017) for this analysis. The search
strategy used for the broad-based analysis was:
(TITLE-ABS-KEY(cryptocurrency OR cryptocurrencies...) (1)

(TITLE-ABS-KEY(...OR digital currency OR digital currencies)

AND PUBYEAR >2010

AND(LIMIT-TO(DOCTYPE,“ar”))

AND(LIMIT-TO (SUBJAREA,“ECON” OR “FIN”))

AND(EXCLUDE(PREFNAMEAUID,“Undef inedUndef ined”))

While the search strategy used for the narrow-based analysis was:
(TITLE-ABS-KEY(Bitcoin OR Ethereum OR Litecoin) (2)

AND PUBYEAR >2010

AND(LIMIT-TO(DOCTYPE,“ar”))

AND(LIMIT-TO (SUBJAREA,“ECON” OR “FIN”))

AND(EXCLUDE(PREFNAMEAUID,“Undef inedUndef ined”))

The last two exclusions were required due to large numbers of papers being
returned which were opinion or reportage from The Economist Newspaper, classified
as articles by Scopus. All data were downloaded as both CSV and as plaintext, where
all information was selected. This allows for the analysis of inward and outward
citations, of abstracts and of a wide variety of other bibliometric areas. The usage of
the terms “cryptocurrency”, “cryptocurrencies”, “digital currency” and “digital
currencies” enabled the analysis of broad-based cryptocurrency research. While the
search of terms relating to “Bitcoin”, “Ethereum” and “Litecoin” enabled a search of
more narrow-focused product level research.
Note: The above figure we see the coauthorship as analysed using clusters of the
countries represented in the field. The top panel represents all research based on
narrow product-based research (that is Bitcoin for example). The middle panel
represents broad area-based research. The lower panel represents all analysed
research. The above figure is prepared using VOSviewer which is a software tool for
constructing and visualising bibliometric networks. The above data was compiled as
of November 2019.
Figure 2 Co-authorship patterns across countries.

4 Results
So what do we find when we examine research in economics and finance as it pertains to
cryptocurrencies?
We first note a great rise in the numbers of articles, whether broad-based or
more narrowly-based, with the great bulk arriving in the 2018-19 period. This is a very
new area. A Google trends search of cryptocurrency or cryptocurrencies will illustrate
this, with essentially no searches until early 2017. This is of course not surprising
given that the Bitcoin ledger did not open until 2009. However, what is notable is the
very significant uptick in research from 2017 to 2018, matching the rise in the Bitcoin
price when the notion of such currencies really began to penetrate into the public
and apparently the academic conscience.
We also evaluated the bibliometrics, per se, of the papers. Core bibliometric
approaches involve surfacing the linkages between papers or articles. These linkages
lend themselves nicely to graphical presentation, being in essence network models.
In all cases we apply fractional counting, whereby authorship or nationality etc is
scaled to the number of occurrences. Therefore an author appearing in a paper with
five others has their linkages weighted . Linkages are, unless otherwise noted,
1

based on number of documents. The thicker the connecting lines in the networks the
higher the weight, documents generally. The package VOSviewer was used for this
analysis.
Note: The above figure we see the coauthorship as analysed using clusters of the
authors represented in the field. The top panel represents all research based on
narrow product-based research (that is Bitcoin for example). The middle panel
represents broad area-based research. The lower panel represents all analysed
research. The above figure is prepared using VOSviewer which is a software tool for
constructing and visualising bibliometric networks. The above data was compiled as
of November 2019.
Figure 4 Co-authorship patterns across authors.

First we examine, in →Figure 2 the nature of coauthorship. This allows us to look

into who is working with whom. →Figure 2 positions this in terms of national
collaboration. We split this into three lobes: narrow products in (a), broad areas in (b)
and overall in (c) The size of the nodes indicates the number of units, documents
here, while the thickness of the lines indicates the strength of the linkages. Colours
and shades represent clusters based on linkages and collaboration. Starting at (c) we
see four main lobes of collaborative research, one each centred on the UK, the US,
France and Spain. US-based authors collaborate strongly with China, surprising
perhaps given the restrictions on cryptocurrencies in place in China. The UK grouping
is essentially Europe, with Germany, Ireland and Russia well represented. Australia is
also present in this grouping, as is Poland and Ukraine linked via Russia. The French
grouping includes India and South Africa, while the Spanish group is more diffuse,
with weaker links and a much more geographically spread nature. The broad
product-based network is much sparser, with three clusters, including that of the US,
UK and France. The narrow product based research shows the four clusters,
suggesting that first, collaboration in this area is “bottom up”, focusing on products
and specific instances of cryptocurrency, and second that this suggests a gap in
exploiting broad conceptual areas.Examining individuals collaboration we see a very
sparse network, regardless of how we cut the focus – there are islands of
collaboration but these are archipelago in format. Enormous synergies exist in
collaboration potential. The present authors appear as crucial nodes in a number of
networks, but these are isolated, suggesting that we should ourselves practice what
we preach!
Note: A citation network is a graphical representation of how often elements of the
graph cite each other. We show this in the above figure for sources, and the table
showing cluster memberships are shown above. The top panel represents all
research based on narrow product-based research (that is Bitcoin for example). The
lower panel represents broad area-based research. The above figures are prepared
using VOSviewer which is a software tool for constructing and visualising bibliometric
networks. The above data was compiled as of November 2019.
Figure 6 Citation pattern across sources.
 In →Figure 4 we observe a number of distinct research clusters based on both
narrow and broad research. There is evidence of a number of clusters of authors that
are prevalent across both types. This is also evident when considering the
combination of both types of research, with further connections and segregation
evident between these clusters and the topics on which each focus. →Figure 6 shows
a citation network of publishing sources. This is a network composed where we
examine how often each element (here, journal or periodical) cites another. Again,
the larger the node the more publications, the stronger the citation strength, the
more often a source cites another, the thicker the linkage line. Also we again
subdivide into networks, broad subject areas (b) and narrow product-based research
(a).
Overall a strong pattern of main players emerges. Clearly also there are two main
clusters – one is focused on the financial economics of the area, revolving around
publications in Economics Letters, Finance Research Letters and International Review
of Financial Analysis, while the other is a more technical cluster, with Physica A and
computing journals. These are however intermingled. This is clearer in the broad
area, with a third cluster emergent on law, security and commerce. Again there is a
divergence between products and broad concerns. What seems evident is that
collaborative opportunities for research do exist but also there is a degree of
intellectual silo-ing here. There are very few citation linkages between the
law/commerce/technical journals and the financial research journals.
Note: A citation network is a graphical representation of how often elements of the
graph cite each other. We show this in the above figure for sources, and the table
showing cluster memberships are shown above. The top panel represents all
research based on narrow product-based research (that is Bitcoin for example). The
lower panel represents broad area-based research. The above figures are prepared
using VOSviewer which is a software tool for constructing and visualising bibliometric
networks. The above data was compiled as of November 2019.
Figure 7 Citation pattern across countries.

We can deeper dive into the networks looking at cross national citation patterns.
Shown in →Figure 7 are two networks. The narrow based products show a very clear
bilobal pattern. There is clear national segregation with the network of researchers
from France and its satellites not really citing strongly the larger group of nations
revolving around UK and USA. Why this is unclear. The situation regarding broader
areas of research is less polarised; we see three lobes of more or less equal size and
importance, one around China, one around the UK and one the USA, all with
significant linkages each to the other. The inference is that when it comes to the
broad architecture of cryptocurrencies we see significant international intellectual
cross pollination but not when it comes to applications.
Note: A citation network is a graphical representation of how often elements of the
graph cite each other. We show this in the above figure for sources, and the table
showing cluster memberships are shown above. The above figure is prepared using
VOSviewer which is a software tool for constructing and visualising bibliometric
networks. The above data was compiled as of November 2019.

Figure 9 Heatmap presenting citation pattern across countries (Full Sample).

Note: The above figure is prepared using VOSviewer which is a software tool for
constructing and visualising bibliometric networks. The above data was compiled as
of November 2019.

Figure 10 Abstract Keyword Cooccurance.

Note: In the above figure we create networks of terms. In the case of material
exported from Scopus it is possible to use some or all of the Author Keywords, the
publisher created Index Keywords, and the Abstract. We show this in the above figure
for sources, and the table showing cluster memberships are shown above. The top
panel represents all research based on narrow product-based research (that is
Bitcoin for example). The middle panel represents broad area-based research. The
lower panel represents all analysed research. The above figure is prepared using
VOSviewer which is a software tool for constructing and visualising bibliometric
networks. The above data was compiled as of November 2019.
Figure 11 Abstract Keyword Cooccurance.

Shown in →Figure 9 is a citation heatmap of articles published by country. The

deeper the shade the more highly cited are these papers, normalised by the mean
number of citations of all papers. We see that papers from France, Lebanon, USA,
China and UK are highly cited despite, for example, Lebanon not being a major
“source” of papers. So on what are authors working? In Figures →10 and →11 we see
an analysis which surfaces this. In →figure 10 we see an analysis of abstract words,
while in →11 we see keywords. Each article requires authors to provide keywords
when they submit a paper, usually up to 6. Shown in →Figure 11 is a keyword
cooccurance network. Again, as usual, the nodes of the network are the units of
analysis, here either regular words in →Figure 10, or keywords in →Figure 11. The
size is the relative frequency, the linkage thicknesses the number of times each are
represented together. Examining first the abstract network, we notice four clear
clusters. Three- computers (far right), economics (top left) and systems (bottom left)
are each quite cohesive and also distinct from each other. There is a cluster linking
these, but it is quite diffuse, which we can label Money. Not surprisingly this is at the
centre of the entire network,these being cryptocurrencies after all. What is
interesting is what is missing – there is no evidence here of a sustained research aim
at cybercriminality, despite the concerns people have adduced since the start of the
cryptocurrency era. No do we see a coherent cluster on environmental issues, nor on
legal aspects. Overall the research community appears to be concerned with the
technical, the financial aspects as well as with the technical aspects of designing the
structures. This suggests that there exists, as much as we have seen earlier in author
and country collaboration, great potential for “filling in the gaps” in research,
through interdisciplinary research.
Specifically, when we turn our attention to the author provided keywords, in
→Figure 11, we see a different picture. Recall that the keywords are what the authors
themselves believe best represent the material. As we have done before we split the
analysis three ways: (a) shows products, (b) areas and (c) overall. For overall we see
five clusters. From the right we see a cluster on the information structure of
cryptocurrencies, one on security, then on the top one on design tolerances, a large
cluster on the financial economics of cryptocurrencies and finally one that examines
the micro-structure and investment potential thereof. It is striking that we do not see
this reflected in the abstracts – it suggests that what authors think, or wish for
readers to think, they are examining is at variance with what is actually examined.
Note: In the above figure we create networks of terms. In the case of material
exported from Scopus it is possible to use some or all of the Author Keywords, the
publisher created Index Keywords, and the Abstract. We show this in the above figure
for sources, and the table showing cluster memberships are shown above. The top
panel represents the keyword cooccurance for the period before 1 January 2015. The
middle panel represents the keyword cooccurance for the period between 1 January
2015 and 31 December 2018. The lower panel represents the keyword cooccurance
for the period after 1 January 2019. The above figure is prepared using VOSviewer
which is a software tool for constructing and visualising bibliometric networks. The
above data was compiled as of November 2019.
Figure 13 Overall Keyword Cooccurance.

→Figure 13 provides a similar analysis when we combine author keywords with

the indexing keywords provided by the publishers, which are often the basis for
bibliometric software such as Scopus or Web of Science to use. A further concept in
scientometric analysis is that of bibliometric coupling. This refers to the degree of
similarity which reference sets share. Think of two articles, each with say 20
references; in article A 5 each come from 4 other journals, in article B they come from
4 also but only 2 of the 4 are common. This set of two articles are coupled together by
having common sources. However, if all references in each of the articles came from
the same set of journals they would be more closely coupled. Thus we can construct
a network where the linkages are the number of times that two journals are cited in
common, the nodes are the journals themselves. This allows us to look at the extent
to which research shares common roots or otherwise. Shown in →Figure 15 through
→16 is a representation of bibliometric coupling based on sources, that is to say
seeing how often pools of research draw their references from the same journals.
→Figure 15 is for narrow product based research and →Figure 16 for areas.
Note: The above figure presents a bibliometric coupling for sources. The above figure
is prepared using VOSviewer which is a software tool for constructing and visualising
bibliometric networks. The above data was compiled as of November 2019.

Figure 15 Bibliometric Coupling.

Note: The above figure presents a bibliometric coupling for sources. The above figure
is prepared using VOSviewer which is a software tool for constructing and visualising
bibliometric networks. The above data was compiled as of November 2019.

Figure 16 Bibliometric Coupling by Cited Sources.

For narrow products we see two clusters; again a common theme in this research
is that there tends to be islands of research with limited spillover. Researchers in
products – Bitcoin, Ethereum etc – draw references and one can reasonably infer
inspiration form either CS or financial economics literature but rarely from both. In
CS the IEEE Access open access journal is dominant, followed bu PLOS One. It is
interesting to see two open access journals as primary sources. In the larger and
more diffuse economics and finance research cluster we see Finance Research
Letters and Physica A as the dominant sources followed closely by Economics Letters.
A marked preference is clear for shorter more focused papers in this area.
Focusing on broader areas as per →Figure 16 we see four clusters of reference
sources. The economics cluster has split into two – one centred around Physica A is a
more quantitative orientated set, including Quantitative Finance and Econometrica,
the other still centres on the letters journals. A third cluster now emerges, blending
economy and technical issues, with no clear dominant source. The clusters are closer
to each other in addition. A takeaway here might be that when it comes to conceptual
areas researchers draw, as might be expected, from a wider and deeper well of
primary sources than is the case for products. This is potentially problematic as
products are embedded within the overall information and economic paradigms of
their creation.
Note: The above figure presents a bibliometric coupling for sources over time. The
top panel represents the bibliometric cited sources for the period before 1 January
2015. The middle panel represents the bibliometric cited sources for the period
between 1 January 2015 and 31 December 2018. The lower panel represents the
bibliometric cited sources for the period after 1 January 2019. The above figure is
prepared using VOSviewer which is a software tool for constructing and visualising
bibliometric networks. The above data was compiled as of November 2019.
Figure 17 Bibliometric cited sources over time.

Finally in →Figure 17 we see the evolution of the bibliometric coupling over time
for products. In the top panel, we observe the clusters of research when analysing
the period prior to 2015. We observe scientific interest from PLOS One and Science,
some interest from journals in economics and finance, such as Econometrica, and
other areas such as computer science and the environment. Interestingly, there is
also a significant cluster of work relating to money laundering, presenting evidence
that forthcoming issues with regards to these new digital products were identifiable
far in advance of their eventual occurrence. In the period 2015 through 2018, we can
observe the clear expansion of coverage across multiple research disciplines. The
largest clusters surround that of Physica A and PLOS One, focusing on the technical
aspects surrounding the underlying characteristics of cryptocurrency, while Finance
Research Letters and Economics Letters focus on the financial and pricing
implications. In the lower panel, we observe the research clusters for the period post-
2018, identifying further expansion of research coverage along with several distinct
areas of research.
5 Conclusions
Cryptocurrencies are a novel, and sometimes controversial financial instrument.
Regardless of whether one believes them to be a passing fad, the future of money or
somewhere in between, they have emerged as one of the most interesting and
discussed financial assets of the last decade. We find here that these assets have had
greatly increased research activity focused on them over the last two years. This
research however is characterised by being rather fragmented. It is fragmented in a
significant sense across products and broad areas. While islands of research do
connect they do so in very limited ways. There are parallel, mostly non-overlapping
research initiatives drawing inspiration form the technical and the economic
literature but limited “interdisciplinary” research. It is our hope that this handbook
goes some way to providing an overview of the areas of research and will spark
greater cooperation.

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Financial characteristics of cryptocurrencies
Paraskevi Katsiampa

1 Introduction
Over the last decade, cryptocurrency markets have remarkably evolved. Cryptocurrencies as a
medium of exchange could seem attractive to potential users as a result of their user anonymity,
low transaction costs stemming from no intermediary involvement, and the fact that an
increasing number of retailers has started accepting Bitcoin payments enabling cryptocurrency
users to purchase goods, including illegal ones. Notwithstanding, cryptocurrencies are primarily
traded for speculation purposes instead of as a traditional medium of exchange due to the fact
that they can provide their users with the potential of reaching extremely high gains in very short
periods of time, despite concerns about risks associated with their unprecedented price
fluctuations raised by economists and financial institutions. Furthermore, cryptocurrencies
resemble more financial assets rather than fiat currencies due to their volatility, persistence,
heavy tail behaviour, and vulnerability to speculative bubbles, among other properties. This
chapter will therefore discuss the financial characteristics of cryptocurrencies. We will start by
looking at their statistical properties and then learn about their properties that make them
resemble financial assets, but also about interdependencies of cryptocurrencies as well as their
relationship with mainstream financial assets.

2 Statistical properties of cryptocurrencies

Since the introduction of Bitcoin, the cryptocurrency market has rapidly developed, with
numerous altcoins having been introduced. Although Bitcoin has been the most popular
cryptocurrency due to the fact that it constitutes the first implementation of the concept of a
digital currency, as of August 2019 there are more than 2500 cryptocurrencies in existence with
the total market capitalisation being estimated to exceed $246 billion (→coinmarketcap.com,
accessed on 29th August 2019). As illustrated in →Figure 1, while Bitcoin represented about 94%
of the total estimated market capitalisation in May 2013, its market share dropped to 33% in
January 2018, as a result of the increase in popularity and, thus, in market capitalisation of more
recently launched cryptocurrencies which have been attracting significant trading volumes. Such
fluctuations in Bitcoin’ market share have raised concerns about Bitcoin’s long-term sustainability
as well as about the increased competition between cryptocurrencies (→Dowd, →2014).
Source: →https://coinmarketcap.com/coins/

Figure 1 Cryptocurrencies’ market share in terms of total market capitalisation.

In this section, we consider several major cryptocurrencies and analyse their statistical
properties. We restrict to cryptocurrencies that have been in existence for three years with a
market capitalisation in excess of 500 million US Dollars (as of 18th August 2019). The
cryptocurrencies meeting these criteria are Bitcoin, Ether, Ripple, Litecoin, Monero, Stellar Lumen,
Dash, NEO, and Ethereum Classic. →Table 1 lists several characteristics, including the market
capitalisation and 24-hour trading volume, of the considered cryptocurrencies as of 18th August
2018, with their total market capitalisation reaching approximately $228 billion, therefore
representing circa 96% of the total market capitalisation of cryptocurrencies in circulation, with
Bitcoin’s market capitalisation in particular being 185 US Dollars, a figure that is about nine times
higher than that of, e. g., Ether, the second largest cryptocurrency. The dataset therefore consists
of daily closing prices for these nine cryptocurrencies from 9th September 2015 (as the earliest
date available for NEO) to 15th August 2019. The data were sourced at
→https://coinmarketcap.com/coins/ and the prices are listed in US Dollars.
Table 1 Characteristics of cryptocurrencies.
Cryptocurrency Symbol Market capitalisation Price 24-hour trading volume Circulating supply
Bitcoin BTC $185,022,920,955 $10,345.81 $12,999,813,869 17,883,850
Ether ETH $20,884,307,088 $194.49 $5,969,012,024 107,377,901
Ripple XRP $12,122,901,988 $0.282646 $1,216,547,019 42,890,708,341*
Litecoin LTC $4,809,876,077 $76.27 $2,743,241,606 63,063,843
Monero XMR $1,510,667,110 $88.02 $80,774,014 17,161,841
Stellar XLM $1,389,769,435 $0.070785 $66,660,569 19,633,542,514*
Dash DASH $854,767,039 $95.11 $130,360,202 8,987,307
NEO NEO $696,953,952 $9.88 $232,179,408 70,538,831*
Ethereum Classic ETC $629,472,339 $5.58 $365,608,038 112,806,644

Notes: Values as of 18th August 2018. Prices listed in US Dollars. * indicates not mineable.
Source: →https://coinmarketcap.com/coins/

→Figure 2 depicts the time plots of the daily closing prices of the nine cryptocurrencies
considered over their common sample covering the period from 9th September 2016 to 15th
August 2019. It can be noticed that the prices of the altcoins would be stable until the end of the
first quarter of 2017, whereas the prices of Bitcoin would steadily increase. However, from the
second quarter of 2017 until the end of 2017 there were severe price fluctuations leading to a
significant and rapid growth in the prices of all the cryptocurrencies, while from the beginning of
2018 onwards all prices started declining. Nevertheless, not all prices shared an identical trend of
decline in 2018. Moreover, while all cryptocurrencies experienced price appreciations again in
2019, the price increase was more significant for Bitcoin and Litecoin, with the price of the latter
somewhat mirroring the price of Bitcoin. →Figure 2 therefore illustrates that all prices seem to
move in a similar pattern and to be correlated, especially during the growth period. Indeed, the
Pearson correlation coefficient, which measures the strength of the association between two
variables, for the different pairs of cryptocurrencies’ prices (reported in →Table 2) confirms this
fact, since all the correlation coefficients are positive – ranging from 0.6832 to 0.9480 – and
significant. Interestingly, this result is true not only for any Bitcoin-altcoin pair as could have been
expected, due to the fact that most altcoin buy and sell orders are executed in Bitcoin, but also for
any other pair of altcoins.
Figure 2 Daily closing prices of cryptocurrencies (in US Dollars).

Table 2 Correlation matrix of cryptocurrency prices.

Bitcoin Ether Ripple Litecoin Monero Stellar Dash NEO Ethereum
Classic
Bitcoin 1.0000
Ether 0.7827*** 1.0000
Ripple 0.7350*** 0.8437*** 1.0000
Litecoin 0.9067*** 0.8861*** 0.8222*** 1.0000
Monero 0.8607*** 0.9381*** 0.8631*** 0.9367*** 1.0000
Stellar 0.7163*** 0.8476*** 0.8867*** 0.7679*** 0.8421*** 1.0000
Dash 0.7822*** 0.8807*** 0.8015*** 0.8740*** 0.9387*** 0.6832*** 1.0000
NEO 0.6853*** 0.9480*** 0.7956*** 0.8219*** 0.9048*** 0.8312*** 0.8239*** 1.0000
Ethereum 0.7302*** 0.9136*** 0.7435*** 0.8228*** 0.8859*** 0.6952*** 0.9055*** 0.8256*** 1.0000
Classic

Note: *** significant at the 1% level.

Summary statistics for the cryptocurrencies’ logarithmic price return series defined as the first
difference of the logarithmic prices on two consecutive days over the common sample period are
reported in Panel A of →Table 3. Interestingly, while the average daily closing price returns are
positive for all the cryptocurrencies considered, ranging from 0.13% (Ethereum Classic) to 0.36%
(Ripple), suggesting that the highest return on average was obtained for Ripple over the common
sample period from 9th September 2016 to 15th August 2019, the median is positive only for
Bitcoin and Ether. The standard deviation ranges from 4.27% (Bitcoin) to 9.44% (NEO), indicating
that cryptocurrencies with lower market capitalisation exhibit larger variability. Moreover, while
the price returns of Bitcoin are negatively skewed suggesting that Bitcoin’s return distribution has
a longer left tail over the common sample period, the opposite result holds for the price returns of
all the altcoins. Nevertheless all cryptocurrency price returns exhibit high kurtosis and thus have
heavy tails, with Bitcoin exhibiting the lowest and Ripple the highest excess kurtosis. Furthermore,
the Jarque-Bera test confirms the departure from normality for all the cryptocurrency price return
series.
It is worth mentioning that in a study of the tail behaviour of the returns of Bitcoin, Ether,
Ripple, Bitcoin Cash, and Litecoin, using an extreme value analysis and estimating Value-at-Risk
and Expected Shortfall as tail risk measures, Bitcoin Cash, which was more recently launched
compared to the other cryptocurrencies, was found to have the highest potential gain and loss
and to thus be the riskiest cryptocurrency, while Bitcoin and Litecoin were found to be the least
risky cryptocurrencies, and hence position in these two could be viewed safer than in their
counterparts (→Gkillas and Katsiampa, →2018). These results indicated that more recently
launched cryptocurrencies are riskier than cryptocurrencies that have been in existence for
several years and seem to be relatively more mature. It is also worth mentioning that
cryptocurrencies have much higher volatility and exhibit heavier tail behaviour than traditional
currencies, and are therefore riskier than fiat currencies.

Table 3 Descriptive statistics for cryptocurrencies’ price returns.

Bitcoin Ether Ripple Litecoin Monero Stellar Dash NEO

Mean 0.0026 0.0026 0.0036 0.0028 0.0018 0.0033 0.0020 0.0027

Median 0.0031 0.0000 −0.0033 −0.0002 −0.0003 −0.0037 −0.0006 −0.0025
Maximum 0.2251 0.2901 1.0274 0.5103 0.4303 0.7231 0.4377 0.8012
Minimum −0.2075 −0.3155 −0.6163 −0.3952 −0.2932 −0.3664 −0.2432 −0.5225
Std. Dev. 0.0427 0.0582 0.0804 0.0631 0.0650 0.0872 0.0617 0.0944
Skewness −0.1106 0.2881 2.8467 1.2041 0.3858 2.0334 0.8128 1.1078
Kurtosis 6.6568 7.0185 37.766 12.723 6.8469 17.8599 9.1410 15.0770
Jarque- 598.356*** 734.772*** 55330.58*** 4473.508*** 686.311*** 10582.13*** 1799.152*** 6721.493*
Bera

Note: *** significant at the 1% level.

Finally, cryptocurrency price returns are stationary but exhibit volatility clustering. They also
exhibit asymmetric reverting behaviour (→Corbet and Katsiampa, →2018) and long memory
(→Cheah et al., →2018; →Jiang et al., →2018; →Phillip et al., →2018) providing evidence against
the efficient market hypothesis, as will be discussed in the next section.

3 Cryptocurrency market efficiency

The notion of market efficiency dates back to as early as in 1970s. A market in which prices always
“fully reflect” all available information is called “informationally efficient” (→Fama, →1970). There
are three forms of informational efficiency, namely (i) weak form of efficiency, where prices reflect
the information contained in the previous prices, (ii) semi-strong form of efficiency, where prices
reflect all public information, and (iii) strong form of efficiency, if prices reflect all public and
private information. Market efficiency is therefore related to the ability of a market to reflect the
information in a quick and efficient manner. In an efficient market, asset prices are not
predictable following a random walk, and the extent to which a market is efficient has been an
important aspect of capital markets, since it affects investors’ profitability. For this reason, there is
vast literature examining the efficiency of different financial markets. Since cryptocurrencies are
primarily used for speculation purposes, several studies have explored the market efficiency of
cryptocurrencies as well, even though the efficient market hypothesis could seem inappropriate
to explain cryptocurrency prices because it assumes that prices always reflect and are driven by
relevant information as well as that investors behave rational in terms of immediately
incorporating all available information in an unbiased manner (→Brauneis and Mestel, →2018).
Empirical tests of cryptocurrency market efficiency are therefore mostly related to testing for price
predictability in terms of randomness, with the informational efficiency of cryptocurrency markets
depending on several factors.
Few such important factors affecting whether cryptocurrency markets appear to be
informational efficient or not are related to the sample time period under investigation as well as
the data and method employed. The results of a battery of robust tests, namely the Ljung–Box
test, Runs tests, Bartels test, AVR test, BDS test and R/S Hurst, for the daily logarithmic price
returns of Bitcoin over the period of the first six years since Bitcoin started being traded revealed
that Bitcoin returns were not weakly efficient (→Urquhart, →2016). When the sample was split
into two equal subsample periods, the results for the first sub-sample were consistent with those
for the whole sample period. However, the results of the Ljung-Box test and AVR test for the
second sub-sample covering the period from 1st August 2013 to 31st July 2016 indicated that
Bitcoin is efficient in the latter period, and hence Bitcoin may becoming more efficient over time.
Nevertheless, a power transformation of the Bitcoin price returns of the form r , where m is an
m
t

odd integer, over the same period of time covering the first six years since Bitcoin started being
traded results in the transformed Bitcoin returns to actually be efficient according to the results of
several tests, including the Ljung–Box test, Runs tests, Bartels test, and BDS test, among others
(→Nadarajah and Chu, →2017). Moreover, the results of various long-range dependence
estimators (including the Centred Moving Average-squared absolute fluctuation, Centred Moving
Average-mean absolute fluctuation, Periodogram-Least Squares, Periodogram-Least Absolute
Deviation) while allowing for time variation for the logarithmic price returns for a period spanning
over the first seven years since Bitcoin was launched have also shown that the Bitcoin market is
informational efficient (→Tiwari et al., →2018). On the other hand, contradictory results to those
listed above have been found for the logarithmic price returns over the time period from 1st
December 2010 to 30th November 2017 due to the fact that the Bitcoin market exhibits long-term
memory and a high degree of inefficiency ratio (defined as the percentage of inefficient windows
among the total number of windows) as well as due to rejecting null hypotheses of randomness in
most sub-periods (→Jiang et al., →2018).
Nevertheless, the Bitcoin market informational efficiency also depends on the data frequency
under consideration, with the higher the data frequency, the lower the pricing efficiency being.
More specifically, although there has been found some evidence of efficiency in the Bitcoin
market at the daily level of data when testing the martingale hypothesis using different variance
ratio tests, there are indications of informational inefficiency at higher data frequencies (→Zargar
and Kumar, →2019). Moreover, even at intraday level (e. g., 15-, 20-, 30-, 40-, and 45-min), the
higher the data frequency, the lower the pricing efficiency is (→Sensoy, →2019).
The degree of informational efficiency of cryptocurrency markets also depends on the market
itself. For instance, there exists non-homogeneous informational inefficiency across Bitcoin
markets in Europe, USA, Australia, Canada, and UK, as a result of different long memory
estimates, with the considered Bitcoin markets being moderate to highly inefficient enabling
investors to capture speculative profits (→Cheah et al., →2018). Moreover, although it has been
shown that both the Bitcoin markets in terms of US Dollars and Euros have become more
informationally efficient over time at the intraday level since the beginning of 2016, the Bitcoin
market in terms of US Dollars is slightly more efficient than the Bitcoin market in terms of Euros,
with Bitcoin markets in terms of Euros therefore providing a more profitable trading environment
at the intraday level (→Sensoy, →2019).
In addition, the informational efficiency of cryptocurrency markets further depends on the
cryptocurrency under examination. While most previous studies have mainly examined the
efficiency of Bitcoin markets due to its dominance in the cryptocurrency markets, market
inefficiencies exist not only for Bitcoin but also for altcoins. Although there is a heterogeneous
pattern of inefficiency across the different cryptocurrencies and despite the fact that the degree of
persistence indicating inefficiency changes over time for the different cryptocurrencies, Bitcoin
seems to be the cryptocurrency passing most of the statistical tests of price randomness,
therefore representing the most efficient cryptocurrency (→Brauneis and Mestel, →2018;
→Caporale et al., →2018).
The efficiency of cryptocurrency markets seems to also depend on the form of efficiency
under examination. Most studies in the literature have examined the weak form of efficiency. On
the other hand, →Vidal-Tomás and Ibañez (→2018) examined the semi-strong efficiency of daily
Bitcoin price returns in the Bitstamp and Mt.Gox exchanges through an event study with
monetary policy and Bitcoin news, and found that Bitcoin did not respond to monetary policy
news and is therefore semi-strong form inefficient with regards to this kind of news, as a result of
the absence of any kind of control from central banks on Bitcoin. However, when focusing on
events that are related to features of Bitcoin, the cryptocurrency was found to respond to
negative events in both the Bitstamp and Mt.Gox markets, while it responded to positive news
only in the Bitstamp market, indicating that Bitcoin has become more efficient over time in
relation to its own events after the bankruptcy of Mt.Gox. Nevertheless, while studying the
evolving predictability in the logarithmic price returns of Bitcoin, →Khuntia and Pattanayak
(→2018) found evidence supporting the Adaptive Market Hypothesis, according to which markets
evolve due to events and structural changes and adapt, suggesting that the market efficiency of
Bitcoin varies in degree at different times and therefore evolves with time. Consequently, the
existence of behavioural bias and occurrence of some events can change efficiency, enabling
speculators to take advantage of such events at times, thus making it unrealistic to assume
perfectly efficient or inefficient markets as per the Efficient Market Hypothesis.
Furthermore, besides the market, cryptocurrency, sample period, data frequency, method
employed, and form of efficiency under investigation, the informational efficiency of
cryptocurrency markets seems to depend on several other factors, such as the liquidity, degree of
maturity, size, and volatility of the market. More specifically, liquidity has a positive and significant
impact on the informational efficiency of cryptocurrency markets suggesting that
cryptocurrencies become more efficient as liquidity increases (→Brauneis and Mestel, →2018;
→Sensoy, →2019; →Wei, →2018). The market size as measured by market capitalisation has also
been found to be positively related to efficiency (→Brauneis and Mestel, →2018), while Bitcoin as
the oldest, most mature, and most commonly used cryptocurrency is the most efficient one
(→Brauneis and Mestel, →2018; →Caporale et al., →2018). On the other hand, volatility has a
negative effect in the informational efficiency of Bitcoin prices (→Sensoy, →2019).
Based on the above, although cryptocurrency markets exhibit inefficiencies, the degree of
inefficiency depends on several factors including the sample time period under investigation, the
data, data frequency, and method employed, the cryptocurrency under investigation as well as
the maturity, liquidity, and volatility of the market, among others. However, the most efficient
cryptocurrency is Bitcoin, which is the most mature and dominant one.
 It is worth noting, though, that, despite the fact that Bitcoin started being traded over a
decade ago, cryptocurrencies still constitute a relatively new asset class and are still rather in their
infancy. As it is common for informational inefficiencies to exist in new and smaller equity markets
(→Bekaert and Harvey, →2002), the existence of long-term memory and inefficiency findings in
cryptocurrency markets are not surprising. Moreover, due to these characteristics, cryptocurrency
markets are frequently compared with emerging markets, which exhibit greater inefficiency
compared to developed markets (→Bekaert and Harvey, →2002). Furthermore, such results are
also related to the irrational behaviour of investors and the lack of a reasonable pricing
mechanism (→Jiang et al., →2018).

4 Bubbles
Few decades ago, the efficient market hypothesis considered in the previous section was widely
accepted by academic financial economists. However, since then it has been frequently criticised,
primarily due to the fact that asset prices are at least partially predictable. According to the survey
by →Beechey et al. (→2000), although the efficient market hypothesis “is the right place to start
when thinking about asset price formation”, it “cannot explain some important and worrying
features of asset market behaviour”. One such feature is related to the bubble behaviour followed
by crashes that different assets may exhibit. The efficient market hypothesis assumes that the
current prices of securities are close to their fundamental values and that investors are rational,
implying that bubbles and crashes cannot occur (→Abreu and Brunnermeier, →2003). However,
throughout history there have existed several popular examples of bubbles followed by crashes,
including the famous Dutch tulip mania in the 1630s as well as the Internet stock boom of the
1990s.
According to →Kindleberger (→1991), a bubble can be defined “as a sharp rise in price of an
asset or a range of assets in a continuous process, with the initial rise generating expectations of
further rises and attracting new buyers – generally speculators interested in profits from trading
in the asset rather than its use of earning capacity”, with the rise being frequently “followed by a
reversal of expectations and a sharp decline in price often resulting in a financial crisis”. Financial
asset bubbles in particular are viewed as inflations of prices beyond expectations based on
fundamental economic features only.
Nonetheless, what occurs in markets depends on the traders’ reaction to specific news and
events. Indeed, changes in asset prices originate from the collective behaviour of several market
participants instead of fundamental values (→Kaizoji, →2000). Interestingly, even though
investors might realise that prices are in excess of fundamental values, they could conjecture that
the bubble will continue to expand and yield large positive returns (→McQueen and Thorley,
→1994), and thereby rationally remain in the market, since expectations leading to self-fulfilling
speculative bubbles are consistent with fully rational, informed behaviour (→Hamilton and
Whiteman, →1985).
Although bubbles – and manias – do not follow an identical path, different bubbles exhibit
some similar features, such as extensive public and media interest and over-valuation compared
to historical averages – features which have clearly been present in cryptocurrency markets.
Moreover, despite the fact that there can be speculation without a bubble, a bubble cannot occur
without speculation. Consequently, due to the extent of public and media attention, the fact that
cryptocurrencies have experienced periods of rapid price appreciations followed by sharp declines
as well as the extent of speculation in cryptocurrency markets, several studies have investigated
whether cryptocurrency markets exhibit speculative bubbles. In an early study – long before the
unprecedented cryptocurrency price appreciations that occurred in 2017, →Cheung et al. (→2015),
applying the →Phillips et al. (→2013) methodology to Bitcoin prices from the Mt. Gox exchange
over the period 2010–2014, detected several short-lived bubbles as well as three large bubbles
during the period 2011–2013 lasting between 66 and 106 days. The authors further found that the
bursting of these large bubbles seems to coincide with certain major events that occurred in the
exchange, namely an online attack leading to $8.75 million in Bitcoin being stolen from the Mt.
Gox exchange in June 2011, the incident in which trading at Mt. Gox was suspended for two days
in April 2013, as well as Mt. Gox’s decision to suspend all Bitcoin withdrawals on 7th February 2014
and to shut down its trading activities on 25th February. On the other hand, →Corbet et al.
(→2018b) investigated whether underlying fundamentals related to Bitcoin and Ether, such as the
blockchain position, the hashrate, and liquidity as measured by the volume of daily transactions,
can be designated as drivers of price growth that could generate the conditions and environment
in which a pricing bubble could thrive over the period between 2009 and 2017. In their study, it
was found for Bitcoin that, although some periods where each of the fundamental drivers showed
a bubble were identified, most bubbles were indicated as from the price alone, whereas for Ether,
even scantier signals of bubbles, which were concentrated in the early 2016 and mid-2017 periods,
were observed. The authors concluded that, although Bitcoin has been in a bubble phase since its
price exceeded the landmark of $1000, there is a lack of clear evidence of a persistent bubble in
the Bitcoin and Ether markets, without this suggesting that their prices are correct, though.
Bubbles were also identified in the more recent study of →Su et al. (→2018), which analysed
Bitcoin prices in terms of both CNY and USD and found that exogenous shocks enable the outset
of bubbles, with important financial crises causing long-term and large-scale bubbles while short-
term bubbles being triggered by domestic economic events, and that bubbles burst as a result of
authorities’ intervention, suggesting that governments can limit speculation in Bitcoin markets
and stabilise its price.
Moreover, →Cheah and Fry (→2015) showed using methods originating in Econophysics that
similar to other asset classes Bitcoin prices are prone to speculative bubbles, that the bubble
component contained within Bitcoin prices is substantial, and that interestingly the fundamental
value of Bitcoin is zero. Later, →Fry and Cheah (→2016) found evidence of a negative bubble in
the prices of both Bitcoin and Ripple, concluding that over the period in question Ripple was over-
priced compared to Bitcoin. More recently, using a theoretical refinement of the model in →Cheah
and Fry (→2015), →Fry (→2018) found evidence of bubbles in the prices of both Bitcoin and Ether
but no evidence of a bubble in Ripple once accounting for heavy-tails and liquidity risk, indicating
technical advantages and reduced levels of speculation in Ripple compared to Bitcoin. On the
other hand, no conclusive evidence of a bubble was found in the price of Bitcoin Cash, which
could, however, be due to its reduced sample size compared to other cryptocurrencies which were
launched much earlier.1
To sum up, the investigation of booms and crashes in financial markets has been a subject of
interest among academics for decades. Recently the literature on bubbles and crashes in
cryptocurrency markets has started emerging as well. While the bubble behaviour in altcoin
markets seems to depend on both the cryptocurrency and period under investigation, Bitcoin has
exhibited several bubbles since its launch. The explanation to cryptocurrencies’ bubble behaviour
lies merely in their very own nature: cryptocurrencies develop bubbles because they are simply
objects of speculation without intrinsic value (→Cheung et al., →2015). This fact has led to
numerous bubbles of different magnitude with various incidents, such as online hacking attacks
stealing Bitcoins and the decision of Chinese regulators to ban cryptocurrency trading, making
them burst. Nevertheless, the risk-management implications are ambiguous since bubbles do not
constitute a prerequisite for the occurrence of boom–bust episodes (→Fry, →2018).
5 Volatility
Financial time series, such as stock prices and exchange rates, often exhibit the phenomenon of
volatility clustering, where large changes tend to be followed by large changes, of either sign, and
small changes tend to be followed by small changes. Since various types of news and other
exogenous shocks could have an impact on an asset’s price, the returns of financial assets tend to
exhibit time-varying volatility, such that markets could be more tranquil during certain periods
and more turbulent during others. Consequently, understanding and modelling time-varying
volatility is of high importance in different areas, such as asset pricing, portfolio selection, and
financial risk management. For instance, investors in stock markets are particularly interested in
the volatility of stock prices, since higher levels of volatility could lead not only to huge gains but
also to huge losses, therefore imposing larger risks. Volatility also has important implications for
interval and density forecasting, since correct confidence intervals and density forecasts in the
presence of time-varying volatility require time-varying confidence interval widths and time-
varying density forecast spreads (→Diebold, →2019).
Of course, it is well known that cryptocurrencies’ prices exhibit a lot of fluctuations, including
many violent ones, with several studies having found evidence of volatility clustering in the price
returns of cryptocurrencies.2 Interestingly, the volatility in cryptocurrency markets increased
around the announcement of trading in Bitcoin futures (→Corbet et al., →2018a). In fact, the price
volatility of cryptocurrencies is significantly higher than the volatility of widely used currencies and
financial assets, making forecasting of cryptocurrencies’ prices a more challenging task compared
to forecasting the prices of, e. g., exchange rates and stock indices. Many studies on the volatility
of cryptocurrencies have employed Generalised Autoregressive Conditional Heteroskedasticity
(GARCH) models, which are broadly applied in financial econometrics, mainly in modelling the
volatility of stock prices and foreign exchange rates, as they are able to explain and forecast the
volatility of financial time series, showing that cryptocurrency price volatility is significantly
affected by both its own past shocks and past volatility.
One interesting finding in the literature on the volatility of Bitcoin is that, in contrast to what is
frequently observed in financial returns, when studying the price volatility of Bitcoin at univariate
level, there is no significant asymmetric effect between positive and negative past errors in the
current levels of Bitcoin’s volatility, known as leverage effect, irrespective of the data frequency.
Consequently, negative return shocks do not have a greater impact on the conditional volatility of
Bitcoin than positive shocks of equal magnitude, as commonly witnessed in different financial
markets. On the other hand, another interesting finding, which is similar to what is observed in
several financial returns, though, is that Bitcoin’s volatility is best described by both a short-run
and a long-run component (→Katsiampa, →2017; →Conrad et al., →2018; →Troster et al., →2018;
→Vidal-Tomás and Ibañez, →2018). More specifically, in a comparison of several GARCH-type
models, such as the simple GARCH, Exponential GARCH, GJR-GARCH, Asymmetric Power GARCH,
Component GARCH, and Asymmetric Component GARCH, the Component CARCH model of
→Engle and Lee (→1999), which decomposes the aggregate volatility into a long-run (permanent)
component and a short-term (transitory) component and which has been found to outperform
the simple GARCH model in financial applications (→Christoffersen et al., →2008), was found to
explain the Bitcoin price volatility better than other GARCH-type models, including models that
allow for different responses of the volatility to positive and negative past shocks – i. e., the
Exponential GARCH, GJR-GARCH, and Asymmetric CGARCH models (→Katsiampa, →2017). The AR-
CGARCH model under the Generalised Error Distribution (GED) has also been found to achieve the
best out-of-sample forecasting performance for Bitcoin returns according to the root mean
squared error (RMSE) when compared to several GARCH-type models under different error
distributions (→Troster et al., →2018).
 Nevertheless, not only does Bitcoin exhibit heteroskedasticity but also altcoins are
characterised by volatility clustering both at daily and intraday frequency. In a comparison of
different GARCH-type models for several cryptocurrencies, it was found that among all the
GARCH-type models fitted, the Integrated GARCH (IGARCH) model gave the best fit for Dash,
Litecoin, Maidsafecoin, and Monero, and the simple GARCH model gave the best fit for Ripple,
whereas the GJR-GARCH model, which takes asymmetric effects of positive and negative shocks in
the conditional variance into consideration, gave the best fit for Dogecoin. Consequently, similar
to Bitcoin and unlike many financial assets, the conditional volatility of most altcoins is not
characterised by significant asymmetric effects between positive and negative past errors.
→Brauneis and Mestel (→2018) further confirmed heteroscedasticity at the daily level for sixty-
eight out of the seventy-three cryptocurrencies considered in their dataset.
Cryptocurrencies’ price volatility also exhibit long memory, structural breaks, and jumps. More
specifically, it has been found that the volatility in different Bitcoin markets exhibits long-range
dependence, although after accounting for structural breaks, long memory in the mean and
variance of cryptocurrencies decreases. Breaks in some cryptocurrencies’ conditional variance
were also found in →Katsiampa (→2019) who found that – contrary to Ether, Ripple, and Stellar –
Bitcoin and Litecoin exhibit one structural breakpoint each in the conditional variance.
Furthermore, cryptocurrencies’ price returns and volatility exhibit jumps. Nevertheless, while
jumps to mean returns have been found to only have contemporaneous effects, jumps to volatility
are permanent.
All in all, although the optimal model describing or forecasting the volatility of the
cryptocurrencies could depend not only on the cryptocurrency under investigation but also on the
sample period, there are some findings that can be generalised. First of all, cryptocurrencies
exhibit volatility clustering, irrespective of the data frequency (daily, intraday, or monthly).
Secondly, most cryptocurrencies do not exhibit significant asymmetric effect between positive and
negative past errors in the current levels of their price volatility. Thirdly, some cryptocurrencies
exhibit structural breaks in the conditional variance. Moreover, cryptocurrencies display long-
memory in the conditional variance, despite the fact that, after accounting for structural breaks,
long memory in the mean and variance of cryptocurrencies decreases. Another interesting finding
is that while Bitcoin’s volatility seems to be described by both a short-run and a long-run
component, this does not seem to be true for altcoins, since the altcoins’ volatility seems to be
better described by more simple GARCH-type models. However, it is worth noting that volatility is
lower in more liquid cryptocurrency markets (→Wei, →2018), and cryptocurrency investors and
traders should consider cryptocurrencies’ volatility dynamics for improving their risk
management.
Finally, it is worth noting that, in contrast to traditional assets, cryptocurrencies are subject to
additional sources of risk including forks, price manipulation, and hacking, among others, all of
which further contribute to their price volatility. In addition, despite the fact that cryptocurrencies
constitute decentralised digital currencies, significant Bitcoin volatility has been found to be
generated by decisions related to both adjusting interest rates and introducing quantitative
easing made by the central banks of the US, EU, UK, and Japan, with decisions related to
quantitative easing having been found to have generated the most significant influence (→Corbet
et al., →2017), therefore suggesting that cryptocurrencies are not completely independent of
government actions but rather remain vulnerable to policy announcements.

6 Interdependencies of cryptocurrency markets

As mentioned in the introduction of this chapter, as of August 2019 the total number of
cryptocurrencies has surpassed 2500, following the success of Bitcoin which led to the emergence
of various alternative digital currencies (altcoins). Although most of them – including Bitcoin,
Ether, Ripple, and Litecoin, among others – are based on Blockchain technologies, each
cryptocurrency has some features that distinguish one from another. For instance, Litecoin is
characterised by faster transaction confirmation times and improved storage efficiency than
Bitcoin, with the block generation time being 2.5 minutes per block for Litecoin compared to 10
minutes per block for Bitcoin, and the maximum limit of coins being four times higher than that of
Bitcoin; Ether constitutes the digital token of Ethereum, an open-source Blockchain-based
platform featuring smart contracts, which is supported by several industry giants through the
Enterprise Ethereum Alliance foundation; whereas Ripple has been adopted by banks as
settlement infrastructure technology, as it connects banks, payment providers, digital asset
exchanges and corporates via the RippleNet, which aims to improve the speed of financial
transactions, with payments settling in only four seconds. On the other hand, Lumen represents
the digital coin of the Stellar network, which is an open source, distributed and community owned
technology that processes financial transactions, with the platform aiming to connect banks,
payment systems and people, while contributing to financial inclusion focusing on developing
markets. Lumen can be used for fast mobile payments and micropayments with very small fees.
Monero provides its users with untraceability of their operations, a feature that could attract
people interested in evading law enforcement.
Nevertheless, despite the fact that different features of cryptocurrencies can influence their
prices and stability (→Yi et al., →2018), cryptocurrencies’ also have several similarities and it could
be expected that the prices of Bitcoin and altcoins are interdependent, not only due to Bitcoin’s
dominance within the market but also due to the fact that most altcoin orders are executed in
Bitcoin. Indeed Bitcoin and altcoin markets are interdependent, with Bitcoin being the dominant
contributor of return and volatility spillovers among cryptocurrencies (→Koutmos, →2018), and
cryptocurrency users therefore face undifferentiated risks (→Gkillas and Katsiampa, →2018).
Moreover, the interdependencies between Bitcoin and altcoins are significantly stronger in the
short-run than in the long-run, with macro-financial indicators influencing the price formation of
altcoins in the long-run to a slightly greater extent than Bitcoin does (→Ciaian and Rajcaniova,
→2018).
However, besides understanding interlinkages of the prices and returns, it is also important to
understand volatility co-movements and spillover effects among cryptocurrencies. Volatility
spillovers are commonly observed in the behaviour of financial assets, and comprehending
covariances and correlations is of paramount importance to investors who are interested in
understanding the risk of their portfolios (→Coudert et al., →2015), since high levels of volatility
interlinkages can limit the benefits of diversification. Understanding volatility co-movements and
spillovers in cryptocurrency markets can assist market participants with improving their
knowledge of the information transmission mechanisms and interdependencies within
cryptocurrency markets, therefore enabling them make more informed decisions as well as adjust
their portfolios accordingly.
The total volatility connectedness in cryptocurrencies increased constantly after December
2016 (→Yi et al., →2018). It has been shown that irrespective of the data frequency (daily or
intraday), the conditional covariances of cryptocurrencies are significantly affected by cross
products of past error terms and previous covariance terms while also capturing asymmetric
effects of both good and bad news, and hence significant volatility co-movements between
cryptocurrencies and time-varying conditional correlations which are mostly positive exist
(→Aslanidis et al., →2019; →Katsiampa, →2018, →2019; →Katsiampa et al., →2019a).
Consequently, conditional correlations between cryptocurrencies do not remain constant but
rather behave differently over different time periods. Nevertheless, when comparing conditional
correlations between Bitcoin, Dash, Monero, and Ripple, correlations between cryptocurrencies
and Monero are found to be more stable across time compared to the correlations of the other
pairs of cryptocurrencies, whereas the most variable correlation is found between Ripple and
Dash (→Aslanidis et al., →2019). Moreover, the cryptocurrencies’ conditional variance, covariance,
and correlation plots exhibit several spikes indicating that they seem to have been susceptible to
various news related to cryptocurrencies, such as Chinese authorities shutting down China-based
cryptocurrency exchanges.
In addition, cryptocurrencies not only exhibit volatility co-movements but also volatility
spillover effects. Interestingly, though, not only Bitcoin spillovers over altcoins. Instead, there are
bidirectional spillovers between cryptocurrency markets, even though cryptocurrencies with
higher capitalisation are more likely to spread volatility shocks to others (→Yi et al., →2018).
→Katsiampa et al. (→2019b) examined the conditional volatility interlinkages and correlations
between three pairs of cryptocurrencies, namely Bitcoin-Ether, Bitcoin-Litecoin, and Ether-
Litecoin, and found evidence of bi-directional shock transmission effects between Bitcoin and
both Ether and Litecoin, and uni-directional shock spillovers from Ether to Litecoin, as well as bi-
directional volatility spillover effects between all the three pairs.
It is also worth noting that when considering portfolios consisting of cryptocurrencies only,
diversification is more efficient in the short to medium runs (→Omane-Adjepong and Alagidede,
→2019). Moreover, in terms of selecting between naïve (using equal weights) and optimal
(Markowitz) diversification in portfolios consisting of cryptocurrencies only, there is very little
difference in performance between the two types of diversification, supporting the findings of
(→DeMiguel et al., →2007) that naïve diversification is as good, if not better, than optimal
diversification (→Platanakis et al., →2018).
Consequently, cryptocurrencies show strong interdependencies both in the conditional mean
and variance equation. Despite the fact that Bitcoin still remains the dominant cryptocurrency,
there are bidirectional spillovers between cryptocurrency markets. Understanding the degree of
connectedness and market spillover effects is of great importance in order for cryptocurrency
users and traders to make more informed decisions with regards to appropriate trading strategy
selection and risk management, especially since cryptocurrency users face undifferentiated risks.

7 Cryptocurrencies and financial assets

Despite the fact that Bitcoin and altcoins are digital currencies designed to work as a medium of
exchange, they are primarily used for speculation and investment purposes rather than as
alternative currencies or medium of exchange, where some investors employ them as a hedge
against stocks or other assets. It is therefore of high importance for cryptocurrency investors to
understand the relationship between cryptocurrencies and mainstream financial assets as well as
cryptocurrencies’ hedging and diversification ability for appropriate risk and portfolio
management.
According to →Baur and Lucey (→2010),
“A hedge is defined as an asset that is uncorrelated or negatively correlated with another asset or
portfolio on average.”
“A diversifier is defined as an asset that is positively (but not perfectly correlated) with another
asset or portfolio on average.”
“A safe haven is defined as an asset that is uncorrelated or negatively correlated with another
asset or portfolio in times of market stress or turmoil.”
Consequently, unlike a safe haven, neither a hedge nor a diversifier reduces losses in extreme
market conditions.
 Several studies3 have investigated the relationship between Bitcoin and different mainstream
assets, all of which have found consistent results showing Bitcoin and other cryptocurrencies not
being correlated with financial assets and commodities, such as stocks, bonds, gold, and oil, with
Bitcoin therefore being isolated from other markets, with no specific asset playing a dominant
role in influencing cryptocurrency market. Interestingly, cryptocurrencies are uncorrelated with
traditional asset classes both in normal times and in periods of financial turmoil (→Baur et al.,
→2018). Similar results have been found to hold for the relationship between Bitcoin and different
currencies which have shown that Bitcoin is not correlated with currencies either.4
Nevertheless, the relationship between Bitcoin and other financial assets is a continuous
process that varies over time (→Ji et al., →2018), and Bitcoin’s hedging and safe haven properties
seem to vary between different horizons (→Bouri et al., →2017). For instance, although an early
study assessing whether Bitcoin can act as a hedge and safe haven for major world stock indices,
bonds, oil, gold, the general commodity index and the US dollar index, found that overall Bitcoin is
a poor hedge, is appropriate merely for diversification purposes, and can only serve as a strong
safe haven against weekly extreme down movements in Asian stocks (→Bouri et al., →2017), some
more recent studies have found that, by adding Bitcoin, the portfolio performance improves, even
though this is primarily due to the increase in returns than in the reduction of volatility (→Kajtazi
and Moro, →2019), that a short position in Bitcoin allows hedging the risk of investment against
various financial assets and that hedging strategies involving gold, oil, emerging stock markets
and Bitcoin reduce considerably a portfolio’s risk, in comparison to a portfolio composed of gold,
oil and stocks from emerging stock only (→Guesmi et al., →2019). Bitcoin can be also used as a
hedge against stocks in the Financial Times Stock Exchange Index, but also as a hedge against the
American dollar in the short-term (→Dyhrberg, →2016). Moreover, →Conrad et al. (→2018) found
that Bitcoin volatility is negatively related to US stock market volatility, indicating that Bitcoin can
act as a safe-haven. On the other hand, →Urquhart and Zhang (→2019), who assessed the
relationship between Bitcoin and different currencies at the hourly frequency concluded that
Bitcoin can act as an intraday hedge for the Swiss Franc, Euro and GBP, but acts as a diversifier for
the Australian dollar, Canadian dollar and Japanese yen. The latter study also found that Bitcoin is
a safe haven during periods of extreme market turmoil for the Canadian dollar, Swiss Franc and
GBP. It is also worth noting that Bitcoin futures cannot mitigate the risk inherent in the underlying
spot market and therefore are not an effective hedging tool (→Corbet et al., →2018a).
Investors always search for alternative investment opportunities and instruments for their
portfolios. Cryptocurrencies are different from mainstream assets and provide investors with such
an alternative mainly due to the high returns they can offer. Consequently, understanding
cryptocurrencies’ relationship with other financial assets is of high importance to investors in
order to make more informed decisions. Cryptocurrency markets have very low correlations with
mainstream assets and are therefore isolated from financial and commodity markets, such as
equity, gold, oil, and currency markets, and no specific asset plays a dominant role in influencing
cryptocurrency markets. However, the relationship between cryptocurrencies and mainstream
assets varies over time, and therefore cryptocurrencies’ hedging and safe haven properties vary
between horizons.

8 Summary
In this chapter, we considered several financial characteristics of cryptocurrency markets. As
discussed, cryptocurrencies are characterised by heavy tail behaviour, very high volatility,
persistence, large abrupt price swings, and vulnerability to speculative bubbles, among other
properties, all of which lead cryptocurrencies to resemble more financial assets rather than fiat
currencies. Moreover, cryptocurrency markets exhibit some informational inefficiencies, which,
however, depend on several factors. Finally, cryptocurrencies are highly connected to each other
but isolated from mainstream assets, with their hedging and safe haven properties varying over
time.
Despite the fact that the first cryptocurrency was introduced over a decade ago,
cryptocurrencies seem to constitute a different type of asset class which seems to still be in its
infancy. Cryptocurrencies are primarily used for speculation purposes instead of as a traditional
medium of exchange, despite the fact that they hold high investment risk and despite concerns
about risks associated with their price fluctuations raised by economists and financial institutions,
with their price discovery being driven by uninformed investors.

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Notes
1 Bitcoin Cash was only launched in July 2017.
2 For instance, →Urquhart (→2017) found evidence of significant price clustering in Bitcoin.
3 Examples of such studies include, e. g., those of →Baur et al. (→2018), →Bouri et al.
(→2017), →Corbet et al. (→2018c), →Ji et al. (→2018), and →Yermack (→2015).
4 The reader can be referred to, e. g., →Baur et al. (→2018), →Corbet et al. (→2018c),
→Giudici and Abu-Hashish (→2019), →Guesmi et al. (→2019), →Ji et al. (→2018),
→Urquhart and Zhang (→2019), and →Yermack (→2015).
The predictability between Bitcoin and US
technology stock returns: Granger causality in
mean, variance, and quantile
Elie Bouri
USEK Business School, Holy Spirit University of Kaslik, Jounieh, Lebanon
Rangan Gupta
Department of Economics, University of Pretoria, Pretoria, 0002, South Africa
Chi Keung Marco Lau
Department of Accountancy, Finance and Economics, Huddersfield Business School,
University of Huddersfield, Queensgate, United Kingdom
David Roubaud
Montpellier Business School, Montpellier, France
In this chapter, we test for Granger causality in mean, variance, and quantile between
Bitcoin prices and various US stock indices belonging to the overall stock market and the
sector of information technology and its various industries. Using daily data covering
the period 18 August 2011 to 15 April 2019, results from the application of the test of
→Chen (→2016) show the following. Unsurprisingly, there is evidence of a relationship
between Bitcoin and US tech stock indices. Specifically, there is clear evidence of
predictability between Bitcoin and US tech stocks, which seems to vary across quantiles.
US stocks Granger cause Bitcoin return, but this is not the case for other stock indices.
Generally, Granger causality from one market to another is insignificant in both mean
and variance. However, when one market is in its bear state, the other become more
volatile. Furthermore, there is evidence of casualties when one market is in its bear
market state, while the other is in its bear or bull market state. Our findings suggest the
need to use unconventional methods such as the Granger causality in moments of
→Chen (→2016), otherwise, it might be wrongly apparent that Bitcoin and US (tech)
stock indices are independent.

1 Introduction
Bitcoin continues to dominate the cryptocurrency market, with a market share
exceeding 50% of the total market value of all cryptocurrencies. As a decentralized
payment system, Bitcoin is backed by the blockchain technology which represents a
public ledger containing all Bitcoin transactions. In fact, the blockchain technology
allows for the validation of Bitcoin transactions by solving complex algorithmic puzzles.
The new transactions are added to the ledger in a so-called mining process through
which Bitcoins are produced and acquired as a reward for solving the crypto puzzles.
Given that specialized and powerful computers are needed to conduct the
computational work, there is a potential association between Bitcoin prices and the
share prices of tech companies that manufacture computer hardware and software.
Although several studies examine the association between Bitcoin returns and
volatility and various macro-economic and financial variables,1 there is still a lack of
empirical evidence regarding the relationship between Bitcoin returns and the returns
of the information technology stock sector and its various industries. Therefore, in this
chapter, we add to the embryonic literature dealing with the association between
Bitcoin and information technology stock markets. Specifically, we use daily data
covering the period 18 August 2011 to 15 April 2019, and follow the interesting approach
of →Chen (→2016), which allows for testing Granger causality in moments. This
approach allows not only for examining Granger causality for mean and variance but
also for quantiles and moments. In fact, the approach of →Chen (→2016) enables the
testing of Granger causality from the upper (lower) tails of one distribution to the lower
(upper) tails of another distribution, which cannot be done using existing approaches
(e. g., →Hong, →2001; →Balcilar et al., →2019).2 Such a feature is important given the
importance of revealing evidence of tail risk spillovers across assets (→Soylu and
Güloğlu, →2019).
Our contributions are on several fronts. Firstly, we add to →Symitsi and Chalvatzis
(→2018) who do not capture the heterogeneity of relationships between Bitcoin returns
and volatility, the return and volatility of technology stocks or the return and volatility
spillovers in the various tails of the distribution. In fact, our analyses show evidence of
Granger causalities that differ across quantiles and between the mean and the variance,
which supports our choice of Granger causality tests in moments of →Chen (→2016).
Secondly, we focus on US equity indices given the US stock market is the largest and
most developed. It also contains very sophisticated investors from around the globe,
and is the hub of leading and innovative technology companies. In addition to an
aggregate stock index, in our case the S&P500, we use not only the information
technology sector index but also indices representing the various industries within the
information technology sector. This is based on the rationale that the Bitcoin ecosystem
might relate differently to various tech companies belonging to computer hardware,
computer software, semiconductors, and internet companies. Our results show
evidence of heterogeneity in the Granger causality results across most of the indices
under study, which justifies our reliance on aggregate, sector and industry level data.
The rest of the chapter is given in four sections. Section →2 reviews the literature.
Section →3 explains the methodology. Section →4 describes the data and presents the
results. Section →5 concludes.

2 Literature review
Predicting asset returns has always been an appealing but a challenging task for both
investors and finance researchers. It has been extensively studied in the academic
literature covering conventional assets such as equities, bonds (→Keim and Stambaugh,
→1986; →Liu et al., →2019; →Xu et al., →2019), commodities (→Zhang et al., →2019),
and currencies (→Baku, →2019), using various macroeconomic and financial variables
as potential determinants of returns and volatility. Interestingly, recent studies indicate
that predictability is not homogenous across the quantiles of the return distribution, in
both of its first and second moments (e. g., →Balcilar et al., →2019).
As Bitcoin has emerged as a leading digital asset, many studies consider the
predictability of Bitcoin returns and volatility using various research methods and a rich
set of variables. →Kristoufek (→2013) reports evidence of a significant association
between Bitcoin prices and Bitcoin attention as proxied by search queries on Google
Trends and Wikipedia. This evidence was later confirmed by →Dastgir et al. (→2019) who
use a copula approach. Other studies associate Bitcoin returns with geopolitical risk
(→Aysan et al., →2019) and economic policy uncertainty (→Demir et al., →2018; →Yu et
al., →2019) as potential predictors of Bitcoin returns or Bitcoin volatility. Other studies
find evidence of a significant association between Bitcoin returns and trading volume
(→Balcilar et al., →2017; →Bouri et al., →2019b), whereas no significant association is
noticed between Bitcoin price volatility and trading volume. Interestingly, these two
studies highlight the importance of studying the nexus between Bitcoin returns
(volatility) and trading volume via quantile-based methods that allow for examining the
whole return distribution. Another strand of research focuses on Bitcoin price
predictability and the presence of long memory to make inferences regarding market
efficiency. This research generally applies statistical tests of random walk in prices (e. g.,
→Urquhart, →2016) and volatility persistence (e. g., →Bouri et al., →2019a). The results
generally suggest evidence of inefficiency, suggesting the ability of predicting Bitcoin
prices and Bitcoin volatility. Other studies examine the association between Bitcoin price
volatility and several macro-economic and financial variables (e. g., →Walther et al.,
→2019), although Bitcoin price volatility is extremely high and persistent (→Bouri et al.,
→2019a). Furthermore, many studies indicate that Bitcoin returns are detached from the
global financial system, suggesting the suitability of Bitcoin for diversifying the
downside risk of stock market returns at global, regional, and country levels. For
example, →Bouri et al. (→2017a) apply dynamic correlation analysis augmented with
quantile-based regression and report evidence that Bitcoin is useful for reducing stock
market risk. Similar results are reported by both →Ji et al. (→2018) and →Corbet et al.
(→2018), although they use different methods.3 →Bouri et al. (→2017b) highlight the
valuable role of Bitcoin for energy commodities. →Shahzad et al. (→2019) find that
Bitcoin is an effective diversifier for G7 stock markets, although gold seems to offer
higher diversification benefits. →Klein et al. (→2018) show that Bitcoin differs from gold
in regard to equity portfolio diversification, indicating its inability to act as a hedge
during stress periods. Furthermore, →Bouri et al. (→2018) apply a quantile-based
approach and find evidence that aggregate commodity and gold prices are predictors of
Bitcoin prices. They also highlight the heterogeneity in the relationship across the
various quantiles of the return distribution, which somewhat concords with the findings
of →Balcilar et al. (→2017) and →Bouri et al. (→2019b) regarding trading volume.
Interestingly, →Symitsi and Chalvatzis (→2018) consider the return and volatility
spillovers between the market of Bitcoin and the markets of energy and technology
companies. They indicate return and volatility spillovers from the technology sector
index to Bitcoin prices. However, their reliance on the BEKK GARCH model makes their
analyses restricted because of its sole focus on mean-based spillovers.
As shown in the above brief review of previous studies, the academic literature
focusing on the relationship between Bitcoin returns and volatility and the returns and
volatility of stock market indices is not well developed. Notably, it lacks evidence
regarding the relationship between Bitcoin and information technology stocks,
accounting for the potential heterogeneity of the return distribution across the various
quantiles.
The importance of applying a tail risk approach in the Bitcoin market is highlighted
by previous studies (see, among others, →Balcilar et al., →2017; →Feng et al., →2018;
→Zhang et al., →2018; →Bouri et al., →2019b; →Shahzad et al., →2019). This suggests
the suitability of applying a quantile-based approach that allows for assessing the
predictability of Bitcoin returns and volatility in specific upper, middle, and lower
quantiles based on the various quantiles of tech stock returns, and vice-versa. We
therefore apply the approach of →Chen (→2016), which enables testing of Granger
causality in mean, variance, and quantile, while considering aggregate, sector, and
industry stock level data from the US.

3 The test of Granger causality in moments

First, let us denote a stationary series of continuous random variables by {y } while it

Yi,t−1 is a set of information that is generated from y such that for all, k > 0 and
i,t−k

i = 1, 2 . Further, let us denote Y = (Y

t−1 ,Y1,t−1 ) and specify F (⋅ ∣ Y
2,t−1 i ) and i,t−1

F (⋅ ∣ Y
i t−1 ) to be the respective conditional distributions of two processes, i. e.:

yu ∣ Y i,t−1 and y ∣ Y , where i = 1, 2 . It follows logically that if Y

u t−1 does not
2,t−1

provide any relevant information in forecasting F (⋅ ∣ Y i ) in such a way as equation

i,t−1

(→1), then as explained by →Granger (→1980), it will suffice to infer that, in distribution,
y2t does not Granger cause y , otherwise y Granger causes y .
1t 2t 1t

F i (⋅ ∣ Y i,t−1 ) = F i (⋅ ∣ Y t−1 ) (1)

Second, within the context of hypothesis testing, the respective null hypotheses in
mean, variance and quantiles that y does not Granger cause y are thus formulated:
2t 1t

No causality in mean:

E[θ(y 1t ) ∣ Y t−1 ] = E[θ(y 1t ) ∣ Y t−1 ]

(2)

No causality in variance:

E[θ 2 (y 1t − E[θ 1 (y 1t ) ∣ Y (1,t−1) ]) ∣ Y (1,t−1) ] = var[y 1t ∣ Y (1,t−1) ]

(3)

No causality in quantiles:

E[θ q (y 1t )|Y 1,t−1 ] = E[I (Q 1t (τ 1 ) < y t ≤ Q 1t (τ 2 )) ∣ Y 1,t−1 ]

(4)
From equations (→2) through (→4), the moment functions θ(⋅) include, but are not
limited to, the following:
θ 1 (y):= y (5)

θ 2 (y):= y
2 (6)

θ q (y):= I (Q it (τ 1 ) < y ≤ Q it (τ 1 )) (7)

y ∈ R ,τ 1 < τ2 and Q it (τ ) denote τ-quantile of F i (⋅ ∣ Y i,t−1 ) and τ ∈ [0, 1]

Using the G statistic as presented in equation (→8), the hypotheses stated above can be
tested, thus:
ˆ
′ −1 ˆ ˆ −1 ′ 2 (8)
G = P (S ρ̂) (S V ΩV S )(S ρ̂) ∼ X q

where:

By computation, P = T − R for some 0 < R < T , and T is the sample size, Ω ˆ

represents the variance covariance matrix, S is the qxn weight matrix for q ≤ n . The
sample cross-correlations between Θˆ
and Θ ˆ
for lag k can be expressed as:
c
1t
c
2,t−k

T ˆc ˆc (9)
1 Θ Θ
1t 2,t−1
ρ̂ k := ∑ ( )( )
P − k σ1 σ2
t=R+1+k

′
ρ̂:= (ρ̂ 1 , ρ̂ 2 , … ρ̂ it ) and V̂ := (σ 1 σ 2 ) × I n k = 1, … n, n < P

In this expression, Θ symbolises the transformed error term ε for i = 1, 2 . In a

(⋅)

it it

more precise way, it is given as:

(1) (10)
Mean: Θ = ε it
it

(1) 2 (11)
Variance: Θ = ε it − 1
it

(q) (12)
Quantile: Θ = I (Q ε,it (τ 1 ∣ β 1 ) < ε it ≤ Q ε,it (τ 2 ∣ β 1 )) − (τ 2 − τ 1 )
it

By denoting Θ := Θ (φ ) to be Θ , Θ , Θ or any alternative zero-mean

(1) (2) (q)
it it i it it it

transformed error term depending on the parameter vector φ, it is possible to write the
expressions obtained as the following:
 (13)
c 2 c 2
Θ i,0t := Θ it (φ i0 ), Θ i,0t := Θ i,0t − E[Θ i,0t ], σ i := E[(Θ i,0t ) ], Θ̂ it := (φ̂ it ),

T T
2
(c) 2 (c)
−1 ˆ ˆ −1
Θ i := P ∑ Θ it , Θ := Θ it − Θ i and σ i := P ∑ (Θ )
it it

i=R+1 i=R+1

It should be stated that while following →Chen (→2016), the parameter vector φ in
this study is obtained from EGARCH and GARCH models for the Bitcoin reruns. This is to
account for the asymmetry associated with stock returns, since ( Θ , Θ ) can assume 1t 2t

different functional forms. To test for Granger causality in mean (i. e. Θ = Θ ),

(1)
1t it

variance (i. e. Θ = Θ ) and quantile (i. e. Θ = Θ ), the G test can be applied.

(2) (q)
1t it 1t it

4 Empirical results
4.1 Data
We use daily data covering Bitcoin price and the stock index of the S&P500 Composite,
S&P500 Information Technology, S&P500 Internet Services & Information, S&P500
Semiconductors, S&P500 Software & Services, and S&P500 Technology Hardware &
Equipment. All data are collected from DataStream, where Bitcoin price against the US
dollar is from Bitstamp – the leading crypto exchange. We denote p and p as stock s
t
b
t

index and Bitcoin price on the tth trading date. The original data is transformed to return
series as its log differenced data: y = 100 × (ln (y )− ln (y )) is the return for
st
s
t
s
t−1

stock index; and y = 100 × (ln (y )− ln (y )) is the return the return for Bitcoin.
bt
s
t
s
t−1

Our first aim is to test whether and how {y } Granger causes {y } in mean and in
ct bt

variance by setting (Θ , Θ ) = (Θ , Θ ) and (Θ , Θ ) respectively. The second

(1) (1) (2) (2)
1t 2t 1t 2t 1t 2t

aim is to examine whether the predictability between Bitcoin return and stock return
could happen in higher moments, therefore we also test one of the following moments
′

Θ , = Θ ,Θ ,Θ ,Θ ,Θ for both i = 1, 2 , and these Θ are defined

(q1) (q2) (q3) (q4) (q5) (q) s
it it it it it it it

by (0,0.2), (0.2,0.4), (0.4,0.6), (0.6,0.8), and (0.8,1) respectively. In this way, we test the null
hypothesis of no Granger causality in most parts of the distributions and test in various
cases of (Θ , Θ ) . For simplicity, we denote i = c, t , in, se, so, and h to represent
1t 2t
′s

price index of S&P500 Composite, S&P500 Information Technology, S&P500 Internet

Services & Information, S&P500 Semiconductors, S&P500 Software & Services, and
S&P500 Technology Hardware & Equipment, respectively. The sampling period for all
data is from 18 August 2011 to 15 April 2019 with R = 1, 214 and P = 783 for the
fixed-sampling-scheme-based out-of-sample analysis.4 →Table 1 presents descriptive
statistics for return series on Bitcoin and stock indices. We can see that all return series
have excess kurtosis and negative skewness indicating that they are leptokurtic and
skewed to the left or to the right. In addition, based on the Jarque-Bera normality
(→1987) test, all return series exhibit non-normality. Unreported results from
conventional unit root tests show that all return series are stationary at the 1% level of
significance.

Table 1 Summary statistics.

Bitcoin S&P500 S&P500 S&P500 S&P500 S&P500 S&P500
Composite Information Internet Semiconductors Software Technology
Technology Services & & Hardware
Information Services &
Equipment
Mean 0.00307 0.00046 0.00065 0.00084 0.00062 0.00070 0.00057
Median 0.00257 0.00028 0.00073 0.0002 0.00073 0.00049 0.00058
Maximum 0.48477 0.04840 0.05873 0.09625 0.05600 0.05875 0.06046
Minimum −0.66394 −0.04184 −0.05200 −0.07146 −0.06893 −0.05216 −0.08202
Std. Dev. 0.05920 0.00861 0.01070 0.01329 0.01359 0.01075 0.01228
Skewness −0.98342 −0.2846 −0.26856 0.29659 −0.29239 −0.22347 −0.30264
Kurtosis 23.1742 6.37717 5.88486 8.74535 5.36065 5.89078 6.07137
Jarque-Bera 34187.84 975.9845 716.5022 2775.911 492.1477 711.9625 815.418
Probability 0.00000 0.00000 0.00000 0.00000 0.00000 0.0000 0.00000
Observations 1997 1997 1997 1997 1997 1997 1997

Note: The table presents the summary statistics of daily returns over the period August 2011 to 15 April 2019.

4.2 Chen’s Granger causality in moment test results

The Chen’s G statistic, as mentioned above, is applicable for testing causality in mean,
variance and quantile q by setting: (Θ , Θ ) = (Θ , Θ ), (Θ , Θ ) and
(1) (1) (2) (2)
1t 2t 1t 2t 1t 2t

, respectively. For the out-sample period, Tables →2 to →7 presents the

(q)
Θ 1t = Θ
1t

results of →Chen’s (→2016) causality test between Bitcoin and the various stock indices.
In each table, Panel A shows the Granger causality from the stock index to Bitcoin, while
Panel B shows the results for Granger causality from Bitcoin to the stock index. Several
interesting results are summarized below, based on the 5% significance of the test
statistic.
Panel A of →Table 2 shows the Granger causality test results from S&P500
Composite index return to Bitcoin return. We first examine whether and how {y } ct

Granger causes {y } in mean and in variance by setting (Θ , Θ ) = (Θ , Θ ) and

(1) (1)
bt 1t 2t 1t 2t

) , respectively. Results show that the G test statistic is significant for

(2) (2)
(Θ ,Θ
1t 2t

(y , y ) = (y , y ) in the out-sample context with n = 1 . Therefore, we conclude

1t 2t bt ct

that the S&P500 composite stock return weakly Granger causes Bitcoin return in its
mean only. Panel B of →Table 2 shows that the G test statistic is significant for
(y , y ) = (y , y ) in the out-sample context, by focusing on Θ or, Θ ,
(q2) (q4)
1t 2t ct bt = Θ 1t 1t 1t

the test statistics Θ = Θ or, Θ are significant. Specifically, there is evidence that
(1) (2)
2t 2t 2t

the mean of Bitcoin return Granger causes the right tail of S&P500 Composite return
with n = 5, 10 . However, the variance of Bitcoin return Granger causes the left tail of
S&P500 Composite return with n = 1, 5 .
Secondly, we focus on the higher moment causality, and find from the significance
of test statistics that Bitcoin return Granger causes S&P500 Composite return at a higher
moment. For example, given (Θ , Θ ) = (Θ , Θ ) , (Θ , Θ ) or
(1) (q4) (q1) (q4)
1t 2t 1t 2t 1t 2t

) , the G test statistic is significant for (y , y ) = (y , y ) suggesting that

(q5) (q4)
(Θ ,Θ 1t 2t bt ct
1t 2t

the stock return, especially the right tail of the stock return distribution Granger causes
both the left and right tail of the Bitcoin return when n = 1, 5 . Furthermore, the test
statistic is also significant for (y , y ) = (y , y ) when (Θ , Θ ) = (Θ , Θ ) ,
(q1) (q3)
1t 2t ct bt 1t 2t 1t 2t

) or (Θ ) , suggesting that the right tail of the Bitcoin return

(q2) (q3) (q5) (q5)
(Θ ,Θ ,Θ
1t 2t 1t 2t

distribution Granger causes both the left and right tail of the stock return when
n = 1, 10 .
Table 2 Casualty-in-Moments Test for the S&P 500 Composite.
(1) (2) (q1) (q2) (q3) (q4) (q5)
N
ϕ ϕ ϕ ϕ ϕ ϕ ϕ
1t 1t 1t 1t 1t 1t 1t

Panel A: S&P500 Composite return ↛ Bitcoin return

ϕ
(1)
1 3.742** 2.524 3.1* 0.109 0.010 0.369 0.862
2t

5 7.777 5.240 6.518 0.326 3.865 4.032 5.754

10 11.761 9.800 10.164 9.543 7.026 10.485 8.587
ϕ
(2)
1 0.146 1.118 0.000 5.44** 0.188 1.750 3.054*
2t

5 3.458 1.851 4.727 6.287 3.201 6.991 7.344

10 4.961 3.565 4.657 16.233* 5.278 13.062 15.947
ϕ
(q1)
1 0.950 0.351 0.704 0.248 0.031 0.641 0.705
2t

5 2.076 3.167 2.070 2.015 2.459 1.544 1.429

10 6.118 5.914 7.696 13.197 2.939 9.616 6.909
ϕ
(q2)
1 3.358* 0.821 3.176* 2.718* 0.359 0.197 0.759
2t

5 10.809* 5.565 7.861 3.542 1.980 2.597 6.181

10 15.174 8.684 14.975 6.174 3.366 15.044 11.585
ϕ
(q3)
1 1.316 0.365 0.414 3.711* 0.920 1.366 3.008*
2t

5 3.793 1.858 3.451 3.496 1.220 3.319 5.707

10 10.675 6.982 9.120 7.452 2.454 12.878 7.579
ϕ
(q4)
1 16.535*** 0.517 7.789*** 0.136 0.736 0.884 11.235***
2t

5 17.916*** 1.831 10.787** 6.560 6.409 5.119 13.305**

10 20.412** 6.587 11.722 12.850 8.384 9.968 15.351
ϕ
(q5)
1 0.321 3.184* 0.003 1.650 1.043 0.464 0.819
2t

5 7.145 5.195 3.457 6.133 7.878 4.686 5.636

10 14.406 9.244 5.453 12.483 16.106* 6.819 13.737
Panel B: Bitcoin return ↛ S&P500 Composite return
ϕ
(1)
1 1.647 0.017 0.588 0.241 0.553 0.829 0.365
2t

5 6.690 4.147 7.191 4.336 8.433 16.624*** 2.446

10 11.182 11.922 8.956 17.118* 11.798 21.461** 8.234
ϕ
(2)
1 0.446 0.366 2.049 4.216** 0.224 2.125 0.005
2t

5 5.729 3.802 4.152 13.136** 4.115 7.417 2.065

10 11.810 7.653 9.242 14.232 11.984 9.829 5.474
ϕ
(q1)
1 0.273 0.023 1.359 0.630 0.203 1.557 0.003
2t

5 10.696* 3.188 11.231** 6.936 4.422 9.952* 4.321

10 14.100 15.761 16.87* 10.179 10.137 16.123* 7.581
ϕ
(q2)
1 0.441 0.620 0.059 0.137 1.147 0.630 0.003
2t

5 1.813 10.57* 3.372 6.103 6.041 3.320 0.180

10 7.849 11.958 7.402 12.443 9.675 9.518 5.079
ϕ
(q3)
1 0.202 0.000 5.563** 1.314 0.003 1.316 0.098
2t

5 6.954 3.110 10.128* 10.633* 1.076 2.059 5.342

10 12.130 9.312 15.666 22.465** 13.412 17.681* 7.069
 (1) (2) (q1) (q2) (q3) (q4) (q5)
N
ϕ ϕ ϕ ϕ ϕ ϕ ϕ
1t 1t 1t 1t 1t 1t 1t

ϕ
(q4)
1 0.265 1.650 0.122 1.663 1.332 0.069 0.883
2t

5 2.956 2.972 5.618 6.503 7.631 5.038 6.989

10 6.521 8.412 8.946 11.709 10.481 14.756 11.097
ϕ
(q5)
1 1.272 0.003 0.859 3.347* 0.331 0.044 0.980
2t

5 1.489 5.591 3.834 5.185 2.782 7.223 8.807

10 11.305 8.400 6.390 14.484 16.216* 12.351 18.863**

Note: ϕ is the first moment, ϕ is the second moment, ϕ is the quantile of (0,0.2), ϕ is the quantile of
(1) (2) (q1) (q2)

it it it it

(0.2,0.4), ϕ is the quantile of (0.4,0.6), ϕ is the quantile of (0.6,0.8), and ϕ is the quantile of (0.8,1).
(q3) (q4) (q5)

it it it

***, **, and * represents significance at the 1 percent, 5 percent, and 10 percent significant level respectively.
Table 3 Casualty-in-Moments Test for S&P500 Information Technology.
(1) (2) (q1) (q2) (q3) (q4) (q5)
N
ϕ ϕ ϕ ϕ ϕ ϕ ϕ
1t 1t 1t 1t 1t 1t 1t

Panel A: S&P500 Information Technology return ↛ Bitcoin return

ϕ
(1)
1 1.670 0.574 0.119 1.181 0.002 0.577 0.070
2t

5 8.340 0.753 5.916 1.571 8.221 16.866*** 1.381

10 11.384 9.920 9.294 3.831 11.757 17.865* 4.983
ϕ
(2)
1 1.334 0.130 1.742 2.431 0.278 0.059 0.976
2t

5 5.575 7.913 4.816 8.728 6.512 4.092 4.263

10 9.763 12.634 7.425 12.996 12.467 7.606 10.715
ϕ
(q1)
1 1.081 1.431 0.177 0.164 0.000 0.168 0.262
2t

5 8.344 3.688 5.402 0.982 7.172 8.561 4.345

10 11.530 10.054 9.791 13.153 10.098 11.045 7.097
ϕ
(q2)
1 0.660 0.078 0.249 0.000 2.311 0.003 2.894*
2t

5 4.432 3.158 2.973 2.837 5.300 3.821 5.801

10 8.769 10.766 5.250 13.875 9.085 10.288 8.956
ϕ
(q3)
1 0.243 0.343 1.132 1.154 1.221 1.352 0.129
2t

5 1.696 7.237 4.625 2.852 7.781 4.199 1.742

10 10.803 12.566 9.486 5.691 16.048* 8.139 8.586
ϕ
(q4)
1 0.139 0.078 0.429 1.098 0.338 1.653 2.115
2t

5 2.780 4.582 3.692 1.658 2.060 4.098 11.355**

10 4.405 8.071 6.850 4.622 4.071 4.825 12.282
ϕ
(q5)
1 0.668 0.504 0.117 0.074 0.645 0.186 0.304
2t

5 3.288 6.454 2.899 1.418 8.882 6.015 2.938

10 5.958 13.865 7.273 5.528 13.926 7.520 14.897
Panel B: Bitcoin return ↛ Information Technology return
ϕ
(1)
1 0.885 4.182** 2.788* 1.566 0.207 0.535 0.976
2t

5 3.198 7.838 5.317 3.766 2.285 3.551 2.205

10 6.122 10.350 8.957 9.766 4.393 3.539 4.210
ϕ
(2)
1 1.518 1.025 1.171 0.103 1.721 1.187 1.221
2t

5 3.101 7.648 5.223 4.186 5.785 4.067 7.094

10 10.327 13.663 9.025 7.209 14.582 11.682 12.340
ϕ
(q1)
1 0.488 0.155 0.006 1.084 0.076 0.090 1.248
2t

5 2.917 8.808 1.452 2.626 0.972 1.091 3.339

10 7.892 12.129 5.909 16.543* 2.890 7.926 8.533
ϕ
(q2)
1 1.088 0.167 1.965 5.967** 0.555 0.025 0.652
2t

5 11.905** 3.286 12.354** 7.237 1.459 7.535 4.462

10 15.801 9.694 17.564* 8.638 8.364 14.018 10.452
ϕ
(q3)
1 0.421 0.420 0.168 0.339 0.015 0.256 0.752
2t

5 1.866 1.357 4.134 3.478 4.499 2.584 2.295

10 8.163 7.815 8.747 6.369 6.500 4.479 9.562
 (1) (2) (q1) (q2) (q3) (q4) (q5)
N
ϕ ϕ ϕ ϕ ϕ ϕ ϕ
1t 1t 1t 1t 1t 1t 1t

ϕ
(q4)
1 2.577 0.176 0.001 1.026 0.316 0.797 3.827**
2t

5 8.271 3.243 4.361 2.273 4.126 4.888 7.657

10 10.320 5.080 9.285 8.509 5.714 12.991 9.937
ϕ
(q5)
1 1.345 6.759*** 1.935 1.052 0.543 0.163 0.309
2t

5 3.367 10.529* 3.103 3.280 7.318 16.995*** 2.359

10 6.141 11.211 6.801 8.441 11.844 17.798* 5.354

Note: See notes to →Table 2.

Panel A of →Table 3 shows the causality test results from S&P500 Information
Technology stock return to Bitcoin return. We first examine whether and how {y } tt

Granger causes {y } in mean and in variance by setting (Θ , Θ ) = (Θ , Θ ) and

(1) (1)
bt 1t 2t 1t 2t

) respectively. The results indicate that the technology stock return only
(2) (2)
(Θ ,Θ
1t 2t

weakly Granger causes Bitcoin return in mean. Panel A of →Table 3 shows that the G
test statistic is significant for (y , y ) = (y , y ) when (Θ , Θ ) = (Θ , Θ ) or
(q4) (1)
1t 2t bt tt 1t 2t 1t 2t

) , suggesting that the mean of technology stock return Granger causes the
(q5) (q4)
(Θ ,Θ
1t 2t

right tail of Bitcoin return when n = 5 . Also, the right tail of technology stock return
distribution Granger causes the right tail of Bitcoin return when n = 5 .
Panel B of →Table 3 shows the causality test results from Bitcoin return to
Information Technology stock return. We first examine whether and how {y } Granger bt

causes {y } in mean and in variance by setting (Θ , Θ ) = (Θ , Θ ) and

(1) (1)
tt 1t 2t 1t 2t

) , respectively. The results show that Bitcoin return only weakly Granger
(2) (2)
(Θ ,Θ
1t 2t

causes the technology stock return in various cases. Panel B of →Table 3 shows that the
G test statistic is significant for (y , y ) = (y , y ) when (Θ , Θ ) = (Θ , Θ ) ,
(2) (1)
1t 2t tt bt 1t 2t 1t 2t

) , (Θ ) , (Θ ) , (Θ ) , (Θ ) or
(1) (q2) (2) (q5) (q1) (q2) (q2) (q2) (q4) (q5)
(Θ ,Θ ,Θ ,Θ ,Θ ,Θ
1t 2t 1t 2t 1t 2t 1t 2t 1t 2t

) , implying that Bitcoin return Granger causes all parts of technology stock
(q5) (q4)
(Θ ,Θ
1t 2t

return distribution when n = 1, 5 .

Panel A of →Table 4 shows the causality test results from Internet S&P500 Services &
Information stock return to Bitcoin return. We first examine whether and how {y } it

Granger causes {y } in mean and in variance by setting (Θ , Θ ) = (Θ , Θ ) and

(1) (1)
bt 1t 2t 1t 2t

, respectively. The results indicate that the internet stock return only weakly
(2) (2)
(Θ ,Θ )
1t 2t

Granger causes Bitcoin return in variance. Panel A of →Table 4 shows that the G test
statistic is significant for (y , y ) = (y , y ) when (Θ , Θ ) = (Θ , Θ ) ,
(q2) (2)
1t 2t bt it 1t 2t 1t 2t

suggesting that the variance of internet stock return Granger causes the left tail of
Bitcoin return when n = 1, 5, 10 . Panel A of →Table 4 shows that the G test statistic is
significant for (y , y ) = (y , y ) when (Θ , Θ ) = (Θ , Θ ) , (Θ , Θ ) ,
(1) (q2) (q1) (q2)
1t 2t bt it 1t 2t 1t 2t 1t 2t

) or (Θ ) , implying that internet return Granger causes the

(q1) (q4) (q5) (q3)
(Θ ,Θ ,Θ
1t 2t 1t 2t

Bitcoin stock return of extreme distribution (i. e. q1 and q5 ).

 Panel B of →Table 4 shows the causality test results from Bitcoin return to internet
stock return. We first examine whether and how {y } Granger causes {y } in mean bt it

and in variance by setting (Θ , Θ ) = (Θ , Θ ) and (Θ , Θ ) respectively. It

(1) (1) (2) (2)
1t 2t 1t 2t 1t 2t

appears that Bitcoin return only weakly Granger causes the internet stock return in
various cases. Panel B of →Table 3 shows that the G test statistic is significant for
(y , y ) = (y , y ) when (Θ , Θ ) = (Θ ) , (Θ ) , (Θ ),
(2) (1) (2) (q5) (q1) (q4)
1t 2t tt bt 1t ,Θ 2t ,Θ ,Θ
1t 2t 1t 2t 1t 2t

) , (Θ ) or (Θ ) , implying that Bitcoin return Granger

(q1) (q5) (q3) (q4) (1) (q2)
(Θ ,Θ ,Θ ,Θ
1t 2t 1t 2t 1t 2t

causes the variance and both the left and right tail distributions of internet stock return.
Table 4 Casualty-in-Moments Test for S&P500 Internet Services & Information.
(1) (2) (q1) (q2) (q3) (q4) (q5)
N
ϕ ϕ ϕ ϕ ϕ ϕ ϕ
1t 1t 1t 1t 1t 1t 1t

Panel A: S&P500 Internet Services & Information return ↛ Bitcoin return

ϕ
(1)
1 1.345 0.781 0.221 0.098 0.214 0.144 0.948
2t

5 10.168* 2.564 8.938 2.133 6.371 7.050 2.441

10 14.761 7.070 15.555 5.558 16.01* 6.687 4.784
ϕ
(2)
1 0.388 0.702 0.171 4.554** 7.376*** 1.455 0.713
2t

5 3.227 6.069 3.780 15.908*** 13.202** 3.205 4.080

10 14.539 10.905 13.597 19.184** 15.083 12.258 15.371
ϕ
(q1)
1 2.479 1.320 0.246 0.003 0.070 0.512 0.110
2t

5 9.993* 5.613 6.129 2.466 1.706 4.316 2.037

10 15.181 7.794 13.334 3.516 6.218 8.641 4.674
ϕ
(q2)
1 7.109*** 0.494 4.443** 0.342 0.010 0.369 3.129*
2t

5 12.76** 3.189 6.845 3.557 2.135 5.383 3.593

10 14.565 7.667 14.260 8.420 5.775 9.646 10.966
ϕ
(q3)
1 3.727* 0.040 0.010 0.641 0.428 0.004 3.262*
2t

5 7.043 5.163 1.660 2.520 4.775 0.754 11.624**

10 16.533* 7.494 7.574 11.833 9.384 10.574 19.255**
ϕ
(q4)
1 0.392 1.114 0.001 0.810 1.643 0.370 0.090
2t

5 10.989* 6.195 11.18** 2.513 5.513 6.154 9.295*

10 16.445* 10.462 17.459* 3.382 14.319 11.742 13.825
ϕ
(q5)
1 1.173 0.780 1.159 1.932 0.506 0.246 0.073
2t

5 1.884 5.441 4.633 3.398 6.444 3.704 1.863

10 8.547 8.932 7.923 9.910 16.081* 8.263 6.311
Panel B: Bitcoin return ↛ S&P500 Internet Services & Information return
ϕ
(1)
1 0.308 4.146** 0.986 1.270 0.444 1.330 1.375
2t

5 4.465 6.654 6.813 3.676 6.358 5.701 2.562

10 5.822 8.426 7.694 11.442 15.462 7.630 7.368
ϕ
(2)
1 1.771 2.043 2.583 0.182 1.351 0.800 0.003
2t

5 5.337 7.844 7.223 4.888 7.397 2.707 4.695

10 11.026 14.645 9.764 12.938 8.958 8.006 13.670
ϕ
(q1)
1 0.079 2.157 0.320 0.237 0.636 0.629 0.607
2t

5 2.669 7.836 4.356 0.480 6.430 6.251 1.074

10 9.131 9.432 7.419 7.326 15.929 11.965 9.923
ϕ
(q2)
1 1.624 1.592 2.152 1.025 0.084 0.263 0.261
2t

5 14.259** 3.144 10.527* 2.910 5.307 4.250 8.190

10 19.189** 6.716 16.981* 11.702 18.615** 11.158 16.785*
ϕ
(q3)
1 0.999 0.368 0.137 0.385 0.118 0.737 1.102
2t

5 3.463 2.540 0.531 1.344 1.163 3.542 3.192

10 11.051 6.801 4.747 4.688 9.056 6.877 10.189
 (1) (2) (q1) (q2) (q3) (q4) (q5)
N
ϕ ϕ ϕ ϕ ϕ ϕ ϕ
1t 1t 1t 1t 1t 1t 1t

ϕ
(q4)
1 0.536 0.166 0.226 0.800 4.367** 1.051 1.544
2t

5 3.677 4.150 11.262** 6.218 4.487 8.313 3.646

10 6.284 13.640 10.624 9.140 5.270 17.015* 7.261
ϕ
(q5)
1 1.828 5.732** 5.407** 1.199 0.036 1.347 0.436
2t

5 4.942 9.022 7.598 5.204 4.772 4.210 7.834

10 5.468 11.401 10.189 15.134 9.323 10.204 12.668

Note: See notes to →Table 2.

Panel A of →Table 5 shows the causality test results from S&P500 Semiconductors
stock return to Bitcoin return. Panel A of →Table 5 shows that the G test statistic is
significant for (y , y ) = (y , y ) when (Θ , Θ ) = (Θ , Θ ) , (Θ , Θ ) ,
(q3) (1) (q4) (1)
1t 2t bt set 1t 2t 1t 2t 1t 2t

) , (Θ ) , (Θ ) or (Θ ) , implying that
(q2) (2) (q3) (q1) (q3) (q2) (q1) (q3)
(Θ ,Θ ,Θ ,Θ ,Θ
1t 2t 1t 2t 1t 2t 1t 2t

semiconductor return Granger causes the Bitcoin stock return of all parts of the
distribution. Especially, the mean of semiconductor return Granger causes the right tail
of Bitcoin return, and the variance of semiconductor return Granger causes the left tail
of Bitcoin return. Moreover, the left tail of semiconductor return Granger causes the
right tail of Bitcoin return, while the right tail of semiconductor return Granger causes
the left tail of Bitcoin return.
Panel B of →Table 5 shows the causality test results from Bitcoin return to
semiconductor stock return. We can see that there is no evidence of Granger causality
from Bitcoin return to the semiconductor return in mean and variance. Panel B of
→Table 5 shows that the G test statistic is significant for (y , y ) = (y , y ) when 1t 2t set bt

) , (Θ ) or (Θ ) , implying that Bitcoin return

(1) (q4) (2) (q5) (q1) (q2)
(Θ , Θ ) = (Θ
1t 2t ,Θ ,Θ ,Θ
1t 2t 1t 2t 1t 2t

Granger causes the mean and variance of semiconductor stock return, as well as the
semiconductor stock return left distribution.
Table 5 Casualty-in-Moments Test for S&P500 Semiconductors.
(1) (2) (q1) (q2) (q3) (q4) (q5)
N
ϕ ϕ ϕ ϕ ϕ ϕ ϕ
1t 1t 1t 1t 1t 1t 1t

Panel A S&P500 Semiconductors return ↛ Bitcoin return

ϕ
(1)
1 0.636 0.757 0.001 0.982 0.406 0.051 0.008
2t

5 10.651* 2.782 5.071 1.500 12.922** 16.088*** 0.443

10 16.731* 7.298 10.861 5.987 14.012 16.673* 5.928
ϕ
(2)
1 1.303 0.005 0.553 1.648 0.830 0.062 1.628
2t

5 3.279 2.900 2.102 11.324** 8.847 5.606 3.874

10 10.456 10.941 9.333 16.698* 12.224 10.215 8.071
ϕ
(q1)
1 1.226 0.711 0.054 1.218 4.564** 0.401 0.622
2t

5 5.453 1.084 4.857 2.760 13.565** 1.922 1.119

10 16.931* 4.407 11.130 11.077 19.149** 5.421 10.746
ϕ
(q2)
1 0.209 1.029 0.510 1.163 5.11** 0.890 1.348
2t

5 7.823 6.888 7.461 2.096 6.332 3.492 6.905

10 11.987 10.551 10.718 6.082 8.105 5.464 7.786
ϕ
(q3)
1 3.376* 2.842* 4.371* 0.019 0.380 2.469 0.611
2t

5 9.774* 5.860 7.672 3.059 2.496 9.327 6.102

10 14.497 8.509 11.445 5.224 5.662 18.154 10.142
ϕ
(q4)
1 0.943 0.101 0.525 4.779 0.610 2.048 2.430
2t

5 1.466 9.653* 6.345 6.478 5.493 7.351 10.996*

10 7.017 13.93 12.476 11.955 11.849 11.327 14.691
ϕ
(q5)
1 0.012 0.830 0.432 0.397 0.338 0.778 0.004
2t

5 5.947 4.759 2.465 6.135 3.937 11.239 3.000

10 9.329 8.127 7.659 8.247 8.377 14.190 7.752
Panel B: Bitcoin return ↛ S&P500 Semiconductors return
ϕ
(1)
1 1.230 4.04** 2.72* 0.640 0.001 0.102 0.040
2t

5 3.668 7.459 6.865 2.319 2.817 3.697 2.682

10 6.411 11.169 15.055 8.851 3.681 8.017 8.155
ϕ
(2)
1 1.416 0.029 2.735* 0.162 0.265 2.031 1.217
2t

5 4.448 10.885* 5.019 4.789 4.090 4.891 7.191

10 9.715 15.944 9.709 9.842 9.277 8.688 17.485*
ϕ
(q1)
1 0.411 1.127 0.198 0.409 0.048 2.377 0.001
2t

5 2.202 5.456 1.625 4.950 2.449 3.772 1.208

10 5.569 8.744 8.720 13.189 6.791 7.953 2.282
ϕ
(q2)
1 2.361 0.000 4.079** 0.397 1.555 0.113 0.852
2t

5 8.666 4.011 7.697 2.742 4.036 1.662 4.368

10 13.680 4.625 10.916 7.801 15.022 8.348 10.388
ϕ
(q3)
1 0.699 0.015 0.139 0.339 1.738 0.376 1.315
2t

5 2.318 5.181 2.275 2.583 6.175 5.125 4.351

10 8.081 12.010 6.614 10.389 13.034 10.627 7.277
 (1) (2) (q1) (q2) (q3) (q4) (q5)
N
ϕ ϕ ϕ ϕ ϕ ϕ ϕ
1t 1t 1t 1t 1t 1t 1t

ϕ
(q4)
1 4.279** 0.169 2.328 0.260 1.630 0.093 2.212
2t

5 8.639 2.969 4.258 2.127 8.325 1.763 8.478

10 11.008 5.982 5.069 14.503 10.610 11.013 9.631
ϕ
(q5)
1 1.605 3.963** 1.502 0.000 0.259 0.028 0.162
2t

5 3.858 5.615 1.942 2.964 1.420 1.988 1.144

10 4.701 7.447 5.360 7.426 9.304 3.261 9.292

Note: See notes to →Table 2.

Table 6 Casualty-in-Moments Test for S&P500 Software & Services.
(1) (2) (q1) (q2) (q3) (q4) (q5)
N
ϕ ϕ ϕ ϕ ϕ ϕ ϕ
1t 1t 1t 1t 1t 1t 1t

Panel A S&P500 Software & Services return ↛ Bitcoin return

ϕ
(1)
1 2.089 0.565 0.204 0.542 0.030 0.226 0.052
2t

5 7.218 0.969 6.653 1.034 6.622 13.194 1.535

10 12.179 12.990 12.361 2.515 11.421 13.892** 4.321
ϕ
(2)
1 1.280 0.181 2.155 3.296* 1.455 0.189 0.013
2t

5 4.070 8.585 6.918 10.152* 7.068 7.429 2.950

10 10.526 13.803 10.949 15.290 13.299 11.723 9.877
ϕ
(q1)
1 2.083 1.251 0.929 0.496 0.019 0.015 0.183
2t

5 14.537** 4.396 8.839 2.513 5.069 6.216 7.248

10 15.683 10.325 12.526 8.021 10.039 6.601 8.393
ϕ
(q2)
1 0.076 0.510 0.214 1.393 1.897 0.085 0.552
2t

5 0.485 4.092 6.614 7.635 6.987 5.027 2.666

10 10.657 7.481 11.015 15.075 14.569 15.974 4.146
ϕ
(q3)
1 0.005 0.471 1.644 1.631 1.403 1.691 0.036
2t

5 5.505 6.179 11.684** 8.807 9.276* 5.208 2.053

10 16.382* 11.659 22.08** 13.321 14.303 7.984 11.353
ϕ
(q4)
1 0.514 0.005 1.133 0.170 0.141 3.937** 0.149
2t

5 3.323 3.779 1.528 4.975 5.477 5.120 3.982

10 11.712 8.611 6.669 7.363 11.407 6.312 8.596
ϕ
(q5)
1 1.448 0.488 0.149 0.076 0.212 0.145 0.050
2t

5 1.771 7.075 1.692 1.199 4.800 6.935 1.136

10 6.436 12.939 8.926 2.919 8.011 9.654 6.807
Panel B: Bitcoin return ↛ S&P500 Software & Services return
ϕ
(1)
1 0.341 3.889 2.161 0.903 0.121 0.150 0.233
2t

5 4.386 7.474 10.784* 5.475 7.055 3.301 1.290

10 6.821 11.643 13.796 7.591 11.214 4.408 4.990
ϕ
(2)
1 1.855 1.532 1.006 0.324 1.300 0.578 0.006
2t

5 2.947 5.784 3.730 3.682 3.301 6.098 5.053

10 8.036 12.382 6.736 6.144 15.407 10.153 13.25
ϕ
(q1)
1 0.122 0.314 0.407 0.210 0.139 0.055 0.150
2t

5 3.506 9.852* 7.251 5.091 2.140 3.370 2.420

10 9.351 13.417 16.172* 14.622 6.151 6.852 9.019
ϕ
(q2)
1 1.650 0.279 1.544 0.398 0.010 0.055 0.139
2t

5 12.817** 3.863 7.648 4.761 1.895 6.808 10.629*

10 16.011* 9.882 12.782 13.161 8.019 15.223 12.234
ϕ
(q3)
1 0.330 0.623 0.267 0.340 0.177 2.371 1.623
2t

5 2.035 1.165 1.897 5.494 4.516 4.548 4.448

10 10.452 6.680 6.977 8.703 5.645 7.047 14.360
 (1) (2) (q1) (q2) (q3) (q4) (q5)
N
ϕ ϕ ϕ ϕ ϕ ϕ ϕ
1t 1t 1t 1t 1t 1t 1t

ϕ
(q4)
1 1.998 0.001 0.535 0.764 2.479 0.055 1.861
2t

5 8.108 2.653 11.091** 6.202 3.389 5.516 4.647

10 11.238 6.036 13.794 9.592 5.498 17.029* 8.993
ϕ
(q5)
1 1.400 6.421** 5.836** 0.558 1.953 1.506 0.328
2t

5 3.215 10.663* 9.666* 6.728 8.232 15.802*** 4.607

10 5.452 11.689 12.996 8.850 10.154 17.437* 7.678

Note: See notes to →Table 2.

Panel A of →Table 6 shows the causality test results from S&P500 Software &
Services stock return to Bitcoin return. Panel A of →Table 5 shows that the G test
statistic is significant for (y , y ) = (y , y ) when (Θ , Θ ) = (Θ , Θ ) ,
(q4) (1)
1t 2t bt sot 1t 2t 1t 2t

) , (Θ ) or (Θ ) , implying that software return Granger

(1) (q1) (q1) (q3) (q4) (q4)
(Θ ,Θ ,Θ ,Θ
1t 2t 1t 2t 1t 2t

causes the mean of Bitcoin stock return and extreme parts of the distribution. Especially,
the mean of software return Granger causes the right tail of Bitcoin return, and the left
tail of software return Granger causes the mean of Bitcoin return, while the right tail of
software return Granger causes both the left and right tails of Bitcoin return.
Panel B of →Table 6 shows the causality test results from Bitcoin return to software
stock return. We can see that there is no evidence of Granger causality from Bitcoin
return to the software return in mean or variance. The G test statistic is significant for
, y ) when (Θ , Θ ) = (Θ ) , (Θ ) , (Θ ),
(1) (q2) (2) (q5) (q1) (q4)
(y , y ) = (y
1t 2t sot bt ,Θ 1t ,Θ 2t ,Θ
1t 2t 1t 2t 1t 2t

) or (Θ ) , implying that Bitcoin return Granger causes the mean

(q1) (q5) (q4) (q5)
(Θ ,Θ ,Θ
1t 2t 1t 2t

and variance of software stock return, as well as the software stock return left and right
distributions.
Panel A of →Table 7 shows the causality test results from S&P500 Technology
Hardware & Equipment return to Bitcoin return. The results show that the G test statistic
is significant for (y , y ) = (y , y ) when (Θ , Θ ) = (Θ , Θ ) , (Θ , Θ ) ,
(1) (2) (2) (q4)
1t 2t bt ht 1t 2t 1t 2t 1t 2t

) , (Θ ) , (Θ ) , (Θ ) , (Θ ),
(q1) (q4) (q2) (2) (q2) (q3) (q2) (q5) (q3) (q2)
(Θ ,Θ ,Θ ,Θ ,Θ ,Θ
1t 2t 1t 2t 1t 2t 1t 2t 1t 2t

) , (Θ ) , (Θ ) , (Θ ) , (Θ ),
(q3) (q3) (q3) (q4) (q4) (2) (q4) (q3) (q4) (q4)
(Θ ,Θ ,Θ ,Θ ,Θ ,Θ
1t 2t 1t 2t 1t 2t 1t 2t 1t 2t

) , (Θ ) or (Θ ) , implying that hardware return Granger

(q5) (2) (q5) (q3) (q5) (q4)
(Θ ,Θ ,Θ ,Θ
1t 2t 1t 2t 1t 2t

causes the mean and variance of Bitcoin stock return and all parts of its distribution.
Panel B of →Table 7 shows the causality test results from Bitcoin return to hardware
stock return. The results indicate that there is no evidence of Granger causality from
Bitcoin return to hardware return in mean or variance. It is clear that the G test statistic
is significant for (y , y ) = (y , y ) when (Θ , Θ ) = (Θ , Θ ) , (Θ , Θ ) ,
(1) (q3) (1) (q4)
1t 2t ht bt 1t 2t 1t 2t 1t 2t

) or (Θ ) , implying that the right tail distribution of Bitcoin return

(1) (q5) (q4) (q3)
(Θ ,Θ ,Θ
1t 2t 1t 2t

Granger causes the mean of hardware stock return. Furthermore, the right tail
distribution of Bitcoin return Granger causes the hardware stock return right
distribution.
Table 7 Casualty-in-Moments Test for S&P500 Technology Hardware & Equipment.
(1) (2) (q1) (q2) (q3) (q4) (q5)
N
ϕ ϕ ϕ ϕ ϕ ϕ ϕ
1t 1t 1t 1t 1t 1t 1t

Panel A S&P500 Technology Hardware & Equipment return ↛ Bitcoin return

ϕ
(1)
1 1.563 0.150 0.906 0.001 0.001 1.108 0.000
2t

5 4.813 3.765 2.403 7.432 2.392 4.550 2.566

10 13.393 7.106 5.943 10.815 5.769 6.649 11.262
ϕ
(2)
1 0.081 0.223 0.063 10*** 0.828 0.530 1.441
2t

5 5.806 7.758 3.852 10.612* 7.915 2.428 2.921

10 25.995*** 15.486 9.847 20.203** 17.872* 18.929** 21.547**
ϕ
(q1)
1 0.586 0.244 1.116 2.155 1.245 0.170 1.209
2t

5 3.367 9.321* 2.302 7.479 3.357 7.939 7.406

10 13.171 11.616 9.503 12.593 5.839 10.596 11.552
ϕ
(q2)
1 1.778 0.166 1.906 1.861 2.551 1.499 1.603
2t

5 6.082 6.509 7.055 9.194 12.461** 6.162 6.872

10 12.068 9.951 16.053* 16.422* 22.306** 11.613 12.921
ϕ
(q3)
1 0.139 0.064 0.943 3.849** 4.818** 0.056 4.325**
2t

5 4.335 10.34* 5.411 5.112 7.385 9.176 12.769**

10 9.219 13.699 13.042 12.734 9.763 21.482** 17.521*
ϕ
(q4)
1 0.995 4.383** 4.854** 1.128 4.998** 2.965* 1.228
2t

5 3.909 4.502 4.808 8.257 10.317* 12.946** 10.364*

10 7.468 9.946 12.848 15.438 13.767 14.07 18.416**
ϕ
(q5)
1 2.247 0.014 0.001 4.649** 1.396 1.135 1.859
2t

5 6.279 10.419* 8.618 10.016* 8.400 5.018 6.151

10 12.258 14.615 10.838 18.248* 15.955 15.126 13.63
Panel B: Bitcoin return ↛ S&P500 Technology Hardware & Equipment return
ϕ
(1)
1 0.196 0.055 0.352 0.070 0.166 0.056 1.019
2t

5 5.272 4.634 2.235 0.373 1.763 1.239 3.343

10 11.076 9.617 5.479 1.580 3.403 1.250 3.971
ϕ
(2)
1 0.574 0.814 0.380 0.001 0.114 0.016 0.297
2t

5 4.553 7.022 1.452 0.018 5.094 0.122 2.565

10 12.054 9.744 3.510 0.158 6.434 0.222 3.654
ϕ
(q1)
1 0.697 0.575 0.351 0.094 0.923 0.004 2.490
2t

5 3.242 8.144 0.972 0.566 1.656 0.780 9.036

10 12.179 9.408 6.924 1.342 3.053 1.573 12.235
ϕ
(q2)
1 0.392 0.104 0.000 0.169 0.020 0.300 0.155
2t

5 3.096 10.946* 5.742 0.576 1.280 1.196 0.918

10 6.761 15.289 9.203 0.916 2.353 1.362 2.937
ϕ
(q3)
1 2.518 14.442*** 0.005 0.097 0.672 0.002 4.755**
2t

5 3.392 14.099** 0.787 0.464 1.548 1.078 6.926

10 10.211 17.963* 3.868 0.752 4.213 1.851 16.679*
 (1) (2) (q1) (q2) (q3) (q4) (q5)
N
ϕ ϕ ϕ ϕ ϕ ϕ ϕ
1t 1t 1t 1t 1t 1t 1t

ϕ
(q4)
1 0.340 0.758 0.122 0.068 0.082 0.267 0.022
2t

5 3.803 13.257** 2.908 0.481 2.686 1.108 7.768

10 11.643 16.322* 6.558 0.847 7.371 1.261 16.742*
ϕ
(q5)
1 0.030 0.011 0.186 0.185 0.003 0.623 0.199
2t

5 9.249 13.041** 8.694 0.699 3.844 1.517 6.968

10 11.667 16.678* 12.628 1.650 7.019 1.097 9.815

Note: See notes to →Table 2.

To conclude there are several important observations regarding the causality

between Bitcoin return and stock return. Starting with the return of the S&P500
Composite stock index, which Granger causes the mean of Bitcoin return only. In
general, there is slightly stronger evidence that stock return causes Bitcoin return, but
this is not the case for the other stock indices. It is interesting to observe that both the
mean and the right tail distribution of stock return Granger cause Bitcoin return, while
this is not the case for the opposite. Notably the mean return of Bitcoin Granger causes
the right tail distribution of stock return, but this is not the case for the opposite. The
above observation implies that causality is more likely to occur when both markets are
in their bear states. Regarding the other stock market indices, asymmetric causality
evidence is found for all markets, except S&P500 Software & Services. There is stronger
evidence of causality flow from stock markets to the Bitcoin market (i. e. S&P500
Software & Services return, S&P500 Internet Services & Information return, S&P500
Semiconductors return, and S&P500 Technology Hardware & Equipment return). Of all
the markets, the S&P500 Technology Hardware & Equipment shows the most obvious
asymmetric causality between its return and Bitcoin return. However, S&P500
Information Technology is the only index to see significant information flow from Bitcoin
return to its return.
There are some other interesting observations. Firstly, there is no evidence of
causality from the mean return of one market to the mean return of another. This
implies that causality seldom occurs when both markets are in their normal states.
Secondly, there is no evidence of causality from the variance of the return of one market
to the variance of the return of another. The two observations above reassure us that
Chen’s Granger causality in moment test is needed. Thirdly, in most cases when
causality happens, it is from the right tail distribution of one market to the variance of
another, which implies that when one market is in its bear market state, it makes the
other become more volatile. Lastly, most cases of casualty occur when one market is at
its bear market, while the other is in its bear or bull market state.

5 Conclusion
It is known that Bitcoin’s survival depends on mass behaviour collaboration and the
blockchain technology through which transactions are confirmed and added and
Bitcoins are mined. In such a technologically backed payment system, potential
associations between the markets of Bitcoin and tech companies are not surprising,
especially in the US, the hub of the largest stock market and innovative technology. In
this chapter, we use the Granger causality in moments approach of →Chen (→2016) on
daily data covering Bitcoin and US tech stock indices. Unsurprisingly, the results show
evidence of a relationship between Bitcoin and US tech stock indices. Specifically, there
is clear evidence of predictability between Bitcoin and US tech stocks, which seems to
vary across quantiles. US stock returns Granger cause Bitcoin return, but this is not the
case for other stock indices. Generally, Granger causality from one market to another is
insignificant in both mean and variance. However, there is evidence of significant
causality in at least two cases: firstly, when one market is in its bear market state, while
the other is in a high volatility state, and secondly, when one market is at its bear
market, while the other is in a bear or bull market state.
While the results extend our understanding of the relationship between Bitcoin and
US tech stock returns, they are comparable to →Symitsi and Chalvatzis (→2018).
However, they are more nuanced, suggesting the need to examine the approach of
→Chen (→2016) to reveal relationships across the various quantiles of the return
distribution. Otherwise, it might wrongly be apparent that Bitcoin and US tech stock
indices are independent.
These results are mainly important for investors and portfolio managers, without
ignoring their importance to policymakers. Investors and portfolio managers can build
on the results to better predict the return and volatility of Bitcoin based on the US equity
aggregate, sector, and industry indices (and vice versa), which can help them refine their
investment decisions. For policymakers, evidence of reported predictability is
informative as it is contradictory to market efficiency. This is somewhat in line with
→Urquhart (→2016).
Future studies could consider using higher frequency data, to make inferences
regarding Granger causalities between Bitcoin and tech stocks, while extending the
analyses to Asian markets where Bitcoin represents a very hot digital asset.

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Notes
1 They apply various methods and generally show the absence or presence of a
weak evidence of predictability. For more details on this literature, the reader
can refer to →Corbet et al. (→2019).
2 As indicated by →Soylu and Güloğlu (→2019), the Granger causality tests in
moments of →Chen (→2016) outperform other related tests such as the tests of
→Hong (→2001) and →Balcilar et al. (→2019).
3 →Ji et al. (→2018) use a graph theory whereas →Corbet et al. (→2018) apply
connectedness measures.
4 Notably, only common daily observations between Bitcoin and the stock index
are considered in the analysis.
Market structure of
cryptocurrencies
Jiri Svec
Sean Foley
Angelo Aspris
Cryptocurrencies are an electronic medium of exchange that can
be traded by different trading groups via digital currency
exchanges. A growing list of altcoins has seen a proliferation of
cryptocurrency exchanges emerge over the last decade as
regulations in many countries around the world struggle to
comprehend with appropriate investor protection rules.
Although there is no central authority to register these
exchanges, it is estimated that there are currently up to five
hundred exchanges in circulation, characterised by varying
platforms, geographical reach, and compliance with regulatory
frameworks. Cryptocurrency markets share many similar
characteristics with both foreign exchange and equity markets
such as limit order books and matching algorithms, and
exchanges that can be both centralised or decentralised. As
these markets are still in their infancy, what shape or form they
will take in future will depend on a combination of acceptance
from consumers, the investment community, as well as
worldwide regulators.
1 Using cryptocurrency for trade
All transactions on the Bitcoin (and other) blockchains are
publicly recorded. This allows all users to determine the balance
of all wallets in existence. However, blockchains are only useful
for transferring units of cryptocurrency between users. When a
user wants to exchange his/her cryptocurrency for an asset – say
a Pizza, the movement of the bitcoin from the consumer to the
pizzeria will be visible, however the delivery of the pizza will not
be recorded. Similarly, in the sale of bitcoin for cash, the bitcoin
transfer will be recorded but there will be no record of the fiat-
currency price paid, nor the actual delivery of the fiat currency.
→Yermack (→2015) and →Baur et al. (→2018) and →Foley et
al. (→2019) show that most cryptocurrency transactions
currently are between speculative investors, and only a small
proportion are used for purchases of goods and services. As a
result, they behave more like speculative investments than
currencies. Even from a legal and taxation perspective, in many
jurisdictions cryptocurrencies are classified as tokens, virtual
assets or commodities rather than currencies (whether it be
digital, cyber or electronic).1

2 Establishing an exchange
As cryptocurrencies became tradeable assets, numerous
markets developed, beginning with the now infamous (and
defunct) “Mt Gox”. The decentralized nature of cryptocurrencies
necessitated that exchanges take on the role of ‘custodian’. In
order to sell bitcoin on an exchange, one needs to deposit
bitcoins to an address whose private key is controlled by the
exchange. This address is usually called a ‘hot wallet’, and is
directly connected to the Internet. It is analogous to the amount
of cash held by a teller at the bank: the balance is not infinite but
is useful for daily deposits and withdrawals. Once the balance in
the hot wallet becomes too large, most exchanges move their
cryptocurrency supplies into a ‘cold wallet’ – this is typically an
account held offline which requires multiple individuals to access
(multisig) – analogous to a bank vault which requires three
different keys to unlock.
Exchanges control all cryptocurrencies held within their
system. Deposits and withdrawals of cryptocurrency to/from the
exchange will appear on the public blockchain. However, once
held by the exchange, it is up to the exchange to keep track of
which bitcoins belong to which user.

3 Trading and fees

The market structure of cryptocurrencies resembles modern
equity markets with continuous trading via a limit order book
without intermediaries. Traders can either execute immediately
with a market order or wait for a better execution price with a
limit order. Limit orders are stored in the limit order book and
are executed according to price-time priority. Order driven
markets without a designated market maker primarily rely on
Endogenous Liquidity Providers (ELPs) to supply liquidity
because it is profitable. Since ELPs have no obligations to
maintain markets, they can withdraw when liquidity provision
becomes risky or unprofitable, adversely impacting market
quality (→Anand and Venkataraman, →2016). To increase the
participation of ELPs in the market, most cryptocurrency
exchanges use the maker-taker model to differentiate between
orders that provide liquidity and orders that remove liquidity.
The maker-taker model reduces undesirable trading behaviour
by charging a higher fee to traders that demand immediacy and
lower fees (or no fees) to ELPs for providing liquidity to the
market. The typical fee for average sized transactions ranges
between 10 and 30 basis points (bps) for traders that consume
liquidity and between 0 and 15 bps for market makers,
depending on the cryptocurrency traded. Fees are generally
calculated on the value (USD equivalent) executed in the last 30
days.

3.1 Where do trades get reported?

Given movements are only recorded on the blockchain when
cryptocurrencies are deposited/withdrawn from the exchange,
users who deposit fiat currency, buy bitcoin, hold them within
the exchange, and then sell them at the same exchange later for
a profit, will not generate any record on the blockchain. In fact,
trades themselves within an exchange will not be recorded at all,
except by the exchange. Many exchanges make this transaction
level data public, however this is entirely separate from the
blockchain itself. Like Bloomberg for equities, organisations such
as →cryptocompare.com and →tardis.dev provide historical and
real-time access to data on exchange-level transactions.

3.2 What happens if the exchange gets hacked?

Depositing crypto-assets with an exchange exposes individuals
to significant counterparty default risk. Put simply, if an
exchange goes bankrupt or is hacked, there are few recourses
available to investors. The ‘trust less’ nature of cryptocurrencies
means that there is no way to cancel or recover lost crypto
assets. As the popularity, and price, of cryptocurrencies has
grown, so too has their allure as targets of cybercriminals.
Numerous exchanges have been hacked in the last few years –
some of the more notable hacks are listed below, and represent
some of the largest names in cryptocurrency trading globally:
 2011 – Mt. Gox – 2,643 bitcoin stolen by an auditor.
2012 – Bitfloor – 24,000 bitcoin stolen from backup servers
via unencrypted private keys.
2013 – Vicurex – 1,454 bitcoin stolen by attackers, leading
to exchange bankruptcy.
2014 – Mt. Gox – 850,000 bitcoin stolen by attackers,
leading to exchange bankruptcy.
2015 – Bitstamp – 19,000 bitcoin stolen via a phishing
attack on employees.
2016 – Bitfinex – 120,000 bitcoin stolen via their payment
processor, BitGo.
2018 – QuadrigaCX – $190 million of crypto assets lost
during suspicious death of CEO.
2019 – Binance – 7,000 bitcoin stolen by a phishing scam.
As users’ concerns about hacks has risen, a number of
responses have been undertaken by exchanges themselves. For
example, customers affected by the 2016 Bitfinex hack were
provided with “BFX” tokens in lieu of their stolen bitcoins. These
represented an “I owe you” of bitcoin from Bitfinex to its users.
Within 244 days, all hacked bitcoins were repaid. Often,
exchanges will go bankrupt, leaving their users as unsecured
creditors. In 2017, an innovation known as “Decentralized
Exchanges” were launched on the Ethereum platform, removing
the custody of the crypto assets from the exchange to the user.
Concerns about the robustness of the market infrastructure,
account security, high volatility and low liquidity combined with
limited regulation reduces the appeal of cryptocurrencies to
highly-regulated institutional investors and consequently, they
have been largely absent from this market thus far.
4 Types of exchanges
There are literally hundreds of crypto exchanges globally. As of
2019, →Coinmarketcap.com lists transaction volumes for over
285 exchanges. The majority of these exchanges are described
as “centralised” in that there is a single, trusted counterparty
that is responsible for operating the limit order book, accepting
deposits/withdrawals in fiat and cryptocurrencies, complying
with “Know Your Customer” (KYC) regulations, and acting as a
custodian for the assets deposited inside the market. In contrast,
“Decentralized Exchanges” (DEXs) do not maintain custody of
any assets themselves, are typically not operated by any
individual and cannot go bankrupt nor be hacked.

4.1 Centralized vs decentralized exchanges

Typical exchanges (for example, Binance, Bitfinex, Poloniex,
Kraken, Bitstamp) are centralized, and operate in ways which
would be familiar to participants of traditional stock exchanges
such as NYSE and NASDAQ. Each exchange chooses which crypto
assets to trade (i. e. Bitcoin, Ethereum, Litecoin) as well as which
currency pairs to create markets in (i. e. Euro/Bitcoin,
USD/Bitcoin, Ethereum/Bitcoin). Users can deposit crypto assets
and/or fiat currencies, and trade these assets in a centralized
limit order book. Whilst these markets are all technically
operated independently in isolation of one another, arbitrage
will tend to keep these markets synchronised, similar to the
global FOREX markets (see, →Makarov and Schoar, →2019).
These markets tend to follow price-time priority, with varying
levels of price granularity, often up to 8 decimal places
(→Dyhrberg et al., →2018). This allows for very high precision
pricing, and ensures the orders of traders willing to trade at
better prices execute first.
 The advent of smart contracts on the Ethereum network (as
well as the large number of initial coin offerings conducted on
the Ethereum platform using ERC20 tokens) allowed limit orders
(the fundamental necessity for limit order markets) to be coded
into self-contained contracts. A smart contract can be encoded
such that it offers to provide N units of an ERC20 currency in
return for E units of Ethereum. A user can then send a ‘market’
order, delivering E units of Ethereum and automatically receiving
N units of ERC20. Such a contract is entirely analogous to a limit
order.
An aggregation of such orders could form a virtual ‘limit
order book’. For example, an offer to provide 10 XYZ in return for
1 Ethereum would be preferred to an offer to provide 9 XYZ, but
would be inferior to an offer to provide 11 XYZ.
In order to function effectively as a marketplace, users of a
DEX would need to observe all available orders, rank them by
their price priority, and then choose which orders to interact
with. The first DEXs (i. e. OasisDex and EtherDelta) used fully on-
chain execution. This means that all order entries, executions
and cancellations were processed by the Ethereum blockchain
itself. As such, the speed of matching was constrained to the
blocktime of Ethereum (currently 14 seconds). →Figure 1 below
documents the operation of a fully on-chain DEX.
Figure 1 The operation of a fully on-chain decentralized
exchange.

It rapidly became evident that relying on the Ethereum

network (and paying fees) to enter, amend or cancel an order
would significantly constrain the growth of DEXs. This led to the
creation of Hybrid Exchanges, such as IDEX and 0×, where a
centralized organisation collated all order entries, amendments
and cancellations off-chain (similar to a centralized exchange)
but custody and clearing (after matches were confirmed) were
undertaken on the Ethereum blockchain. Centralizing the limit
order book facilitated much faster confirmation of transactions
and reduced the cost constraint of needing to pay miners to
update stale limit orders. However, it did introduce a single,
central point of failure and/or censorship. →Figure 2 below
documents the operation of a DEX with an off-chain order book
utilising on-chain settlement.
Figure 2 The operation of an off-chain decentralized exchange.

4.2 Advantages of DEXs

DEXs offer users many potential advantages over traditional
exchanges. These include: no counterparty default risk since the
exchange never takes custody of your token; no KYC regulations
since (similar to torrents) there are no centralized parties on
whom to enforce any regulation; the ability to list virtually any
token immediately; and the ability to remain free of any
government based censorship in a truly decentralized
environment. For these reasons, DEXs have attracted increasing
numbers of users and transaction volumes, as reported in
→Figure 3 below. Whilst trading activity in DEXs is growing, the
number of transactions executed in these venues is dwarfed by
that of centralised exchanges.
Figure 3 Transaction volumes on decentralized exchanges.

4.3 Disadvantages of DEXs

Whilst the nature of DEXs is changing rapidly, there are currently
many limitations of DEXs which hinder their widespread
adoption. These include: a public transaction ledger which allows
all users to see the addresses associated with all transactions, an
inability to trade tokens outside of the (currently Ethereum
based) smart contract environment (e. g. fiat currencies and
Bitcoins cannot be traded); slow speed of transactions due to a
reliance on the underlying blockchain; as well as low levels of
liquidity and basic order type functionality due the reliance on
smart contracts. Another disadvantage of DEXs is that they do
not strictly enforce price time priority. This, combined with the
complexity and high precision (many decimal points) of
cryptocurrency trades mean mistakes can be very costly –
missing one decimal place can result in an arbitrage opportunity
with a factor of 10× or more. This has resulted in a variety of
mispricings appearing on all DEXs, costing participants
significant profits.
4.4 Investability of cryptocurrencies
The value of cryptocurrencies has risen rapidly in recent years.
When it briefly touched 20,000 USD in December 2017, Bitcoin
alone was valued at more than 300 billion USD. But how
investable are cryptocurrencies? →Dyhrberg et al. (→2018)
examine this issue by estimating the transaction costs and
intraday trading patterns of the Bitcoin/USD exchange rate
across the Gdax, Gemini and Kraken cryptocurrency exchanges.
In contrast to quote-driven markets, where effective spreads are
generally smaller than quoted spreads as some trades take place
within the spread, traders in fully electronic order-driven
cryptocurrency markets cannot trade inside the quotes.
Furthermore, trades frequently do not execute at the best prices
as quoted depths are very small and order quantity frequently
exceeds the best posted depth. Consequently, traders are forced
to walk up the limit order book and effective spreads are
frequently larger than quoted spreads. →Dyhrberg et al.
(→2018) find that quoted spread across the three cryptocurrency
exchanges ranges from 0.54 to 7.80 while effective spread
ranges from 5.60 to 22.51 bps. This is significantly narrower than
the average quoted (effective) spread of 37.2 (23.9) bps of stocks
on the NYSE (→Boehmer et al., →2005), 32 (27) bps on the
Australian Stock Exchange (→Aitken et al., →2017), 25.9 (25.0)
bps on the centralized electronic order book of Euronext, and
70.5 (40.2) bps on the hybrid order-driven segment of the LSE
(→Gajewski and Gresse, →2007). In fact, Bitcoin spreads are
comparable to the one hundred most liquid stocks on the NYSE
which display an average quoted (effective) spread of 10.9 (7.3)
bps (→Boehmer et al., →2005).
→Figure 4 presents the intraday variations in liquidity,
spread and volatility observed in the Bitcoin market on U.S.
exchanges. As cryptocurrency markets trade continuously, the
graph is more consistent with intraday patterns generally found
in the foreign exchange markets and does not depict the typical
U-shape bid-ask spread and volatility associated with trader
behaviour in the equity markets.

Figure 4 Intraday variation in volume, quoted spread and

volatility for the Bitcoin/USD exchange rate between 7th
September, 2017 and 10th May, 2018 averaged across Gemini,
Gdax and Kraken cryptocurrency exchanges. All variables are
hourly averages, scaled by the variable average (→Dyhrberg et
al., →2019).

→Figure 4 shows the trading activity dips early in the

morning (U.S. time) as the European markets open and then
rises to peak as the U.S. markets begin trading. Trading then
declines through the U.S. market close and subsequently drops
off as the Asian market close. Volatility follows the same pattern
but the peak and troughs are not as pronounced, while quoted
and effective spreads display an inverse relationship with
liquidity and volatility. This distinct intraday pattern shows that
trades on U.S. cryptocurrency exchanges originate mostly during
the day which is consistent with orders being executed by retail
investors. Interestingly, weekend generate a similar pattern,
which contrasts with the subdued trading activity typically
observed in the foreign exchange market.

Figure 5 The proportion of time investors can trade

cryptocurrencies within the best ten levels of the order book
across different trade sizes (from 1st August to 5th October,
2017). All currency pairs are converted into USD.

To better gauge the investability of cryptocurrencies,

→Figure 5 shows the proportion of time the bid or ask side is
able to absorb different sized liquidity shocks across six currency
pairs between Bitcoin (XBT), Ethereum (ETH), Ethereum classic
(ETC), Litecoin (LTC) and USD. The figure shows that investors
can generally trade between 500 USD and 1,000 USD within the
best ten price levels of the order book. However, there is
generally insufficient depth for larger institutional sized
transactions. XBT/USD currency pair offers the best prospects of
executing a larger order.

4.5 Cryptocurrency derivatives

In December 2017, the Chicago Mercantile Exchange (CME) and
the Chicago Board Options Exchange (CBOE) paved the way for
the nascent cryptocurrency financial futures, launching their
respective cash-settled bitcoin futures trading contract. The
launch of a financial futures contract was intended to provide
institutional investors, investments funds, miners, and retail
investors with a regulated and centralized marketplace to
speculate on the price and volatility of Bitcoin.2 Users would also
benefit from the risk management opportunities afforded by
financial derivatives from spot currency price movements. The
introduction of Bitcoin futures on CME was seen by many
observers as a significant step towards the legitimization of
digital currencies, potentially elevating cryptocurrencies to a
recognized emerging asset class.
The CME Bitcoin futures are based on the CME CF Bitcoin
Reference Rate (BRR) as of 4:00 pm London Time. The reference
price aggregates executed order flow at global cryptocurrency
spot exchanges, including Bitfinex, Bitstamp, Coinbase, Genesis
Global Trading, itBit, and Kraken during a specific calculation
window prior to its publication.3 The price and size of each
relevant transaction is recorded and added to a list which is
partitioned into 12, 5-minute equally-weighted time intervals
between 3:00 and 4:00 pm. For each partition, a volume-
weighted median trade price is calculated across these
constituent exchanges and the BRR is then determined by taking
an equally-weighted average of the volume-weighted medians
of all partitions.4 The BRR was designed by CME Group and
Crypto Facilities Ltd (CF),5 around the IOSCO Principles for
Financial Benchmarks6 and is a daily reference rate of the USD
price of one bitcoin. The choice of this benchmark is geared
toward resilience and replicability in the underlying spot market.
Like many of its other financial derivatives, Bitcoin futures
trade on CMEs Globex platform (and ex-pit via Clearport)
between Sunday and Friday from 5:00 pm to 4:00 pm with a 60-
minute break each day. The market is supported by a market-
maker program to ensure sufficient liquidity for its participants.
The fees for trading Bitcoin are priced at a significant premium
to Equity Index futures (approximately 3× higher).7 Margin
requirements for Bitcoin futures are also significantly more
onerous than for other instruments. The maintenance margin
for Bitcoin futures is currently around 37% (compared to 4% for
E-mini S&P 500 futures), where the Initial Margin for hedgers
(speculators) is 100% (110%) of the maintenance margin. These
requirements are subject to change and the CME retains the
right to impose exposure limits or additional capital
requirements. This trading and clearing are regulated by the
Commodity Futures Trading Commission (CFTC).
Since its launch in 2017, the CME has seen over 20 futures
expiration settlements, with over 3,300 individual accounts
trading approximately 7,000 CME Bitcoin futures contracts each
day. The contract unit is for 5 bitcoins with a minimum price
fluctuation of 25 USD per contract. As of September 2019, the
value of a single BTC contract was approximately 50,000 USD.
→Corbet et al. (→2018) examine the relationship between
Bitcoin futures and spot prices, finding that the underlying leads
the futures contract in terms of price discovery. They suggest
that both the financial instrument and market structure may
play a role in this surprising relationship, commenting that the
absence of a large cohort of institutional investors may impede
its contribution to price discovery. An examination of the
Commodity Futures Trading Commission (CFTC) Commitments
of Traders (COT) report reveals that “Leveraged Funds” and
“Other Reportables” dominate open interest in BTC futures with
institutional investors (asset managers) holding only small
interests. As of September, 2019, Asset Manager (Institutional)
percent of open interest for long and short positions measured
only 6.3% and 4.8%, respectively. Leveraged funds are defined in
Traders in Financial Futures (TFF) as traders that may be
engaged in managing and conducting proprietary futures
trading and trading on behalf of speculative clients.8 Other
reportables, meanwhile are traders that are not placed in a
dealer, asset manager, or leveraged fund category and mainly
consist of retail traders with fewer than 25 bitcoin contracts. The
relatively high representation of traders with small positions in
CFTC reportable data distinguishes it from other more
prominent financial market contracts and suggests that it may
be a factor in the lack of price discovery in this market.
Given the success of Bitcoin futures, in September 2019, CME
Group announced that it would offer options on its Bitcoin
futures contracts starting in the first quarter of 2020 pending a
regulatory review. The options aimed to provide clients with
additional tools for precision hedging and trading.

5 Cryptocurrency specific trading issues

5.1 Undercutting
While the physical trading on cryptocurrency exchanges is
comparable to trading on other equity exchanges, relative tick
size, the minimum allowable trading price increment expressed
as a percentage of the price is much smaller than on equity
exchanges. Tick size selection is one of the most important
decisions made by an exchange to influence overall market
quality. Tick size determines the cost to gain price priority over a
standing limit order and dictates the minimum bid-ask spread, a
major component of trading cost. As the price of
cryptocurrencies rose, and Bitcoin in particular, the relative
spread became increasingly small and unconstrained. On most
cryptocurrency exchanges is it either one cent (for example,
Bitstamp and Coinbase) or ten cents (Bitfinex) which leads to a
relative tick size of as low as 0.01 bps when one bitcoin trades
around 10,000 USD.
With such a small trading increment, it is relatively
inexpensive for traders to improve limit orders by a negligible
amount to gain priority, as illustrated in →Figure 6. This
‘undercutting’ behaviour dis-incentivizes traders to supply
liquidity and encourages them to cross the spread to get
executed, leading to lower depth at best quotes and
deteriorations in quoted spread.
Figure 6 The bid and ask quote and trade prices for BTC-USD on
August 2nd 2017 from 4:00 am to 4:07 am (→Dyhrberg et al.,
→2019).

→Buti et al. (→2019) develop a theoretical model of the public

limit order book to analyze the effects of a tick size on market
quality and show that market quality for spread unconstrained
securities can be improved with a tick size increase. Several
exchanges have recognised that small tick sizes can lead to
excessive undercutting behaviour and have begun to increase
tick sizes for many of the currency pairs to improve market
quality.9 The following excerpt from a Kraken press release in
2017 highlights the impact of rising cryptocurrency prices on the
prevalence of undercutting.

Reducing the price precision will help reduce extraneous activity in the order
books as traders continually jump in front of each other by a very small
fraction. We have received many requests from clients for this reduction and it
will help reduce load on the trade engine with more efficient order books.
(Kraken Press Release, August 26, 2017)
→Dyhrberg et al. (→2019) confirm that a wider tick size on
Kraken changes traders’ behaviour, significantly reduces
undercutting, and leads to an overall improvement in market
quality. →Figure 7 shows the relative quoted spread and the
relative tick size in bps (log scale) for the constituents of the S&P
500 index and the currency pairs on Kraken pre and post the tick
size increases in August/September 2017.

Figure 7 Comparison of relative tick sizes and relative quoted

spreads across Kraken and S&P500 stocks (→Dyhrberg et al.,
→2019).

5.2 Short selling constraints

The ability to short a security by allowing rational arbitrageurs to
borrow without constraints is seen in finance theory as a
necessary condition for efficient capital markets. It is associated
with price discovery and increased market liquidity and yet it is a
feature that is not built into the blockchain. Users cannot spend
cryptocurrencies they do not have; however, this does not
preclude users from taking financial positions related to the
value of this currency.

I would short it if there was an easy way to do it10

Bill Gates, Microsoft co-founder

Prior to the establishment of Bitcoin futures listed on the Cboe

and CME, users wanting to bet against Bitcoin (or other altcoins)
or engage in some form of risk management were limited to just
a few platforms. Amongst the most popular for shorting were
Bitfinex and Poloniex. In a short sale, the seller enters into a
regular spot sale of the digital currency except that the
transaction is settled by delivering cryptocurrency that was
borrowed. In this regard shorting cryptocurrencies is similar to
shorting listed securities – short sellers must locate the currency
to borrow it. Cryptocurrencies can be borrowed on an exchange
(e. g. Bitfinex or Poloniex) through peer-to-peer functionality,
meaning that borrowers are borrowing from other participants,
who will receive a rebate in the form of interest income. The
rebate will depend on the term of the loan and the rate will
exhibit variation over time. The cryptocurrency borrower may
seek offers or make a bid to borrow digital tokens and are not
permitted to exceed certain leverage thresholds. Bitcoin
borrowers on Bitfinex, for example, are not permitted to borrow
more than 70% of the bitcoins sold in a short sale. The fiat
proceeds of any short sale serve as collateral for the borrowing
of the bitcoins until those bitcoins are repaid.
 Given the prohibitively onerous margin requirements for
retail traders to short Bitcoin (and other altcoins), alternative
shorting options, for example, CFDs (contracts for difference)
have been established by a range of brokers including, Plus500
and eToro. CFDs function in a manner that is similar to futures
contracts, in that investors can bet on an underlying asset
without having to own it physically, thereby allowing for short
positions.
The North American Derivatives Exchange (Nadex) is a U.S.-
based regulated exchange that offers binary options and
spreads to investors.11 Option spreads can be used to limit risk
while gaining exposure to both the short and long side of
Bitcoin. The contracts are settled in USD and therefore do not
require ownership of the physical.
Looking to overcome issues of liquidity (particularly amongst
specific altcoins) in the peer-to-peer crypto exchange platforms,
repo markets have recently been canvased with crypto assets. A
repo can be thought of as a loan secured against collateral,
except the collateral is not pledged, it is sold and repurchased at
maturity. By providing crypto asset holders with an ability to
lend in this environment, professional market participants could
borrow for the purposes of taking or covering short positions. A
current example of a platform providing this service is Oxygen.12
Finally, prediction markets also provide a possible approach
to short cryptocurrencies. These markets allow investors to
create an event to make a wager based on the outcome. For
example, predicting that Bitcoin will decline by a certain
percentage sets a wager that other parties can participate in by
taking the other side. These wagers are conducted in an
unregulated market and thus pose significant risks.
5.3 Front running
Unlike stock markets, all transactions on the blockchain are
public, including the wallet address of the user. This may seem
harmless at first, however it exposes large orders to the risk of
being front run. Imagine a trader holds 100 million USD of
Bitcoin, and decides to sell. In order to do so, the trader first
needs to transfer the large stack of bitcoins to an exchange.
Such a transaction will show up on the blockchain, and
monitoring sites such as WhaleAlert.io may broadcast this
transaction to the world at large. This may not be an issue if the
trader is able to execute large orders immediately. However, due
to the trust-less nature of cryptocurrencies, exchanges typically
‘lock’ deposits for 30-60 minutes to protect themselves from
double spend attacks. This means that keen observers, noticing
a large influx of bitcoins, may infer the depositor intends on
selling. If this sale is large enough to have a significant price
impact, the observer may themselves sell the asset deposited in
order to ‘front run’ the depositor, making profit from the
eventual price impact of the large order. Analytics like these
enabled researchers to identify that there may be a connection
between the USD Tether and the pumping of the bitcoin price on
the associated Bitfinex exchange (see →Griffin and Shams,
→2018).

5.4 Griefing
Stock markets central matching engines process orders in pure
price-time priority. These engines are now calibrated to separate
orders to an incredibly fine measurement of time – typically to
the picosecond (one trillionth of a second). However, many DEXs
utilise the ‘clock time’ of the Ethereum network (14 seconds),
which can cause problems.
Figure 8 A bidding war between two arbitrageurs attempting to
submit a market order to the Ethereum blockchain (→Daian et
al., →2019).

Specifically, imagine a situation in which a user posts an

order on a DEX which is mispriced, which gives rise to potential
arbitrage. In order to exploit this opportunity, a user needs to
submit a ‘market’ order to the DEX, exhausting the attractive
liquidity. The issue is that this order will not be confirmed until
the next Ethereum block is mined. As miners process
transactions in order of fee priority, an arbitrageur can offer a
high fee to interact with a profitable arbitrage opportunity.
→Daian et al. (→2019) identify thousands of such opportunities,
and document ‘bidding wars’ with the miners to take advantage
of these situations.
When one user sees an arbitrage opportunity in a DEX, they
submit a market order with a fee – say $1. This order is only
executed once incorporated by a miner into a transaction.
Before the market order is executed, a second arbitrageur may
also spot this opportunity, and offer a $2 fee to the miner. When
a miner eventually solves the cryptographic puzzle, they will
collect fees from both users, but only the user with the highest
fee will have their order executed. The ‘losing’ bidder will pay
the fee to attempt to interact with a smart contract which has
already been exhausted of liquidity.
Such conduct is called “Griefing” and is documented by
→Daian et al. (→2019). →Figure 8 below extracted from their
paper demonstrates a ‘bidding war’ between two arbitrageurs
attempting to submit a market order to the Ethereum
blockchain, bidding in the fee they are willing to pay the miner to
prioritise their order.

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Dyhrberg, A., S. Foley, and J. Svec (2018). How investible is
bitcoin? Analyzing the liquidity and transaction costs of bitcoin
markets. Economics Letters 17, 140–143. a, b, c, d, e, f
Dyhrberg, A., S. Foley, and J. Svec (2019). The impact of tick sizes
on trader behavior: Evidence from cryptocurrency exchanges.
Available at: https://papers.ssrn.com/sol3/papers.cfm?
abstract_id=3194932. a, b, c, d, e, f, g, h
Foley, S., J. R. Karlsen, and T. J. Putniņš (2019). Sex, drugs, and
bitcoin: How much illegal activity is financed through
cryptocurrencies? The Review of Financial Studies 32, 1798–1853.
a, b
Gajewski, J-F., and C. Gresse (2007). Centralized order books
versus hybrid order books: A paired comparison of trading costs
on NSC (Euronext Paris) and SETS (London Stock Exchange).
Journal of Banking and Finance 31, 2906–2924. a, b
Griffin, J. M., and A. Shams (2018). Is bitcoin really un-tethered?
Available at SSRN: https://ssrn.com/abstract=3195066 or
http://dx.doi.org/10.2139/ssrn.3195066. a, b
Makarov, I., and A. Schoar (2019). Trading and arbitrage in
cryptocurrency markets. Journal of Financial Economics 135, 293–
319. a, b
Yermack, D. (2015). Bitcoin, innovation, financial instruments,
and big data. In Handbook of digital currency. 31–43. a, b
Notes
1 Library of congress,
→https://www.loc.gov/law/help/cryptocurrency/world-
survey.php
2 Around the same time CMEs rival, Cboe Global Markets
also introduced Bitcoin futures under the ticker “XBT”.
However, these were discontinued in March 2019 due to
a lack of demand. Bakkt is another bitcoin futures
contract launched by the Intercontinental Exchange
(ICE) in 2018 where buyers receive physical Bitcoin
delivery on the day of their trade.
3 Although these constituent exchanges and platforms
are unregulated, each has proactively instituted Know-
Your-Customer (KYC) and Anti-Money Laundering (AML)
policies.
4 For greater detail around pricing of these benchmarks
see
→https://www.cryptofacilities.com/cms/storage/resour
ces/cme-cf-reference-rate-methodology.pdf
5 CF Benchmarks is authorized by the U.K.s Financial
Conduct Authority (FCA) and recognized as a
Benchmark Administrator under the European
Benchmarks Regulation (EU BMR).
6 In 2013, IOSCO recommended principles for
administrators of financial market benchmarks that
have been widely accepted as representing best
practices by regulators: see International Organization
 of Securities Commission, “Principles for Financial
Benchmarks: Final Report” (July 2013).
→https://www.iosco.org/library/pubdocs/pdf/IOSCOPD
415.pdf
7 Through to May 31, 2018, the CME provided a 50%
discount to all market participants for Globex spread
transactions.
8 The COT report separates traders in financial futures
and options markets into four main categories:
Dealer/Intermediary; Asset Manager/Institutional;
Leveraged Funds; and Other Reportables. The TFF
report provides a weekly breakdown of each Tuesday’s
open interest for markets in which 20 or more traders
hold positions equal to or above reporting levels
established by the CFTC. The trader categories are
obtained via Form 40 which is required under CFTC
Regulation 18.04 to be completed by reportable traders.
Among the reported details in the TFF report are
spreading (open interest by long and short positions)
and the number of traders in each category.
9 For example, both Kraken and BitMex have increased
their tick size in 2017.
10 →https://www.cnbc.com/2018/05/07/bill-gates-i-would-
short-bitcoin-if-i-could.html
11 Nadex is regulated by the Commodity Futures Trading
Commission.
12 →https://oxygen.trade/
The Wild West of ICOs
Shaen Corbet
Douglas J. Cumming

1 Introduction
As with any juvenile and rapidly expanding financial product, we
must be aware of the potential for illicit and ethically-challenging
decision-making while the boundaries for regulation continue to
be designed. The very creation of cryptocurrencies has
somewhat challenged regulators. Cryptocurrencies have
provided an exceptionally easy platform that can be used for
cross-border trade, but they can easily generate illicit activity.
Companies and governments alike can utilise these products for
somewhat ‘questionable’ practices. Three specific key concerns
have been identified in recent literature: 1) the use of
cryptocurrencies by governments to circumvent internationally-
binding sanctions and controls; 2) the announcement of
companies of their broad intentions to enter the cryptocurrency
market, with little or no intention of following through on their
commitments; and 3) the simplistic nature through which
investor theft has continued to escalate within the scope of
unregulated ICOs. These situations necessitate broad
consideration by regulators and policy-makers before the
markets for cryptocurrencies can be truly identified to have
evolved to levels similar to that of other types of traditional
markets.
There have been a number of ethically-challenged issues
that have arisen since the establishment of Bitcoin and other
growing cryptocurrencies and digital asset types. Regulatory
bodies and policy-makers alike have observed the growth of
cryptocurrencies with a certain amount of scepticism based on
the growing potential for illegality and malpractice through the
use of cryptocurrencies. Some regulatory authorities, including
the International Monetary Fund, have expressed their
satisfaction with the product’s development and the benefits
that are contained within its continued growth, however, the
Securities and Exchange Commission (SEC) amongst other
international authorities have explicitly warned of the potential
market manipulation techniques and ability to utilise fraudulent
methods to defraud and steal from unwilling and unsuspecting
investors.
The rest of this chapter is as follows. Section →2 presents a
thorough review of the literature relating to the development
and issues relating to ICOs and criminality in cryptocurrencies.
Section →3 presents a review of the irregularities that have
occurred in ICO markets, with emphasis on criminality, the use
of ICOs by sovereign states and corporates and other examples
of questionable ICOs. Section →4 presents and overview as to
how the regulation has changed over time, while Section →5
concludes.

2 Previous literature
Research based on ICOs has developed substantially since 2018,
focusing on a broad number of areas such as underlying
technology, financing and governance. It is notable that a
developing strand of research has began to focus on issues such
as illicit usage of ICOs and the developing role that
cybercriminality has begun to play at the point at which
cryptocurrencies begin their existence. →Adhami et al. (→2018)
analysed the determinants of the success 253 ICOs to find that
the probability success is higher if the code source is made
available, when a token presale is organized, and when tokens
allow contributors to access a specific service (or to share
profits). While →Hashemi Joo et al. (→2019) identify that ICOs
have generated billions of dollars of funding to startups and
projects worldwide in less than two years, many successful ICOs
yielded extremely high returns to investors. While the ICO is a
revolutionary vehicle for business funding, it has raised concerns
among users as well as potential investors about its risk and lack
of regulation. The future of this innovative funding method
highly depends on further development and placement of
appropriate regulatory supervision, better understanding of risk
and benefits and attaining the confidence of users. →Deng et al.
(→2018) focused on the September 2017 decision to ban ICOs in
Chine, noting that the decision could hamper revolutionary
technological developments and dampen the growth of this
potentially beneficial market. The authors provide a non-
exhaustive classification of the legal status of ICOs, including the
pre-sale of products or services, offering of shares, issue of
debentures, issue of derivatives, collective investment schemes
and crowdfunding, as well as a possible regulatory reform of the
current ICO ban in China. It is concluded that ICOs could be best
regarded as pre-sale of products or services, whereas, the other
five types of ICOs are highly likely to be considered as financial
securities and thus should be subject to securities laws. →O’Dair
and Owen (→2019) went as far as to investigate as to how new
music ventures might obtain alternative entrepreneurial finance
through token sales or ICOs, presenting evidence as to the
breadth that this new developing market can reach. →Fisch
(→2019) assessed the determinants of the amount raised in 423
ICOs while drawing on signalling theory to show that technical
white papers and high-quality source codes increase the amount
raised, while patents are not associated with increased amounts
of funding. The results indicate that some of the underlying
mechanisms in ICOs resemble those found in prior research into
entrepreneurial finance, while others are unique to the ICO
context. →Felix and von Eije (→2019) found that the average
level of under-pricing of ICOs of 123% in the US and 97% in the
other countries. The results for the US ICOs are significantly
higher than for US IPOs on average and also higher than US
IPOs at the beginning of the dot.com bubble. The authors also
study the determinants of ICO under-pricing. Further,
companies that use a large issue size or a pre-ICO (a sale of
cryptocurrencies before the ICO) leave less money on the table.
→Cohney et al. (→2019) found that many ICOs failed even to
promise that they would protect investors against insider self-
dealing and that a significant fraction of issuers retained
centralised control through previously undisclosed code
permitting modification of the entities’ governing structures.
→Barone and Masciandaro (→2019) analyse separate money
laundering techniques including the use of cryptocurrency to
shed light on their relative role as an effective device for the
criminal organisations to clean their illegal revenues. This
research is developed further in the work of →Corbet et al.
(→2019) who develop on the specific methods of illegality that
have become a central issue in the developing cryptocurrency
markets. Among the most alarming issues in recent years
include that which have substantially damaged market integrity
and identified the presence of potential fraud and criminal
behaviour within the broad market system (→Gandal et al.
(→2018); →Griffins and Shams (→2018)). Such issues have
become ever more alarming due to the multiple identified
interactions between both product (→Corbet et al. (→2018);
→Katsiampa et al. (→2019); →Corbet and Katsiampa (→2018);
→Corbet et al. (→2020); →Celeste et al. (→2019);
→Akhtaruzzaman et al. (→2019)) and derivative types (→Corbet
et al. (→2018)). Further, →Corbet et al. (→2019) investigate the
effectiveness of technical trading rules in cryptocurrency
markets and provide significant support for the moving average
strategies, with emphasis on the variable-length moving average
rule performs the best with buy signals generating higher
returns than sell signals.
→Nguyen et al. (→2019) found that the negative impact of
an Initial Public Offering (IPO) on existing stock prices can also
be observed in the cryptocurrency market, where altcoin
introductions are found through the use of Autoregressive-
Distributed-Lag (ARDL) estimations, to reduce Bitcoin returns by
0.7%. This result is found to be particularly pertinent as the
average and median daily returns of Bitcoin are 0.6% and 0.3%,
respectively. →Lahajnar and Rozanec (→2018) analysed a
number of factors, which directly or indirectly influence the
successful implementation of ICO projects, and the researchers
extracted the most important among them (model parameters).
→Huang et al. (→2019) found using 915 ICOs issued in 187
countries between January 2017 and March 2018 that ICOs take
place more frequently in countries with developed financial
systems, public equity markets, and advanced digital
technologies. The availability of investment-based crowdfunding
platforms is also positively associated with the emergence of
ICOs, while debt and private equity markets do not provide
similar effects. Further, countries with ICO-friendly regulations
have more ICOs, whereas tax regimes are not clearly related to
ICOs. →Chen (→2019) focus on signals released in multiple
channels in different ICO stages to investigate the relations
between signal processing and information asymmetry. The
authors find differing results throughout the different stages
analysed, first indicating that in the crowd sale stage, high
credible and easy-interpretable signals have significant
influences on token sales. In the listing stage, low credible and
easy-interpretable signals have significant effects on token
trading. High credible and hard-interpretable signals, which
deliver project fundamental information, lose their functions in
both stages, causing information asymmetry in ICOs. Further,
investor comments on social media, which is a multiple-way
communication channel, play the role of information
surveillance for ventures’ voluntary disclosures.

3 Some brief examples of cryptocurrency

and ICO irregularities
The very creation of cryptocurrencies has somewhat challenged
regulators. →Nakamoto (→2008), while attempting to change
the face of finance and fiat currency as we know it, challenged
the views of many based on the viability of the cryptocurrencies
at large. However, in the decade since the creation of Bitcoin,
there have been a number of opportunistic manoeuvres that we
must consider. Cryptocurrencies have provided an exceptionally
easy platform that can be used for cross-border trade and
generally illicit activity. Further, while pricing dynamics continue
to be challenged as possessing a substantial bubble →Corbet et
al. (→2018), companies and governments alike can utilise these
products for ‘questionable’ practices. Three key concerns have
been identified: 1) the use of fake ICOs to steal unsuspecting
investor funds; 2) the use of cryptocurrencies by governments to
circumvent internationally-binding sanctions and controls; and
3) the announcement of companies of their broad intentions to
enter the cryptocurrency market, however, with little or no
intention of following through on their commitments. Both of
these situations contain substantial asymmetric information and
moral hazards that necessitate broad consideration by
regulators and policy-makers. In this section, we discuss each
issue in detail.

3.1 Questionable motives, criminality and ICO

disappearance
A controversial area of Initial Coin Offerings (ICOs) concerns
financial regulators and businesses highlighting the importance
of full and fair disclosure of corporate intention to incorporate
blockchain technology. While ICOs can help companies to reduce
the costs of raising capital, the lack of transparency and very
limited information available for investors in the white papers
might affect the corporate performance in the long run. The
absence of a unified regulatory framework creates multiple
speculation opportunities for all market players. At corporate
level, the decision to adopt cryptocurrency or blockchain
technology can change the corporate identity of the firm, for
example, from a more conventional identity to that of a Fintech
company, and attract a new group of investors. However, those
intentions to adopt blockchain often stays at the stage of writing
a white paper, making corporate announcements, or even
simply changing the name of corporation, and not going further
to actually launching the stated cryptocurrency or building the
proposed platform. Thus corporations may try to take advantage
of the euphoric and speculative investment motives and ride a
wave on the cryptocurrency bubble. The explosive behaviour of
the cryptocurrency markets can be compared with Dot.com
bubble and related corporate name changes (→Cooper et al.
(→2001)).
Note: Data was available between 1 January 2014 and 31 July
2018. Data was obtained from →www.coindesk.com. The above
bars represents the number of ICOs initiated per month while
the black line represents their size as measured in US$ millions.

Figure 1 Number and monetary value of initial coin offerings,

2014–2018.

One of the largest signals that there exist the presence of

irrational exuberance in cryptocurrency markets is denoted
within not only the number of Initial Coin Offerings (ICOs) in
recent years (see →Figure 1), but indeed the source of these coin
offerings. A substantial number of corporate entities have made
announcements with regards to their intentions to enter the
cryptocurrency sphere, for a host of differing reasons. This has
raised alarm due to the inherent dangers associated with
asymmetric information and moral hazard. As with any new
financial product, we must be aware of the potential for illicit
and ethically-challenging decision-making as the boundaries of
regulation are designed. The very creation of cryptocurrencies
has somewhat challenged regulators. Cryptocurrencies have
provided an exceptionally easy platform that can be used for
cross-border trade and generally illicit activity. Companies and
governments alike can utilise these products for ‘questionable’
practices. Two key concerns have been identified: 1) the use of
cryptocurrencies by governments to circumvent internationally-
binding sanctions and controls; and 2) the announcement of
companies of their broad intentions to enter the cryptocurrency
market, however, with little or no intention of following through
on their commitments. Both of these situations necessitate
broad consideration by regulators and policy-makers. Regulatory
bodies and policy-makers alike have observed the growth of
cryptocurrencies with a certain amount of scepticism, based on
this growing potential for illegality and malpractice. →Foley et al.
(→2019) estimate that around $76 billion of illegal activity per
year involve Bitcoin (46% of Bitcoin transactions). This is
estimated to be in the same region of the U.S. and European
markets for illegal drugs, and is identified as ‘black e-
commerce’.
However, at the core of the main issue with ICOs is simply
that of direct theft, which has occurred on multiple occasions,
including the most simplistic of financial crime, where the host of
the ICO simply disappears. Unfortunately, this type of scam has
become far too common in recent times. Amongst the most
well-known is that of Pincoin, representing one of the largest
ICO scam in history. Together with Ifan, another blockchain
company, 32,000 investors were duped out of the equivalent of
$660 million. The company had promised its investors a 40%
monthly returns on their investment, luring unsuspecting
investors with claims that the ICO was to be overseen by PIN
Foundation. Further, Modern Tech promised an 8% reward to
every investor for bringing in another investor, indicative of a
classic multi-level-marketing scheme with the benefit of
hindsight. Titanium was another example of a textbook ICO case
of fraud. The ICO was based on a social media marketing blitz
that allegedly deceived investors with purely fictional claims of
business prospects. Charges were then filed against Michael
Alan Stollery, a self-described blockchain evangelist, who is
reported to have lied about business relationships with the
Federal Reserve and dozens of well-known firms, including
PayPal, Verizon, Boeing, and The Walt Disney Company. The
complaint alleges that Titanium’s website contained fabricated
testimonials from corporate customers. As evidence of the sharp
perceptions and actions of regulatory authorities, the Titanium
ICO was stopped before it was finished.
In 2016, over $30 million dollars were seized by Chinese
authorities investigating the OneCoin operation in the country.
The company claimed to be officially licensed in Vietnam, but this
was later refuted by the country’s government. More than five
countries have warned investors of the risks involved for those
choosing to invest in the company, including Thailand, Croatia,
Bulgaria, Finland and Norway. In 2017, another example of
substantial ICO fraud was that of Confido, who had collected
1235 Ethereum, at the time valued at approximately $375,000
before the price of tokens became tradable and their value
subsequently skyrocketed. At one point, the price of one CFD
token rose approximately that of twenty times the amount of the
initial ICO price. This price jump made Confido one of the best-
performing ICOs ever in terms of short-term token price rise,
and the tiny project possessed a market cap of $10 million in a
very short amount of time. However, a number of market
monitors had raised suspicions based on the lack of credibility
and the continued anonymity of those responsible. Thereafter, a
message on Confido’s subreddit said that the company is having
unspecified legal problems which will delay development ‘until a
resolution is found.’ Shortly after, the value of CFD had collapsed
to $0.03 and all associated had become non-responsive.
BitConnect closed down its crypto-lending platform in
January 2018 following the issuance of cease-and-desist orders
from Texas and North Carolina securities regulators, which
claimed the company was engaging in an unregistered securities
sale through its initial coin offering (ICO). Users exchanged
Bitcoin for BitConnect Coin (BCC) on the BitConnect platform
which had launched in January 2017, and were promised
substantial returns on their investments. There were broad
accusations and signs that there existed a broad ponzi scheme
referral system. BitConnect’s BCC token plunged more than 90
percent, falling from over $400 to less than $20 in the first weeks
of 2018. A number of users have since launched a class action
lawsuit against BitConnect to recoup lost funds.
Further, in a quite astonishing case in 2018, in a creditor
protection filing from the Nova Scotia Supreme court,
QuadrigaCX passed on 9 December 2018, leading to a liquidity
crisis at the exchange. CEO Gerald Cotten had died of
complications with Crohn’s disease ‘while travelling in India,
where he was opening an orphanage to provide a home and
safe refuge for children in need.’ The company had said that
Cotten was the sole person with passwords to access the
exchange’s ‘cold storage,’ where the vast majority of its client
holdings were held. QuadrigaCX filed for creditor protection in
compliance with the Companies’ Creditors Arrangement Act
(CCAA). The exchange only has CA$375,000 in cash, while it owed
approximately CA$260 million to its users. The exchange kept
most its assets in offline storage systems called cold wallets,
which are secured by digital security keys in order to protect
them from hacking and theft. Cotten was solely responsible for
the wallets and corresponding keys, which the company has
been trying to find after his passing.1 The company’s auditors
raised substantial, ongoing suspicions when they wrote in a 2019
report that they had ‘been unable to locate any traditional books
and records, including accounting records documenting
Quadriga’s financial results and operations following 2016’.
In April 2019, the founder of German-based startup
Savedroid has allegedly disappeared after raising a reported $50
million through both an ICO and private funding. It was later
reported that Savedroid’s CEO posted a video to YouTube
claiming that the apparent exit scam was actually a PR stunt the
company pulled off to advocate for ‘high quality ICO standards.’
This type of behaviour again presents further evidence of the
non-standard incidents that have been repeatedly occurring in
the market for ICOs, generating substantial erosion of trust
while verifying continued suspicion on behalf of regulators and
market participants alike.

3.2 Facebook and Project Libra

One of the largest ICO-related announcements in recent times
surrounded that of Project Libra, which is a proposed digital
currency by that of Facebook with an estimated launch date
during 2020. The project, currency and transactions are to be
managed and cryptographically entrusted to the Libra
Association, which was founded by Facebook’s subsidiary Calibra
and a number of other companies across payment, technology,
telecommunication, online marketplace, venture capital and
nonprofits. It was first rumoured in May 2019 that Facebook had
been secretly planning to release a cryptocurrency, with names
reported such as GlobalCoin and Facebook Coin. The new coin is
not proposed to be decentralised, thereby firmly relying on trust
in the Libra Association as a lender of last resort. The company
also announced a new digital wallet called Calibra, which will be
operated by Facebook as a separate subsidiary and provide
users with a way to store and spend Libra. Facebook provided an
image of Calibra’s design, including a three-wave symbol that
serves as the Libra’s equivalent of a dollar sign. The currency’s
blockchain, which is open source, will be programmed in a new
language developed by Facebook called Move. Facebook will
invite third parties to build smart contracts and other
blockchain-based services. The proposed idea to leverage upon
the already global Facebook network, utilising a token which
would be backed by financial assets including currencies and US
Treasury securities in an attempt to mitigate issues with
volatility, with substantial financial support to be provided by a
variety of companies that have already offered their support to
the idea. The Libra Association will thereby create new Libra
currency units based on demand while previous currency units
will be retired as they are redeemed for conventional currency.
In the related white paper, it was proposed that the
reconciliation of transactions will be performed at each service
partner, and the blockchain’s distributed ledger will be used for
reconciliation between service partners which would
theoretically prevent an association member extracting and
analysing the distributed ledger. In a May 2002 report in the Wall
Street Journal, it was widely reported that there were a number
of additional business models and benefits that Facebook was
considering to be central to the creation of Libra, including: 1) a
plan to launch a full payments network while the company had
been reportedly in discussions with payment networks Visa and
Mastercard, payments processors such as giant First Data as well
as large e-commerce merchants to support the launch; 2) that
Facebook had been the ability to generate up to $1 billion in
investments collectively from associated firms to provide
collateral to bolster and back the stablecoin that will be
associated with the new payments network; 3) the new coin will
exist as the currency of the payments system in order to
eliminate credit card fees for merchants as well as to avoid the
volatility of other cryptocurrencies like Bitcoin and Ether; and 4)
the new coin could potentially be tied to Facebook’s core
advertisement engine, thereby rewarding users for viewing
advertisements and then purchasing goods, similar to how
loyalty points rewards work.
The announcement of Libra’s coincided with unprecedented
scrutiny from regulators surrounding Facebook’s actions and
behaviours across multiple fronts in recent years. The company
has spent much time since 2017 battling to regain user trust
after multiple privacy scandals, thereby experiencing much
scepticism when Project Libra was initially announced. Since
Libra’s unveiling, the project has received quite a negative
reception from some policymakers. The United States Federal
Reserve Chairman Jerome Powell signalled much scepticism
about Facebook’s plans for Libra, stating that he did not ‘think
that the project can go forward’ and that it was of the utmost
importance that there be ‘broad satisfaction with the way the
company has addressed money laundering’ during testimony
before the House Financial Services Committee. Regulators had
possessed ‘serious concerns’ with the project in its entirety
when gauging its potential from the previous announcements. It
has also not been identified as to whether money has actually
changed hands from members who had expressed interest in
the Libra association as some of the companies who agreed to
lend their names to the project avoided making strong public
statements in support of it. This very fact reflected significant
uncertainty about how Libra will actually work and even if it is
possible to launch a network like this within the bounds of
international law, potentially explaining the reluctance for some
companies to offer support. At the core of this project, Facebook
is trying to build a payment system that combines the best
characteristics of blockchain and conventional networks. But the
result may wind up just being a contradictory and jurisdictional,
regulatory and legislative disaster. Amongst one of the key
issues is whether Libra will actually provide meaningful privacy
to its users, particularly as Facebook’s plan incorporates
delegating responsibility of the company’s network to its
subsidiary Calibra, where Facebook executives have stated that
Calibra will not share account holder’s purchase information
with Facebook without authorisation. After the multiple privacy
issues that have occurred in recent times, this is highly unlikely
to lead to a positive response from users.
The European response has been far more damning. In
September 2019, French finance minister Bruno Le Maire stated
that the nation will not allow the development of the
cryptocurrency in Europe as it is a threat to the monetary
sovereignty of nations. He also spoke about the potential for
abuse of marketing dominance and systemic financial risks as
reasons for not allowing cryptocurrency in Europe. He
announced that the French government refused to authorise the
development ‘on the European soil’. He continued to state that
‘the monetary sovereignty of states is at stake. Any failure in the
functioning of this currency, in the management of its reserves
could create considerable financial disorders’. One of the major
fears around the Libra is that it replaces the national currency in
states where the currency is weak or experiencing a strong
devaluation. There are also substantial fears that cryptocurrency
escapes control over the financing of terrorism. In early August
2019, a joint statement by several regulators in charge of
personal data protection, in the US, Europe, the UK, Canada and
Australia, summoned the social network to give guarantees in
this area. The EU’s competition authority subsequently begun
investigating Libra, fearing ‘possible impediments to
competition’. From a political standpoint, the United States
House Committee on Financial Services Committee asked
Facebook to halt the development and launch of Libra, citing a
list of recent scandals and that ‘the cryptocurrency market
currently lacks a clear regulatory framework’. Further, the US
House Committee on Financial Services Democrats later sent a
letter to Facebook asking the company to stop development of
Libra, citing concerns of privacy, national security, trading, and
monetary policy. In one of the most damning attacks on the
planned cryptocurrency, Jerome Powell, chair of the Federal
Reserve, testified before Congress on 10 July 2019 that the
Federal Reserve had ‘serious concerns’ as to how Libra would
deal with ‘money laundering, consumer protection and financial
stability’. It would be very much considered that the project,
even after substantial development will face considerable
opposition at all stages prior to establishment and throughout
the process international regulatory alignment.

3.3 Venezuela and the Petro

In mid-December 2018, the Venezuelan economy is estimated by
the IMF to have exceeded 1,000,000% price inflation, otherwise
identified as hyperinflation, combined with a premium of
approximately 2,500% between its official currency, the bolivar,
and a black-market exchange rate that has been thriving under
the influence of those with access to the official rate at source.
Throughout 2018, the Venezuelan government under the
leadership of President Nicolas Maduro have established a
number of routes through which they could reduce the burden
of economic collapse. Primarily, a new sovereign bolivar (bolivar
soberano) was identified to replace the old bolivar (bolivar
fuerte) at a conversion rate of 100,000:1, indicating that 100,000
old bolivars was the equivalent of US$1.5 cent.2 Other countries
with high levels of inflation, like Zimbabwe and Ecuador, have
escaped by adopting the dollar, which would most likely be
politically unacceptable for Mr Maduro’s regime. Zimbabwe
pegged their economy to the US dollar when citizens refused to
accept payments in the local currency. In Venezuela, which
deprives people of access to dollars more effectively than did
Zimbabwe (noting that the Zimbabwean economy underwent
four rounds of redenomination and the printing of the $100
trillion bill before resorting to building a new currency), people
could switch from the bolivar to the Petro.
This innovative product aimed at restructuring the Venezuelan
economy was launched in February 2018 through the Petro,
indicative of a cryptocurrency that would be supported ‘by oil
assets and issued by the Venezuelan State as a spearhead for
the development of an independent, transparent and open
digital economy open to direct participation of citizens’. The
associated product white-paper3 states that

Venezuelan oil assets will be used to promote the adoption of crypto assets
and technologies based on the country’s block-chain. … The Venezuelan
population will have at their reach a technology that will allow them having a
valuable reserve and robust means of payment to stimulate savings and
contribute to the country’s development. Petro will be an instrument for
Venezuela’s economic stability and financial independence, coupled with an
ambitious and global vision for the creation of a freer, more balanced and
fairer international financial system.

The base price of the Petro was denoted at one barrel of oil. The
link to oil is no more convincing. The Petro is not yet itself
exchangeable for oil. It is simply backed by a government’s
guarantee that it is backed by oil. The very creation,
advertisement and distribution of such a currency during a
period of exceptional economic strife generated substantial
concern about the credibility of this ground-breaking sovereign
asset. The Petro’s pre-sale to investors began on 20 February
2018, where 38.4 million tokens were made available until 19
March 2018. The Venezuelan government stated that US$3.3
billion was raised through the sale but this has yet to be
independently verified. We must also note that one of the very
characteristics of a cryptocurrency is that it be free of
government intervention, explicitly decentralised from central
bank authority.
The introduction of the Petro is quite similar to the German
government’s decision to introduce the Rentenmark to stem the
growth of hyperinflation during the 1920s. The Rentemark was
made stable through the backing of property used for
agriculture and business, tangible products through which the
German population could hold as security to underpin the value
of the Papiermark. This is one of the key differences when
observing the Petro and it’s underlying fulcrum. Without explicit
backing, this product is simply driven by unsupported market
sentiment, offering little for a population desperate for
economic stability. Although not the first Venezuelan
cryptocurrency, products such as Bolivarcoin, Onixcoin, Rilcoin
and Perlacoin have preceded Petro, however, each have had
little purchase internationally. When initially announced in
December 2017 by President Maduro, one major concern was
identified in this new cryptocurrency’s ability to circumvent US
sanctions that had been implemented on the Venezuelan
economy and their ability to access international financing.
Officials of Iran and Russia have said their governments might
be interested in issuing cryptocurrencies. The Marshall Islands
announced that it would issue one, called the sovereign, that it
will accept as legal tender. The Marshall Islands is a dollarised
economy; a second currency would give it at least the illusion of
greater control over its money. Iran and Russia are subject to
American sanctions. The one common theme throughout these
envisaged planned cryptocurrencies is a non-standard
relationship between these countries and the economy of the
United States. The US Department of the Treasury have explicitly
warned that investor’s partaking in the initial coin offering of
Petro would be in breach of such sanctions that have been
imposed on countries such as Venezuela.
The ethical underpinning that supports the generation of the
Petro is somewhat opaque. A number of rating agencies,
international economists and news agencies have all stated that
this product is nothing more than a scam and a product to
circumvent restrictions while providing false hope to a desperate
population. The project has been identified as missing critical
information, from the description of the mechanism to its
technology and supposed oil-backing. The underlying
technology supporting the product has been broadly challenged
and has throughout 2018 changed substantially from that
information provided in the Petro’s original white-paper. The
principal platform for the coin is NEM, where accounts are
anonymous, but can disclose their identities in the description of
their coins if they wish. The Venezuelan government issued 82.4
million tokens from an NEM account in March 2018 described as
preliminary coins. The product has continued to evolve as a
product who’s underlying structure remains fluid, but this is not
a unique selling point, in fact, it would raise fears that there is a
strong theme of desperation from economic collapse at the
foundations of the necessity for this outlier sovereign product
designed specifically to ‘petrolise’ salaries and prices. The Petro
has also continued to obtain support from a number of
international exchanges. Hong Kong-based Bitfinex, one of the
world’s largest exchanges by volume, in March said it never
intended to list the Petro due to its ‘limited utility.’ The only
exchange that has publicly discussed plans to list the Petro is
India’s Coinsecure. As of late 2018, the product remains un-
traded. The technology behind the coin is said to be in
development while nobody has been able to make use of the
Petro despite claims of substantial investment at the time of the
ICO. Further, a number of international journalist who have
contacted the Venezuelan government for comment remain
unanswered while the Superintendence’s website is
unresponsive. In August 2018, President Maduro announced that
salaries, pensions and the exchange rate for the bolivar would
be pegged to the Petro, thereby underpinning the economy to
the simplistic assumption that one barrel of oil (priced at
approximately $66 at the time that this peg had taken place,
backed with crude oil reserves located in a 380-square-kilometre
area surrounding Atapirire4) is equivalent to one Petro. This
statement and the precarious nature of this sovereign
cryptocurrency presented a strong signal of the desperation that
had now taken over, that a government would simply rest their
economic future (although already bleak) on an exceptionally
high-risk, high-volatility, untested, unverified and most likely
illegal product.

3.4 KodakCoin and other examples of corporate

manoeuvres
On the 9 of January 2018, camera manufacturer Kodak
announced that it was entering the cryptocurrency market
through the creation of KODAKOne, described as a revolutionary
new image rights management and protection platform secured
in the blockchain. Kodak announced that its development
seamlessly registers, manages and monetises creative assets for
the photographic community (→Corbet et al. (→2019)). It would
be used to underpin the assured buying and selling of rights-
cleared and protected digital assets while ensuring
transparency. The announcement had a significant sharp impact
on volatility (which peaked at over 60% per day) with shares
increasing from over $3 per share to over $12 in less than one
week. This was associated with an increase in market sentiment
and research using terms such as ‘Kodak’ and ‘KODAKCoin’.
Kodak CEO Jeff Clarke said in a press statement, ‘For many in the
technology industry, ‘blockchain’ and ‘cryptocurrency’ are hot
buzzwords, but for photographers who’ve long struggled to
assert control over their work and how it’s used, these
buzzwords are the keys to solving what felt like an unsolvable
problem.’ In theory, photographers will be able to upload their
images to a platform called KodakOne, create a blockchain-
based license for each image, and use web-crawling software to
scour the Internet looking for copyright violations. Instead of
using dollars, photographers can have clients pay them in
KODAKCoins. However, there are many analysts and market-
commentators alike that continue to identify Kodak’s strategy as
a technique to capitalise on the current cryptocurrency frenzy or
is it indeed a valid evolutionary characteristic of blockchain.
The results provided by →Corbet et al. (→2019) indicate a
substantial and sustained increase in return volatility in the
period after the announcement of Kodak’s intention to create a
cryptocurrency. Such announcements can potentially take
advantage of the euphoric and speculative investment motives
that have been inflating what some consider to be a significant
bubble in cryptocurrency markets. Announcements without
strong supporting evidence can present an channel through
which speculative contagion can flow from cryptocurrency
markets to equity markets. The definition provided by the US
Securities and Exchange Commission for a ‘pump-and-dump’
specifically comes to mind, that often occur on the Internet
where it is common to see messages posted that urge readers to
buy a stock quickly or to sell before the price goes down, or a
telemarketer will call using the same sort of pitch. Often the
promoters will claim to have ‘inside’ information about an
impending development or to use an ‘infallible’ combination of
economic and stock market data to pick stocks. In reality, they
may be company insiders or paid promoters who stand to gain
by selling their shares after the stock price is ‘pumped’ up by the
buying frenzy they create. Once these fraudsters ‘dump’ their
shares and stop hyping the stock, the price typically falls, and
investors lose their money. These ‘sudden’ cryptocurrency
announcements have also attracted the attention of regulators.
Jay Clayton, the chairman of the Securities and Exchange
Commission (SEC), said that the agency was ‘looking closely at
the disclosures of public companies that shift their business
models to capitalise on the perceived promise of distributed
ledger technology.’ However, Kodak then decided to delay the
ICO of KODAKCoin in an attempt to verify accredited status of
approximately 40,000 potential investors. The SEC requires that
an individual accredited investor has a net worth that exceeds $1
million, or an annual income of at least $200,000, along with
other conditions. The company claims it needs ‘several weeks’ to
verify the ‘accredited investors’ status of those who applied to
invest in the ICO. Potential investors from outside the US would
then be considered in accordance with their local jurisdictions.
But one key point that can be taken from the case of Kodak is
that it’s price, two months later, remained elevated by almost
100% of that from early January 2018. Even without the
implementation of an ICO, the announcement of a
cryptocurrency related plan has potentially incorporated any
cryptocurrency speculation into the share price of a publicly
traded company. This is a point of concern for regulators and
policy-makers alike.
While Kodak provide an example of a company that has
attempted to incorporate cryptocurrency into their non-
cryptocurrency-related business practices, there have also been
a number of companies that have gone one-step further and
attempted to change their names to identify as a
cryptocurrency-related company. This is even more astonishing
as some of these companies for the most-part had no prior
interaction with any form of IT or technological development. In
a detailed analysis investigating both the financial market effects
and the theoretical grounding or indeed ethical support
surrounding such decisions, →Akyildirim et al. (→2019) found
that thirty-one companies are identified to have partaken in
‘crypto-exuberant’ naming behaviour. In 2015 and 2016, there
are only two companies, NXChain and First Bitcoin Capital that
change their names, previous known as AgriVest Americas and
Grand Paracaraima Gold respectively. In 2017, there are twelve
companies who then change their names, and eleven in 2018.
When comparing the companies who had partaken in crypto-
exuberant company announcements, those who have utilised
cryptocurrency and blockchain when naming are found to have
on average higher returns, yet more volatile returns with mean
returns of −0.0081% and a standard deviation of 5.1575%.
Further, such companies exhibit far more substantial extreme
returns (where evidence is provided of one-day price decreases
of 52.8% and increases of 57.7% when compared to −15.9% and
16.9% in non-cryptocurrency companies respectively), further
associated with skewness and kurtosis in excess of three times
that of other non-cryptocurrency-based company names. Such a
result indicates that companies that partake in the use of
cryptocurrency-based naming practices are found to be
substantially riskier shares to purchase when compared to other
companies that have changed their corporate name for other
types of reasons.
Quite incredibly, there have also been two companies who
have actually changed their name twice, in both cases from a
non-crypto-exuberant name to a crypto-exuberant name and
then back again. In August 2018, Focused Capital II Corp
announced its intention on the TSX Venture Exchange to change
its name to Fortress Blockchain Corp, clearly positioning its
corporate identity to be further associated with the growing
blockchain and cryptocurrency markets. During this transaction,
the company issued 71.2 million common shares and signalled
its intention to begin trading on the TSXV under the ticker
‘FORT’. In a largely unanticipated move, in April 2019, Fortress
Blockchain then applied to the TSX Venture Exchange to change
its name to Fortress Technologies Inc while continuing to use the
same ticker. This situation is the only identified case within the
dataset of a company retracting on its decision to partake in
crypto-exuberant behaviour. However, Long Island Iced Tea
Corp. remains as one of the most famous companies to employ
a crypto-exuberant naming strategy when changing their
corporate identity to Long Blockchain Corp in 2017. The stock
price then sharply increased almost 300% stating that it was
‘shifting its primary corporate focus’ from tea to distributed-
ledger technology. In 2019, it has been announced through
warrants in the United States that the FBI is looking for evidence
of insider trading and securities fraud connected to Long Island
Iced Tea stock, where two men related to a separate company,
were arrested for securities fraud. There have also been broad
accusations about the presence of a ‘pump-and-dump’ scheme,
where promoters buy a cheap stock, start hyping it to investors
with eye-catching claims, then sell their own holdings during the
resulting mania, hopefully securing a profit before the stock
comes crashing down. Based on a number of text messages that
the FBI have since uncovered, they are interested in a person
known as ‘Eric W’ in a series of messages, where the accused
person owned approximately 15% of the shares in Long Island
Iced Tea at the time that the company’s name was changed.
There is further investigation into the use of an investor relations
program to develop hype around the company during this time.
Riot Blockchain has also been investigated throughout 2018 and
2019 by the SEC. It had previously changed its name from
Bioptix, where its previous business practices was based on the
development of veterinary products patent and developing new
ways to test for disease.

4 How has the regulation of ICOs changed

over time?
While clearly portraying evidence of the multiple issues that the
market for ICOs have experienced in recent times, including that
of moral hazard, adverse selection, insider trading and market
manipulation amongst others, and the very fact that participants
have been continuously proven to have acted out outside
existing regulatory frameworks, have caused much distrust
within the broad ICO market. In many cases there was an
absence of due diligence, standardised financial reporting,
prospectuses containing the main risk factors of the company
and its businesses and broad corporate governance. Instead,
many fund providers to these projects released whitepapers with
poor information, in some cases omitting the name of the
company or its address, however, focusing on marketing
techniques, even in some cases using celebrities in an almost
tactical capacity to distract investors. The first responses from
national regulators around the world focused on warnings and
guidance while providing thorough investigations with reports
and outright bans (such as that seen in China in September
2017). Most regulators would agree that although ICOs are
currently not governed by specific regulations, the broad
practices of many ICOs might already fall under existing legal
and jurisdictional coverage. Recently, it has been discussed that
some ICOs might actually be contained within the scope of
regulation focused on Initial Public Offerings (IPOs), private
placement of securities, crowdfunding or even collective
investment schemes.
The development and growing sophistication of
international regulatory scrutiny has somewhat alarmed
cryptocurrency entrepreneurs. In the past, the rapidly expanding
ICO landscape resembled a free for all, where the most talented
and knowledgeable appear to have been taking funds from the
most vulnerable who were seeking quick profit. The negative
media coverage on cryptocurrency criminality has most certainly
attracted the attention of regulatory authorities. The effect of
increased scrutiny by authorities has been to multiply regulatory
barriers for entrepreneurs aspiring to begin an ICO. However,
this has generated some confusion. There has been
considerable controversy over the status of utility tokens, which
require fewer disclosure forms and checks from the SEC and
which are favoured by most startups opting for an ICO. The SEC
were seen to have adequately forewarned cryptocurrency
startups when asserted that most ICO tokens would require
greater disclosure, the first time that the commission had
clarified its stance regarding ICOs. The increased level of
regulation for a security token sale appears to have made ICOs
costlier while taking more time as compared to an ICO for utility
tokens, where the average cost is estimated to be between $1
million and $3 million for a security token sale. Private sales to
accredited investors also shift costs of conducting a public ICO.
Entrepreneurs have increasingly begun issuing a bonus (or
discount) on their tokens to private investors.
When the SEC released the ‘Framework for Investment
Contract Analysis of Digital Assets’ in April 2019, many in the
cryptocurrency community were unhappy with the broad
definition which the SEC applied to securities, which left little
room for true utility tokens. Initial Exchange Offerings (IEOs)
have been another area in which regulators and cryptocurrency
innovators have recently developed contrasting opinions. The
largest concerns for the users of cryptocurrencies has been the
security as a multitude of hacking events have generated many
negative reverberations throughout the industry. It is against
this backdrop that more regulatory oversight has become
necessary.
Regulators must also continue to monitor the growth of
online casinos, who have somewhat recently revolutionised the
world of gambling through the use of cryptocurrency in online
casinos. It is now possible to gamble using Bitcoin amongst
other cryptocurrencies, which had been found to improve the
security of your gambling experience. More online casinos have
started accepting cryptocurrency in a bid to attract younger
players, which further provides an anonymous playing
experience and improve the transaction processes. This also
generates widespread issues with regards to the taxation and
cross-border monitoring of fund flows and has been identified
one of the trends that has contributed to the immense growth of
the online gambling industry.

5 Concluding comments
In this chapter, we provide a thorough account of the key issues
that have engulfed the ICO market in recent years, somewhat
stifling the growth of illicit cryptocurrency auctions, but further
failing to eliminate the issue completely. A central theme
throughout these listed issues and examples surrounds
substantial damage to credibility within the market. We have
observed cases of theft at the level of the exchange, within the
whitepapers that have been provided, through the usage of
celebrities to support marketing tactics, through the illegal
cross-jurisdictional transfer of funds and indeed, the most
simplest form of theft, where the ICO counter-party quite simply
disappears with the accumulated assets of investors. While
cryptocurrency-enthusiasts continue to promote the positive
attributes that support the potential growth of this new
investment asset, the same proponents cannot ignore that this
entire sector has been rampant with levels and styles of
fraudulent behaviour that is quite difficult to find in other
international markets of similar scale and scope. But there have
been significant positive developments in terms of the future
scope of international regulation and the potential to eliminate
fraudulent behaviour. It is essential that during the continued
growth of the sector for cryptocurrencies that regulation,
including a broad international set of standards, be developed
and maintained to grow at pace with the market for
cryptocurrencies. It is essential that regulations must compare
effectively with the sophistication of the market that they
attempt to monitor. Until the broad gap between regulation and
the capacity for cryptocurrency market misuse is diminished,
there will continue to be substantial and frequent loss of
investor assets through mechanisms that represent those
usually observed in an exceptionally juvenile market.

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Notes
1 However, it was widely reported that Cotten mostly
worked from his computer at home, which is encrypted.
Cotten’s wife, Jennifer Robertson, reportedly stated in
an affidavit, ‘I do not know the password or recovery
key. Despite repeated and diligent searches, I have not
been able to find them written down anywhere.’
2 We must note that the greatest level of hyperinflation
was identified in Hungary, where the daily inflation rate
reached 207% in July of 1946, leading to a currency
reform on August 1, 1946. The Pengo was replaced by
the Forint, and the conversion rate was 400 octillion
Pengo to one Forint.
3 Available at: →https://www.petro.gob.ve/
4 To date, there is no evidence of oil accumulation at this
site.
The ethical and legal aspects of
blockchain technology and
cryptoassets
Thomas A. Hulme

1 Introduction
Cryptoassets have been in existence since circa 2008 when
Bitcoin (“BTC”) was created. Since then, the law with respect to
cryptoassets and smart contracts have not been tested as
merely not enough consumers and businesses were dealing with
them; fast-forward to the end of 2017, and the price per 1 BTC
was circa $20,000.
Two years later, at the end of 2019, the cryptoasset market is
now testing, particularly legal principles due to the volume of
business and wealth concerning this market. Infrastructure
exists to facilitate the storage and trading of cryptoassets;
further, smart contracts and derivative contracts exist to allow
faster transfer of wealth and to speculate on the price of any
given cryptoasset. Moreover, there are hundreds if not
thousands of cryptoassets, with more being created each month.
The cryptoasset market has grown, and it is now at the point
where businesses and consumers are unsure where they stand
with respect to this new asset. In particular, what rights these
new assets have and further concerns with respect to the
business activities they are carrying out and the clarity to
understand if they are applicable to their business. Examples of
theft cases, less-than-ethical businesses practices, money
laundering concerns and consumer protection concerns are all
factors which have contributed to organisations such as the
Financial Conduct Authority (“FCA”) and Her Majesty’s Revenue
& Customs (“HMRC”) to investigate and provide guidance.
Furthermore, we are seeing more civil cases enter and proceed
through the commercial courts of England and Wales, which
implies the value of claim any given claimant is seeking, is
substantial enough for it to warrant issuing a claim with the
courts.

2 Previous literature
Literature concerning blockchain technology and cryptoassets
generally speaking has increased since the rise in the price of
BTC in 2017. With respect to the law, literature has been scarce,
to say the least. However; there are some notable publications
from particularly individuals and government bodies which have
shed some light on the approach of government and the
applicability of existing laws.
Leigh Sagar is a practising barrister of England and Wales
and wrote a book called The Digital Estate, published in →2018;
this book examines the law concerning (inter alia) digital assets
and cryptoassets and seeks to provide clarification on the rights
and practical considerations in relation to these new assets. It is
very much a practice guide for those lawyers who wish to
understand more the rights and remedies associated with (inter
alia) cryptoassets.
Turning to other types of literature, in November →2019 the
Lawtech Delivery Panel released a statement named Legal
statement on cryptoassets and smart contracts. The Lawtech
Delivery Panel is a group arranged by The Law Society of
England and Wales to explore the ongoing technological
changes in the legal industry. This statement considers the key
and most topical points which are legally pertinent. Those points
being the law of property and the applicability of cryptoassets,
and further, smart contracts. This publication was key in the
progression of the legal industry dealing with these new
conceptual assets, of which, characteristics have not been tested
in the law previously. The Financial Conduct Authorities Guidance
on Cryptoassets published in January →2019. This guidance was
written after an initial statement published by the FCA and public
consultation to the public and appropriate professionals. This
guidance seeks to clarify the FCA’s position with respect to
finance law, specifically the Financial Services and Markets Act
→2000. The guidance sets out different types of cryptoassets
and applies them to the appropriate laws.
Some more academic papers have been written, reviewing
the regulatory framework with respect to cryptoassets, one of
which is Global Cryptoasset Regulatory Landscape Study
released in May →2019 by the University of Cambridge Faculty of
Law research. The paper seeks to review the regulatory measure
implemented by different jurisdictions and the challenges each
jurisdiction faces with respect to the actives being conducted. In
→2018 Kevin Warbach wrote Trust, but Verify: Why the
Blockchain Needs the Law, a publication reviewed the practical
consequences of implanting blockchain technology into existing
systems and the consequences that will have on the law, as a
result of smart contracts, and systems and contract which do not
need enforcing.

3 Blockchain technology and cryptoassets

3.1 What is blockchain
Blockchain is the name given to a piece of software, coded in a
particular way. The key characteristic of a blockchain system is
the implantation of an abstract process of data storage. Typically
programs will store data on the running computer hard drive, or
a hard drive which the computer running the program is
connected with, on the Internet; the source of data is from a
single hard drive. When a piece of software is created
implementing blockchain systems, the data of a piece of
software is stored in several hard drives, simultaneously.
Creating software in this way has a profound effect on the
data; in that, once the data is within any particular system, it can
not be amended or deleted. In order to distinguish between
typical software and blockchain software, an example is set out
below.
When one creates a document which contains words, on any
particular word processing software, one can save the document
as a file on the hard drive of the computer the software is
installed. Alternatively, one may wish to save it on a hard drive in
a data centre, or a “cloud”. Further, one may wish to save the
document at each of those places. Each place where the file is
saved, the file can be amended or deleted. One could make an
amendment of the cloud file and save it. If one wanted to
continue working from that document, one would have to access
the file stored on the cloud, not on the hard drive of the
computer. More importantly, if the cloud then corrupts, the file is
lost. If the type of data storage was blockchain based, one would
need to ensure that the computer hard drive is part of the
blockchain network. Once the file is saved on the computer, it
will simultaneously be saved on all hard drives that are part of
that particular blockchain system. If the computer was
destroyed, the same file would be accessible. Further, another
party would not be able to delete or amend the document.
3.2 What are cryptoassets
Cryptoassets are a strange concept. They are not tangible
property which is easily identifiable and which we can physically
pass to each other. They are not intellectual property (“IP”)
(although there will inherently be IP in the software code which
creates cryptoasset through the utilisation to blockchain
technology). They have been likened to currency; however, the
consensus is that it is not currency (perhaps currently). Previous
chapters in this book will no doubt discuss the principles of
money in more significant detail and apply them to the current
cryptoasset landscape. Cryptoassets are a generic name for the
existence of a log created as a result of the running of a program
which utilises the concept of blockchain technology. A blockchain
program can be designed and used for purposes other than
creating cryptoassets; however, the characteristics of
cryptoassets are likely to be contained within the program.
Blockchain technology is a concept applied to the software
which creates a ledger. Inputting data into the ledger containing
numbers creates a ledger of a numerical account. If the software
enables more than an account to exist and the theoretical
transfer of numeric data from one account to another, you have
two accounts in the blockchain transferring numbers. The
concept of digital accounts that record numbers is not new and
is currently used widely by banks. When one signs into their
online banking, they will see their account with numbers, these
numbers represent the monetary value which the bank owes
you. There will be a ledger of sorts behind the figures one sees
on a banks database. These numbers can, however, be altered
manually by one who has access to the software; an account can
read £100 and then for someone with access to accidentally or
purposefully add an addition “0” at the end. The account will
then have £1,000 within it; this is because these numbers are just
a log to make sure the bank (and we) know how much they owe
us.
Returning to blockchain systems; this ledger is different from
typical ledgers (such as the ones a bank would typically use)
because the data is stored simultaneously on blocks. This has
the effect that the data within the ledger can not unilaterally be
manipulated as the software requires each block to agree and
confirm any change. This creates a system where a finite amount
of numbers exist in a ledger (depending on how the software is
written); this brings a sense of permanence to the numbers.
These numbers and entries in the ledger are used and called
Cryptoassets. Similarly, the data in numbers can be replaced by
other data, such as word, patents etc. and this is the
permanence element of blockchain systems.
A typical Cryptoasset ledger will typically contain a set
amount of numbers, (or cryptoassets). Alternatively, the
program will have an additional software layer which enables
users to access the open-source blockchain software to join it
and become part of the blockchain; as a result, further
cryptoassets can be created, or “mined”.
In conclusion, a cryptoasset is a piece of data which can only
be created on a blockchain system. Characteristics of a
cryptoasset are (but are not limited to) that they can be accessed
by using a public key (to direct one to the particular blockchain),
a private key which will allow one to deal with the cryptoassets
and finally, that any given cryptoasset is unique. A cryptoasset
can not be copied, deleted or manipulated; it has a sense of
permanence.

3.3 What are smart contracts

As an element of security is provided by way of the blockchain
technology systems, smart contracts have been created. A smart
contract is a piece of software which has the terms and typically
the enforceability of the terms, built within the code of the piece
of software. This could operate outside of the blockchain area;
however, security would be an issue if blockchain wasn’t used. A
smart contract could be in the form of a cryptoasset which can
be sent and exchanged. That cryptoasset may have the term
built within it that on a particular date, it will send instructions to
its own software, to create another cryptoasset and send it to
whichever wallet it currently exists in.
The purpose of a smart contract is to enable two parties to
interact with security and without the fear that the other party
may not fulfil their obligation. The reason for that is because the
obligations are held within the contract and outside of the
control of either party.

4 The law
The law of England and Wales consists and is created in several
different ways. Firstly, there is common law which comes from
disputes being heard at court, and a particular legal principle
being drawn from it. Secondly, there is legislation which is
passed through parliament. Lastly, there is law which comes
from the European Union (“EU”), which is either a Regulation,
Directive or Decision. A Regulation is a piece of legislation which
all EU members must adhere to, as it is written. A Directive is a
broad set of guidelines; each member state must following and
implement by their own legislation. A Decision is a law which is
directed and specific member states. Although the UK is no
longer a member state, they will still be subject to certain EU
laws, unless they are repealed.
Blockchain technology itself is a concept and therefore, not
broadly subject to any law. Therefore, this part of the chapter will
only review cryptoassets.
4.1 Different types and current use of cryptoassets
Theoretically and conceptually, blockchain technology and
cryptoassets could be utilised for an incredibly broad range of
commercial and general purposes. Within this chapter, I will only
mention what I suggest are the current uses and loosely defined
types of cryptoasset. The FCA has released to sets of cryptoasset
guidance and has (broadly) provided for five different types:
1. Exchange Tokens
2. Utility Tokens
3. Security Tokens
4. E-money Tokens
5. Unregulated Tokens

4.1.1 Exchange Tokens

Exchange tokens are Cryptoassets such as BTC which have a
permanence to them; however, do not represent anything. They
simply exist. Derivatives of BTC exist such as Litecoin (“LTC”) and
Bitcoin Cash (“BCH”), and they have similar qualities, although
they are not the same as BTC. These tokens are unregulated by
the FCA.

4.1.2 Utility Tokens

I liken Utility Tokens to a credit one can possess in a shop. They
are like Exchange Tokens in a sense they do not represent
anything; they can, however, be used or traded in exchange for
something else. During the ICO boom, the majority of the
Cryptoassets which were created were Utility Tokens. An
organisation (typically a tech start-up) would create a limited
number of Cryptoassets which can then be sold for other
Cryptoassets or FIAT currency. The organisation would then have
equity to funds its business. In the event, their product or service
comes to market, those who bought the native Cryptoassets or
Token of the start-up would be able to use the Token to
purchase or use whatever the product or service us.
These tokens are generally unregulated by the FCA.
However, these tokens may possess other qualities which make
them akin to E-Money.

4.1.3 Security Tokens

Security Tokens provide a right or obligation in relation to a
Specified Investments. An example of this is a Cryptoasset which
represents, or mirrors the characteristics of (inter alia) a share,
bond or debt contract. These Cryptoassets are regulated and fall
within the Financial Services and Markets Act →2000 and fall
within the remit of the FCA.

4.1.4 E-money Tokens

E-Money Tokens are such tokens which act like E-Money. E-
Money is something set out in the Electronic Money Regulation
(“EMR”) and which is regulated by the FCA. An E-Money Token is
one which meets the characteristics of E-Money:
1. electronically stored a monetary value that
represents a claim on the issuer;
2. issued on receipt of funds for the purpose of
making payment transactions;
3. accepted by a person other than the issuer; and
4. it is not excluded by regulation 3 of the EMRs.
Example.

I create 100 “E-Money Cryptoassets” (“EMC”) of which each is worth

£1.00.
A consumer approaches me and purchases 50 EMC for £50.00. That
consumer can then redeem the 50 EMC for £50.
Not only can the consumer trade 50 EMC with me, but their local
shop also accepts the EMC. The consumer purchases a product from
the shop for 25 EMC. The shop can then approach me and redeem
the 25 EMC for £25.
An essential factor is that I, the issuer, have contracted that anyone
in “possession” of the EMC can redeem it through me.

4.1.5 Unregulated Tokens

This is a broad general categorisation which includes
Cryptoassets such as BTC. As long as a Cryptoasset is not
regulated like the above, for the FCA, they are not regulated.
It is convenient to note at this point that just because a
Cryptoasset does not fall within the definition or E-Money or is a
regulated asset for the above purposes; that does not mean that
it is not regulated at all. Laws will generally apply, and the above
definitions are provided by the FCA and are specific to financial
regulation as that has been the most common use of
cryptoassets at this point in time.
One of the most poignant laws is the Proceeds of Crime Act
→2002 (“POCA”), which applies to assets generally and sets out
the legislative scheme for the recovery of criminal assets. As the
majority of cryptoassets are untraceable to a person and they
have been synonymous with illegal activity, POCA will apply to
cryptoassets. This chapter will not specifically detail this piece of
legislation, however.
4.2 The rights over cryptoassets
Cryptoassets have become increasingly popular and used for
multiple reasons. Further, the value associated with them can be
quite significant; take BTC, for example with a current price of
circa $8,000. With such value being placed upon them, certainty
about rights and obligations must be provided and understood.
This is especially important as Cryptoassets are mostly a new
form of “property”; it has the characteristics of actual property
in that they are unique. However, they also have similar features
of Intellectual Property, information or data.
Cryptoassets are being used to store vast amounts of wealth,
transfer the wealth associated with an asset from one entity to
another and used to purchase real products, such as real
property, cars or a bottle of water. Therefore, if one posses a
Cryptoasset and relies on an implied right, those rights must be,
in fact, the legal rights one has over property if it is in fact,
property.
Property in terms of law is not property as one may
understand it to be. Property is a recognised term in law and has
been developed in common law and legislatively. There are
different classes of legal property, which result in different rights
associated with those properties and also a variety of separate
legislation.
The law and the courts of England and Wales are used to
enforce a legal right that one has over a thing. If a piece of land
belongs to a person legally, in the event another person
attempts to assume a right over the said property (physically by
taking possession or by way of conduct by attempting to sell the
property, for example), I can apply to the courts to recognise my
rights over a property. The courts will order that actions are
carried out which recognise my right over the property.
 If Cryptoassets are not defined as a class of property in law,
in the event that one needs or wants to enforce their right over
property (for example ones Cryptoasset was stolen and I want to
retrieve them back) the court may not have jurisdiction to order
an action to facilitate the return of the property.

4.3 Law of property

In typical situations, the classification of something being
property is not a thought that would cross one’s mind. If I sell a
car, there is no dispute that a vehicle is a piece of personal
property. If I have legal title over a vehicle and it is stolen, or I
enter into a contract which I want to remind (and I have the legal
right to do so), the courts have jurisdiction to deal with the car as
a piece of property. They can place a freezing order over it or
alternatively an order for delivery, for example.
IP is another form of property, which is intangible, however
laws and infrastructure has developed to accommodate this
form; such as the ability to register certain forms of IP. The
rights that IP have can, therefore, be enforced through the
courts; they recognise a right over the IP. If I have a registered
piece of IP and someone appropriates or uses it, I can enforce
my right through the courts.
The concept of property, in law, comes from the piece of
legislation which is the Law of Property Act 1925 which defines
property as “anything in action, and any interest in real or personal
property”. Thereafter, the nature of the rights associated with
the property was considered by Lord Wilberforce in the case of
National Provincial Bank v Ainsworth. Lord Wilberforce stated
that a property right was “definable, identifiable by third parties,
capable in its nature of assumption by third parties, and [must]
have some degree of permanence or stability.”. Common law (a
type of law derived from heard cases of which legal principles
arise) defines personal property as one of two categories:
1. a chose in possession; or
2. a chose in action
A chose in possession is a tangible object, such as a car. It can be
seen, touched and identified.
A chose in action is a right to a possession, which can be,
enforced by legal action such as a debt or the money in one’s
bank account.
Although the majority of Cryptoassets are definable,
identifiable by third parties and has some degree of stability,
they are not tangible. Further, they are not pieces of IP (however
it is possible that IP can be registered or written into the code of
a cryptoasset by way of implementation on blockchain systems).

4.4 Are cryptoassets property?

If one “owns” 10 BTC, worth circa $80,000 and one were
transacting with another party with the broad terms that one will
purchase an object for 10 BTC. 10 BTC is transferred to another
party, and they give me the possession of the object. However,
on delivery of the object, it is not the object that was agreed
upon. If I exchange cash (as a chose in possession) or execute a
bank transfer (a chose in action), I can apply to the court to claim
damages or execute a right to return the property. If BTC is not
property, nor is it IP, what right or action can one bring to take
possession of it?
There have been two known judgments from the courts of
England and Wales which consider the question of if BTC is
property. It is imperatively essential to note the distinction that
this is in reference to BTC and not Cryptoassets generally.
Liam David Robertson v Persons Unknown
In this case, Robertson is a Cryptoasset investor and had
accumulated circa 100 BTC. These BTC were stolen. Robertson
was able to locate the BTC to a particular wallet, in control of the
well-known Cryptoasset exchange and custody agent, Coinbase.
Robertson was able to identify the BTC due to the fact that each
BTC or divisive BTC is identifiable (unlike cash) and that on the
BTC blockchain, you can trace the movement of every BTC.
Robertson applied to the Commercial Court in London seeking
that a freezing order is placed upon the BTC located and within
the control of Coinbase so that they would not be dissipated. The
basis of this application was that Bitcoin was legal property and
its legal title was with Robertson. For the purpose of this
application, BTC was allowed to be viewed as property.

Vorotyntseva v Money-4 Ltd (T∕A Nebus.com) and others

This case was heard in 2018; however, the judgment was only
published on 13 November 2019. This matter was an application
for a freezing order and involved BTC and the Cryptoasset
Ethereum (ETH). The order was granted as a “very preliminary
order” by Justice Birss. Mr Justice (sir) Birss is a judge in the
courts of England and Wales who is known to have a particularly
astute understanding and knowledge of technology. It is
important to note that the question of whether BTC or ETH is
property was not brought up and therefore gives no further
certainty to the rights over cryptoassets. A further hearing will
take place in which an argument may be put forward that BTC or
ETH is or is not personal property.
Not all crypto assets are the same, and many have
significantly different characteristics. BTC and ETH are two
particular cryptoassets, which are similar in some respect but are
different in others. At this stage, it is impossible to rely upon the
judgments above as it did not consider particular characteristics
of the Cryptoasset. It is important moving forward that
Cryptoassets should not be given a broad definition and rights
assigned to them due to the nature and individuality of each
Cryptoasset. BTC and ETH, for example, are created on a public
blockchain and is, therefore, open-source.
There are however private blockchain systems which
subsequently create Cryptoassets. These systems may not be
branded as Cryptoassets; however, they are, for all intents and
purposes.
Examples of these are:
1. the J. P. Morgan coin created for the purpose of
internal wealth transfer; and
2. the cryptoasset used to transact within the
Ripple Network.
The Ripple Network uses a system by issuing cryptoassets (which
is more akin to a chose in action rather than a chose in
possession) which are redeemable for an underlying asset, such
as several Great British Pounds or BTC. This allows the Ripple
Network to be used to transfer wealth efficiently, and the asset,
which the issued Cryptoasset represents, can be redeemed by
the original person that the Cryptoasset was issued, or the
person to whom it has been transferred. In the circumstances
such as this, more significant thought must be had into the
rights and classification of the Cryptoasset used to represent the
underlying asset and furthermore, the underlying asset itself, if
it is a Cryptoasset.
4.5 Legal interest
To complicate matters further, there are two principles ways of
ownership in English law. These two types are a Legal interest
and a Beneficial (or Equitable) interest.
Legal ownership is concerning the title of the property; an
easy example of this is a motor vehicle purchased and registered
in England. When a motor vehicle is bought, a V55 is completed
and sent to the Driver and Vehicle Licensing Agency which will
then record the new owner and keeper of the motor vehicle. If
however I asked a friend to purchase a car on my behalf and I
give him/her the money to purchase the motor vehicle, it would
be registered in his/her name. He/she will have the legal title to
the motor vehicle; however, I have a beneficial interest in the
vehicle, which can be enforced through the courts.
If Cryptoassets are capable of being property, the law of
ownership and interest will likely apply, especially in the
circumstances of private blockchain Cryptoassets which are used
as an identification of a beneficial interest in an underlying
property.
When considering Cryptoassets, one may think it difficult to
demonstrate that one owns a Cryptoasset; there is no central
register where all Cryptoassets and owners are registered.
Neither are they tangible property where one can have physical
possession of an object, which is prima facie evidence of legal or
beneficial ownership. Cryptoassets are stored on a wallet on the
blockchain; which is shared with all other participants of the
blockchain; this gives the impression that one person can no
own them. However, due to the intrinsic characteristics of the
Cryptoassets and the fact a public and a private key is required
in order for a Cryptoasset is to be dealt with, typically,
possession or knowledge of a private key is prima facie evidence
of ownership. However, if a private key is appropriate, it
becomes challenging to identify the owner of the Cryptoasset
and the courts would likely turn to the evidence of fact to
determine an owner or the Cryptoasset.
Companies such as Bitcoin Suisse have created a “paper”
waller. This wallet is printed and is one of a kind; it contains a QR
code which will link the user to the public address. It also
includes a scratch surface, which when scratched away reveals
the private key to access the wallet; this is an example of how a
physical note or possession is being associated with a
Cryptoasset, mostly shared on a blockchain.

4.6 The Anti Money Laundering Directive & the

Money Laundering Regulations
The EU passed a piece of legislation which is the Anti Money
Laundering Directive (“AML”), requiring member states to
implement their own law to deal with particular ant money
laundering (and counter-terrorism) considerations. There have
been five amendments to the AML, the most recent being
implemented on 10 January 2020. The UK has implemented the
AML by way of the Money Laundering Regulations (“MLRs”).
The MLRs were previously with respect to particular
regulated organisations which are typically targeted by those
who seek to launder money, such as solicitors and those in the
financial sector; however, as of the fifth AML and MLRs,
cryptoasset businesses are now brought within its remit. This
has the consequences that the majority of cryptoasset business
must comply with the MLRs and must register with the FCA.
Whether a business will fall within this remit will depend on the
activities that the business undertakes, they are:
1. Cryptoasset exchange provider (including
Cryptoasset Automated Teller Machine (ATM),
 Peer to Peer Providers, Issuing new cryptoassets,
e. g. Initial Coin Offering (ICO) or Initial
Exchange Offerings); and
2. Custodian Wallet Providers.
The requirements include (inter alia) having particular policies
which determine the processes a business must undertake in
identifying the person they are dealing with and where the funds
they receive originated.

4.7 Identifiability
BTC has been likened to the rare metal, gold. This is because
there is a finite resource of them and therefore deflationary in
nature. There is one key difference between the two: unless the
metal is a registered coin with a serial number, one piece of gold
ore is indistinguishable to another (apart from its weight); one
BTC, however, is easily identifiable. However, when one
purchases a BTC, they purchase a number of them, not each
number specifically by public key address or ledger entry.

4.8 Smart contracts

A contract is a legal agreement in law which is defined by its
characteristics and requires a particular set of requirements to
be fulfilled in order for it to be legally binding and enforceable. A
contract needs to have an offer; the Offer needs to be accepted;
consideration needs to pass between parties (each party
receives something in exchange for something else), and there
must be intentions to be legally bound. A contract can be
defined in writing, spoken, or by way of conduct. A smart
contract is a contract embedded within a piece of software
typically implementing blockchain technology. The point of a
Smart Contract is to code a set of obligations of which can be
automatically and autonomously carried out. It is possible to do
this without the implantation of Blockchain technology, however,
with the implementation of Blockchain technology, for the
reasons set out above, the terms of the contract are secure; they
can not be amended. Therefore there is a sense of assurance
and reliability that we have not seen or been able to rely on
typically. A smart contract, in concept, will usually act like an
“escrow agent” or the way solicitor’s undertakings work. An
escrow agent is typically used (outside of England and Wales) in
a transaction. In contrast, a set of funds are held on behalf of
both parties on either side of a transaction; to be paid on
completion of a contractual obligation. This is typically used
when obligations are fulfilled in tranches, or the value of the
contractual obligation is relatively substantial.
By way of example:
If Party A wanted to purchase 1,000,000 widgets for the price
of £1.00 per widget from Party B. This might be a substantially
sized contract for each party, and there is an element of risk:
Party A will want to ensure that the widgets they are
receiving are of specified quality, and Party B will want to secure
payment of £1,000,000.
If Party A pays Party B £1,000,000 and then they receive the
widgets, but only half of them arrive, or a part of the whole of
them are not to the specified quality or description, Party A has
lost £1,000,000, and they can not sell the widgets.
In order for Party A to recover damages, they will need to
enforce the contract through the courts, which is a financial risk
and will take time.
To ensure this doesn’t happen, Party A may suggest that the
funds are placed with an independent escrow agent. Once they
receive the widgets of satisfactory quality, they will inform the
escrow agent, and payment is made. If the widgets are not of
satisfactory quality or the contract is wrong, they have not lost
the £1,000,000, the widgets can be returned (if agreed), and
Party A will not insure a cash flow issue for the loss.
The involvement of an escrow agent costs time and money
and leaves room for human error. The ability to automate the
entire process is, therefore, beneficial for both parties. This is
what a Smart Contract is. The nature of Blockchain technology
and the aforementioned subsequent creation of Cryptoassets
(which may or may not be regarded as property and therefore
rights and obligations come with them), allows for the
theoretical possibility that these Smart Contracts can thereafter
be sold, containing their obligations.
Inevitably, when the execution of a contract is at the mercy
of a program, disputes will arise. The dispute that is in questions
is if the smart contract fails to perform the obligation as it was
intended, where does the fault and liability lie, to ensure the
damaged party is put in a place if the smart contract had not
failed? Fortunately, this question has recently been raised in a
Court of Appeal case in Singapore in the case of Quoine Pte Ltd v
B2C2 Ltd [→2020] SGCA(I) 02. In this case, the Appellant
(Quoine) was a business operating a cryptoasset exchange (the
“Exchange”) and would also carry out market-making activities
to create liquidity. The Respondent (B2C2 Ltd) was a trader on
the Exchange using an algorithmic trading software (“ATS”),
created by the director of the Respondent and it worked with
little human intervention. The ATS was deterministic in that it
would always give the same output to the corresponding input;
however, a failsafe existed whereas if the ATS could not receive
data, the default position or fail-safe would activate and
automatically purchase 10 BTC for 1 ETH. In 2017 the
Respondent failed to appropriately update the Exchanges
operating system, and as a result, the ATS made thirteen trades
at the default position. These trades were circa 250 times the
actual value; in essence, as a result of the failure to appropriately
update the Exchange operating system, the Respondent came
into a windfall and received BTC worth circa 250 times what he
had paid for them. The Appellant, noting the abnormality of
these trades, cancelled them. The Respondent consequently
claimed breach of contract against the Appellant. In the first
instance, the Respondent was successful with their claim. The
Appellant then appealed the judgment, and the question of the
legal principle of Mistake arose.
The pertinent factors in this appeal decision are with respect
to the contract formed as a result of an automated process, or
smart contract. Those particular factors are:
1. where deterministic algorithms (i. e., those that
always produce the same output given the same
input) are concerned, it is the programmer’s
state of knowledge that is relevant and to be
attributed to the parties;
2. the relevant inquiry is whether, when
programming the algorithm, the programmer
was doing so with actual or constructive
knowledge of the fact that the relevant offer
would only ever be accepted by a party
operating under a mistake and whether the
programmer was acting to take advantage of
such a mistake; and
3. the relevant time frame within which the
knowledge of a programmer or the person
running the algorithm should be assessed is
from the point of programming up to the point
that the relevant contract was formed.
4.9 Tokenisation
Tokenisation is the concept of creating a series of Cryptoassets
which can be assigned to a physical object, allowing the rights
over a portion of that object to be dealt with by way of
Cryptoasset. An example of this concept is with respect to
investments, to make such investments more accessible to the
public. A painting may cost £1,000,000, and a consumer may
want to invest in that painting as they suspect its value will
increase. If that person does not have £1,000,000, they are
unable to invest in the painting. If however the painting was
principally split into 16ths and a cryptoasset is created for the
sole purpose of attaching to the painting, of which only 16
Cryptoassets exist, it is possible that the painting can be stored
independently. Individuals can purchase 16ths of the painting.
That person would then have ownership and legal interest in the
Cryptoasset and beneficial interest in one-sixteenth of the
painting; that person can then independently sell their 16th
interest in the painting to a buyer.
Considerations of legal property, regulation and property
interest are factors which are applicable in this circumstance;
however, there are very few actual examples of structures such
as this.

5 Ethical considerations
Cryptoassets can be quite difficult to understand conceptually;
however, to the public, they are broadly seen as either:
1. something used to illicit activities;
2. a way to get rich quick.
5.1 Anonymous currency
This perception is not unwarranted, and the rise in popularity
stems from these activities. Although BTC was originally created
as a way for consumers to transfer wealth without a government
body, due to their anonymous nature, in that anyone could
control a BTC wallet and that wallet is not associated with a
name, BTC is often used to be the payment of choice to purchase
illicit objects such as illegal drugs and firearms. Anyone can track
the movement of any particular individual or BTC; however,
associating a geographical location or person to that wallet is
impossible. It isn’t just BTC, but a large amount of cryptoassets
created on a public blockchain share the same anonymous
characteristics as BTC and therefore can also be used for the
same ends. Further, the price of BTC has encouraged criminals
to hack into the servers of cryptoasset business and then to
transfer all the BTC or other cryptoasset held in a wallet, to a
wallet held by the criminal. Again, anyone would be able to see
the transfer of the cryptoassets from wallet A to wallet B;
however, it is impossible to determine the owner of wallet B.
The aforementioned MRL will seek to limit anonymity with
this respect by ensuring cryptoasset business have all the correct
and up to date, “know your customer” information for each
waller or BTC holder. If ones BTC are stolen, and they can be
traced on the blockchain to a wallet which is in the possession or
custody of a cryptoasset business, it is likely that the cryptoasset
business will have the personal information of the person
controlling the wallet, containing the stolen BTC.

5.2 Initial Coin Offerings (“ICO”)

An ICO is when a business, typically a startup, or younger, would
create their own cryptoasset and sell them to the mass public, in
order to take on capital to develop a product or service. After the
dramatic rise in the price of BTC, many opportunists saw this as
a way to get rich quick. Individuals would write a “White-paper”
briefly setting out an idea and in some cases with little to no
detail of the end goal product. Those individuals would then
market the sale of their cryptoassets (or tokens) by way of ICO.
Information concerning cryptoassets was limit at the start of
2018, and if the public knew one thing about them, it was that
BTC rose from $1,000 to $20,000 in the space of a year. As a
result, many consumers were more than willing to send the
hosts of these ICOs their hard-earned money with the hope, one
of the tokens will rise in price, as did BTC.
Some of these ICOs were genuine and yielded a product or
service after years of development, some of the ICOs were
undertaken by naive individuals, and the rest were utterly
fraudulent.

5.3 Scams
As briefly mentioned, due to the lack of general knowledge of
cryptoassets, individuals prey on those consumers, willing to
part with their cash. There are several types of common scams
that occur in high frequency; the most typical example being:
A website that suggests if you purchase BTC with them, they
will hold the BTC for you and then you will earn interest on your
BTC. Once the victims pay, they will have an account which
shows they own a number of BTC, which then increases every
day. This gives the victim the illusion that they have in fact
bought BTC and they have a growing amount which they can
soon sell for FIAT currency at a huge profit. The victim will then
look to withdraw the BTC, at which point the scammers seem to
go quiet, then several months later the website disappears.
6 Concluding remarks
This chapter, albeit briefly, sets out an overview of the key
components of the underlying blockchain technology and the
characteristics which it provides, the subsequent creation of
cryptoassets and the applicability of smart contracts. Further,
the chapter sets out the applicable laws and challenges the law
faces when dealing with complex systems and the new digital
asset, cryptoassets. It is clear that existing legislation is
somewhat adequate to deal with cryptoassets and smart
contracts, as are some principles of law, however, there are
circumstances which will arise and will likely test the
aforementioned legal principles. Until more cases are brought to
the courts which include arguments determining the
characteristics of the given cryptoassets in consideration or
property law; there is little certainty With that said, at the recent
statement was issued by the UK Jurisdictional Taskforce which
sets out the considerations of law and Cryptoassets generally.
This statement concludes by suggesting that cryptoassets are
capable of being property in law.
Legal certainty amongst business has risen as a result of
regulatory clarification; however, new cryptoassets providing for
new characteristics and utilities will likely challenge the existing
legal framework and encourage new pieces of legislation and
regulation to form to deal with these challenges. As cryptoassets
are becoming increasingly adopted by business, purchased by
consumers, those using them will want to know that they have a
way of enforcing their rights over them as property, or to at least
know if they have any rights over them at all. Further, consumer
protection is required to protect those subject to unethical
activities.
 As for the ethical considerations, the implementations and
widening of the MLR remit to include cryptoasset businesses is a
positive step towards curbing any unethical activities, however,
there is little that can be done to prevent scammers from
approaching consumers and defrauding them. this is not so
much as a legal consideration, however a challenge that will only
be met with the mass adoption of cryptoassets, and with that,
the knowledge and understanding that comes with it.

Bibliography
Blandin, Apolline, Ann Sofie Cloots, Hatim Hussain, Michel
Rauchs, Rasheed Saleuddin, Jason Grant Allen, Bryan Zhang, and
Katherine Clou (2019). Global cryptoasset regulatory landscape
study, September 2019. →
Dean Armstrong, Q. C., Dan Hyde, and Sam Thomas (2018).
Blockchain and cryptocurrency: International legal and regulatory
challenges, 06 September 2018.
Financial Conduct Authority (2019). Guidance on cryptoassets:
https://www.fca.org.uk/publication/consultation/cp19-03.pdf. →
Financial Services and Markets Act 2000. a, b
Proceeds of Crime Act 2002. →
Quoine Pte Ltd v B2C2 Ltd [2020] SGCA(I) 02. →
Sagar, Leigh (2018). The Digital Estate. →
UK Jurisdiction Taskforce (2019). Legal Statement on cryptoassets
and smart contracts: https://35z8e83m1ih83drye280o9d1-
wpengine.netdna-ssl.com/wp-
content/uploads/2019/11/6.6056_JO_Cryptocurrencies_Statemen
t_FINAL_WEB_111119-1.pdf, November 2019. →
Vorotyntseva v Money-4 Ltd (T/A Nebus.com) and others.
Warbach, Kevin (2018). Trust, but verify: Why the blockchain needs
the law, 33 Berkeley Tech. L. J. 487. →
The environmental effects of
cryptocurrencies
Shaen Corbet
Larisa Yarovaya

1 Introduction
This chapter discusses the environmental aspects of cryptocurrency
markets and as to how their rapid growth can influence the environment
and through which channels this process manifests. While it is not
popular discussion among investors, we find that environmental issues
can be of interest by wider society, students, policy makers and
stakeholders of FinTech companies. Environmentalism has a long
history, and controversy around this subject is remains quite substantial,
thus to not make our discussion over-complicated, in this chapter we will
focus on the area where to date, we possess the most thorough data
and evidence through which we can build the case, namely electricity
consumption associated with the mining of cryptocurrencies. The total
carbon footprint of the industry is now estimated to have surpassed that
of many large industrial nations. This chapter investigates the multiple
knock-on effects and consequential behaviour of this rapid growth in
energy usage, such as an increase in global temperature, the growth of
mining companies who have targeted third world infrastructures, and
the complete shutdown of the internet as we know it. Saying that, we
encourage investors not to ignore these environmentalism matters,
since we also show that electricity consumption is proven to be one of
the commonly used variable in valuation of mineable cryptocurrencies
and identification of their fair value, which affect investments returns
and should be considered in their trading strategies.
As cryptocurrencies as a financial market product continue to evolve,
it is becoming more certain that innovative solutions are going to be
needed to solve some substantial forthcoming issues with regards to
energy usage and technological capacity. The energy usage of Bitcoin
mining has increased from 4.8 Twh to 73.12 Twh over the last two years,
and the whole network now consumes more energy than Austria.1 The
estimated energy footprint per Bitcoin transaction is over 600 Kwt, which
is estimated to be equivalent to over 300,000 contactless payment
transactions, or to the power consumption of an average household for
over 22 days. Bitcoin in its current form is a very expensive transmission
mechanism. The major fuel used by these networks, due to its relatively
majority-based Chinese point of origin, is coal-fired power plants, which
has resulted in an extensive carbon footprint for each transaction. This
raises questions about the environmental sustainability of
cryptocurrencies. The participation in the validation and mining process
of Bitcoin requires both special hardware and a substantial amount of
energy, therefore, there is on-going carbon production. The computing
power required to solve one Bitcoin has quadrupled throughout 2019,
compared to the same period twelve months previous. This has led to
some concern within the sector of the imminent need for broad
international regulation in a bid to stall such exponential growth in
energy usage. However, there are difficulties in providing definitive
estimates. Further, the argument has been even more substantially
muddied, as cryptocurrency proponents have stated that the usage of
renewable energy has not been appropriately accounted for.
Research by →Li et al. (→2019) presented evidence through data
analysis and experiments, that the estimated electricity for Monero,
could consume 645.62 GWh of electricity in the world in a single year
after the hard fork. If there is 4.7% mining activity happening in China,
the consumption is at least 30.34 GWh, contributing a carbon emission
of between 19.12 and 19.42 thousand tons in a single year. →Stoll et al.
(→2019) utilised a methodology for estimating the power consumption
associated with Bitcoin mining based on IPO filings of major hardware
manufacturers. The authors then translate the power consumption
estimates into carbon emissions, using the localisation of IP-addresses.
As of late 2018, the authors estimate the electricity consumption of
Bitcoin to be 48.2 TWh, and estimate that annual carbon emissions
range from 23.6 to 28.8 MtCO , similar to that produced by the nations
2

of Jordan and Mongolia, a result that the authors consider to be

conservative. Should other cryptocurrency markets such as Ethereum,
Monero and zCash among others be considered, this figure could well
double, a sum equivalent to that of Portugal. Further, →Krause and
Tolaymat (→2018) had previously identified that that mining Bitcoin,
Ethereum, Litecoin and Monero consumed an average of 17, 7, 7 and 14
MJ of energy to generate one US$, respectively. While presenting results
largely in line with →Stoll et al. (→2019), it was also estimated that it
took four times more energy for mining 1 US$ of Bitcoin than it did to
mine one US$ of copper and double that of either platinum or gold.
→Mora et al. (→2018) showed that when basing their calculations on
projected Bitcoin usage, under the assumption that it follows the rate of
adoption of other broadly adopted technologies, this new
cryptocurrency had the potential to create enough CO emissions to
2

push warming above 2 degrees Celsius within less than three decades.
While opponents of such estimates largely point towards the
omission in such research of renewable energy usage, it is highly
probable given the relatively small share of renewable in most countries
with large mining pools that the net effects of the growth of
cryptocurrency is carbon positive and detrimental to our environment at
its current rate of growth. Recent research has focused on issues such
as the sharp growth in cybercriminality (→Corbet et al. (→2019)), and
the use of cryptocurrency for illicit purposes (→Foley et al. (→2019)), but
little research to date has been done on the environmental impacts of
cryptocurrencies (→Truby (→2018); →Easley et al. (→2019); →Greenberg
and Bugden (→2019); →Li et al. (→2019)).

1.1 Why should we care about the environmental effects of

cryptocurrencies?
It is not surprising that environmental aspects are often put aside in
finance academic literature and financial industries. While there are
many goals that enterprise may have, firms in the financial sector are
less likely to directly aim at environmental actions without
incentivisation, such as improving air and water quality, wildlife and
habitats protection. Investment companies and funds are interested in
maximising financial returns and decreasing the risks of investments,
while incorporation of environmental goals and values into their
strategy in majority of cases seems unnecessary, excessive, and most
importantly, too expensive. This is also reflected in the finance research
and papers published in reputable finance journals, where the majority
of those analysing the risk-return characteristics of financial assets
rather than the environmental implications of their growth. However,
the situation is ever evolving. With elevated attention to the importance
of the environment among society, and acknowledgement of the climate
change issues facing society by the majority of governments and
institutions worldwide, we observed emergence of environmental and
climate finance field, as well as expansion of the research addressing
urgent multidisciplinary research questions in finance and
environmental science simultaneously. Corporate social responsibility
matters shaped not only business and accounting processes, but further
encouraged emergence of various ethically-cleansed financial assets
and instruments, that are available for investors, which cause the
changes in their investment objectives. The investors more often follow
the ethical values and beliefs in making investment decisions, and
environmental factors could be a strong influence.
As to whether cryptocurrency investors care about the carbon
footprint of this industry and its environmental impacts is a significant
question. We can only guess, but the easiest assumption to make here is
that they do not care about it. If they do care about the increased
mining difficulty and electricity consumption, then only in the context of
the increased cost of mining and its impact on the prices and
consequentially investment returns, while wider environmental impacts
might be not considered. The majority of mining pools are situated in
China and around 80% of Bitcoins minded there, followed by 10% in
Czech Republic, and Iceland, Japan, Georgia and Russia account
approximately 2% of network hashrate each. The location of mining
pools matters due to the energy sources, environmental standards, and
clean energy alternatives available in the countries. Not only the power
consumption itself is important, but also energy sources which
determine the carbon footprint of this industry.
According to →Mora et al. (→2018) cumulative Bitcoin mining
emissions likely to warm the planet by 2 degrees Celsius within 22 years
if the current rate is similar to some of the slowest broadly adopted
technologies, or within 11 years if adopted at the fastest rate at which
other technologies have been incorporated. However, this estimates are
based on assumption that the sources of fuel will be fixed and remained
unchanged over the target period of time.Thus, it is still possible to
decrease the environmental impacts of Bitcoin mining and it is critical to
explore the ways to decrease the carbon footprint of cryptocurrencies.

1.2 Technological vs ecological environmentalism

The nature of debates around any new technological development can
be better understood if by referring to an early study by →O’Riordan
(→1985) who discussed the differences between technological and
ecological environmentalism, comparing technocentrists and
ecocentrists viewpoints and beliefs. Technocentrism denotes that
humans and technologies can impact environment, and by using
adequate management we can minimise the negative impacts of
economic growth on nature. This assumes that humans relationships
with environment related to utility and usefulness of resources that are
provided by nature. Thus, as individuals and as society we would care
about negative impacts on environment only if we are directly benefiting
from it and our negative impacts are subsequently reducing those
benefits. In contrast, ecocentrism provides more romanticised
interpretation of environmental protection suggesting that it’s moral
obligation of all human kinds to respect and protect the nature
regardless of its use and its value referring to wild nature as to integral
companion of man. Thus, people should try to avoid causing any harm
to nature and environments since they are directly harming their own
natural habitat.

1.3 Are all cryptocurrencies equally bad for the

environment?
There are various digital currencies available and some of those are less
energy consuming than others. A useful classification of the digital
assets provided by →Corbet et al. (→2020a) who explained that financial
cryptocurrencies that are intended solely for the transfer of wealth and
to be used as payments systems, are just one of the possible
applications on the top layer of the blockchain stack. Authors classify
each digital asset in one of three categories:
1. Currencies: Digital assets whose primary (and in most
cases, only) use is that of financial payment or monetary
transfer.
2. Blockchains/Protocols: Digital assets whose primary
usage is that of a blockchain platform, or protocol, on
which other applications can be built.
3. Decentralised Applications (dApps): Applications
combining a user interface, and a decentralised back-
end, built upon an already existing blockchain.
For the first category, digital currencies, to possess value, they must be
scare, a shortcoming of all previous attempts at creating digital
currencies. The mining process creates, and ensures scarcity. Miners
allocate resources, in the form of computing power, to this pursuit, in
the hope of receiving a block reward (a payment of Bitcoin to the first
node to arrive at the correct solution to the mathematical problem).
Digital assets derive their value, and the scarcity necessary for value,
from this mining process. Digital assets can be stored using a variety of
methods: online wallets, online exchanges, hardware wallets and paper
wallets (cold storage) being just a selection of the possible storage
methods.
Thus mining process is what mainly cause the environmental
unsustainability of the digital currencies. Bitcoin is the most well-known,
but not the only mineable cryptocurrency that is currently traded.
Another popular mineable cryptocurrency is Ether which is built on
Ethereum protocol. Ethereum use the same proof-of-work algorithm as
Bitcoin, and even though the carbon footprint per transaction is lower,
the entire Ethereum network also consumes the amount of electricity
comparable with whole countries. Overall, all cryptocurrencies can be
divided by mineable and non-mineable currencies.
2 Proof-of-work algorithm
2.1 Bitcoin mining
Bitcoin’s trust-minimising consensus has been enabled by its proof-of-
work algorithm. The machines completing the algorithms consume
substantial amounts of energy while completing their tasks. New sets of
blocks are added to Bitcoin’s blockchain approximately every 10 minutes
by miners. The code that supports Bitcoin includes several rules to
validate new transactions. Every miner individually confirms whether
transactions adhere to these rules, eliminating the need to trust other
miners, instead trusting the process. Every miner in the network is
constantly tasked with preparing the next batch of transactions for the
blockchain. Only one of these blocks will be randomly selected to
become the latest block on the chain.
In proof-of-work, the next block comes from the first miner that
produces a valid one. The difficulty is regularly adjusted by the protocol
to ensure that all miners in the network will only produce one valid block
every 10 minutes on average. Once one of the miners finally manages to
produce a valid block, it will inform the rest of the network and other
miners will accept this block once they confirm it adheres to all rules,
and then discard whatever block they had been working on themselves.
The lucky miner gets rewarded with a fixed amount of coins, along with
the transaction fees belonging to the processed transactions in the new
block. Then the cycle begins once again.
The continuous block mining cycle incentivises miners to mine
Bitcoin. As mining can provide a solid stream of revenue, these miners
are very willing to run machines that consume substantial amounts of
energy in an attempt to generate reward. Over the years this has caused
the total energy consumption of the Bitcoin network to grow to
unsustainable levels, as the price of the currency reached new highs. It
is widely considered that Bitcoin alone uses more power when mining
than that of countries such as the Philippines, Chile, Venezuela, the
Czech Republic and Austria. Bitcoin’s biggest problem is perhaps not
even its massive energy consumption, but the fact most mining facilities
in Bitcoin’s network are located in regions that rely heavily on coal-
based power. A Bitcoin ASIC miner will, once turned on, not be switched
off until it either breaks down or becomes unable to mine Bitcoin at a
profit. Because of this, Bitcoin miners increase both the baseload
demand on a grid, as well as the need for alternative (fossil-fuel based)
energy sources to meet this demand when renewable energy
production is low. In the worst case scenario, the presence of Bitcoin
miners may thus provide an incentive for the construction of new coal-
based power plants, or reopening existing ones. This impact would be
even harder to quantify.
In late 2017, Credit Suisse estimate that a bitcoin price of $50,000
would increase the electricity consumption tenfold. And at a bitcoin
price of $1.1 m, it would be profitable to use almost all the electricity
currently generated in the world for mining. The bank views the latter
prospect as not worth worrying about, for two reasons: it doesn’t think
bitcoin will ever reach that value, since the competition from other
cryptocurrencies is too strong; and it thinks that power consumption of
mining will fall over time as better technologies are used for miners.
Credit Suisse explicitly compares bitcoin to marijuana cultivation and
data centres, two other industries that once sparked fears they would
have huge power draws.

2.2 Ethereum
The power usage of Bitcoin is somewhat in contrast to that of other
large cryptocurrencies such as Ethereum. Ethereum has plans to change
its proof-of-work algorithm to an energy efficient proof-of-stake
algorithm called Casper. This change would minimise energy
consumption and will be implemented gradually. For now, Ethereum is
still running on proof-of-work completely. In its current state the entire
Ethereum network consumes more electricity than a number of
countries, based on a report published by the International Energy
Agency while Bitcoin had been estimated to use 73 TWh per year,
Ethereum’s power usage was substantially lower at 7.65 TWh per year.
Proof-of-work was the first consensus algorithm that managed to prove
itself, but it is not the only consensus algorithm. More energy efficient
algorithms, like proof-of-stake, have been in development over recent
years. In proof-of-stake coin owners create blocks rather than miners,
thus not requiring power hungry machines that produce as many
hashes per second as possible. Because of this, the energy consumption
of proof-of-stake is negligible compared to proof-of-work. Bitcoin could
potentially switch to such an consensus algorithm, which would
significantly improve sustainability. The only downside is that there are
many different versions of proof-of-stake, and none of these have fully
proven themselves yet. Nevertheless the work on these algorithms
offers good hope for the future.
As cryptocurrency markets continue to develop, it is to be expected
that solutions are imminently necessary to solve some substantial
forthcoming issues. The energy use of Bitcoin mining has increased
from 4.8 Twh to 68.9 Twh over the last two years and the whole network
now consumes more energy than Czech Republic. The energy footprint
per Bitcoin transaction is now in excess of 500 Kwt, which is equivalent
to 350,000 visa transactions. Energy wise, Bitcoin in an expensive
transmission mechanism. Nowadays, most mining pools, i. e. groups of
miners working in specialised warehouses with extensive amounts of
mining hardware, are situated in China. The major fuel used by these
networks is thus from coal-fired power plants, which results in an
extensive carbon footprint for each transaction. Some estimates say
more than 60 percent of the processing power used to mine bitcoin is in
China, where it relies heavily on the burning of coal. An estimated 85%
of cryptocurrency mining occurs in China, where electricity is cheap and
largely sourced from environmentally unsustainable sources like coal-
powered plants. As the cryptocurrency industry grows, and the adoption
of blockchain technology increases, it is increasingly important for
cryptocurrencies’ blockchain technology to be more environmentally
conscious. By prioritising efficiency, these new cryptocurrencies also
reduce their environmental impact. In doing so, the industry neatly
exemplifies how improving the environmental output of an industry can
be linked to enhanced productivity and effectiveness. Coal and other
fossil fuels are also the largest generator of electricity for the rest of the
world, and coal is a significant contributor to man-made climate change.
Burning it produces carbon dioxide, a gas that is a primary contributor
to global warming. This reliance on fossil fuels has given rise to
speculation that bitcoin’s energy consumption will continue to rise as it
grows in popularity. This raises questions about the environmental
sustainability of cryptocurrencies.
Participation in the validation and mining process of Bitcoin requires
both special hardware and a substantial amount of energy. Thus there is
embedded carbon and ongoing carbon production. The computing
power required to solve one Bitcoin as of 2019 has quadrupled
compared to twelve months previous. Evidence of this substantial
growth in difficulty is presented in →Figure 1. This has led to some
concern within the sector of the imminent need for broad international
regulation in a bid to stall such exponential growth in energy usage.
However, there are difficulties in providing definitive estimates and the
argument has been even further muddied as cryptocurrency
proponents have stated that the usage of renewable energy has not
been appropriately accounted for.
Note: The top two figures represent the price and volatility of Bitcoin
between 2010 and 2019. The middle pair of figures presents the
hashrate and mining difficulty respectively. The bottom figures
represents the number of unique addresses used to mine Bitcoin and
the block size respectively.

Figure 1 The Changing Characteristics of Bitcoin, 2010–2019.

 The rest of this chapter is as follows. Section →3 presents a
thorough review of the literature relating to the growth of energy usage
within the cryptocurrency sector along with the main identified issues
that exist today. Section →4 presents an overview released data to date,
with associated commentary as to what the trends have being
presenting and as to whether multiple sources are generating the same
conclusions. Section →5 outlines and explains the multiple issues that
have been identified to date. Section →6 presents a concise overview of
the proposed solutions to the analysed issues, while Section →7
concludes.

3 Previous literature
Research by →Stoll et al. (→2019) utilised a methodology for estimating
the power consumption associated with Bitcoin mining based on IPO
filings of major hardware manufacturers, insights on mining operations,
and mining pool compositions. The authors then translate the power
consumption estimates into carbon emissions, using the localisation of
IP-addresses. As of late 2018, the authors estimate the electricity
consumption of Bitcoin to be 48.2 TWh, and estimate that annual carbon
emissions range from 23.6 to 28.8 MtCO , similar to that produced by
2

the nations of Jordan and Mongolia, a result that the authors consider to
be conservative. Should other cryptocurrency markets such as
Ethereum, Monero and zCash among others be considered, this figure
could well double, a sum equivalent to that of Portugal. →Krause and
Tolaymat (→2018) had previously identified that that mining Bitcoin,
Ethereum, Litecoin and Monero consumed an average of 17, 7, 7 and 14
MJ of energy to generate one US$, respectively. While presenting results
largely in line with →Stoll et al. (→2019), it was also estimated that it
took four times more energy for mining 1 US$ of Bitcoin than it did to
mine one US$ of copper and double that of either platinum or gold.
→Mora et al. (→2018) showed that when basing their calculations on
projected Bitcoin usage, under the assumption that it follows the rate of
adoption of other broadly adopted technologies, this new
cryptocurrency had the potential to create enough CO emissions to
2

push warming above 2 degrees Celsius within less than three decades.
 While opponents of such estimates largely point towards the
omission in such research of renewable energy usage, it is highly
probable given the relatively small share of renewable in most countries
with large mining pools that the net effects of the growth of
cryptocurrency is carbon positive and detrimental to our environment at
its current rate of growth. This research sets out to specifically
investigate as to whether the price volatility effects of such
cryptocurrencies, proxied by Bitcoin, has generated dynamic
correlations with electricity and utilities providers in countries that
contain the largest international mining pools. Such increased demand
through the cryptocurrency mining process should theoretically
manifest in changing financial dynamics for these identified companies.
We have also selected to investigate as to whether any dynamic
relationship exists between Bitcoin and the markets for green energy
ETFs and the market for ICE EUX Carbon Credits, where one lot of 1,000
CO EU Allowances provides an entitlement to emit one tonne of
2

carbon dioxide equivalent.

Recent research has focused on issues such as the sharp growth in
cybercriminality (→Corbet et al. (→2019)), and the use of cryptocurrency
for illicit purposes (→Foley et al. (→2019)), but little research to date has
been done on the environmental impacts of cryptocurrencies (→Truby
(→2018); →Easley et al. (→2019); →Greenberg and Bugden (→2019);
→Li et al. (→2019)). Further, there is much evidence to suggest that this
new financial product has continued to progress with evidence provided
of growing efficiency (→Bariviera (→2017)) and product and pricing
enhancement through the use of related derivatives products (→Corbet
et al. (→2018); →Akyildirim et al. (→2019)). While the main stream of
cryptocurrency research is currently focused on the dilemma as to
whether this is a currency or speculative asset (→Baur et al. (→2018));
and conducting analysis of the multiple forms of pricing inefficiencies
(→Urquhart (→2017); →Sensoy (→2019); →Mensi et al. (→2019);
→Katsiampa et al. (→2019)), →Corbet et al. (→2019) have provided a
concise systematic review of the literature associated with
cryptocurrency markets at large, and note that more research is needed
to assess environmental and energy use issues. As this new financial
product continues to develop through improved market efficiency
(→Ekinci et al. (→2019); →Corbet et al. (→2020b)) and portfolio design
(→Akhtaruzzaman et al. (→2019); →Corbet et al. (→2018)), it is
imperative that we continue to understand the true risks associated.
While considering the broad improvement in pricing efficiency and
market efficiency, indicative of a rapidly developing financial market
product, our paper assesses the financial long terms impacts of Bitcoin
energy usage.
In →Figure 1, we present the 1) mining difficulty; 2) hashrate; 3) the
number of daily transactions; 4) the number of unique Bitcoin mining
addresses and 5) block size of Bitcoin. Through each particular variable,
we observe the growing maturity of this new financial product over
time. Mining difficulty reflects how difficult it is to find a new block
compared to the easiest that it could be, recalculated every 2016 blocks
to a value such that the previous 2016 blocks would have been
generated in exactly two weeks had everyone been mining at the same
difficulty. As more miners join, the rate of block creation will increase,
which causes the difficulty to increase in compensation to push the rate
of block creation back down. A hash is the output of a hash function, and
the hashrate is the speed at which a compute is completing an
operation in the Bitcoin code. A higher hashrate when mining increases
your opportunity of finding the next block and receiving the reward. The
increased difficulty in mining has led to a need for more powerful
technology and increased energy usage to mine cryptocurrency. Of
course, the source of this additional required energy is central to the
issues that Bitcoin, among other cryptocurrencies, faces.
Due to the growing number of mining pools across the world, we
focus specifically on the six largest. China accounts for 81% of mining
pool concentration, the Czech Republic 10%, while Iceland, Japan,
Georgia and Russia account for 2% respectively. After a thorough
analysis, only China, Japan and Russia possess publicly traded electricity
companies or core utility companies that trade primarily in energy.
Further, there have been issues identified with the very nature of such
concentration. →Stoll et al. (→2019) found that the four largest Chinese
pools now provide almost 50% of the total hashrate, with Bitcoin
operating three of such pools.
4 What does the data tell us?
As of December 2019, it has been estimated that annualised global
revenue available through the mining of Bitcoin alone was estimated to
be $5.4 billion. The global estimated cost to generate this revenue is
approximately $3.9 billion. Consider this, with one cryptocurrency, the
potential rewards for mining is a spoil of a pool of $1.5 billion.
Considering the incredibly rapid growth in the number of
cryptocurrencies that exist today, it is easy to comprehend as to how
large this market, and the profits that exist for the most efficient miners
in the market. It is this market efficiency that has come into sharp focus
with costs accounting for approximately 70% of revenues. Much of the
cost surrounds the technological challenges that miners face. In terms
of mining cryptocurrency, substantial energy is allocated towards heat
reduction. Countries with warmer climates have been broadly linked
with substantial technological issues and machine malfunctions. While
considering that a basic miner can use approximately 1,500 watts per
hour, much of this energy is converted directly to heat output, which can
be in excess of 5,000 BTU per hour. When considering the fact that some
mines possess up to 5,000 of these miners in close proximity, it is very
easy to quickly identify the scale of the temperature issues that are
faced. The task is not aimed at cooling the air, but rather to evacuate it
from the areas surrounding the miners using industrial fans.
Evaporative coolers are then used to cool the physical infrastructure
surrounding the miners, controlling for moisture and evaporation from
the heat exchange which can create disastrous consequences for the
electrical infrastructure. If for example, a mine consumes 40 MW of
electricity per hour, and given an energy consumption of about 1,500
watts per hour per Bitcoin mining machine, these miners can consume
over 75% of the electricity consumption with regards to the
cryptocurrency mining process. Therefore, the cooling process of the
miners can account for up to 25% of the total energy usage costs of a
mine. We must further consider as to how hard these miners are
working. In some cases, to reduce machine wear-and-tear, some miners
are set to run below their maximum operating capacity. This would
cause such cooling estimates to vary quite considerably. For example,
some mining machines have controllers that gauges the ambient
temperature and sets the fan speed and the voltage and clock speed of
the machine accordingly. During periods of warm weather, this process
will result in mining machines running at slower speeds (as measured in
terahashes per second) to keep the chips cooler and reduce the risk of
significant damage.
→Stoll et al. (→2019) found directly estimated the significant carbon
footprint. The authors demonstrated a methodology for estimating the
power consumption associated with Bitcoin’s blockchain based on IPO
filings of major hardware manufacturers, insights on mining facility
operations, and mining pool compositions. We then translate our power
consumption estimate into carbon emissions, using the localisation of IP
addresses. We determine the annual electricity consumption of Bitcoin,
as of November 2018, to be 45.8 TWh and estimate that annual carbon
emissions range from 22.0 to 22.9 Mt CO . However, this validation
2

process uses this ‘vast amounts of electricity’, to earn cryptocurrency

without spending any money. To estimate the electricity consumption,
the authors used IP addresses and hardware data from recent IPO
filings. The authors wrote that their study points to potential drawbacks
of blockchain technology that should be considered by policymakers. As
of late 2019, the total network hashrate (1,000,000 GH/s) was estimated
to be 121,669 PH/s with an estimated energy footprint per transaction of
640 KW/h. This is found to represent almost 7.2 million households that
could be powered by the equivalent energy that Bitcoin is accounting
for, or otherwise 22 households could be powered for one day by the
electricity consumed for a single transaction. This indicates that Bitcoin’s
electricity consumption2 as a percentage of the world’s electricity
consumption was estimated to be 0.35%, with an annual carbon
footprint 36,947 kt of CO , with a carbon footprint per transaction 303
2

kg of CO .2
Note: The above figure presents the total number of bitcoins that have
already been mined; in other words, the current supply of bitcoins on
the network. The data is correct as of January 2020.

Figure 2 Bitcoins in circulation.

Note: The above figure presents the total USD ($) value of trading
volume on major bitcoin exchanges. The data is correct as of January
2020.

Figure 3 USD ($) Exchange Trade Volume.

Note: The above figures represent the total size of all block headers and
transactions and the average block size in MB respectively. The data is
correct as of January 2020.
Figure 4 Blockchain size and the average block size.
Note: The above figure presents the average number of transactions per
block, the median time for a transaction to be accepted into a mined
block and added to the public ledger (note: only includes transactions
with miner fees) and finally, the total value of Coinbase block rewards
and transaction fees paid to miners. The data is correct as of January
2020.
Figure 5 Average Number Of Transactions Per Block, Median
Confirmation Time and Miners Revenue.

To analyse the sectoral growth of Bitcoin since 2009, we present a

number of characteristics surrounding this new product in Figures →2
through →5. As Bitcoin obtained more attention as a new financial
product, its internal structure changed quite substantially. With this
added attention developed a sharp increase in the number of
transactions, trading volume and mining processes associated. In
→Figure 2 we identify the number of Bitcoins in circulation, with
evidence of sharply elevated growth rates in the period between 2010
and 2013. However, in the period since 2017, this growth rate has
somewhat plateaued. In →Figure 3, we observe the USD ($) exchange
traded value of Bitcoin. As expected, during the sharp price appreciation
of late-2017, the value of the market grew from approximately $1 billion
to almost $5 billion. In →Figure 4, we observe some of the key statistics
with regards to blockchain size. As of late-2019, the blockchain size of
Bitcoin grew above 250 GB, while the average block size exceeded 1.20
MB per transaction. In →Figure 5, we observe the average number of
transactions per block which has consistently exceeded 1,000
transactions since late 2015, and has been above 2,000 transactions
since mid-2018. Throughout 2019, the median confirmation time has
averaged approximately seven minutes, which was the consistently
average range experienced between 2013 and late-2017. Miner’s
revenue has also be consistently above $5,000 since Q2 2017, peaking
during the period in which Bitcoin prices almost reached $20,000.
Note: The above figure presents the total value of all transaction fees
paid to miners (not including the Coinbase value of block rewards), the
total value of all transaction fees paid to miners (not including the
Coinbase value of block rewards), miners revenue as percentage of the
transaction volume and miners revenue divided by the number of
transactions. The data is correct as of January 2020.

Figure 6 Total Transaction Fees, Total Transaction Fees in USD, Cost as a

% of Transaction Volume and cost per Transaction.
Note: The above figure presents the total number of unique addresses
used on the Bitcoin blockchain, the number of daily confirmed Bitcoin
transactions, the total number of transactions and the number of Bitcoin
transactions added to the mempool per second. The data is correct as of
January 2020.

Figure 7 Number Of Unique Addresses Used, Confirmed Transactions

Per Day, Total Number of Transactions and the Transaction Rate.

In →Figure 6, we observe the key statistics with regards to

transaction fees in the market for Bitcoin. We observe that the total
transaction fees grew quite substantially during periods of sharp price
appreciation, reaching over $20 million in late-2017. However, we also
observe that cost as a proportion of the transaction volume has sharply
declined over time while the cost per transaction has increased to a
sustained high level since early-2017. In →Figure 7, we can clearly
identify the sharp growth in interest in the mining of Bitcoin as a
product. There has been a consistent level of growth in the number of
unique addresses mining the product, peaking during the largest price
appreciations in Bitcoin. The has been echoed by the confirmed
transactions per day in Bitcoin and the total number of transactions. In
→Figure 8, we see the behaviour of the number of unspent transaction
output (UTXO) which is an abstraction of Electronic Money. Each UTXO
represents a chain of ownership implemented as a chain of Digital
Signatures where the owner signs a message (transaction) transferring
ownership of their UTXO to the receiver’s Public Key. The total UTXOs
present in a blockchain represent a set, every transaction thus
consumes elements from this set and creates new ones that are added
to the set. The set thus represents all the coins in the system. In early-
2018, while Bitcoin prices starts to decline from lifetime highs, the UTXO
declined in a similar fashion, remaining elevated during some periods of
short-term panic in mid-2019, but being quite low otherwise. Further,
the mempool size, representing the aggregate size of transactions
waiting to be confirmed has had a number of short-term spikes value
over the past three years as measured in bytes per second. These large
spikes can indicate that a number of miners have left the process.
Further, the spike could also mean that the Bitcoin protocol is under
threat, simply because transactions are not processing at their usual
pace. It is also possible that the spike is because someone is spamming
the network on purpose, to either raise fees or prevent certain
transactions from processing.
We observe the number of unspent transaction outputs in →Figure
9, which has been at a lifetime high of almost 70 million outputs in late-
2019. Further, we observe the output value, which contains instructions
for sending bitcoins. The value is the number of Satoshi (1 BTC =
100,000,000 Satoshi) that this output will be worth when claimed.
ScriptPubKey is the second half of a script and there can be more than
one output, and they share the combined value of the inputs. Because
each output from one transaction can only ever be referenced once by
an input of a subsequent transaction, the entire combined input value
needs to be sent in an output if you don’t want to lose it. There have
been a number of distinct, sharp increases in this value, most notably in
early-2016 and mid-2019. In →Figure 10, we observe that the estimated
transaction value has reduced consistently over time, however, as the
price of Bitcoin increased, so did the estimated USD($) transaction value.
Finally, →Figure 11 presents the user count of blockchain wallet users
over time. We can clearly see a sharp growth of user numbers in the
period since 2014, peaking in excess of 45 million in the period since
early-2019.
Note: The above figure presents the number of unspent Bitcoin
transactions outputs, also known as the UTXO set size and the
aggregate size of transactions waiting to be confirmed. The data is
correct as of January 2020.
Figure 8 Number of Unspent Transaction Outputs and the Mempool
Size.
Note: The above figure presents the number of unspent Bitcoin
transactions outputs, also known as the UTXO set size, the total number
of Bitcoin transactions, excluding those involving any of the network’s
100 most popular addresses and the total value of all transaction
outputs per day (includes coins returned to the sender as change). The
data is correct as of January 2020.
Figure 9 Number of Unspent Transaction Outputs, Number of
Transactions Excluding Popular Addresses and the Output Value.

In →Table 1 we observe the international estimates of international

electricity consumption (as of the most recent estimates in 2017). We
observe that China is the largest consumer of electricity in the work,
estimated to be in excess of 6.3 trillion kW hours per year. This is
followed by the United States, then India, Russia and Japan. It is
important to note that Japanese power consumption is almost twice that
of the next group of countries that includes Germany, Canada, Brazil
and South Korea. When considering the average electrical energy usage
per capital, we observe a considerable change in the above rankings.
Norway is the most significant user as measured per person, estimated
to be in excess of 24,000 kWh per person per year. The UAE, Canada,
Finland, Sweden and the United States follow, with emphasis on the
need for heating consumption of electricity in Scandinavia, and cooling
in the UAE. When considering China’s usage per capital, it does not
feature in the least efficient countries on this list. This is also the case
with regards to the average power per capital.
Note: The above figure presents the total estimated value of
transactions on the Bitcoin blockchain (does not include coins returned
to sender as change), and the Estimated Transaction Value in USD value.
The data is correct as of January 2020.
Figure 10 Estimated Transaction Value and the Estimated USD
Transaction Value.

Note: The above figure presents the total number of blockchain wallet
users. The data is correct as of January 2020.

Figure 11 Blockchain Wallet Users.

Table 1 International estimates of electricity consumption, as of 2017.
Rank Country Electricity Average electrical Average power
consumption (per energy per capita (kWh per capita (watts
million kW h/yr) per person per year) per person)
1 China 6,310,000 4,475 510
2 United 3,911,000 12,071 1,377
States
3 India 1,547,000 1,181 260
4 Russia 1,065,000 7,481 854
5 Japan 934,000 7,371 841
6 Germany 533,000 6,602 753
7 Canada 528,000 14,930 1,704
8 Brazil 518,000 2,516 287
9 South Korea 495,000 9,720 1,109
10 France 431,000 6,448 736
11 UK 309,000 4,795 547
12 Italy 291,000 4,692 535
13 Saudi Arabia 272,000 9,658 1,102
14 Taiwan 249,500 10,632 1,213
15 Mexico 238,000 1,932 220
16 Spain 234,000 4,818 550
17 Australia 224,000 9,742 1,112
18 Indonesia 221,070 1,058 117
19 Iran 218,000 2,632 300
20 South Africa 112,000 3,904 445
21 Turkey 347,400 2,578 294
22 Thailand 264,000 2,404 274
23 Egypt 143,000 1,510 172
24 Ukraine 143,000 3,234 369
25 Poland 142,000 3,686 420
26 Malaysia 131,000 4,232 483
27 Sweden 127,000 12,853 1,467
28 Norway 126,400 24,006 2,740
29 Vietnam 125,000 1,312 149
 Rank Country Electricity Average electrical Average power
consumption (per energy per capita (kWh per capita (watts
million kW h/yr) per person per year) per person)
30 Argentina 116,000 2,643 301
31 Netherlands 108,000 6,346 724
32 UAE 96,000 16,195 1,848
33 Philippines 94,370 885 101
34 Kazakhstan 91,000 4,956 565
35 Pakistan 82,000 471 50
36 Finland 81,000 14,732 1,681
37 Belgium 81,000 7,099 810
38 Venezuela 78,000 2,523 288
39 Austria 69,750 8,006 913
40 Chile 66,000 3,739 426

Note: Data obtained from →https://www.cia.gov/index.html.

Table 2 Electricity prices for households as of 2019 (per kW).
Iran $0.01 India $0.08 Namibia $0.13 Uganda $0.20
Burma $0.03 UAE $0.08 Colombia $0.14 Finland $0.20
Iraq $0.03 Sri Lanka $0.08 Hong $0.15 France $0.20
Kong
Zambia $0.03 Vietnam $0.08 USA $0.15 Philippines $0.20
Egypt $0.03 Lebanon $0.08 Cambodia $0.15 Peru $0.20
Qatar $0.03 Taiwan $0.09 Macao $0.15 Greece $0.20
Algeria $0.04 Turkey $0.09 Lithuania $0.15 New Zealand $0.21
Kazakhstan $0.04 Argentina $0.09 Iceland $0.15 Kenya $0.22
Azerbaijan $0.04 Botswana $0.09 Malta $0.15 Switzerland $0.22
Afghanistan $0.05 Serbia $0.09 Honduras $0.16 Luxembourg $0.22
Saudi $0.05 Cameroon $0.09 Brazil $0.16 Austria $0.23
Arabia
Bahrain $0.05 Indonesia $0.10 Croatia $0.16 Czech Republic $0.23
Ukraine $0.05 Ecuador $0.10 Costa Rica $0.16 Australia $0.24
Malaysia $0.06 Canada $0.10 Chile $0.16 Spain $0.25
Ghana $0.06 Tanzania $0.10 Estonia $0.17 Netherlands $0.25
Pakistan $0.06 Jordan $0.11 Israel $0.17 Liechtenstein $0.26
Bangladesh $0.06 Albania $0.11 Senegal $0.17 Italy $0.27
Russia $0.06 South $0.11 Romania $0.17 United $0.27
Korea Kingdom
Nepal $0.07 Thailand $0.12 Sweden $0.18 Ireland $0.28
Nigeria $0.07 Morocco $0.12 Poland $0.18 Japan $0.29
Tunisia $0.07 Norway $0.12 Singapore $0.18 Jamaica $0.30
Belarus $0.07 Bulgaria $0.13 Slovakia $0.18 Portugal $0.30
Georgia $0.07 South $0.13 Latvia $0.19 Belgium $0.31
Africa
Mexico $0.08 Hungary $0.13 Uruguay $0.19 Denmark $0.33
China $0.08 Ivory Coast $0.13 Slovenia $0.19 Germany $0.35

Note: Data obtained from →https://www.globalpetrolprices.com/electricity_{p}rices/ in US$

terms as of November 2019.
 In Tables →2 and →3, we observe estimates of the electricity prices
facing both households and businesses as of 2019. Within this list, we
observe that countries such as Iran, Iraq and other middle eastern
nations such as Qatar present evidence of substantially reduced
household charges for electricity. Germany represents the most
expensive country to buy domestic electricity per kW, closely followed by
Denmark, Belgium, Portugal, Jamaica and Japan. In terms of the
business charges in →Table 3, although rates are broadly reduced in
comparison to household estimates, Denmark is the most expensive at
US$0.28 per kW. This is closely followed by Jamaica and Costa Rica. In
terms of the cheapest countries in which to buy electricity, Venezuela,
Libya and Ethiopia represent the cheapest countries in which to run
potential cryptocurrency mining operations.
Table 3 Electricity prices for businesses as of 2019 (per kW).
Venezuela $0.01 Russia $0.08 Bulgaria $0.12 Singapore $0.15
Libya $0.02 South $0.08 Burma $0.12 Cameroon $0.15
Korea
Ethiopia $0.02 Czech $0.09 Thailand $0.12 Poland $0.15
Republic
Uzbekistan $0.03 Canada $0.09 Philippines $0.12 Macao $0.16
Zambia $0.03 Ecuador $0.09 Romania $0.12 Switzerland $0.16
Algeria $0.04 Uruguay $0.09 Taiwan $0.13 Guatemala $0.16
Qatar $0.04 UAE $0.10 Hungary $0.13 Mexico $0.16
Kazakhstan $0.05 Turkey $0.10 Chile $0.13 Uganda $0.16
Iraq $0.05 Malaysia $0.10 Bolivia $0.13 Slovakia $0.17
Paraguay $0.05 Ukraine $0.10 Peru $0.13 Austria $0.17
Azerbaijan $0.05 Estonia $0.10 Greece $0.13 Malta $0.17
Kuwait $0.05 Tanzania $0.10 Brazil $0.13 Australia $0.17
South Africa $0.06 Serbia $0.10 Croatia $0.13 Liechtenstein $0.17
Argentina $0.06 China $0.10 France $0.13 Mali $0.17
Georgia $0.06 Lebanon $0.10 Belgium $0.13 Belize $0.18
Iceland $0.07 Bangladesh $0.10 Slovenia $0.13 Kenya $0.19
Saudi Arabia $0.07 Belarus $0.11 Pakistan $0.14 Ivory Coast $0.21
Armenia $0.07 DR Congo $0.11 Finland $0.14 United $0.21
Kingdom
Mozambique $0.07 Nigeria $0.11 Luxembourg $0.14 Honduras $0.22
Sri Lanka $0.07 Israel $0.11 Netherlands $0.14 Italy $0.22
Indonesia $0.07 Botswana $0.11 Colombia $0.14 Germany $0.22
Egypt $0.07 Tunisia $0.11 Ghana $0.14 Japan $0.22
Nepal $0.08 Morocco $0.11 Hong Kong $0.14 Costa Rica $0.24
Bahrain $0.08 USA $0.11 Latvia $0.15 Jamaica $0.24
Vietnam $0.08 Bosnia & $0.12 Spain $0.15 Denmark $0.28
Herz.

Note: Data obtained from →https://www.globalpetrolprices.com/electricity_{p}rices/ in US$

terms as of November 2019.
In each country, a substantial number of mining companies have
harnessed a large amount of network hash power in their mining
efforts, creating a more centralised structure of the mining process. The
three countries with the largest production of Bitcoin include:
1. China: which mines the most bitcoins of any nation and
has been driven, in part, by cheaper electricity in
comparison to international counterparts. Chinese
Bitcoin miners have gained an advantage by capturing a
large percentage of Bitcoin’s hash power. China is home
to many of the top Bitcoin mining companies such as
F2Pool, AntPool, BTCC, and BW. It’s estimated that these
mining pools own somewhere around 60% of Bitcoins
hash power, meaning they mine about 60% of all new
Bitcoins.
2. Czech Republic: accounts for approximately 10% of all
mining and is home to Slush Pool, which was the first
mining pool and currently mines about 11% of all blocks.
Slush is probably one of the best and most popular
mining pools despite not being one of the largest.
3. Iceland: accounts for 2% of cryptocurrency mining. The
new industry’s relatively sudden growth has been
raising concerns for its environmental impact. Iceland’s
energy comes from hydroelectric dams and geothermal
power plants, creating electricity without carbon
emissions. It has been the relatively cheap, and
abundant amounts of energy that have attracted
multiple companies to Iceland.
4. Japan: accounts for approximately 2% of mining, driven
by cheap electricity and low setup fees, both of which
are a substantial advantage for venture businesses.
There has been a large drive for Japanese companies
setting up cryptocurrency mining processes both at
home and abroad. Japanese companies moving into the
business in anticipation of future growth. For example,
DMM.com, has set up Japan’s largest cryptocurrency
 mining operation in the central city of Kanazawa, while
GMO Internet has one in Scandinavia.
5. Russia: accounts for 10% of international mining. Russia
as a whole currently mines one-tenth of the world’s
bitcoin production. RMC previously raised $43 million in
an initial coin offering (ICO) in 2017, which was identified
as the largest Russian ICO at the time.
6. Georgia: accounts for approximately 2% of Bitcoin
mining and is home to a company known as BitFury who
acts as one of the largest players in the Bitcoin mining
business segment, known particularly for their role in
the development and sales of efficiency streaming
hardware to Bitcoin users and businesses. Bitfury is one
of leading full service Blockchain technology companies
and one of the largest private infrastructure providers in
the Blockchain ecosystem. In late 2016, the company
became famous as they were estimated to be mining
approximately 15% of all Bitcoins in the world.
Within these companies, there are a number of substantial mining
pools. A mining pool is a joint group of cryptocurrency miners who
combine their computational resources over a network. Individually,
participants in a mining pool contribute their processing power toward
the effort of finding a block. If the pool is successful in these efforts and
is rewarded with cryptocurrency tokens as a result, the mining pool
divides up these rewards to individuals who contributed according to
the proportion of each individual’s processing power or work relative to
the whole group. In some cases, individual miners must show proof of
work in order to receive their rewards. There are broadly three types of
mining pools: 1) Proportional mining pools are among the most
common. In this type of pool, miners contributing to the pool’s
processing power receive shares up until the point at which the pool
succeeds in finding a block. After that, miners receive rewards
proportional to the number of shares they hold; 2) Pay-per-share pools
operate somewhat similarly in that each miner receives shares for his or
her contribution. However, these pools provide instant payouts
regardless of when the block is found. A miner contributing to this type
of pool can exchange shares for proportional payout at any time; and 3)
Peer-to-peer mining pools aim to prevent the pool structure from
becoming centralised. As such, they integrate a separate blockchain
related to the pool itself and designed to prevent the operators of the
pool from cheating as well as the pool itself from failing due to a single
central issue.
1. Poolin: is a public pool which mines about 18% of all
blocks. They are based in China, but have a website fully
available in English.
2. F2Pool: is based in China. It mines about 17% of all
blocks.
3. BTC.com: is a public mining pool that can be joined and
mines 15% of all block.
4. AntPool: is a mining pool based in China and owned by
BitMain. AntPool mines about 11% of all blocks.
5. ViaBTC: is a relatively new mining pool. It is targeted
towards Chinese miners and mines about 9% of all
blocks.
6. 1 Hash & 58 coin: This is a Chinese pool made from two
pools: 1 THash and 58 coin.
7. Slush Pool: was the first mining pool and currently
mines about 11% of all blocks. Slush is probably one of
the best and most popular mining pools despite not
being one of the largest.
8. BTC.top: is a private pool and cannot be joined. It mines
about 7% of all blocks.
9. Bitfury: is a private pool that cannot be joined. Bitfury
currently mines about 3.5% of all blocks.
While success in individual mining grants lead to complete ownership of
the reward, the probability of achieving success is very low because of
high power and resource requirements. Further, due to the increasing
difficulty of mining in recent years as popularity of these digital
currencies has grown, mining is often not a profitable venture for
individuals. The costs associated with expensive hardware necessary to
be a competitive miner as well as electricity oftentimes outweigh the
potential rewards. The benefits of mining pools are found within a
number of key characteristics. First, they require less of each individual
participant in terms of hardware and electricity costs, thereby increasing
the chances of profitability. Whereas an individual miner might stand
little chance of successfully finding a block and receiving a mining
reward, a mining pool dramatically improves the success rate as the
cumulative effort leads to better chances of finding a block, though the
joint effort comes at the cost of shared reward. However, by taking part
in a mining pool, individuals give up some of their autonomy in the
mining process. They are typically bound by rules established within the
pool while they are further required to share any potential rewards,
which reduces profits in comparison to working alone.

5 What are the main identified issues to date?

5.1 Do cryptocurrency miners take advantage of developing
regions?
As we have been developing, cryptocurrency miners seek low cost
electricity and permissive policy environments, which can also
unfortunately create environmental hazards and substantial impacts
upon local consumers without producing any benefit for communities.
The energy needs of these miners means that mining is in fact quite
mobile. China has been a dominant force in the cryptocurrency industry,
acting as a home to the world’s largest Bitcoin mining companies.
Regions such as the Xinjiang or Sichuan possess substantial surplus
energy which can be made available to these mobile mining operations.
Since 2018, China has however begun to exert regulatory pressure on
provincial governments to encourage the closure of crypto mining
operations and has withdrawn incentivised taxation offers. Further,
China has consistently attempted to enact financial regulations on
cryptocurrencies. Notably, The People’s Bank of China, China’s central
bank, implemented measures prohibiting domestic Bitcoin exchanges
and banning the practice of raising public funds for the development
new cryptocurrencies, while China’s financial regulatory measures have
been found to correlate with depreciation in Bitcoin’s value. Due to
these issues and similar problems in North America and Western
Europe, these operators have been continuing to explicitly seek out
countries with looser regulatory environments and physical
environments that favour the cost of crypto-mining production.
Crypto-mining facilities potentially subsidise the development of
renewable energy resources by seeking the cheapest resource,
optimising consumption value. In 2017, 80% of China’s Bitcoin mining
operations were based in Sichuan, a province that generates
approximately 90% of its energy production from renewable resources,
thereby accounting for 43% of global Bitcoin mining operations. The
profitability of cryptocurrency mining is dependent on the currency’s
market value in concurrence with the price of electricity. The most
efficient mining operations are those that can operate at the lowest cost
by obtaining the cheapest electricity capable of supporting extreme
consumption. As a result, miners seek cheap electricity markets while
benefiting from policy environments that do not regulate the ways in
which electricity can be consumed. This can manifest in a number of
quite unusual outcomes. With regards to countries without substantial
asset resorts, the Democratic Republic of Congo for example, has been
linked with a number of substantial projects that could help to protect
children there from forced labour.
One particular project has the ambition to provide global
manufacturers of high-tech devices like smartphones with a guarantee
that cobalt used in lithium-ion batteries was not mined by children
which has been an incredibly broad issues associated with cobalt
development in the country. The Democratic Republic of Congo is
reported to possess in excess of half of the world’s cobalt resources,
which will become ever more valuable as companies attempt to develop
electric cars. Other substantial issues have been identified in Venezuela,
where hyperinflation has prompted dramatic shortages of basic
necessities and food, bitcoin and other cryptocurrencies could help ease
the strain. Given its global usage and the relative ease of cross-border
payments and transfers, cryptocurrency has been a viable alternative to
an increasingly problematic local fiat money for many Venezuelan
citizens. The Petro (PTR) has its origin in the idea of president Hugo
Chavez of a strong currency backed by raw materials. The blockchain
allows the transfer of value and information, without third parties, they
provide the tools to successfully face the challenge of creating platforms
and financial instruments that are transparent, efficient and inclusive.
Petro was aimed to be a sovereign crypto asset backed by oil assets and
issued by the Venezuelan State as a spearhead for the development of
an independent, transparent and open digital economy open to the
direct participation of citizens. It is also aimed to serve as a platform for
the growth of a fairer financial system that contributes to development,
autonomy and trade between emerging economies. Venezuelan oil
assets will be used to promote the adoption of crypto assets and
technologies based on the country’s blockchain. The ambition of the
State is to promote and encourage the use of Petro with a view to
consolidating it as an investment option, savings mechanism and means
of exchange with State services, industry, commerce, and citizens in
general. Petro aspired to be an instrument for to develop Venezuela’s
economic stability and financial independence, while also providing an
opportunity to create a freer, more balanced and fairer international
financial system.
Further, Haiti, a country that has been still reeling from natural
disaster, and possessing a gross national Income per capita of
approximately $900, have also attempted to benefit from blockchain.
The Haitian government has suggested that blockchain technology
could be used to record and register property transactions, voting,
intellectual property and other aspects of the national bureaucracy.
Proponents of blockchain believe that its further development in such
regions could enhance the distribution of government services,
therefore helping to provide identity services and even help to enhance
freedom of speech while counteracting corruption which has been
prevalent in these jurisdictions.

5.2 Global warming effects?

A key element of many cryptocurrencies, including bitcoin, is that so-
called miners compete to complete complex mathematical calculations
to get the right to add a ‘block’ to the blockchain. The addition of the
block stores information about a transaction, and the winning miner is
rewarded for its work. The rise in cryptocurrency mining can therefore
be seen as environmentally damaging in two ways. Firstly, the mining of
cryptocurrency requires substantial volumes of electricity. Secondly,
cryptocurrency mines are distributed in a way that enables them to take
advantage of cheap electricity in countries that utilise power generation
from non-renewable resources such as coal, effectively giving the
industry a commercial preference towards unsustainable energy.
Additionally, bitcoin mining falls outside conventional environmental
regulatory frameworks designed to address traditional mining. While
the physical damage on-site remains minimal, the indirect
environmental damage these mines produce as a result of their
electricity consumption remains unchecked. Similarly, bitcoin miners are
not required to offset or mitigate their electricity consumption as other
forms of mining or even industrial operations may be required to do.
Consequently, not only do bitcoin mines use vast amounts of electricity,
they are not held to any form of environmental standard for either
where they source their electricity, nor are they required to mitigate the
environmental damage they cause.
In a 2018 study that examined the entire chain of events that leads
to the creation of Bitcoin, researchers at University of Hawaii at Manoa3
examined how the projected growth of this cryptocurrency would harm
the climate. By way of comparison, the scientists compiled data on the
uptake of forty different technologies ranging from dishwashers and e-
books to electric power and the Internet. Compiling data on the
electricity consumption of the various computing systems used for
Bitcoin verification at present and the emissions from electricity
production in the countries of the companies that performed such
computing, the authors estimated that in 2017, Bitcoin usage emitted 69
MtCO2e. They used this information to estimate the rate of uptake this
cryptocurrency will see in the coming years. Based on their most
conservative appraisal, the team found that the cumulative emissions
from bitcoin would be enough to push global warming beyond 2C in 22
years. If the average rate of technology uptake is used instead, this
number is closer to 16 years. To work it out, the scientists analysed the
power efficiency of computers used in bitcoin mining, the location of
miners around the world and the CO2 emissions from electricity in those
countries. The finding that emissions from an expanding bitcoin could
push the Earth beyond 2C of warming above the pre-industrial level is
particularly stark given the Intergovernmental Panel on Climate
Change’s recent report on the impacts of such a temperature rise. The
report’s authors warned that to avoid the worst impacts of climate
change, such as coral reef extinction and Arctic ice disappearance,
warming must be limited to 1.5C. Though bitcoin has growing rapidly in
the decade since it was introduced, this growth has somewhat
stagnated over the past 10 months, suggesting fears about its climate
impacts may be premature. However, this research was met with some
opposition. Given the decentralised nature of Bitcoin and the need to
maximise economic profits, its computing verification process is likely to
migrate to places where electricity is cheaper, suggesting that electricity
de-carbonisation could help to mitigate Bitcoin’s carbon footprint — but
only where the cost of electricity from renewable sources is cheaper
than fossil fuels. One of the key arguments proposed by opponents
surrounded the efficiency of the mining process. While the future
growth of cryptocurrencies like bitcoin is highly unpredictable, we do
know that the global electric power sector is de-carbonising and that
information technologies, including cryptocurrency mining rigs, are
becoming much more energy efficient.

5.3 Could Bitcoin stop hinder functionality of the Internet?

The continuing argument surrounding the benefits and complications
that the development of Bitcoin and other cryptocurrencies provide has
provided much substantial debate. However, at times, it has often
teetered somewhat on brink of exceptionally alarmist and sensationalist
accusations, such as that which accused Bitcoin of containing enough
disruptive force to hinder and even stop the functionality of the Internet.
This accusation obtained far more credibility when in June 2018, the
Bank of International Settlements released a report4 which stated that
amongst a number of substantial concerns, the rapid growth of Bitcoin
could generate substantial issues with regards to the functionality of the
Internet. One of the key elements of the report read: “To process the
number of digital retail transactions currently handled by selected
national retail payment systems, even under optimistic assumptions, the
size of the ledger would swell well beyond the storage capacity of a
typical smartphone in a matter of days, beyond that of a typical personal
computer in a matter of weeks and beyond that of servers in a matter of
months. But the issue goes well beyond storage capacity, and extends to
processing capacity: only supercomputers could keep up with
verification of the incoming transactions. The associated communication
volumes could bring the Internet to a halt, as millions of users exchanged
files on the order of magnitude of a terabyte.” This would manifest
through the need for an incredible amount of computer storage for
major cryptocurrencies to keep up with the speed of transaction-
processing systems that are currently in place. This finding presents a
major issue for the process surround the scaling-up of cryptocurrencies.
Each miner is required to download and verify the history of all
transactions ever made, including amount paid, payer, payee and other
details. The issues then surrounds the growth of this enormous history,
with every transaction more information, the ledger continues to grow
substantially as time passes. As of January 2020, the size of the Bitcoin
blockchain alone was 240 GB. →Figure 12 presents the estimated energy
consumption that this represents between 2017 and 2019. Other
cryptocurrencies, such as Ethereum, Litecoin and Bitcoin Cash, for
example, were 181 GB, 22 GB, 158 GB respectively. To deal with this
issue, cryptocurrencies have limits on the throughput of transactions in
order to keep the size and of the ledger and the time needed to verify all
transactions manageable.
Note: The above data was obtained from
→https://digiconomist.net/bitcoin-energy-consumption.

Figure 12 Bitcoin Energy Consumption.

The disintegration of the actual processing power of cryptocurrency

would manifest when considering the number of digital retail
transactions currently handled by selected national retail payment
systems. When considering the average computer used during the retail
process, or indeed the mobile technology used for cost-efficiency
throughout, one can easily understand how quickly that the size of the
cryptocurrency ledger would overwhelm the storage capacity of such
technology, it presents a clear example as to how the continued
evolution of digital technology could actually lead to substantial issues
without further technological evolution. Despite this extremely negative
finding, the BIS did however add that blockchain and its associated
distributed ledger technology could provide some benefits for the global
financial system. It stated that the software have the potential to make
the sending of cross-border payments more efficient, and with the
regards to international flows could improve the exporting and
importing industry.
6 Does there exist regulatory solutions?
There are a number of potential solutions to the problem as to how to
reduce the environmental impacts sourced within the Bitcoin mining
process. There are a number of schools of thought with regards to such
a solution, but theory suggests that two prevail: first, policy-makers
could stand aside and let the market attempt to solve the issue on its
own, while secondly, the government could immediately stand in and
regulate the entire market in a rigid manner should the stated issues
continue to escalate.
When allowing that the market will solve these environmental issues
on its own, it is assumed that the market participant will acquire
information about the externalities on a voluntary basis, while then
working to solve them without government involvement. Generally,
such markets often become more efficient over time as they will
theoretically correct government failures. The process of mining
somewhat counteracts this theory. Bitcoin’s blockchain system involves
multiple miners competing to be first to successfully undertake
verification work, where only the first successful miner will be rewarded,
leading to significant delays in transaction processing times and costs.
To counteract this, miners have become innovative and developed the
technology that they use, but this advancement on its own is not
enough. This approach remains problematic as it relies on the market
naturally identifying cost driven solutions that are also environmentally
beneficial. As outlined, this can work, but the most cost-effective
solution will not always be an environmentally beneficial one,
particularly as the cost-driven approach in the past has been for mining
to occur in low cost jurisdictions like China, where the environmental
costs of bitcoin mining are more pronounced. If markets identified more
commercially effective means of improving efficiency this may see
progress towards more environmentally efficient outcomes stall.
The alternative solution is to implement government regulation.
Regulatory frameworks can help to internalise environmental costs, so
that commercial-effective solutions directly take into account
environmentally-effective ones. Such frameworks can introduce rules
and requirements which have the effect of better controlling or
mitigating the environmental impacts of cryptocurrency while they
could also include conventional cap and trade schemes designed
specifically for the cryptocurrency industry, to control the amount of
electricity used by bitcoin mines. Alternatively (or additionally),
incentivising the use of clean energy sources in bitcoin mining could be
further encouraged as a more environmentally conscious developments
in the industry. If one country introduces onerous regulations to
improve the environmental impacts of cryptocurrencies, and this comes
at a commercial cost, cryptocurrency miners may move offshore to a
country that does not enforce or have such regulations in place (broadly
like miners did to utilise low cost electricity in China). Regulations must
therefore take into account the unconventional nature of bitcoin mines
and their ability to easily relocate if regulations are unfavourable.
Globally coordinated efforts to regulate cryptocurrency’s environmental
impacts may mitigate this outcome, though present regulatory
agreement and diverse policy approaches make this unlikely in the short
term. However, there are many other issues that must be addressed in a
regulatory construct in advance of such deep-rooted industrial
concerns. There have bee many issues with the generation of fake ICOs,
where energy is wasted in a manner that eventually leads to those
operating the ICO simply walking away with the funds of unsuspecting
investors. Such types of fraud have been exceptionally damaging for the
industry at large, creating a broad opinion that cryptocurrencies have
been ripe with fraud. This image was not helped as substantial rumours
began, later supported by evidence that the exchanges had been largely
driven by fake volumes traded. There are now developing broad fears
that such interactions might have been misstated due to the widespread
allegations that now exist based on the presence of fake volumes. In a
recent SEC report,5 Bitwise Asset Management examined exchanges for
fake volume, and found that roughly 95% of reported trading volume in
Bitcoin is fake or non-economic in nature. Bitwise used screen scrapers
to collect live trading data from over eighty exchanges for a period of
several months. The only ten exchanges that passed Bitwise’s tests were
Binance, Bitfinex, Coinbase, Kraken, Bitstamp, bitFlyer, Gemini, itBit,
Bittrex, and Poloniex. This research compared the number of website
visits to trading volume across exchanges to identify suspects that
participate in faking trading volume, as indicated by disproportionately
high volume relative to website visits. In all, the report utilises forty-
eight cryptocurrency exchanges, focusing on monthly traffic between
November 2018 and April 2019. There were nearly 800 million
cryptocurrency exchange website visits in that time period, while the
total reported trading volume was $1.96 trillion, of which only $272.5
billion appears to be real trading volume on non-volume faking
exchanges. About 86% of the trading volume looks to be fake with 65%
of that total real volume originating on Binance and Bitfinex, both of
which have virtually no regulatory oversight. Such fake volume is found
to be either the fraudulent movement of cash or those generated from
washing trades as per the definition in the Bitwise Report6 who also
argues that the prices on exchanges with fake volume do not influence
the price of bitcoin in the real spot market.
To mitigate these continued developing issues, cryptocurrency
market regulation would necessitate deep-rooted exchange regulation.
Almost all foreign exchange flows through banks or currency houses
where all transactions should run through an exchange that is
regulated. In recent times, British banks are turning away
cryptocurrency exchanges, and even closing customers’ accounts for
wiring to an exchange, so even if they’d prefer to be based in the UK,
exchanges have to open accounts in mainland European countries such
as Slovenia. Without tight regulation, they fear the funds could be used
by criminals on the dark web or for money laundering. If they are part of
that process, they could get fined or shut down. Exchanges should then
be allowed to manage ICOs, to reduce the number of fake or fraudulent
ICOs that exist. Investors would then follow Know-Your-Customer and
Anti-Money Laundering processes. Many of the warnings issued by
various countries also note the opportunities that cryptocurrencies
create for illegal activities, such as money laundering and terrorism.
Some of the countries surveyed go beyond simply warning the public
and have expanded their laws on money laundering, counter-terrorism,
and organized crimes to include cryptocurrency markets, and require
banks and other financial institutions that facilitate such markets to
conduct all the due diligence requirements imposed under such laws.
For instance, Australia, Canada, and the Isle of Man recently enacted
laws to bring cryptocurrency transactions and institutions that facilitate
them under the ambit of money laundering and counter-terrorist
financing laws. Some jurisdictions have gone even further and imposed
restrictions on investments in cryptocurrencies, the extent of which
varies from one jurisdiction to another. Some (Algeria, Bolivia, Morocco,
Nepal, Pakistan, and Vietnam) ban any and all activities involving
cryptocurrencies. Qatar and Bahrain have a slightly different approach
in that they bar their citizens from engaging in any kind of activities
involving cryptocurrencies locally, but allow citizens to do so outside
their borders. There are also countries that, while not banning their
citizens from investing in cryptocurrencies, impose indirect restrictions
by barring financial institutions within their borders from facilitating
transactions involving cryptocurrencies (Bangladesh, Iran, Thailand,
Lithuania, Lesotho, China, and Colombia).
One of the final necessary changes would be to clean up the
international tax ambiguity with regards to cryptocurrencies.
Blockchains do not work without a token, and tokens need to be traded
in and out of fiat (government backed currencies like the US dollar). This
means there will always be a chance to profit (in fiat terms), so
governments needs to clarify their stance. One of the many questions
that arise from allowing investments in and the use of cryptocurrencies
is the issue of taxation. In this regard the challenge appears to be how
to categorise cryptocurrencies and the specific activities involving them
for purposes of taxation. This matters primarily because whether gains
made from mining or selling cryptocurrencies are categorised as income
or capital gains invariably determines the applicable tax bracket. One,
singular universal approach might warrant further investigation when
analysing the variety of tax treatments for cryptocurrency. For example,
in the UK, when using cryptocurrencies, corporations pay corporate tax,
unincorporated businesses pay income tax, individuals pay capital gains
tax. While in Argentina and Spain, the assets are subject to income tax,
while in Denmark they are subject to income tax with the losses
deducted. In Israel, they are taxed as an asset, in Bulgaria
cryptocurrency is taxed as a financial asset, while in Switzerland they are
taxed as foreign currency. It is very easy to see how the broad treatment
of cryptocurrency can be deemed to be confusing, but also possessing
many pathways through which illicit behaviour can occur once
international tax treaty’s and cross-border transfer legislation is also
considered. Such international tax revenue could also be best served to
be partially ring-fenced, acting as an insurance policy for any potential
environmental damage that cryptocurrencies could generate. However,
such legislative behaviour would necessitate a standardisation of the
international approach.

7 Concluding comments
As cryptocurrencies as a financial market product continue to evolve, it
is becoming more certain that innovative solutions are going to be
needed to solve some substantial forthcoming issues with regards to
energy usage and technological capacity. The major fuel used by these
networks, due to its relatively majority-based Chinese point of origin, is
coal-fired power plants, which has resulted in an extensive carbon
footprint for each transaction. This raises questions about the
environmental sustainability of cryptocurrencies. The participation in the
validation and mining process of Bitcoin requires both special hardware
and a substantial amount of energy, therefore, there is on-going carbon
production. As the cryptocurrency industry grows, and the adoption of
blockchain technology increases, it is increasingly important for
cryptocurrencies’ blockchain technology to be more environmentally
conscious. By prioritising efficiency, these new cryptocurrencies also
reduce their environmental impact. In doing so, the industry neatly
exemplifies how improving the environmental output of an industry can
be linked to enhanced productivity and effectiveness. Coal and other
fossil fuels are also the largest generator of electricity for the rest of the
world, and coal is a significant contributor to man-made climate change.
This reliance on fossil fuels has given rise to speculation that bitcoin’s
energy consumption will continue to rise as it grows in popularity. This
raises questions about the environmental sustainability of
cryptocurrencies.
When observing estimates of the electricity prices facing both
households and businesses, we observe that countries such as Iran, Iraq
and other middle eastern nations such as Qatar present evidence of
substantially reduced household charges for electricity. In terms of the
cheapest countries in which to buy electricity, Venezuela, Libya and
Ethiopia represent the cheapest countries in which to run potential
cryptocurrency mining operations. This makes such countries attractive
to cryptocurrency miners. However, the political stability of some might
not be feasible. Further, crypto-mining facilities potentially subsidise the
development of renewable energy resources by seeking the cheapest
resource, optimising consumption value. The profitability of
cryptocurrency mining is dependent on the currency’s market value in
concurrence with the price of electricity. The most efficient mining
operations are those that can operate at the lowest cost by obtaining
the cheapest electricity capable of supporting extreme consumption. As
a result, miners seek cheap electricity markets while benefiting from
policy environments that do not regulate the ways in which electricity
can be consumed. This can manifest in a number of quite unusual
outcomes, such as those experienced in the Democratic Republic of
Congo, Venezuela and Haiti. Proponents of blockchain believe that its
further development in such regions could enhance the distribution of
government services, therefore helping to provide identity services and
even help to enhance freedom of speech while counteracting corruption
which has been prevalent in these jurisdictions.
The rise in cryptocurrency mining can therefore be seen as
environmentally damaging in two ways. Firstly, the mining of
cryptocurrency requires substantial volumes of electricity. Secondly,
cryptocurrency mines are distributed in a way that enables them to take
advantage of cheap electricity in countries that utilise power generation
from non-renewable resources such as coal, effectively giving the
industry a commercial preference towards unsustainable energy.
Additionally, bitcoin mining falls outside conventional environmental
regulatory frameworks designed to address traditional mining. While
the physical damage on-site remains minimal, the indirect
environmental damage these mines produce as a result of their
electricity consumption remains unchecked. Similarly, bitcoin miners are
not required to offset or mitigate their electricity consumption as other
forms of mining or even industrial operations may be required to do.
Consequently, not only do bitcoin mines use vast amounts of electricity,
they are not held to any form of environmental standard for either
where they source their electricity, nor are they required to mitigate the
environmental damage they cause. The disintegration of the actual
processing power of cryptocurrency would manifest when considering
the number of digital retail transactions currently handled by selected
national retail payment systems. When considering the average
computer used during the retail process, or indeed the mobile
technology used for cost-efficiency throughout, one can easily
understand how quickly that the size of the cryptocurrency ledger would
overwhelm the storage capacity of such technology, it presents a clear
example as to how the continued evolution of digital technology could
actually lead to substantial issues without further technological
evolution.
Overall, the total carbon footprint of the industry is now estimated
to have surpassed that of many large industrial nations. This chapter
has investigated the multiple knock-on effects and consequential
behaviour of this rapid growth in energy usage, such as an increase in
global temperature, the growth of mining companies who have targeted
third world infrastructures, and the complete shutdown of the Internet
as we know it. Considering the evidence provided, we encourage
investors not to ignore these environmentalism matters, particularly due
to the substantial electricity consumption from coal in countries such as
China. Further investigation of these issues are exceptionally important,
as should they continue to be made without fair supporting analysis, it
could be considered to be an unfair attack on this developing industry.
However, should such problems continue to transpire with evidence
provided, it is of the utmost importance that regulators, policy-makers
and governments alike take appropriate action.

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1 →BitcoinEnergyConsumption.com, October 2019.
2 Data obtained from →https://digiconomist.net/bitcoin-energy-
consumption
3 Available at: →https://www.hawaii.edu/news/article.php?
aId=9588
4 Available at: →https://www.bis.org/publ/arpdf/ar2018e5.htm
5 Available at: →https://www.sec.gov/comments/sr-nysearca-
2019-01/srnysearca201901-5574233-185408.pdf
6 “Fake volume refers to any reported trading volume that does
not reflect legitimate price discovery in the market. This
includes: 1. Fraudulent Prints: This is volume that is simply
printed on the tape by an exchange, with no corresponding
trading taking place, or 2. Wash Trading: Wash trading occurs
when a single or affiliated trader executes trades with itself.”
from Bitwise Report.
Evaluating a decade of
cryptocurrency development:
Navigating financial progress
through technological and
regulatory ambiguity
Shaen Corbet
In this final chapter, we present an overview of the key lessons
that have been provided throughout this collection. The
substantial surge in interest and continued media coverage
surrounding cryptocurrencies, and in particular, Bitcoin, has
generated an environment through which pricing bubbles,
market manipulation and illicit usage could thrive. There have
been many accusations of substantial inherent issues such as
the generation of significant environmental effects and the
potential shutdown of the internet and broad technology as we
know it due to the sheer size of cryptocurrency ledgers. Further,
legal and regulatory issues, including the lack of international
consistency as to what exactly cryptocurrency represents as a
financial product continue to obstruct the trust of many
investors. The many cases of market manipulation and illegality
that exist have also substantially diminished trust. However,
after a decade in existence, the price of Bitcoin remains
consistently elevated, acts as quite a useful diversification tool,
and does present uses as a tool to covert international value,
even if it is one of the most volatile alternative investments in
existence.
 While cryptocurrency as a product continues to expand at
pace, it is of the upmost importance that we continue to expand
our understanding of this youthful financial product, with
particular emphasis on the contagion effects that can be sourced
therein. The regulatory issues surrounding the growth and
usage of cryptocurrencies has also been the focus of substantial
attention in recent time. These chapters provided a broad cross-
discipline perspective. We first analysed a range of questions
such as what exactly is blockchain, or what best describes the
Bitcoin mining process? We focused specifically on the provision
of explanation outlining the role of cryptocurrencies and
blockchains on real economic transactions, investigating as to
how blockchain affects information friction and asymmetry in
economic and financial transactions and further, as to how it
changes the landscape of markets while considering spillover
effects upon all market participants.
Further, we investigated the literature on both broad- and
narrow-based cryptocurrency research from a bibliometric and
scientometric perspective. Such analysis is used to establish the
development of a visual representation and explanation of the
flow of research direction during the past decade based on
blockchain and cryptocurrency across all disciplines. We provide
clear evidence of a growing but fragmented research area, while
concluding that there is a significant difference in how
researchers treat broad conceptual topics versus individual
products. We finally provided a concise overview of the current
topics that have been central to recent research efforts, while
attempting to provide oversight key areas that have presented
evidence of particular deficiency. Regardless as to whether one
believes that cryptocurrencies to be a passing fad, the future of
money or somewhere in between, they have emerged as one of
the most interesting and discussed financial assets of the last
decade, with particular evidence that these assets have had
greatly increased research activity focused on them over the last
two years. This research however is characterised by being
rather fragmented. It is fragmented in a significant sense across
products and broad areas. The authors state that “while islands
of research do connect they do so in very limited ways”. This
research is found to be parallel, mostly non-overlapping
research initiatives drawing inspiration form the technical and
the economic literature but limited “interdisciplinary” research.
It is within this section of the research that this handbook goes
some way to providing an overview of the areas of research and
will spark greater cooperation to develop broad alignment. Such
recommendations will hopefully provide direction for future
research synergy.
Next, we investigated the financial characteristics of
cryptocurrencies, identifying that they are best characterised by
heavy tail behaviour, very high volatility, persistence, large and
abrupt price swings, and vulnerability to speculative bubbles,
among other properties, all of which lead cryptocurrencies to
resemble more financial assets rather than fiat currencies.
Moreover, cryptocurrency markets exhibit some informational
inefficiencies, which, however, depend on several factors. Finally,
cryptocurrencies are highly connected to each other but isolated
from mainstream assets, with their hedging and safe haven
properties varying over time. This research is further supported
through two further piece of works, the first providing a test of
the interactions between cryptocurrency and various US stock
indices using Granger causality analysis; and the second
specifically analysing the market microstructure of
cryptocurrencies. Unsurprisingly, there is evidence of a
relationship between Bitcoin and US tech stock indices.
Specifically, there is clear evidence of predictability between
Bitcoin and US tech stocks, which seems to vary across quantiles.
US stocks Granger cause Bitcoin return, but this is not the case
for other stock indices. Generally, Granger causality from one
market to another is insignificant in both mean and variance.
However, when one market is in its bear state, the other become
more volatile. Furthermore, there is evidence of casualties when
one market is in its bear market state, while the other is in its
bear or bull market state. With regards to market
microstructure, while analysing a broad range of specific
questions, one of the key takeaways is based on the fact that
there continues to be no central authority to register
cryptocurrency exchanges, it is estimated that there are
currently up to five hundred exchanges in circulation,
characterised by varying platforms, geographical reach, and
compliance with regulatory frameworks. Cryptocurrency
markets share many similar characteristics with both foreign
exchange and equity markets such as limit order books and
matching algorithms, and exchanges that can be both
centralised or decentralised. As these markets are still in their
infancy, what shape or form they will take in future will depend
on a combination of acceptance from consumers, the
investment community, as well as worldwide regulators.
The next chapter sets out to establish the key issues that
have become central within the market for Initial Coin Offerings
(ICOs). Within this context, we provide a brief overview of the
existing literature based on ICOs around the world, while
explaining the motivations and styles of criminality that have
occurred, the methods that have been widely used by
cryptocurrency thieves, the potential for the innovation of theft
within the sector and the related problems that such
technological progress can potentially generate, and the types of
market agents that have set out to potentially misuse ICOs for a
variety of reasons at both the sovereign and corporate level. As
cryptocurrency markets continue to evolve, it is imperative that
policy-makers and regulators continue to monitor the potential
development of sophisticated manipulation and cybercriminality
techniques that have developed throughout the market for
cryptocurrencies. A central theme throughout these listed issues
and examples surrounds substantial damage to credibility within
the market. We have observed cases of theft at the level of the
exchange, within the whitepapers that have been provided,
through the usage of celebrities to support marketing tactics,
through the illegal cross-jurisdictional transfer of funds and
indeed, the most simplest form of theft, where the ICO counter-
party quite simply disappears with the accumulated assets of
investors. While cryptocurrency-enthusiasts continue to promote
the positive attributes that support the potential growth of this
new investment asset, the same proponents cannot ignore that
this entire sector has been rampant with levels and styles of
fraudulent behaviour that is quite difficult to find in other
international markets of similar scale and scope. But there have
been significant positive developments in terms of the future
scope of international regulation and the potential to eliminate
fraudulent behaviour. It is essential that during the continued
growth of the sector for cryptocurrencies that regulation,
including a broad international set of standards, be developed
and maintained to grow at pace with the market for
cryptocurrencies. It is essential that regulations must compare
effectively with the sophistication of the market that they
attempt to monitor. Until the broad gap between regulation and
the capacity for cryptocurrency market misuse is diminished,
there will continue to be substantial and frequent loss of
investor assets through mechanisms that represent those
usually observed in an exceptionally juvenile market.
Finally, this book concluded with an investigation of the
environmental aspects of cryptocurrency markets and as to how
their rapid growth can influence the environment and through
which channels this process manifests. The authors find focus on
the area where to date, we possess the most thorough data and
evidence through which we can build the case, namely electricity
consumption associated with the mining of cryptocurrencies.
The total carbon footprint of the industry is now estimated to
have surpassed that of many large industrial nations. This
chapter investigates the multiple knock-on effects and
consequential behaviour of this rapid growth in energy usage,
such as an increase in global temperature, the growth of mining
companies who have targeted third world infrastructures, and
the complete shutdown of the Internet as we know it. Saying
that, we encourage investors not to ignore these
environmentalism matters, since we also show that electricity
consumption is proven to be one of the commonly used variable
in valuation of mineable cryptocurrencies and identification of
their fair value, which affect investments returns and should be
considered in their trading strategies. Overall, the authors
concluded The rise in cryptocurrency mining can therefore be
seen as environmentally damaging in two ways. Firstly, the
mining of cryptocurrency requires substantial volumes of
electricity. Secondly, cryptocurrency mines are distributed in a
way that enables them to take advantage of cheap electricity in
countries that utilise power generation from non-renewable
resources such as coal, effectively giving the industry a
commercial preference towards unsustainable energy.
Additionally, bitcoin mining falls outside conventional
environmental regulatory frameworks designed to address
traditional mining. The total carbon footprint of the industry is
now estimated to have surpassed that of many large industrial
nations. This chapter has investigated the multiple knock-on
effects and consequential behaviour of this rapid growth in
energy usage, such as an increase in global temperature, the
growth of mining companies who have targeted third world
infrastructures, and the complete shutdown of the Internet as
we know it.

1 Concluding thoughts on the benefits

associated with cryptocurrencies
It is very important that we present a balanced argument within
the scope of such research on cryptocurrencies. While much
research to date has focused on the pitfalls and specific issues
that cryptocurrencies have produced, there have also been a
substantial number of benefits provided. Some of the main
benefits that have been observed to date include:
1. Credibility: One of the most substantial issues
with the establishment of a new product is
developing trust and recognition with a
customer base. International traders and those
who conduct cross-border trade are generally
exposed to exchange rate risk while being
subject to fees associated with exchanging one
currency for another. Further, there may be
challenges in exchanging currency dependent
on availability in certain jurisdiction. Fortunately,
for some large cryptocurrencies, this is not a
particularly significant issues as the digital
currency is universally recognised at an
exchange-driven value. This minimises valuation
risk and somewhat saves time in determining a
price for a transaction, as well as any fees
associated with exchanging money from one
form to another. As cryptocurrency continues to
expand and is increasingly adopted around the
 world, it has the potential to make financial
transactions faster and simpler.
2. Improved Security: Unlike traditional payments,
cryptocurrencies are digital and encrypted;
meaning that you have a substantially reduced
risk of having assets exposed to theft as would
be possible in other transactions with other
legacy payment systems. It is far more difficult
to steal cryptocurrency compared to a physical
wallet. However, there are issues with specific
types of criminality that must be addressed
before to ensure that credibility is maintained.
However, identity theft and hacking are two
specific issues that cryptocurrency users are
constantly exposed. Credit cards operate on a
‘pull’ basis, where the store initiates the
payment and pulls the designated amount from
your account, necessitating credentials at the
point of purchase. Cryptocurrency uses a
separate ‘push’ mechanism that allows the
cryptocurrency holder to send exactly what he or
she wants to the merchant or recipient with no
further information. However, there is no scope
for error as misplaced trades cannot be retrieved
without a resolution provided from a party that
might not be able to be identified in a timely
manner.
3. Elimination of Transaction Fees: While it is
considered standard among cryptocurrency
exchanges to charge so-called ‘maker’ and
‘taker’ fees, and other fees such as deposit and
withdrawal fees, cryptocurrency users are
generally not subjected to the traditional
 banking fees associated with fiat currencies,
therefore, no account maintenance or minimum
balance fees, no overdraft charges and no
returned deposit fees, among many others.
While standard wire transfers and foreign
purchases typically involve fees and exchange
costs, since cryptocurrency transactions have no
intermediary institutions or government
involvement, the costs of transacting are kept
very low. This can be a major advantage for
travellers. Additionally, any transfer generally
occurs rapidly, therefore, eliminating the
inconvenience of typical authorisation
requirements and waiting periods usually
experienced in the banking system. These
services act like PayPal (who does not accept
cryptocurrency) does when considering cash or
credit card users, thereby providing the online
exchange system. Cryptocurrency act as a direct
threat to similar payment mechanisms.
4. Improved accessibility: As the international
usage of technology continues to expand, many
more populations are not only able to access
cryptocurrency, but with the increased speed of
such technological development, these same
populations can use this new payment
mechanism in a meaningful way. It is very
possible that such product development mirrors
the expansion of mobile phone technology in
the latter period of the 1990s, where the new
product spread rapidly through the developing
world, and saturated markets where standard
landline telephones had never been established.
 It is not unrealistic to assume that
cryptocurrency can do similar. Because users are
able to send and receive cryptocurrency with
only a smartphone or computer, cryptocurrency
is theoretically available to populations of users
without access to traditional banking systems,
credit cards and other methods of payment.
5. Corporate advancement: By being an early
adopter of cryptocurrency, it is entirely possible
that you can gain a competitive advantage over
your competition. This also includes being able
to access finance and data transfer, and other
corporate elements of the Internet including
marketing and advertisement which can be used
to target anybody who has a viable data
connection and ready access to their relevant
websites and portals. It is very important to
recall that there are an estimated 2.2 billion
individuals across the world who have access to
the Internet or mobile phones, while also not
possessing access to traditional systems of
banking or exchange. The cryptocurrency
ecosystem holds the potential to make asset
transfer and transaction processing available to
this vast market of willing consumers, once the
required infrastructure (digital and regulatory) is
put in place.
6. Improved User Autonomy: which is one of the
benefits of digital currencies as users possess
more autonomy over their own money than fiat
currencies do. Users are able to control how they
spend their money without dealing with any
 form of regulatory intermediary authority such
as government.
7. Discretion: Cryptocurrency purchases are
discrete unless a user voluntarily publishes
records of their transactions, while these
purchases are never associated with one’s
personal identity, similar to purchases with cash,
while and cannot easily be traced back to the
point of origin. While is must be stated that
cryptocurrency transactions are not completely
anonymous or entirely untraceable, they are less
readily linked to personal identity than other
forms of payment.
8. Adaptability: Due to the exceptionally large
range of cryptocurrency now available, there
exists a range designed for specific usage,
providing evidence of the wide-ranging flexibility
of these new digital products. Some
cryptocurrencies are specifically designed to
mask the buyer and seller’s identities, while
others are specifically designated for specific
purpose, such as charitable donation or a
mechanism through which market participants
can gamble for example.
9. Broad decentralisation: Blockchain technology
incorporates a substantial technological network
to manage the recording and collection of
Bitcoin transactions. The technological system is
managed by the network and not any one
central authority, therefore operating on a peer-
to-peer basis, similar to a ledger or a database
that records property rights. The forms of mass
collaboration this makes possible are just
 beginning to be investigated. The use of such a
system eliminates brokers, the usage of
solicitors and other parties who would normally
increase the cost of transaction. There various
advantages to decentralisation, where this
system can ensures the those without access to
fair banking systems can participate in the
global economy: anyone can store and transfer
wealth to anyone anywhere in the world.
Another benefit of decentralised exchanges is
that users are fully in control of their data as
there is no central authority storing or managing
it.
10. Tailor-made asset transfers: The blockchain
cryptocurrency ecosystem may also be used to
facilitate specialist modes of transfer.
Cryptocurrency contracts can be designed to
add conditions that include third-party approvals
or can be specified to pay at on exact date or
time in the future. Though largely unrecognised
as legal tender on national levels at present,
cryptocurrencies by their very nature are not
subject to the exchange rates, interest rates,
transactions charges, or other levies imposed by
a specific country. And using the peer-to-peer
mechanism of the blockchain technology, cross-
border transfers and transactions may be
conducted without complications over currency
exchange fluctuations, and the like.
11. Increased Speed of Transactions: The usage of
broad decentralisation means that
cryptocurrency transactions are one-to-one
affairs, leading to greater clarity in establishing
 audit trails, greater accountability, and less
confusion as to who owes who. Cryptocurrency
users can pay for their coins anywhere that they
have Internet access, however, personal
information is not necessary to complete any
transaction. Further, such transactions have the
added benefit that they are immediately settled,
which is in contrast to a number of other
mechanisms where third parties or legislative
delays are imposed.

2 Concluding thoughts on the issues

associated with cryptocurrencies
Considering the listed benefits and many facts provided
throughout the chapters provided in this book, there remains a
substantial number of significant issues that must be rectified
before cryptocurrencies can truly be represented in the same
manner as traditional financial assets. Although the first decade
of existence has contained many incredibly unique events
attributed to the development of cryptocurrencies, there remain
a number of substantial issues that continue to require
resolution such as:
1. Scalability: One of the largest problems facing
the cryptocurrency space today is the issue of
scalability. The main concern within this regards
is trust of the blockchain, that is, if there are only
a few entities capable of running full nodes, then
those entities could potentially collude to
present themselves with a large number of
additional cryptocurrency, and there would be
 no way for other users to audit such behaviour,
namely, that a block is invalid without processing
an entire block themselves. Currently, most of
the cryptocurrencies can handle 10–100
transactions per second. This limitation stops
blockchain networks from being used by solid
companies and real-world business use cases.
Obviously, that’s a temporary thing that is close
to being solved by various solutions, like
Lightning network, Waves-NG, Graphene, etc.
While the number of cryptocurrencies continues
to increase at pace, the speed of a transaction is
another important metric that cryptocurrencies
cannot compete with on the same level until the
infrastructure delivering these technologies is
massively scaled. Such an evolution is complex
and difficult to do seamlessly. However, some
have already proposed several solutions,
including lightning networks, sharding, and
staking as options to overcome the scalability
issue. To resolve this issue, it is necessary to
create a blockchain design that maintains
Bitcoin-like security guarantees, but where the
maximum size of the most powerful node that
needs to exist for the network to keep
functioning is substantially sub-linear in the
number of transactions.
2. Time-stamping: It is of the utmost importance
that the system maintains the current time to
high accuracy. All cryptocurrency users have
clocks in a normal distribution around some
‘real’ time with standard deviation of twenty
seconds, that is, there are no more than twenty
 seconds between two nodes on the blockchain.
The system should continuously provide a time
which is within the designated standard
deviation (or less if possible) of the internal clock
of >99% of honestly participating nodes. External
systems may end up relying on this system;
hence, it should remain secure against attackers
regardless of incentives. For example, Ethereum
possesses a thirteen second block of time and
with no particularly advanced time-stamping
technology implemented. It uses a simple
technique where a client does not accept a block
whose stated timestamp is earlier than the
client’s local time. However, to date, this has not
been tested under serious attacks. The recent
network-adjusted timestamps proposal tries to
improve on the status quo by allowing the client
to determine the consensus on the time in the
case where the client does not locally know the
current time to high accuracy; this has not yet
been tested. But at this point in time, issues
surrounding time-stamping are not currently at
the foreground of the key challenges to
cryptocurrencies, however, they do open an
avenue through which cybercriminality can
prevail.
3. Transparency: It has been well-established in
the preceding literature that the majority of ICOs
end up unsuccessful and some of them even
fraudulent. Many cryptocurrencies often state
that they are decentralised, however, it is
estimated that 80% of the top fifty coins are held
by the top twenty wallets. It is further estimated
 that the twenty biggest wallets held more than
90% of total token supply. The lack of
transparency, accountability and professionalism
from renowned institutions can deeply influence
perceptions of the industry, which in turn greatly
reduces the benefit of digital currencies. The
undermines blockchain adoption in different
industries. One current situation that is being
broadly monitored is that of the issue of fake
volumes traded being identified across many
exchanges.
4. Credibility: The continuous manner in which
cybercriminality and even basic levels of theft
across the industry continue to deeply diminish
trust within the cryptocurrency industry at large.
There have been widespread issues with regards
to trading fees and the costs of transactions.
While some exchanges charge a single flat fee,
on average, of 0.25% of the transaction value, on
all trades, but there has been a breach of trust
and loss of credibility when some exchanges
split their trading fees into two separate fees
(the maker fee and the taker fee), where maker
fees can be higher than the taker because the
maker adds liquidity to the market. As we begin
to understand these processes, the credibility of
those who provided incorrect information in the
past is duly diminished.
5. Liquidity: A lack of liquidity can generate an
imbalanced environment, where orders are not
placed/executed on time, and there is an
increased possibility where large cryptocurrency
owners can manipulate prices. Further, such
 reduced levels of liquidity can create a scenario
where markets become more volatile and see
more price slippages. A secondary issue is that
power within the cryptocurrency sector falls into
the hands of exchanges with large liquidity,
generating substantially escalated fees for the
listing of cryptocurrencies on such exchanges.
6. Price volatility: Price volatility, and
subsequently, a lack of an inherent value, is an
important issue, but one which can be overcome
by linking the cryptocurrency value directly to
tangible and intangible assets. Increased
adoption should also increase consumer
confidence and decrease this volatility. The
market continues to be quite small in
comparison to other more developed financial
markets, even considering that it has grown
exponentially. The construction of a
cryptographic asset with a stable price might go
some of the way to eliminating such exceptional
short-term volatility, however, such a response
must be wary of the generation of implicit
contagion effects.
7. Regulations: In the continuing cases of hacks
and breaches of exchanges, there continues to
be quite a stark absence of regulation. In 2019,
both the European Banking Authority (EBA) and
the European Securities and Markets Authority
(ESMA) have publicly called for better
assessments of cryptocurrency technology and
its impacts to develop appropriate regulations.
The Securities and Exchange Commission (SEC)
in the US is applying their regulatory guidance to
 cryptocurrency projects as it considers another
form of securities. It is this broad absence of
regulation is the most important aspect that
prevents merchants from accepting digital
currencies.
8. Transaction Delays: The cryptocurrency market
is plagued with a litany of delays across almost
every type of transaction. From opening a
trading account to verifying your identity and
being able to make deposits and withdrawals,
the system seems to be quite slow. While
cryptocurrency transactions are known for being
fast, delays can happen and can be a way to
protect users from hacking or fraudulent
transactions. Exchanges sometimes delay
transactions if they suspect the user did not
authorise the transactions. Some issues with
regards to scalability have been identified by
experts as being the cause of transaction delays.
As the blockchains become longer, more
transactions are being held up in the queue
awaiting approval. It is vital that key
stakeholders in the market continue to work on
efforts to combat these issues.
9. Physical usage of cryptocurrency: It has
become a very obvious trend in recent times, but
there has been a substantial decline in the
growth of cryptocurrency acceptance. This has
been attributed to excessive fees and high
volatility. Cryptocurrencies through their very
design, are supposed to simplify the transaction
process significantly by reducing fees to a mere
1% and eliminating the need for extra hardware.
 However, due to the novelty of blockchain
technology, substantial issues were passed
towards customers. Depending on the
blockchain, you can end up paying from $0.01
(Dash) to up to $30 (Bitcoin) in commission,
which would indicate that those
cryptocurrencies denoted to be cheapest or
those who provide free transactions will be
eventually used by the masses. However, the
credibility of some less well-known
cryptocurrencies has created an issue with
regards to adoption and some companies and
countries appear fearful to be a first-mover.
10. Cybercriminality issues: Arguably, the most
substantial issue to date, as continued
criminality in this sphere has greatly reduced
confidence across all agents. There have been
multiple ICOs breached and have cost investors
hundreds of millions of dollars in losses.
Mitigating this will require continuous upkeep of
security infrastructure and the development of
enhanced security measures that go beyond
those used in the traditional banking industries.
There have been a number of high-profile
cryptocurrency hacks and heists that have
resulted in millions of dollars being stolen.
Traders and investors have lost funds and some
platforms have ceased to operate. In a bid to
counter the activities of these criminals, traders
and platform operators have to take a number
of precautionary measures. However, there are
side effects to these policy changes as they have
created a number of bottlenecks that hamper
the cryptocurrency trading process. This then
creates a trade-off between security and
efficiency. Due to the activities of hackers, some
traders prefer to store the bulk of their
cryptocurrency holdings in offline wallets. This
means that when trading they have to move
from offline storage to online storage before
participating in the trade, increasing the risk and
cost of efforts. It must be considered that
transactions on a blockchain are immutable and
as such if funds get stolen, there is little chance
of ever recovering such funds. This not only
applies to cryptocurrency traders.
Cryptocurrency trading platforms constantly
have to improve their security framework in
order to stay ahead of the hackers and thieves. It
is important to remember that as technology
becomes more sophisticated, so do hackers.
Exchanges are essentially so vulnerable to hacks
because they centralise the risk, so further
decentralisation can be an option in the pursuit
for maximum security. Some of the key
cybercriminality risks have been identified as:
I Price manipulation: The light
regulation of exchanges has
created an environment where
abusive and illicit manoeuvres
can manifest. It is reported that
crypto exchanges use
algorithms to manipulate the
prices of coins. In a number of
situations, cryptocurrency
traders exposed a promotion on
some exchanges which inflated
the trading volume on the
exchange, where there was a
connection between fake trading
volumes and paybacks as
trading fees as an airdrop.
Further, when a tradeable asset
can drop by as much as fifty
percent in less than 24 hours, we
must ask significant questions.
There are a number of reasons
that contribute to the excessive
volatility in the market but
perhaps the biggest contributor
is the activities of ‘whales’, who
are individuals that have large
cryptocurrency holdings. They
are able to swing the market by
manipulating the price of a
cryptocurrency. They do this by
means of buying and selling
walls. The problem with this
regularly occurring scenario is
that the whales can drive up the
price without actually investing
in the market. The actual trades
that have boosted the price of
the cryptocurrency has come
from the smaller traders.
Further, one of biggest reasons
why this sort of asset price
manipulation is possible is due
to the lack of position price
 limits/fees on many
cryptocurrency trading
platforms. If adequate limits or
fees are put in place, it would
discourage the movement of
large buy and sell market
positions.
II Pump and Dump ICO Schemes:
ICOs have emerged to become
an integral part of the
cryptocurrency market. Many
tokens are introduced to the
market via ICOs with investors
buying these tokens in exchange
for fiat money. Pump and dump
ICO schemes continue to be a
problem for the market due to
the lack of regulation. During
the ICO, the entrepreneurs
behind the token speculate
massively on the coin, driving
the prices up and getting
investors attracted. Once this is
done, the same investors cash
out, therefore leaving the
investors with worthless coins
that have little or no value. There
has also been a substantial
increase in the level of spoofing
payment information and
phishing.
III Loss/corruption of a wallet file:
Most users store their
 cryptocurrency wallet files on
their computers. Therefore, they
can be stolen using malware or
lost if the hard disk crashes. So
most advanced users make hard
copies of their secret key and
purchase USB hardware wallets.
IV Spoofing/manipulating a user
address: Collection of funds in an
ICO usually opens at a specified
time and closes when the
required amount has been
collected. The collection address
is posted on the project website
when it opens. There have been
a number of situations where
such user addresses have been
intercepted and the precedes
stolen. This has also manifested
in the hacking of payment
gateways.

3 In conclusion
Overall, cryptocurrencies have a long way to go before they can
replace the traditional mechanisms through which global
finance flows. However, as outlined throughout this book, even
considering the many, substantial issues that exist within this
developing sector, there have also been a number of benefits
and unexpected side-effects generated. To briefly conclude, the
regulation of the product and the subsequent reduction of
cybercriminality appear to immediately necessitate action, even
before the need for technical improvement. It would appear that
the reduced usage of cryptocurrency has manifested directly
from the substantial theft and illicit usage that is central to the
product’s usage. Media coverage has been based largely on
such issues, not necessarily on the implicit benefits contained
therein. Most individuals, without deep financial knowledge base
their views of such products on such basic news coverage, which
has mainly surrounded the volatility of these products and the
cybercriminality contained within. Should confidence be
restored, this could lead to increase usage, allowing
cryptocurrencies to potentially grow in a more organic manner.
It must be noted that the use of such technology presents
benefits to countries with a lack of basic infrastructure, such as
easy access to banking networks. However, the very nature of
the technology also makes it a very useful tool for many forms of
illicit behaviour. Governments and regulatory bodies in the
medium-term will most likely reach a crossroads as to how to
balance these positive and negative outcomes. While some
investors in 2009 did not foresee the longevity of digital
currencies as a viable financial product, many most certainly did
not envisage their survival for a decade. Cryptocurrencies have
presented much resilience, continuing to thrive even considering
the many issues that they have faced. It is within the
forthcoming decade that we will understand as to whether
cryptocurrencies can grow to be the ground-breaking future of
finance that proponents claim the product can become.