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The peculiar nature of Cryptocurrencies

In present times, the question of reducing one's exposed risk to currency devaluation and negative interest rates arises; options become more and more contemplated, including cryptocurrencies.


First, a brief history, the idea of a digital currency in which transactions are decentralized using cryptography, rather than centralized by an authority [1], was first published by Satoshi Nakamoto in 2009 under the name of Bitcoin. The two main properties of this type of currency: digital and decentralized, create a free market and anonymity in some cases. No wonder why 11 years later, the total market capitalisation (investment) of all cryptocurrencies totals 341B USD[2]. Due to the rising popularity of cryptos, governments have started to regulate them by requiring ID when buying Bitcoin for example. Ironically, this was one of the main selling points - anonymity. As a result, private countermeasures have put in place, such as coin mixing [3] and many others.


Fig 1.1 EUR to USD [4]


Fig 2.2 BTC to USD [5]


From the figures overleaf we can see how the national currencies are much less volatile than the private currency - Bitcoin. In fact, within the span of July to September, the volatility of BTC to USD was 2.5 times more EUR to USD's . Though this may concern some investors, it certainly proves that the bitcoin market is free, in contrast to national currencies.


Research has been made regarding the feasibility of using Bitcoin as a method of monetary storage. Though the main difficulty lies with the high inter-correlation between each crypto, this makes it hard to strictly diversify within the crypto market. However, there has been success integrating cryptos with commodities and stocks in a 5-20% range.


To conclude, current times are forcing a reshape of the way we perceive financial systems and cryptocurrencies are at the frontier. From the perspective of national interest and private interest cryptocurrencies hold many benefits such as reducing storage portfolio risk and government independence alternative from gold.


Ledoit, Patrick

(Year 12 student at Bangkok Patana School)


References:

1 - Lexico dictionary - https://www.lexico.com/definition/cryptocurrency

2 - Global Charts - https://coinmarketcap.com/charts/

3 - Cryptomixer - https://cryptomixer.io/

4 - Yahoo Finance - https://finance.yahoo.com/quote/EURUSD=X

5 - Yahoo Finance - https://finance.yahoo.com/quote/BTC-USD

6 - Buy Bitcoin WorldWide - https://www.buybitcoinworldwide.com/volatility-index/

7 - Forex volatility Calculator - https://www.investing.com/tools/forex-volatility-calculator

8 - Journal of Finance and Accounting - doi:10.11648/j.jfa.20170506.14

9 - SSRN Electronic Journal - doi:10.2139/ssrn.3127534

10 - Finance and Accounting- doi:10.11648/j.jfa.20170506.14


Sources and further reading


cryptocurrency (n.d.) by Lexico powered by Oxford dictionary. Accessed on 26 August 2020 from https://www.lexico.com/definition/cryptocurrency


"Total Cryptocurrency Market Capitalisation" by Trading View. Accessed on 26 August 2020 from https://www.tradingview.com/markets/cryptocurrencies/global-charts/


"Bitcoin Mixer" by Crypto Mixer. Accessed on 27 August 2020 https://cryptomixer.io/


"EUR - USD" by Yahoo Finance. Accessed on 26 August 2020 from https://finance.yahoo.com/quote/EURUSD=X


"BTC - USD" by Yahoo Finance. Accessed on 26 August 2020 from https://finance.yahoo.com/quote/BTC-USD


"Bitcoin Volatility Index" by BuyBitcoinWorldwide. Accessed on 26 August 2020 from https://www.buybitcoinworldwide.com/volatility-index/


"EUR - USD Volatility" by Forex. Accessed on 26 August 2020 from https://www.investing.com/tools/forex-volatility-calculator


Andrianto, Y. (2017). The Effect of Cryptocurrency on Investment Portfolio Effectiveness. Journal of Finance and Accounting, 5(6), 229. doi:10.11648/j.jfa.20170506.14


Symitsi, E., & Chalvatzis, K. J. (2018). The Economic Value of Bitcoin: A Portfolio Analysis of Currencies, Gold, Oil and Stocks. SSRN Electronic Journal, 48. doi:10.2139/ssrn.3127534


Andrianto, Y. (2017). The Effect of Cryptocurrency on Investment Portfolio Effectiveness. Journal of Finance and Accounting, 5(6), 229. doi:10.11648/j.jfa.20170506.14

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