Bitcoin Digital Currency as an Investment Asset

By Dr. Vassilios G. Papavassiliou, Assistant Professor of Finance, University College Dublin

 

 

 

 

 

Cryptocurrencies are digital assets that have become quite popular in recent years; however, their basic features are still considered a “black box” to academics and practitioners. In 2017, the cryptocurrency market exhibited record-breaking growth rates in terms of market capitalization and transactional activity. As of January 2018, the total market capitalization of the cryptocurrency market was $630 billion. There is a growing list of businesses worldwide that have begun accepting cryptocurrencies as legal tender. The leading cryptocurrency by market value is bitcoin, the ownership of which is recorded on an electronic ledger called blockchain, which is not encrypted.

The purpose of bitcoin is to allow peer-to-peer electronic transactions between counterparties without the intervention of any intermediary. Trading is conducted on cryptocurrency exchanges and is based on market forces similar to the trading of stocks or bonds. A distinct feature of a cryptocurrency exchange is that it acts as a central counterparty (CCP) clearing house to both buyers and sellers, offering greater transparency, lower transaction costs and greater investor protection in cases of default by a participant. Bitcoin is traded on different cryptocurrency exchanges, and its price may differ across trading venues due to differences in supply and demand.

Bitcoin’s basic features differ from those of conventional currencies. First, bitcoin is fully decentralized and is not controlled by any central bank. Second, it is secure, as the blockchain “distributed ledger technology” ensures transactions can never be altered (there are some fundamental privacy challenges in the blockchain industry that need to be addressed). Third, bitcoin is fully digitalized, allowing for zero transportation costs and near-zero transaction costs.

The growth of the cryptocurrency market has…

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