Is Cryptocurrency Equivalent To Traditional Modes Of Investment Or Not

Question

Task: Prepare a research report analysing whether cryptocurrency is equivalent to other traditional modes of investment or not.

Answer

Introduction:
A cryptocurrency is a form of electronic money, which is originated through computer technology. This technology-based currency is a protected form of currency, which is created, controlled and ensures transaction protection while keeping the user identity discreet. Compared to the traditional mode of currency transfer and storing, where government plays the central role of creation, control of circulation, storing and disbursement of the fund, cryptocurrency is controlled by the user. Here, money is generated by the source; however, storing and circulation is controlled by the user allowing the transaction to be cost-friendly and secure in the absence of middleman or middle institutions. Though there is literature that arguesa cryptocurrency is a secure form of digital money. However, argument is there against the proposition defining there are risks in holding and transferring money in the form of cryptocurrency. Through this study, an extensive literature analysis has been done in order to understand whether cryptocurrency is equivalent to other traditional modes of investment or not. Besides this, their superiority or inferiority has been analysed underpinning the traditional model of currency. Next to this, it has been analysed how cryptocurrencies have impacted the stock market as it is a new form of digital currency in the market.

Issue a:
Comparison of cryptocurrency with other traditional forms of investment:
Digital currency or cryptocurrency can council the identity of the owner entirely by maintaining a total animosity. In the case of traditional currency, whenever the users use their debit cards or credit cards, their personal and business data can be access through the transaction. So, tracking the financial activities of the owner is easier with the traditional transactional process. Cryptocurrency does not carry any personal information of the owners without adding them by the owners as it is not mandatory. Bitcoin is the most popular cryptocurrency among the others in the world of digital currency (Tien Tuan AnhDinh et al. 2018). It has made its appearance in the digital world and expands the opportunities of financial transactions in the digital space. From then, it is almost a decade that Bitcoin (BTC) can sustain their popularities as the most acceptable bitcoin till the present time.

Importance of cryptocurrency than the other traditional forms of investments:
The cryptocurrency was invented in the first decade from the second millennium. From the beginning, cryptocurrency has sparked interest among the financial experts and economists, and still, now that is going on regarding the general financial experts as well as the financial institutes. A more comprehensive description can be found in the study by Zimmer (2017), starting from the beginning, the bitcoin had grown to a great extent. At the initial stage, the value was the US $2019 while at the starting of August 2017 it was the US $422. The process of Bitcoin transaction is represented in the following figure.

Figure 1: The ways of Blockchain in Bitcoin
source: (Zimmer: 2017)

A study of Sichinava (2019) also acknowledged that the general capitalisation of the cryptocurrency in the world in December 2017 was $570 billion while in the year of 2018, it became $130,85 billion. The blockchain cryptocurrency can be used as special transaction methods. It also more while one is using the cryptocurrency then they have excellent access to the data with the internet connection and facilities to data transfer. According to the study conducted by Hong (2017), it was seen that the financial transaction with the cryptocurrency or Bitcoin was a peer-to-peer transaction as it went directly to one party to another without any activities of any other financial institutes. Thus, it is a faster and time-saving method than other traditional methods. Cryptocurrency is not like other traditional currency; it is more like a conventional currency. The market of cryptocurrency can go up within seconds while also has the chances of going down in a heartbeat. More investors are investing in the cryptocurrency as they are understanding the importance of the digital currency in this digital era. This has the scope of making the market more digitalised as well as the transaction. The digital signature is providing part of the solutions. The literature pertaining to Taleb (2019) strongly suggested that the elliptic curves digital signature algorithm was the base of most of the digital cryptocurrency, which was better than the traditional financial transaction and the investments. Thus, bitcoin or the cryptocurrency is getting more significant with each passing day.

Security of cryptocurrency than the other traditional forms of investments:
There is always a third party in the traditional transaction or the investment that would monitor the transaction. The organisation can track the activities of the owner by following their financial transactions and investments. Also, getting back the currency is more manageable in case of fraudulent payments or any other issues. The investors need to apply the chargeback option and get their investment back. It will confirm that the investor has enough balance in their account to make the payments, but in another case, there would be a more complicated process that can delay the financial activity. Also, the transaction made through crypt will conduct between the two parties, and the investor will also have the chance to make apparent demand from the recipients with push facilities. The cryptocurrency guards the financial information and the activities of the investors and the owners while the traditional investment process will, at one point make some of the financial and personal information vulnerable and open for theft.

The study introduced by Denis Sergeevich et al. (2019) stated that cryptocurrency was invented from the intersection between ideology, economics, and cryptography. According to the authors, the first cryptocurrency was Bitcoin that got worldwide recognition as well as brought revolution among the financial world. This made the financial transaction easier as well as secure than before. According to the study conducted by Bondarenkoet al. (2019), it was found that most of the countries did not have any idea what was cryptocurrency; at first, it was a form of investment as well as used as digital money. Thus, the authority has prohibited its citizen from using such a ‘grey’ zone transaction policy. Nevertheless, with time, the investors get more use to with the framework of cryptocurrency. Developing an understandable and stable cryptocurrency market can make the economy stable and secure in any country as well as prosperous than any other traditional financial transaction. On the other hand, the research done by Conti et al. (2018) stated that from the beginning of 2009, the bitcoin cryptocurrency had expanded at a tremendous rate and worth almost $170 billion currently. As per the opinion of the authors, the bitcoin security was very compact as they ran by ‘miners’ network node that checked the proof-of-work (PoW) regarding incentive-compatibilities.

Rate of sustainability of cryptocurrency than the other traditional forms of investments:
Using cryptocurrency in the international market is easier than any other mode of transaction. In this era of digitalisation and globalisation, many of the investors are investing in international stocks and conducting other modes of investments. This could be done by using cryptocurrency with an easier and more smooth process than any other third-party transaction. As has been previously reported in the literature by Giudiciet al. (2020) that the growing rate of the cryptocurrency had brought new challenges and issues in the economy and financial market in all over the world. The authors had used neoclassical and behavioural theories to understand the significant trends and contributions of the cryptocurrency in the modern economy. They also discussed the previous literature regarding the topic and how the authors had interpreted the impacts of the cryptocurrency as well as the chances of sustainability and growth of this digital currency. However, there were some non-socio-economic issues regarding the sustainability of this revolutionary digital currency, as some of them preferred the traditional market more.

Figure 2: Cryptocurrency list along with the market capitalisation of 26th August 2019
(Source: Link.springer.com 2019)

The above table would describe the market value of the cryptocurrency in all over the world. One more study conducted by Hyun et al. (2019) investigated the relationship between the cryptocurrencies by a copula directional dependence (CDD) along with the rate of sustainability of the digital currency. From this research, it can be said that bitcoin is the most influential cryptocurrency and affects the stock market and the world economy most. Therefore, it is safe to say that though there are many hindrances cryptocurrency is going to sustain and influence the stock market as well as the world economy.

How cryptocurrency is superior or inferior to other traditional forms of investment:
There are always questions regarding should one buy gold or bitcoin or in other cases, should one invest more in stocks or cryptocurrency. The questions are always there as in what is better and more profitable for anyone to invest. The traditional ways of investment are known to all, while the concept of cryptocurrency is an emerging one. Some of the governments, as well as other authorities, still do not have an obvious idea about the concept of cryptocurrency; thus, they are forbidding their citizens to use the cryptocurrency. Nevertheless, it is inevitable to say that the cryptocurrency or more specifically the popular one among all of them, Bitcoin is changing the world economy as well as the ways of the financial transaction. Though some people do not understand the full extent of using cryptocurrency, still they are interested in investing in bitcoins rather than any traditional ways of investment. This single attribute can prove the popularities and the scope of cryptocurrency in the modern digitalised economy where digital currency is going to be the major influencing factor.

Cryptocurrency superiority or inferiority compared to traditional forms of investments in regards to importance: Cryptocurrency, or in this case, bitcoin is known for the volatility of the value in the market. It can be compared to stocks and bonds. It is seen that the other stocks will steadily go up or fall while looking for a place to become more stable. Nevertheless, in the case of cryptocurrency, there are no such things. The cryptocurrency went from $1000 to above $20,000 before settling down in the middle of somewhere (Nasdaq.com 2018). A recent study conducted by Corbet et al. (2019) concluded that the market of cryptocurrency was growing since the time of the invention of the digital currency. The authors had conducted an empirical study on the digital currency and had become an essential financial asset along with the traditional assets. However,with the underdeveloped infrastructure of the cryptocurrency and the growing rate of cybercrimes was jeopardising the status of the cryptocurrency among the citizens and traders. While gold or other traditional investment form do not have such issues, providing them with the advantages.

Gold is one of the oldest traditional forms of investments but in this new era of digitalisation cryptocurrency is the centre of the stock market and to the investors. Gold is less risky than other modes of investment. However, in this era of digitalisation and globalisation, cryptocurrency is growing in the market and becoming more powerful day by day and influencing the world economy more than any other form of investment. Thus, it can be said that cryptocurrency is an essential component in the financial market. One method employed by Chu et al. (2017) was GARCH modelling to understand the importance and status of the cryptocurrency in the world economy and how much it was influencing the financial market lately. As per the finding, it can be seen that underpinning factors like internet literacy, digital currency literacy, cryptocurrency has a positive impact on the money market. Hence, it is superior tothe alternative form of money; however, it is inferior if the literacy rate of the internet is low in the state.

Cryptocurrency superiority or inferiority compared to traditional forms of investments in regards to security:
The cryptocurrency is one of the popular methods of investment along with the traditional ways. Gold is another most dependable form of investment. Now many of the investors try to understand which method will be the safest to invest, and their hard earn money will be in a safe hand. The value of gold can go up or down with many influencing factors in the world economy. Bitcoin or the other cryptocurrencies also have the trait, but bitcoin is more volatile than any other mode of investments, especially the traditional ways. In this digital era crime related to cyber securities and the internet are also increasing. Thus, the security of the under-developed infrastructure regarding the cryptocurrency is reducing the scope and the opportunities of the cryptocurrencies in the world economy. However, all these can be mended by developing the technologies and understanding the policies related to the usage of the cryptocurrencies. A more comprehensive description can be found in the study of Al-Khazaliet al. (2018) gold was one of the static investments as it stayed at one point and rarely went down or up at any points. It was safe to invest as there was more security regarding the investments. However, bitcoin was the most volatile one as it could go up and also fall rapidly, which was not at all stable. This was successfully established by Dyhrberg (2016) in his study as he performed GARCH volatility analysis to interpret the differences between the bitcoin, gold, and the dollars. According to the author that the dollars and gold were similar in advantages and capabilities in regards to the exchange medium. Nevertheless, bitcoin could be used as risk management in the stock market, and it could be utilised as a reverse medium in the stock market to reduce the amount of loss. As per the research of the author, the bitcoin had a place among the gold and the dollar in the portfolio and the financial market as it had value advantages and exchange advantages as a medium in the market of the economy.

Cryptocurrency superiority or inferiority compared to traditional forms of investments in regards to sustainability:
The sustainability of the bitcoin performs more actively than the other medium of exchange. Some question that if bitcoin is the replacement of the gold or is it similar to gold or is it going to sustain in the market with so much volatility. Gold is different in nature than cryptocurrency as it is one of the tried and tested mode of investment. Gold is the safe haven for the investors as it rarely changes the value in the financial market. Also, when the value changes, then it would be minimal in amount, almost unnoticeable for the investors. Nevertheless, bitcoin is the opposite in nature; thus, investors use it to reverse risks or reduce the amount of loss in their other investments. Now to measure the chances of sustainability of the bitcoins, the advantages of bitcoins can be mentioned as these are the traits that would attract investors to use this form of investment rather than the traditional ones.

As per the research conducted by Nakamoto (2008), bitcoin was a peer-to-peer investment method. There would not be any other mediator that could use the financial or the personal documents of the investors. The investors could directly invest and cancel their payments. However, in the case of gold or dollar in any other mode of investment, there would be a medium that would conduct the transaction in-between. In the literature pertaining to Lee (2019) strongly suggested that from the dawn of the cryptocurrency the federal government was marketing the medium of investment and turning to more than capable of sustaining in the era of digitalisation as well as influencing the microeconomy of the world economy with this new investment medium. It was reported in the literature by Arruñada and Garicano (2018) that cryptocurrency was one of the most influencing and significant investing media in this era in all over the world. It was changing the world with all the new techniques and policies implemented by it as a digital currency in the world economy, which was a signature of a progressing economy.

Issue b:
Impact of cryptocurrencies to the stock market:
From the dawn of the invention of the cryptocurrency, it is attracting investors from the market. The increase in the crypto assets regarding the volume of trading in the stock market is attracting the investors who belong from institutions. This can reduce the volatility due to the unstable price while the large market players accumulate more crypto assets in their portfolio. Once bitcoin was predicted as evil and associated with the dark web till last year. From the last year, it has attracted every investor in the stock market regardless of their financial standings as if they are a small businessman or a high-end star-player from the corporate world as it is increasing the value in the stock market. Especially the rise in the value of the bitcoin has attracted many investors from the stock market who invested in the crypto assets than the traditional stocks in the market.

It can be said that the conventional tools of trading are blending with the digital assets in the stock markets in this era of digitalisation. As every activity has some precise effects, this also has some—the interrelation between the traditional stocks and crypto-assets is also becoming prominent during the present period with the rise in interest of the investors on the digital form of asset.

The relationship between traditional stocks and the crypt-assets in the stock market:
The traditional stock market relay on the value of the different sectors in a particular period. Nevertheless, in the case of the crypto-assets, it only relies on ion itself; it is more self-dependent than the other form of investments which also gets affected by the other real sectors. A recent study by Daniel (2019) concluded that the market sentiment of the trading market could not affect the investment of the crypto-assets as it could an investment for ‘Dummies’. The author had suggested almost 200 cryptocurrencies that could be good for investment regardless of the status of the market. The author had assumed that the total value of the crypto-assets should be 1 trillion dollars in the last year. The trading tool and the law of demand and supply are the only things that are similar in both of the investing methods. The market of the cryptocurrency can be influenced by the speculators as it is more independent. The nature of self-independence is indicating the trait of more or less self-sufficiency in the characteristics in the cryptocurrency assets. According to the research article from Modern trader (2018), when the higher market would indicate the high price of the cryptocurrency, then it would also indicate the correlation between both the factors. From that, it can be said that the market of the cryptocurrency will be able to assist the movement and transaction laws regarding the stock market. It will also indicate that the cryptocurrency would lose the nature of independence along with it. The crypto enthusiast will be at ease as they are having issues with this trait of the cryptocurrency. The market of cryptocurrency will be able to be mature enough for the complete life cycle regarding the process of the global economy. It will reduce the volatility and stabilise the currency as well as increase the value of the cryptocurrency in the perception of the investors.

Disadvantages and advantages of trading the crypto-assets in the traditional stock market:
In light of the study by Jim Liew et al. (2019), it was conceivable that the short-term cryptocurrency market was semi-strong regarding the market efficiency of the stock market. The authors had investigated the transaction reports of almost a number of 100 cryptocurrencies in the duration of 2015 to 2018. They found out that the main issue related to the crypto assets was the hidden risk of ‘beta-in-the-tails’. On the other hand, the research done by Kozlowski et al. (2020) suggested that after the accumulation the cryptocurrency had been more stabilised and became a mature investment that was attracting more investors as they were assuming that the new tool of investment was going to be more successful and profitable for them. The study introduced by Rasa Subaciene and AugustasSubacius (2019) had stated that the accusation of the cryptocurrency was needed more research as the digital currency was changing and be4ing more mature with the time. The authors had studied the digital currency and got more information by the time as they were searching for the overall impacts t it had on the traditional stock market. The transparency, trustworthiness as well as the accountability of the new currency in the market are attracting more investors in the stock market as they are becoming more stabiles and the volatility of the market reducing day by day.

According to Lahmiri and Bekiros (2020), the cryptocurrency market is comparatively unstable and irregular during the ongoing situation of COVID-19 pandemic while international stock markets act in a more stable way. Thus, they suggested that investing in cryptocurrencies could bring more risks to an investor, especially during the period of crisis. The bitcoin price index during the condition of COVID-19:

Figure 3: BITCOIN price data during the pandemic
Source: (Cai 2018)

The two assets existing simultaneously in the modern digital world: Some of the corporate investors in the stock market have changed their names and ways of the transaction to get better access in the transaction tool that helps them to acquire more bitcoin due to the rise of the value of this cryptocurrency. The bitcoin has raised its value almost to the mark of the 8000 dollars in a duration of one year from July 2018 to July 2019. Many of the investors in the market has attracted by this figure; thus, they invested in it. However, there is always a risk regarding the chances of falling the cryptocurrency. If that happens then, the overall market performance will be affected by this action.

Figure 2: The rise of the Bitcoin from July 2018 to July 2019
Source: (Motlagh, Miši and Miši 2020)

The finding of Sami and Abdallah (2020) tried to find the impact of the cryptocurrency market on the stock market returns, and for this analysis, the study conducted research on the Gulf countries. By collecting and analysing data, the authors came to the conclusion that cryptocurrency actually affected the stock market adversely indices in these countries. Hence, the cryptocurrency market can be considered as a substitute forthe stock market. They also suggested that this digital currency market could be considered as one of the major factors that can influence prices and returns in the stock market. Another study of Gil-Alana et al. (2020) explained also assured that a cryptocurrency is a new form of investment and hence it plays a significant role in an investor portfolio. The main reason for this significance is that cryptocurrencies provide the opportunity of change for investors.

Conclusion:
Underpinning the extensive literature review done, it has been understood that there is still a dilemma regarding the utilisation of the cryptocurrency in different states around the world. The government in a different country are not fully aware of the utilisation of the same and thus forbidding the citizen to utilise the same. However, there has been substantial evidence that cryptocurrency is secure and better compared to the traditional mode of currency considering the fact that citizens are aware of theft or loss of digital money in case of negligence with currency security. However, no evidence has been retrieved from the previous studies that clearly demonstrate that cryptocurrency is superior to other traditional forms of investment in all scenario. As far as investment is concerned, people still believe, investment in gold is superior as it is tried and tested mode of investment, and the return is high. Lastly, when the stock market influence of the cryptocurrency is concerned, then it can be seen that there has been a significant increase in the volume of crypto assets, which is attracting institutional investors. It is also anticipated that price stabilisation will take place, and volatility in the market will reduce once the large market players consider cryptocurrency in their investment portfolio.

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