Dissertation/research method on the impact of Cryptocurrencies in the UAE

This chapter’s aim is to give a background of the research topic, an event analysis of cryptocurrencies, since cryptocurrencies has fast received a global consideration and interest. Using at least five cryptocurrencies, this dissertation will analyze how cryptocurrencies have developed, how the launch of the cryptocurrencies has impacted different economies and what the future holds for cryptocurrencies. Additionally, this chapter will give the aim of the dissertation, the motivation behind the dissertation, and give an outline of the dissertation.

According to the Merriam Webster, cryptocurrencies refer to “any form of currency that only exists digitally, that usually has no central issuing or regulating authority but instead uses a decentralized system to record transactions and manage the issuance of new units, and that relies on cryptography to prevent counterfeiting and fraudulent transactions”. Whereas they are technically not money, their worth is associated to actual world currencies. Cryptocurrencies are fast gaining popularity. The marketplace cap and price of these assets, according to Arnold (2017), are touching unprecedented highs, with millions and billions of the United States (U.S.) dollars of worth per day presently being traded in cryptocurrencies. Financial establishments are investing in developing digital currency know know-hows. Blockchain-based technology startups are thriving. With changes continuing to happen in the cryptocurreny atmosphere, the need to understand marketplace dynamics of cryptocurrencies rises. As cryptocurrencies have continued to gain popularity, the increase has been characterized by crises. From then fall of Mt. Gox that happened in 2014 to the hack of Ethereum, marketplace crashes have been rampant occurrence.

Cryptocurreny is a recent technology that is fast receiving substantial attention and interest. On the one hand, it is fundamentally based upon a new technology, the capability of which has not wholly been comprehended (Blockchain Luxembourg, 2018). Conversely, at least in the contemporary form, it does similar roles as other, extra old-fashioned assets. The first decentralized cryptocurreny, Bitcoin, has gained a large following from academics, media, as well as the financial sector since 2009 when it was conceived (Bordo, 2018). Built on blockchain know-how, Bitcoin has set up itself as a marketplace leader of cryptocurrencies and there are no signs of holding back. As opposed to being funded upon traditional trust, the currency is founded upon cryptographic proof that offers several advantages compared to old-fashioned methods of payments, like Mastercard and Visa (Bitcoinwiki, 2018), including lower costs of transaction, high liquidity, along with anonymity, to mention but a few.

Indeed, the worldwide interest in Bitcoin has spiked one more time in months. For instance, the United Kingdom (U.K.) government is considering disbursing out research scholarships in Bitcoin, a number of information technology firms are stockpiling Bitcoin as a way of defending against ransom ware, and increasing numbers in China are purchasing Bitcoin and perceiving it as an investment opening.

Since 2009, several cryptocurrencies have been created. As of February 2017, Bratspies (2018) notes that 720 cryptocurrencies are inexistence. Nonetheless, Bitcoin remains the most popular and largest of the cryptocurrencies that are in existence, accounting for more than 81% of the total cryptocurreny marketplace (Clements, 2018). The combined marketplace capitalization of all cryptocurrencies is estimated at $19 billion as of 2017 February, with the world’s top 15 currencies accounting for more than 97% of the marketplace, and seven of these currencies accounting for about 90% of the total marketplace capitalization (CryptoCoinNews, 2018). For this analysis, focus will be on eight cryptocurrencies, Bitcoin, Monero, Ethereum, Ripple, Litecoin, MaidSafeCoin, Dash, and Dogecoin, which fall into the classification of having been in existence for above two years and are falling within the top 15 currencies by way of marketplace capitalization.

The cryptocurreny marketplace has erratically evolved and at an extraordinary speed within the short span of time it has been in existence. Since the dawn of the pioneer anarchic cryptocurreny, Bitcoin, there are several other cryptocurrencies. Bitcoin, the most popular as well as well-known cryptocurreny globally, has been increasing in fame. It has the original structure that it had as at 2009, yet repeat cases of the world marketplace changing has created a new demand for cryptocurrencies that is greater than the initial displaying. Cryptocurreny can be used in digital exchange of value without a third party oversight (Bitcoinwiki, 2018). Cryptocurreny functions on the theory of solving encryption algorithms with the goal of creating exceptional hashes that are determinate in number.

Combined with a connection of computers functioning to verify transactions, users have the ability to exchange hashes just like they would exchange physical currency (Arnold, 2017). There is a limited number of Bitcoin that can be generated, thus avoiding an overabundance as well as making sure Bitcoin rarity (Guadamuz & Marsden, 2015). Worth exists for Bitcoin since its utilizers have confidence and trust that should they accept its payment, they can be able to employ it elsewhere to buy something that they need or want (Miles, 2017).Blockchain Luxembourg (2018) notes Bitcoin does not have inherent worth since it cannot be employed to make physical objects that have value. Nonetheless, its value continues to exist due to acceptance and trust.

The motivation behind conducting this dissertation is that while there are several cryptocurrencies that are currently in use, there is but a smidgeon of research available on the currencies; research upon the currencies and sector are still scarce. Most of the studies that have also been done are largely focused upon Bitcoin as opposed to the diverse distribution of cryptocurrencies and is continuously being outpaced by fluid sector developments, like technological progression, new coins, as well as increasing government control and regulation of the marketplace (D’Alfonso et al., 2018; Lakhami & Iansiti, 2017; Middlebrook & Hughes, 2014; Nahorniak & Vladyslava, 2017; Pattinson, 2011). Most studies have been focused upon security, technological, and legal issues surrounding Bitcoins and other studies have considered the financial characteristics of cryptocurreny (CryptoCoinNews, 2018; D’Alfonso et al. (2018); Pflaumn & Hateley, 2011). Evidently, notwithstanding the significance of the cryptocurreny phenomenon, limited research has been done regarding the concept with some studies conflicting on their findings regarding Bitcoins particularly.

Notwithstanding the fact that fluidity of the sector does, acceptably, present a challenge to study, an all-encompassing assessment of the cryptocurreny marketplace in needful. Additionally, earlier studies have hinted on the need to analyze as well as conduct research on other cryptocurrencies apart from Bitcoin. It is upon these grounds that this dissertation bridges the gap in literature by analyzing seven cryptocurrencies by highlighting different aspects of the cryptocurreny industry to help policymakers, economists, scholars, and governments understand details concerning cryptocurreny sector for better ways moving forward. Concerted effort will be dedicated to the examination of the dissimilarities between the cryptocurrencies that are in existence today.

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The aim of this dissertation is to analyze cryptocurrencies using an event technique. Other objectives of the study include the following:

i. To determine the global trends with respect to marketplace capitalization of Bitcoin, Monero, Ethereum, Ripple, Litecoin, MaidSafeCoin, Dash, and Dogecoin

ii. To explore the similarities and differences between Bitcoin and the rest of the cryptocurrencies.

iii. To determine the five most widely used cryptocurrencies used in the world among Bitcoin, Monero, Ethereum, Ripple, Litecoin, MaidSafeCoin, Dash, and Dogecoin.

The research questions that are considered in this dissertation are:

i. What are the major trends regarding marketplace capitalization of the world’s major eight cryptocurrencies?

ii. How does Bitcoin relate with the other major cryptocurrencies as a far as performance in the last two years are concerned?

iii. Which are the five most widely used cryptocurrencies used globally?

Two hypotheses will be tested in this dissertation:

H1: Bitcoin is to remain the world’s leading cryptocurreny in terms of marketplace capitalization

H2: The use of cryptocurreny is likely to continue increasing globally.

Cryptocurreny has been defined in a number of ways. Nonetheless, the commonly accepted definition is that it is a digital depiction of worth that is aimed at constituting a peer-to-peer (P2P) substitute to public-issued lawful tender that is employed for general-purpose exchange medium, secured by cryptography mechanism, and is convertible into legal tender and the vice versa is true.

Cryptocurrencies have increased in popularity since the rise of the concept. It is, therefore, necessary to examine the technology into details.

This chapter offers literature review regarding the cryptocurreny marketplace. The chapter begins by giving a brief history regarding cryptocurrencies, highlighting that the technology dawned in 2009 when Bitcoin was launched. The chapter continues to discuss into details the eight chosen cryptocurrencies chosen for this study, discussing the currencies’ main features and capabilities. The chapter then proceeds to compare the eight cryptocurrencies using statistical data and theoretical deductions that have been made by different scholars.

Notwithstanding the fact that the electronic currency concept was developed as early as 1980s, Bitcoin that was launched in 2009 by Satoshi Nakamoto, a pseudonymous developer is the first decentralized cryptocurreny (Ross, 2017). In a nutshell, a cryptocurreny refers to a virtual coinage system that operates alike to a standard coinage, allowing utilizers to offer cybernetic payments for services as well as goods free of a principal trustworthy power (Miles, 2017). Cryptocurrencies depend upon the broadcast or spread of digital data, using cryptographic techniques to warrant unique and legitimate transactions. Instead, businesses and individuals electronically transact with the coin on a P2P linkage. By the beginning of 2011, Bitcoin caught a wide interest and attention, and a number of altcoins (an over-all name given to all other kinds of cryptocurrencies) before long appeared.

In 2011, Litecoin was launched, gaining decent success as well as enjoying the top-most cryptocurreny marketplace cap after Bitcoin cryptocurreny until it got outpaced by Ripple on the 4th of October, 2014 (Litecoin Project, 2017). Bordo (2018) points out that Litecoin improved Bitcoin’s protocol, raising the speed at which transactions occurred with the notion that it would be extra suitable for daily transactions.

Launched in 2013, Ripple introduced a considerably distinct model from that which was employed by Bitcoin, Ripple presently upholds the second top most marketplace cap of about $255 m (Blockchain Luxembourg, 2018; Gans & Halaburda, 2013). Another cryptocurreny that is currently in existence is Peercoin, which employs an innovative technological development in securing and sustaining its coinage (Zuckerman, 2018). Peercoin combines proof-of-work (PoW) knowhow that is used by Litecoin and Bitcoin in addition to proof-of-stake (PoS) which is its own mechanism, to use an amalgam linkage security machinery.

Lately, NuBits/NuShares cryptocurreny have also emerged, launched in 2014, which primarily depend upon a dual coinage model that is exclusively detached from the unitary coinage model employed by traditional coins (Ross, 2017).

Presently, more than 720 coins are in existence with varying trade volumes and user bases (Arnold, 2017). Owing to the high instability and unpredictability of the cryptocurreny, its marketplace and industry capitalization dramatically changes, but approximated to be more than $5 billion, with Bitcoin accounting for about 88% of the marketplace capitalization (Dupont, 2012). Bitcoin along with other existing cryptocurrencies are regarded as decentralized systems; they have no central power/authority. They employ cryptography in controlling their transactions, thus increasing the supply and preventing fraud (Pflaumn & Hateley, 2011), hence the name cryptocurrencies. Once all transactions are confined, all transactions are digitally stored and recorded within a blockchain, which is regarded as an accounting system. Payments are authenticated by network nodes. In Bitcoin case, powerful computers are sometimes required for the whole process.

Bitcoin’s set of rules offer an effective protection against currency ‘counterfeiting.’ Nonetheless, the environment is susceptible to theft (CryptoCoinNews, 2018). Utilizers keep keys to their individual Bitcoins and perform transactions with the assistance of wallets. Miles (2017) states that exchanges enhance trade between fiat currencies and Bitcoins, ad equally allow for storing of Bitcoins. Bitcoins can be stolen via exchanges or wallets. Guadamuz and Marsden (2015) reason that till now, exchanges have been targeted extra frequently compared to wallets. Many wallets are situated on utilizers’ computers, whereas exchanges are naturally online, making exchanges an easier target. Pattinson (2011) notes that in February 2014, it was established that $350 m value of Bitcoins were embezzled from Mount Gox, a conduct that lead to in the closure of the exchange.

The supply of a number of cryptocurrencies rise at a preset rate, and can never be changed by any central power/authority (Lakhami & Iansiti, 2017). For instance, in 2014, there were approximately 13 million Bitcoins in circulation, with the highest allocation eventually reaching 21 million (Nahorniak & Vladyslava, 2017). Originally, Bitcoin was partly popular because its anonymity allowed trade in unlawful goods. On 2nd October, 2013, the government of U.S. closed the largest website that was involved in this unlawful activity (Chu et al., 2015) and during that process, approximately 1.5% of all Bitcoins that were in circulation at that time were received by FBI (Gandal & Laburda, 2018). The prices of Bitcoins continued to rise notwithstanding the action by the government of U.S., partly because the currency had a robust deflationary facet to it as a result of its limited supply (Raymaekers, 2015). Also, there are massive fluctuations in the value of cryptocurrencies, in part, due to speculation, general uncertainty, and security challenges/issues as to how the marketplace or sector will develop.

From the brief above, it can be seen that in the beginning was the Bitcoin. Bitcoin refers to a P2P, open source digital currency first proposed in the year 2008 in a white paper that was published under Satoshi Nakamoto’s name. Beginning the paper, Nakamoto states that “Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weakness of the trust based model” (Durbin & Watson, 1971, p.17). Additionally, the availability of trusted intermediary raises transaction costs, eliminating possibilities for small unpremeditated transactions (Middlebrook & Hughes, 2014). Further, a lot of pressure is mounted upon trusted intermediaries to collect as much data and information as can be possible to help in the controlling of transaction costs. For this reason, Nakamoto set out to make a coinage that wholly eliminated any trustworthy principal power and substitute trust with cryptographic resilient, a system that would have the added benefit of having low costs of transactions, low latency, as well as pseudo-inconspicuousness (Zuckerman, 2018).

According to CryptoCoinNews (2018), a Bitcoin, along with succeeding cryptocurreny, is just but a series of digital autographs, where each user digitally transmits their coin to the next coin by validating hash for the former business deal as well as the public key of the subsequent owner besides toting these to a coin’s end to ensure that possession can dynamically be programmed into the coinage. Moreover, these series of computer cryptographs are kept in some platform referred to as ‘wallet’ on individual hard drives and/or through wired wallets such as Coinbase. Just like commodities or cash, Bitcoins can be destroyed, stolen, or lost. The only way through Bitcoins can be sent or received is by logging a business deal upon the public account book, equally known as the ‘blockchain.’

Ethereum is a decentralized computing platform that was launched officially in 2015 and has its individual Turing-complete programing language (Chu et al., 2015). The public ledger system records contracts or scripts that are run as well as executed by all participating nodes, and are activated via payments that have native cryptocurreny ‘ether’ (Bovaird, 2016). Currently, it has attracted a substantial attention and interest from a number of institutional players and developers. It differs from Bitcoin by its ability to leverage the employment of ‘smart contracts’ in its codes (Ross, 2017). Whereas it is growing at somewhat a significant rate in the recent past years, Ethereum, according to Desjardins (2016), has a total marketplace capitalization of about 10% of Bitcoin’s (Lakhami & Iansiti, 2017).

Zuckerman (2018) asserts that whereas the underlying currency, the Ether, depreciates and appreciates in worth, Ethereum’s worth is largely propelled by its rising utility as well as ability to ultimately remove the involvement of third parties in determining contractual responsibilities. The main payback of Ethereum can be established in the belief that so long as it can be aptly coded, Ethereum’s smart scripts or contracts carry potentially unrestricted utility (Hileman, 2016). Hofman (2014) notes that Ethereum Network functions to facilitate data, votes, and information exchange, implying that there possibilities of using cases well above merely serving as an interrupter to present time monetary institutions. The Ether currency, as Kar (2016) states, functions as the fuel or gas the gives power to transactions within Ethereum Network.

Earlier known as XCoin as well as DarkCoin, Dash is a confidentiality-centric cryptocurreny that was launched in 2014 (Asolo, 2018). Though founded upon Bitcoin’s basics besides sharing alike properties, Dash’s network is a 2-tiered, bettering on that used by Bitcoin (Raymaekers, 2015). It has recently realized a substantial rise in marketplace worth since the start of 2017. Dash, relative to Bitcoin, is monitored by a dispersed connection of servers, referred to as ‘masternodes,’ which function to alleviate the necessity of a third party overseeing entity (William & Olson, 2013), as well as allows for operations like instant transactions and financial privacy (Yermack, 2013). Contrarily, utilizers, users, or ‘miners’ within the currency’s link offer computing influence for fundamental operations like sending as well as receiving currency, along with the prevention of double expending (Chu et al., 2015).

The strength of employing masternodes is that computations or dealings can be established almost within actual time, relative to Bitcoin linkage since masternodes are unique from miners, along with the two having non-overlapping operations (Svetlana & Angelika, 2014). Dash employs the X11 chained PoW hashing protocol which assists to evenly deal out the processing through the network while upholding an alike coinage spreading to Bitcoin. Utilizing 11 distinct hashes raises security as well as decreases the improbability of Dash. Dash functions using a decentralized monitoring system by blockchain which permits possessors of masternodes to make verdicts as well as offers a technique for the stage to finance its individual development (Kasiyanto, 2016).

Created and launched by Charles Lee in 2011, Litecoin is regarded as the ‘silver’ to Bitcoin’s gold as a result of its extra plentiful total supply of approximately 84 million Litecoin. Litecoin borrows the principal notions from Bitcoin yet has changed some fundamental parameters, like the mining protocol is founded upon scrypt as opposed to SHA-265 of Bitcoin. Founded upon alike P2P algorithm used by Bitcoin, it has often been considered as the leading competitor of Bitcoin since its features’ are better than those of Bitcoin (Litecoin Project, 2017).

Litecoin has two principal differences from Bitcoin. It uses scrypt as a PoW protocol and a substantially faster validation time for dealings and operations. Bitcoin allows for standard computational hardware for purposes of verifying transactions as well as minimizing the incentives to employ specifically formulated hardware, whereas Litecoin minimizes transaction authorization times to minutes as opposed to hours and is chiefly attractive in time-crucial circumstances (William & Olson, 2013).

MaidSafeCoin is a cryptocurreny that powers the P2P Secure Access For Everyone (SAFE) connection, which amalgamates the computing influence of all its utilizers, and can be regarded as a crowd-sourced internet (MaidSafe, 2017a). Each MadeSafe coin possess a distinct identity and there exists an upper hard limit of about 4.4 billion coins relative to Bitcoin’s 21 million coins. With the currency being employed to pay for services upon the SAFE link, the cryptocurreny will be reused, implying that theoretically, MadeSafe coin amount will not become exhausted (MaidSafe, 2017b). The process involved in generating new MadeSafe currency is alike to other cryptocurrencies, and with regard to MadeSafe’s network, this is known as ‘faming’ (Desjardins, 2016). Utilizers of MadeSafe contribute their individual computing powers as well as storage spaces to the network who are compensated with coins when the SAFE network accesses information and data from their stores (MaidSafe, 2017a).

Monero (XMR) is a cryptocurreny system that functions with the goal of providing anonymous digital cash through the use of signatures, stealth addresses, and confidential transactions to mystify the origin, destination of executed coins, and transaction amount (Magro, 2016). Kar (2016) states that Monero is a private, secure, untraceable currency that is founded around scalability and decentralization. It was launched in 2014. The currency is wholly donation-based, society propelled, and exclusively based upon PoW (Hofman, 2014). Whereas transactions along Monero’s network are private, utilizers can establish a level of privacy, permitting as little or much access to their transactions as they may desire. Despite the fact that it uses a PoW protocol, Monero is extra alike to the Litecoin currency since mining can be executed through any contemporary computer and is not restricted to specifically designed hardware (Bovaird, 2016).

Created in December 2013 by a marketing expert and Australian brand, as well as a Portland programmer, Oregon, Dogecoin began as a joke currency but faster obtained traction DeVries (2016) Dogecoin is a departure on Litecoin, operating on cryptographic scrypt allowing alike advantages over Bitcoin like faster operation processing times (William & Olson, 2013). Among the reasons why Dogecoin attracts people is its light-hearted philosophy as well as lower entry hurdles to capitalizing in or obtaining cryptocurrencies.

Ripple (XRP) is the only cryptocurreny that lacks a blockchain but in its stead employs a ‘global consensus ledger.’ The Ripple algorithm is employed by institutional players like large banks as well as money service establishments. Native token XPR functions to bridge currency between countrywide pairs that are hardly traded as well as to avert spam attacks (Kristoufek, 2018). Developed in 2012, Ripple is the first universal real-time grow settlement connection which allows banks to rely real-time global payments across connections (Desjardins, 2016). The Ripple connection is a blockchain platform that incorporates a payment structure, as well as currency system known XPR that is not founded upon PoW like Dash and Monero. One distinct property of Ripple is that the XPR is not mandatory for transactions on the Ripple network, despite the fact that it is encouraged as a link currency for extra competitive across international border payments (Kasiyanto, 2016). Relative to Bitcoin, Ripple has strengths like greater control over the system owing to the fact that it is not subject to the cost volatility of the underlying currencies, besides the fact that it has more secure distributed approval process (Magro, 2016).

Consider the Tables 1 and 2 below for a statistical analyses of the cryptocurrencies. Note, in this analysis, Ethereum is not considered.

Table 1: Summary Statistics of Every Day Exchange Rates of Bitcoin, Litecoin, Dash, Maidsafecoin, Dogecoin, Monero, Euro, and Ripple against the $ Between 23 June 2014 And 28 February 2017 (Rivin & Scevola, 2018).

Table 2: Summary Statistics of Every Day Log Returns of the Exchange Rates Of Bitcoin, Litecoin, Dash, Maidsafecoin, Dogecoin, Monero, Euro, and Ripple Against The $ Between 23 June 2014 And 28 February 2017 (Rivin & Scevola, 2018).

The above Table 1 indicates that Dogecoin’s exchange rate is the least significant of all the cryptocurrencies and as at February 2017, the exchange rate stood at about $0.0002 to a Dogecoin. This is because Dogecoin is largely employed as a currency meant for online tipping as opposed to a currency for standard payments. It also has the least mean, median, firs quartile, minimum. Conversely, being the most famous of all the cryptocurrencies, Bitcoin has the largest/greatest minimum, median, mean, first quartile, third quartile, and maximum values, implying that it has a greater significance as well as higher worth relative to other currencies. The cryptocurrencies’ exchange rates are positively skewed, with Monero, Ripple, and Litecoin being the most skewed. Regarding kurtosis, MaidSafeCoin displays a less peakedness relative to that of a normal distribution; Dash, Dogecoin, and Bitcoin show similar levels to the normal distribution; Monero, Ripple, and Litecoin have substantially greater peakedness relative to the normal distribution. MaidSafeCoin, Ripple, and Dogecoin’s exchange rates have the least standard deviations and variances, implying that their low volatility can somewhat be justified by the low worth of the exchange rates along with the fact that their interquartile ranges and range are considerably restricted. Conversely, Dash, Litecoin, and Bitcoin’s exchange rates show the highest standard deviation and variance.

From Table 2 about the log returns, Monero, MaidSafeCoin, and Dash have the least minimum values, whereas Litecoin and Dash have the highest maximums. The medians and mans of the cryptocurrencies are nearly similar as well as nearly equivalent to zero. Only the log returns of Litecoin and Bitcoin are positively skewed. Log returns of the cryptocurrencies have a peakedness that is considerably greater relative to that of a normal distribution, with the most peaked being those of Litecoin, Dogecoin, and Dash. Worth noting is that while much has been said about Bitcoin returns’ volatility, the log returns of the same have the lowest standard deviation and variance.

According to Linden (2017), the combined marketplace capitalization (that is, the product of marketplace price and the number of existing currency units) of all cryptocurrencies has risen more than three times since the beginning of 2016, reaching $27 billion by April 2017 (Figure 1 below.

Figure 1: The Total Cryptocurreny Marketplace Capitalization Has Risen By More than Three Times since the Beginning of 2016, Reaching About $25 Billion as At March 2017

(Hileman & Rauchs, 2017).

Even though Bitcoin remains the leading cryptocurreny with reference to marketplace capitalization, other cryptocurrencies are fast cutting into its historically leading marketplace capitalization share: whereas Bitcoin’s marketplace capitalization contributed for about 86% of the total cryptocurreny marketplace as at March 2015, it has fallen to 72% as at March 2017 (Kristoufek, 2018) (Figure 2). Ether, which is the native cryptocurreny of the Ethereum system, has set up itself as the 2nd largest cryptocurreny. The joined ‘other cryptocurreny’ group has doubled its marketplace capitalization share from 2015’2 3% to 2017’s 6% (Linden, 2018). The combined ‘other cryptocurreny’ category has doubled its share of the total market capitalization from 3% in 2015 to 6% in 2017.

Figure 2: Bitcoin Has Conceded Substantial ‘Marketplace Capitalization Share’ To Other Cryptocurrencies (Hileman & Rauchs, 2017).

Monero and Dash have equally become increasingly famous and presently account for a combined 4% of the cryptocurreny marketplace capitalization (Hileman, 2016). Figure 3 below shows that Monero and Dash have realized the most substantial growth with reference to price in the recent years. Whereas Monero’s price had begun skyrocketing as early as 2016, that of Dash had risen exponentially as from December 2016 (Linden, 2017). Moreover, the price of ether has equally recovered from a series of attacks that were launched upon Ethereum atmosphere, beginning with the DAO hack in during the month of June 2016, and rose eight times since its 2016’s below 7% value in December 2016 (Linden, 2018). Generally, all listed cryptocurrencies have increased their marketplace values so far.

Figure 3: Marketplace Prices of Monero, Ether, and Dash Have Realized a Significant Growth since June 2016 (Hileman & Rauchs, 2017).

Comparing the average number of every day transactions executed on each and every one of the cryptocurrency’s payment connection, Bitcoin is significantly the most commonly employed, followed at some distance by Ethereum (Table 3).

Table 3: Average Everyday Number of Transactions for Principal Cryptocurrencies (Hileman & Rauchs, 2017).

All other cryptocurrencies have low transaction volumes. Nonetheless, an overall trend towards increasing transaction volumes was established by Svetlana and Angelika (2014) through an assessment of quarters from the fourth quarter of 2016. Dash and Monero transaction volumes were found to be increasing at the fastest rate. That notwithstanding, Bitcoin still remains the marketplace leader with respect to marketplace capitalization as well as usage even though the increasing interest in other cryptocurrencies cannot be ignored as shown in the Figure 4 below. Bitcoin is also the most widely backed up cryptocurreny among people taking part in wallets, exchanges, and payment firms, which are the main industry sectors in the cryptocurreny industry.

Figure 4: Bitcoin Is the Most Extensively Used and Supported Cryptocurreny among Participating Wallets, Exchanges, and Payment Companies (Hileman & Rauchs, 2017).

The cryptocurreny marketplace appears to be growing in popularity daily. With the astronomical emergence of cryptocurrencies like Ethereum and Bitcoin, among other cryptocurrencies, there appears to be increase or influx of people into the marketplace. Lilienthal and Ahmad (2018) state that many cryptocurreny exchanges cannot afford to have their account creation functionalities open all the time, implying that the entry into the market is increasing in demand. The average every day trading volume of the cryptocurreny marketplace is often trillions of dollars with the total marketplace capitalization standing at around a half a trillion dollars, which is a surprising feat taking into consideration the fact that the market has barely been in existence for less than a decade (Plassaras, 2013). Notwithstanding the good performance, there are several problems and functional and structural concerns associated with the market. The problems and issues have been attributed to the infant nature of the marketplace, lack of good understanding of the cryptocurreny space, as well as some unusual economics of cryptocurrencies. Some of the problems and issues are discussed below.

When transferring money from one user to another, the sender may copy the intended recipient’s wallet address. However, the malware may replace the address within the clipboard with another user’s address and since not every single user is keen enough to double check an address after they have copied, losses are likely to be realized. Also, users stand a chance of being duped into entering phishing websites wherein they upload their cryptowallets as well as enter their passwords.

With cryptocurreny, even a correct address use and a genuine payment can result in a loss of money (Leng, 2018).Classic cryptocurreny, Ethereum’s most popular currency, in June 2017, suddenly began stealing money from utilizers’ wallets (Marshall, 2017). It later turned out that hackers had employed social-engineering techniques to persuade the hosting provider that they were the genuine and real owners of the domain, thus gained access. Soon, they began intercepting the flow of cash.

The biggest issue facing the cryptocurreny marketplace is the excessive volatility. The prices of most cryptocurrencies on exchange platforms dramatically fall and rise with a short span of time. There are several reasons that have been advanced to explain the excessive volatility within the cryptocurreny marketplace yet the biggest contributor is the undertakings of the “whales.” In this paper, whales refer to those people who have large cryptocurreny holdings. These individuals have the ability to influence the market by controlling cryptocurreny prices. They do and realize this by way of buy and sell walls. A buy wall simply refers to a buy position that is worth a lot of money being opened upon a crypto-trading platform (Plassaras, 2013). Usual investors trading in small amounts will recognize this position and interpret to imply a forthcoming price increase. Once this occurs, the price of the cryptocurreny will rise inevitably.

The challenge with this frequently happening scenario is that the whales often drive up cryptocurrencies’ prices without really investing in the marketplace. Jayachandran (2017) reasons that the real trades that have heightened or enhanced prices of cryptocurrencies have originated from smaller traders. When prices are at some point that favours the whales, they can often adjust their sell and buy walls, pump in more cash into the system and once they do so, the price of a particular cryptocurreny dramatically falls. This process can get repeated a number of times with only the whales realizing benefits. Plassaras (2013) points out that the main reason why this kind of manipulation of asset price is possible is because there is a lack of position price fees/limits on a number of cryptocurreny trading platforms. The implication is that if adequate fees or limits were put in place, it would demoralize and discourage the movement of large buy and sell marketplace positions.

Presently, there are several tokens, mining operations, investment platforms, and coins that are offering guaranteed percentage returns. There are fears that these will in the end be scams or some Ponzi schemes in which one gets their initial investment back so that they can be lured to invest the more. Since there are several uncertainties about the future of cryptocurreny, fears are everywhere and people are adamant to invest in the cryptocurreny marketplace.

Initial coin offerings (ICOs) have risen to become an integral component of the cryptocurreny marketplace. Several tokens are introduced into the marketplace through ICOs with investors purchasing these tokens within the exchange for approval money. As a result of lack of regulation, pump and dump ICO arrangements continue to be a challenge for the cryptocurreny marketplace. During an ICO, an entrepreneur behind the token massively forecast on the coin, pushing prices up as well as attracting investors. One this is realized, the investors cash out, thereby leaving the investors with valueless coins that barely have value (Lilienthal & Ahmad, 2018). The promise and hope of a quick recovery of money functions like a giant magnet that sucks thousands and millions of first time cryptocurreny investors into the pump and dump chats on telegram application.

By design, the pump and dump scheme are formulated to raise the price of low volume cryptocurrencies as well as tokens within the shortest time possible as well as to create “buy” positions at some price positions which will later be used by the pump and dump to quit their position, leaving all with a few valueless coins. There several thousands of people being duped through the pump and dump schemes daily. Houben (2015) states that the only possible way cryptocurreny exchanges can counter the challenge of pump and dump promotions is by way of enabling circuit breakers alike to the one that are presently are in existence on stock exchanges across the globe. Circuit breakers function to put temporary holds upon trading in case the price of an asset significantly rises or falls within a short period of time thus minimizing efficiency and effectiveness of price manipulation undertakings.

Right from its inception, the cryptocurreny marketplace has been beset by activities of cybercriminals and hackers. There have been reported and registered cases of high-profile cryptocurreny heists and hacks that have resulted in the loss of millions of dollars. Investors and traders have lost funds and certain cryptocurreny exchange platforms have stopped operating. The repercussion of these hacks has been characterized with the price of some cryptocurrencies considerably dropping (Houben, 2015).

In an attempt to counter these cybercriminal activities, platform operators and traders have to take several precautionary measures. Whereas some of the measures are very useful, some of them create bottlenecks that hinder the process of cryptocurreny trading, which consequently creates a trade-off between efficiency and security. Consider, for example, a case where there is a need to provide sufficient security for cryptocurreny that is held in a wallet storage. To the cybercriminal activities, some traders opt to store the substance of cryptocurreny assets within offline wallets, implying that any single time when they wish to trade, they have to transfer their assets from offline storage platforms to online ones before taking part in the trade. This creates another stress or bother within an already convoluted trading atmosphere.

Further, blockchain transactions are immutable. Thus, in case funds get stolen, there are few chances of ever recovering them. Cryptocurreny exchange platforms constantly have to better their security structures so that they can stay ahead of the thieves and hackers. Most of these security upgrades equally make the process of trading to be a lot more difficult, challenging, and cumbersome with all the sanction protocols and steps that should be carried out before a transaction is completed (Lilienthal & Ahmad, 2018).

Price charting is one crucial component of commodity or asset trading. There is always a need to develop price charts so that investment analysis can be carried out and trading strategies be developed. The challenge, however, with this marketplace is that prices can considerably vary on the various cryptocurreny exchange platforms. With such great price dissimilarities for a single cryptocurreny, price monitoring becomes a challenging endevour (Leng, 2018). In addition to this, the sheer extent of volatility within the marketplace as well as the challenge becomes even extra aggravated.

The cryptocurreny marketplace is afflicted with several delays across nearly every single step of an exchange. Right from the opening of a trading account to verifying one’s identity as well as being capable of making deposits along with withdrawals, the system appears to be considerably slow (Jayachandran, 2017). Blockchain knowhow should make trade and transactions happen quicker yet it appears to take loner for trade and transactions to be sanctioned on the different chains. Issues to do with scalability have also been noted by professionals as being the major cause of delays in transactions since as blockchains get longer, additional transactions are held up within a queue awaiting for approval (Bryans, 2014). The marketplace is volatile. For this reason, delays can be expensive. Traders may end up missing out on a number of favourable positions as a result of a transaction failing to get posted on.

Cryptocurrencies are new investment openings or opportunities within a rapidly developing marketplace. As the marketplace continues to mature, more cryptocurrencies will begin popping up and creating an ecosystem. This implies a rapid growth and new cryptos arising with several uses. For instance, whereas Bitcoin is digital gold that has little use for black marketplace dealings, sites like Steem function to create their individual traffic and are progressively growing (Houben, 2015). The more the number of people using cryptocurrencies the higher the demand merely pushing the price up. In addition, the lack of centralization and regulations within the marketplace implies that the marketplace is purely down to marketplace forces with insignificant human intervention, the reason for which magnified price changes have been seen over the time past in the cryptocurreny market. While the price of some cryptocurrencies, like Bitcoin, have stabilized within the market, the network security continues to be bettered up by expert mining operations globally (Leng, 2018). For instance, Bitcoin transactions, according to Houben (2015), are secured by about 1.5 billion gigahertz per every second and this continues growing at an exponential rate. This makes the Bitcoin cryptocurreny to be by far the most and largest secure production blockchain all over the world since that of its runner-up, Ethereum is about 2000 gigahertzes per second protecting Ether exchanges (Shawdagor, 2018). Bryans (2014) also notes that the maturity of the cryptocurreny marketplace extends to the variety and amount of services that are being developed and the overall cryptocurreny being adopted. All data signify that the general adoption of cryptocurreny is fast growing at an unparalleled rate and that future of the market is lustrous and bright. Jayachandran (2017) states that cryptocurrencies have a high operational efficiency and functions to facilitate easier information sharing regarding certain trades or products since with the use of cryptocurrencies, traders do not need any more documents to be passed along but traders can now register all details on the blockchain. Lastly, cryptocurrencies have secure encryption as well as tamper-proof information/data storage besides functioning to eliminate a central power that has full access to the information or data.

There are several weaknesses of cryptocurreny marketplace and cryptocurrencies. While other marketplaces are faced with frequent changes in business rules, blockchain is not. Blockchain is in most cases not modular, implying that an old encryption module cannot be replaced or changed easily (Shawdagor, 2018). Supposing that business principles change and we want to export information or data to a new blockchain with right and correct data models, a blockchain does not offer an instant out-of-the-box exit approach. Cryptocurrencies are potentially in conflict with prevailing strategies and approaches to regulatory amenableness like General Data Protection Regulation (GDPR) (Bryans, 2014). Shawdagor (2018) states that the concept of cryptocurreny is not simple and easy to grasp for any newcomer. This necessitates good education to make many people understand how the system works it mass adoption of the concept is the ultimate goal. Some cryptocurrencies have weaknesses that can still be considered as marketplace opportunities for other technologies. For instance, having been designed as a digital cash structure, Bitcoin has limitations that altcoins has identified and used as market opportunity (Houben, 2015). Also, Bitcoin’s concerns gave room for altcoins. With such loopholes, other better technologies can arise that can expose cryptocurrencies to cutthroat competitions that would only jeopardize the future of the cryptocurrencies (Bryans, 2014).

Adopting blockchain within a business significantly changes the system of the business. Blockchain functions to enable secure information and data transfer as well as payments. In addition to the Internet of Things (IoT), blockchain offers massive new openings to business persons. For instance, the system facilitates the flow of large amounts of information and data regarding products. In addition to helping merchants to send money or data securely, cryptocurrencies also assist the merchants to understand why there is a need to make the transfers in a cost effective manner. The employment of the blockchain knowhow enables people to carry out business even more efficiently and easily with international or overseas firms or partners or customers. This ease and efficiency develops as a result of faster and easier transmission of data and information or digital properties as well as a completely automated system of exchange record keeping which makes the whole process fraud free and crystal clear. This serves to simplify and somehow automate compliance and accounting. Cryptocurrencies also provide a platform for analytic research and big data. They give back power and control to the utilizers since they allow users to control who accesses their data. The world is fast becoming more digital and more globalized. Thus, more individuals will accept the blockchain concept in their everyday lives.

The blockchain technology is a secure and easy medium for data and money transfer. However, there is danger in taking this intrinsic simplicity for granted. There is still a great need to work out a strategy to IoT money and data transactions. This system of monetizable data and money transfers brings the question of would be the most beneficiary of the system; the people trading over the network or the individuals generating information, of the individuals managing the networks. One principal threat is that the knowhow would be so joyously be incorporated and adopted across the world that there would be no need for banking institutions. Such a huge scale shift of nearly all know-hows in every government body and company across the world would call for a lot of determinations and efforts (Eyal & Sirer, 2013) since it would need a lot of study and research and beta testing, among other concerns. Evidently, the scalability issues continue to be threat; too many exchanges (overload), notwithstanding concerted efforts that have been directed to solve the challenge. There is also the threat of unwanted centralization; large mining farms and mining pools. The threat of quantum computers in the future who will have the ability to decrypt information and data. There is also fast and hype changing environment. Also, there is often the possibility of hacks and mining attacks. Regulatory threats are also eminent upon cryptocurrencies. Gans and Halaburda (2013) observe that just like the Internet has been censored in different parts of world, cryptocurrencies are likely to face regulatory pressure in regions and places where they will threaten local governments and currencies.

This chapter aims at illustrating the methodology that will be employed for this dissertation. Further, the chapter will give the sources of information and data that will be employed to obtain the needed data for carrying out the analysis. The chapter will equally illustrate the sample size, sample data, and period for the analysis. Techniques employed to gather the study’s needed data will also be highlighted.

For the purpose of this study, secondary data regarding price and index information for different cryptocurrencies will be employed. This secondary data will be obtained from the cryptocurrencies index 30 (CCI30). For purposes of computing and analyzing efficiency of the cryptocurrencies in the marketplace, data from the database will be extracted in excel format. While focus will be on Bitcoin, Monero, Ethereum, Ripple, Litecoin, MaidSafeCoin, Dash, and Dogecoin, other three cryptocurrencies will also be included to help obtain a comprehensive analysis of trends and patterns in terms of market capitalization of the currencies.

To ensure that data gathered for a study is reliable, dependable, and consistent, there is a need to choose a short sample period (Corlu & Alper, 2015). In formed by Corlu and Alper (2015)’s view, the sample period chosen for this study will entail indices and prices of the chosen cryptocurrencies between 18/12/2018 and 19/1/2019. The event date (ED) for this study is chosen to be 20/12/2018 as it will help in calculating the cryptocurrencies’ prices and indices and also help in the identification of whether the changes would happen after the ED or not.

The event announcement that will be considered for this study is Dubai’s New Year’s Eve which took place on 31/12/2018. Coming at a time when the Rugby Sevens game and National day celebrations were ongoing, the event attracted several people from across the world. For purposes of consistency, researchers will compare data from trade of the various chosen cryptocurrencies. The intended source for this research’s pricing and indexing data is a publicly accessible site wherein trades occurring on a specific exchange are visible on the site’s interface. The site gathers as well as aggregates the visible information or data, by use of application programming interface (API). Since the site is publicly accessible, there will be no cost implication in acquiring data from the same. The researchers will use the ‘closing rate,’ which refers to the exchange rate as at the midnight Greenwich Mean Time (GMT).

The research method that was employed for this study is the event study approach. According to Corlu and Alper (2015), an event study method is a statistical technique for assessing the implication or effect of an event upon the worth of a firm. Since an event study methodology can be employed to elicit the impacts of any kind of event upon the magnitude and direction of stock price variations, Chan et al. (2017) state that the technique is very versatile. An event study technique tries to gauge the valuation impacts of a corporate happening or event, by examining the reactions and data from the stock price that are surrounding the event or announcement of the same.

The general procedure of employing an event study methodology begins by using monetary marketplace data to gauge the effect of a particular event upon the value of a company or industry. Corlu and Alper (2015) assert that given the rationality that characterizes marketplaces, the impacts of a given event will immediately be reflected in security prices. This assertion insinuates that a measure of a specific event’s economic implication can be gauged by use of security prices that are observed over a short period, a fact that informed this study’s short sample study period. It is crucial to underscore that short-horizon event study periods are extra reliable compared to long-horizon event study durations (Chu et al., 2015).

By design, event studies methodologies imply the following: depending upon an approximation window ahead of an intended event, the technique serves to approximate what a normal stock return of an affected company/firm ought to be at the very day when the event should be happening and a number of days after the event (that is, within the EW). After this, the technique deducts the normal returns from the real returns to obtain the abnormal returns that is attributed to the event (Chan et al., 2017). Nonetheless, event studies may differ depending on their specifications of normal returns, with the most commonly used model of this technique is the market model (Chu et al., 2015).

It is likely that the marketplace realized a positive change in the cryptocurreny market capitalization before the Dubai’s New Year’s Eve. As such, the period before the event began and after it ended will be used in determining how quickly the marketplace would stabilize. The event window (EW) will, therefore, statistically be determined by the formula below:

EW = [t ∈ Z | T (1) < t ≤ T (2)] ……………………….. (Durbin & Watson, 1971)

Where T (1) = the window’s starting time, T (2) = the window’s end period, t = time-steps, t = 0 implies the event day, Z = integer numbers, and t ∈ Z = t ought to be an integer.

Length of EW = [T - (t-1)] …………………………….. (Linden, 2017)

Where T = end of window

The CW, also called estimation window, entails a particular period beyond the event date. For proper computation, the researchers will ensure that the CW does not overlap with the EW. Worth noting is that while there is no agreement on the right length of a CW, most studies and researchers have used a CW ranging between 180 days and 200 days and between 10 and 20 days before the desired event (Chan et al., 2017).

Also, this study will consider variations in corporate performance before, during, and after the celebration, variations in shareholders returns or share prices. The researchers will also conduct analysis based upon share price information or data, using the formula

Abnormal Return = Actual Return – Expected Return …………………….. (Corlu & Alper, 2015).

Within the event’s overall test period (TP), the researchers will approximate abnormal return for each period about the event data (31/12/2018) using the following formula:

et = Rt - E(Rt ) ……………………………………………….( DeVries, 2016).

Correlation coefficient (r) between the cryptocurrencies under consideration will as well be computed. This will help in determining the relative strength of the cryptocurrencies against Bitcoin and the U.S. dollar (USD). Middlebrook and Hughes (2014) state that correlation coefficient is employed in statistics to gauge how robust/strong an association between two variables is. r will be obtained using the formula below:

R

Such an information will be important in determining the potential of the individual cryptocurrencies to continue surviving in the marketplace relative to the Bitcoin and to determine the future of cryptocurreny in the global marketplace.

This chapter aims at employing the event study technique along with the proposed statistical models to assess the behaviour of cryptocurrencies within the study’s sample period. The chapter will provide details regarding the data that was gathered and the data relative to abnormal return, return, and anticipated return. In this chapter, an analysis of the competition between the cryptocurrencies using price information and data is carried out. Literature and media have largely focused on Bitcoin. Additionally, this chapter highlights on the various findings that were made from the study and also provides the output of the research in as a far as the objective of this study is concerned.

Eight altcoins were used for this comparison: Bitcoin, Monero, Ethereum, Ripple, Litecoin, MaidSafeCoin, Dash, and Dogecoin. Marketplace capitalization values for these cryptocurrencies are significantly skewed. Gandal and Laburda (2018) assert that total marketplace capitalization in digital monies was about $8.2 billion as at 26th February 2014, with Bitcoin accounting for about 90% of this market capitalization. The second-largest marketplace capitalization was found to be Litecoin, which accounted for about 5% of total digital money marketplace capitalization (Bovaird, 2017). Ethereum, the currency that had the third-largest marketplace capitalization value, accounted for about 1% of the total marketplace capitalization (Clements, 2018). These coins were among the first entrants into the cryptocurreny marketplace. However, interest in cryptocurreny has increased, leading to the development of more coins, some of which like Peercoin and Litecoin were developed to help fix what their developers regarded as Bitcoin’s limitations. While developers have largely developed other cryptocurrencies to help solve the various challenges that were noted with Bitcoin, this study established that the recent surge in entry of more coins into the marketplace is as a result of two factors: the entry is considerably cheap or costless and that the founders of cryptocurrencies have made substantial profits, a finding that is supported by a study by Gans and Halaburda (2013).

Those two motivations for the entry of new currencies into the cryptocurreny marketplace (capitalizing upon potential popularity as well as fixing limitations of Bitcoin) signifies a disagreement regarding the driving force behind the demand for cryptocurrencies – whether individuals purchase them as a result of their individual potential as currencies or for anticipatory purposes. See the table below for a summary of the currencies’ market capitalization.

Table 4: Summary of the Currencies’ Market Capitalization (Erdas & Caglar, 2018).

This study establishes that both forces are operational within the marketplace, with varied implications. First is the reinforcement influence. The reinforcement influence results from a one-sided network influences that are present during the process of adopting a currency (Christin, 2013). In this regard, the researchers found out that as Bitcoin becomes extra popular, a number of people would be led to believe that Bitcoin will thrive and win “the winner-takes-all” race against other currencies. Eyal and Sirer (2013) reason that with such an expectation, the demand for Bitcoin will continue to increase or rise. The second influence is the substitution influence, which is the outcome of speculative dynamics. This study found out that as Bitcoin continues to become more costly as well as more popular, people fear that it will be too volatile (overvalued), thus look for alternative cryptocurrencies for purposes of investing. The Table 5 below shows the exchange rates of the cryptocurrencies that were used for the analysis against Bitcoin (BTC).

Table 5: Exchange Rates of Chosen Cryptocurrencies versus BTC on BTC-E Exchange (Source: Excel).

The Table 5 above reports the first day (18/12/2018) and last day (19/1/2019) of data, along with the threshold date in between the first and second days (30th September 2013).

Figure 6: Variations in exchange rates of Different Cryptocurrencies versus BTC (Source: Excel).

The figure 5 above graphically represents the variations in the exchange rates of the currencies during the three distinct periods. From the Figure 5, it is possible that some currencies took off, whereas others did not. Also, the coins can be categorized into two groups. First, LTC, DASH, and XPR retained their individual values against the BTC over the time when the study was carried out, implying that they were successful, whereas D and ETH significantly declined I value during the two periods. Second, the worth of the coins that took off only increases during the second period. During the first period, as BTC becomes extra worthy, against the U.S. dollar, its value equally rises against the other currencies. During the second period, the value of BTC in U.S dollars further increases, yet the values of the successful cryptocurrencies (LTC, DASH, and XPR) rise against the BTC. Thus, during the second phase, the values of the successful currencies against the U.S dollar rise faster compared to the value of the BTC.

Undeniably, three data points are insufficient to draw conclusions. As such, the researchers also examined the correlations in the daily exchange rates of the currencies that were found to be successful as well as the U.S dollar against BTC. The outcomes are as displayed in the Tables 6(a) and 6(b) below.

Table 6(a): Correlations during the Daily Closing Prices at BTC (Source: Excel).

During the first period (a total of 152 observations were considered)

Table 6(b): Correlations during the Daily Closing Prices at BTC (Source: Excel).

During the second period (a total of 150 observations were considered)

The researchers used r($/BTC) to signify the exchange rate between $/BTC, as well as for other exchange rates. The positive correlations that were noted during the first period of the study (in Table 6(a) show that during that period, when Bitcoin rose in value against the U.S dollar, it equally rose in value against other currencies. Nonetheless, the correlations during the first period are largely weak, that is, the demand for a coin was weakly influenced by the prices of other cryptocurrencies.

During the second period, the correlations signify the trends and patterns that are noted in Figure 5 above. Specifically, this study found out that there is a significant and robust negative correlation between exchange rate r($/BTC) as well as the rates for three major cryptocurrencies, r(DASH/ BTC), r(XPR/BTC), and r(LTC/BTC) as supported by Christin (2013). This implies that when Bitcoin was increasing in value against the U.S. dollar, it was decreasing in value against Litecoin as well as other major currencies.

The other four cryptocurrencies’ prices vary in lockstep and the correlation among the same is much higher relative to the first period. To determine this, the researchers examined the same correlation at Cryptsy, a smaller exchange. The Cryptsy was employed for this analysis since, just like BTC-e, it had traded in the major digital currencies against BTC for comparatively a long span of time (Yermack, 2013). Nonetheless, unlike the BTC-e, Cryptsy did not transact in the U.S dollar. The findings of the correlations are as shown in Tables 7a and 7b.

Table 7(a): Correlations in Everyday Closing Costs at Cryptsy (Source: Excel).

During the 1st period, 117 observations were considered

Table 7(b): Correlations in Everyday Closing Costs at Cryptsy (Source: Excel).

During the 2nd period, 149 observations were considered

The results shown in Tables 7a and 7b are similar to the patterns and trends shown in Tables 6a and 6b. During the first period, the demand for a digital currency is weakly influenced by the prices of other cryptocurrencies. Nevertheless, during the second period, the prices of various cryptocurrencies move in lockstep, possibly owing to the fact that higher demand for a particular currency propels higher demand for other cryptocurrencies.

One possible explanation of these observations is that during the first period, the reinforcement influence is dominant. The demand for the most famous digital currency, Bitcoin, grows even more robust, and the demand for all other cryptocurrencies grows less strong or weaker. For the other comparatively successful cryptocurrencies, demand is not strongly related and associated (Christin, 2013). During that period, Bitcoin obtained moderate coverage within the mainstream media, yet other cryptocurrencies received none. From the results, it is reasonable to anticipate that during that time, cryptocurrencies were obtained by fanatics, possibly extra likely believing in their potential capability as cryptocurrencies. There is a possibility that Bitcoin, being the most popularized by the media, equally could win some demand from individuals who initially were not informed of cryptocurrencies.

During the second period of the study, the network influences function to drive the division between the losers and winners in the digital currency marketplace. Nonetheless, the observations in the successful cryptocurrencies are no more consistent with the reinforcement influence. The substitution influence dominants. In addition, the second phase of the study period, the interest in certain other currencies grows. The media coverage of the Bitcoin cryptocurreny is substantially during the time of the study, and some media platforms also cover other cryptocurrencies (Gandal & Laburda, 2018). As Bitcoin’s value increases with respect to the U.S dollar during the second period, the worth of the successful cryptocurrencies equally increases against the U.S dollar and at a quicker rate. This substitution influence may be the outcome of the arrival of new investors or traders to the marketplace, who obtain as well as trade the cryptocurrencies more as monetary assets relative to other cryptocurrencies capability (Christin, 2013). This study asserts that it would be improbable to maintain prices of digital coins as financial possessions if none believed in their individual potential as currency. Yermack (2013) explains that why very few cryptocurrencies are aggressively traded for a long span of time. For this reason, the researchers interpret their study’s findings by stating that for each and every four successful digital currencies, there is a group of investors and traders who have faith in its future as a legal tender.

To determine the validity of the interpretation that there is extra popular interest in cryptocurrencies during the second period, the researchers employed Google Trends. Using this, the researchers examined the major cryptocurrencies that were considered for this study. The results showed that there is more searches for Bitcoin relative to other cryptocurrencies. For instance, the correlation in the total number of searchers between Bitcoin and Litecoin is 0.95. Considering Bitcoin and Litecoin, the following result was obtained.

From the analysis, the searches for both Litecoin and Bitcoin first peaked during November, during which time the price of Bitcoin reached $215/BTC. By 18/12/2018, the price of Bitcoin had declined to $1.7.9/BTC. Starting with October 2019, the number of Google searches rose and attained a second peak during December 2019. The number for Litecoin, at this peak, was at 16 whereas that of Bitcoin was at 100. Litecoin’s peak was 5 and Bitcoin’s first peak was 62. The second Bitcoin peak was about 61% higher relative to the first peak, whereas for Litecoin, the second peak was about 220% higher relative to the first peak. Thus, there is comparatively extra interest in Litecoin during the second period of the study compared to the first one.

Alike pattern was observed for Dash. Dash searches are a proportion of Litecoin searches, and even significantly smaller proportion of Bitcoin searches. Thus, the data are not easily perceptible if graphed with other two cryptocurrencies. Looking at the searches for Dash, the currency’s searches peaked in December 2019. Using December as the baseline of Dash’s searches as 100, the cryptocurrency’s searches increases due to increased interest in possible cryptocurrencies during the second period of the study’s data.

The availability of dependable and reliable currency exchanges is essential for competition among cryptocurrencies. The currency exchange marketplace has rapidly been developing over time. MT. Gox, according to Bollen (2013), was the main exchange till mid-2013. During November 2019, the Federal Bureau of Investigation (FBI) shutdown a Wells Fargo account that belonged to the Mt. Gox subsidiary, grabbing more than $2.8 million (Gandal & Laburda, 2018). This resulted in the weakening of the exchange, owing to the fact that it became hard for the U.S clients to access it. As at November 2019, Mt. Gox still remained the most important player, yet no more a dominant exchange. The greatest and largest Bitcoin exchange at that time was BTC China, with about 35% of the trades. BTC China, according to Leng (2018), only trades Bitcoin against the Chinese Yuan (CNY). Mt. Gox became the second with about 27%. The third and fourth currency exchanges for cryptocurrencies were Bistamp (with 25%) and BTC-e (with 15%) of the transactions, with these thee latter exchanges being traded against the U.S dollar.

In the case of exchanges that involving the U.S dollar and BTC, as at mid-December 2019, there were three main exchanges: Bitfinex, Bitstamp, and BTC-e. BTC-e was the first of these three to trade BTC/$, and had approximately 26% of the volume for 2019’s currency pair. Bitstamp, which purely traded BTC/$, had approximately 50% of the volume for the 2019’s currency pair, whereas Bitfinex, which entered later after the two, had about 27% of this marketplace. Several other exchanges were active in the $/BTC currency pair, yet the volume that was traded was considerably small.

In the case of LTC/USD and LTC/BTC trades, BTC-e was the leading exchange with about 97% and 90%, respectively, of the volume of exchanges for these two legal tender pairs. Additionally, in the case of LTC/BTC, five other trades had non-trivial exchange, that is more than 1%, in this legal tender pair. In the LTC/USD, only a single exchange had above 1%. For DASH/BTC, a similar picture to LTC/BTC was noted. BTC-e led by approximately 90% of the marketplace. Three other trades had above 1%. In the case of Ripple, XRP/BTC, BTC-e had above 95% of the trade volume.

Several new transactions have entered the cryptocurreny marketplace. As a result of the multiplicity of exchanges within the cryptocurreny marketplace, the questions emerges whether the prices at the trades and exchanges differ, and whether they permit for arbitrage chances. Shall we keep holding to the knowledge that in the long run, there will still be these multiple exchanges within the cryptocurreny marketplace?

BTC-e transacts several currencies. Based upon the pairs that are traded at BTC-e as well as the closing price data, the researchers examined whether triangular transaction is profitable. That is, whether transacting the BTC from US dollar, then for BTC for currency C, and lastly C for the US dollar is profitable at closing time. Due to the depth of the analysis, the researchers used Dash, Litecoin, and Ripple for currency C.

Bratspies (2018) states that BTC-e permits for exchanges of the USD/BTC, LTC/BTC, and USD/LTC. According to Dupont (2012), there is not triangular openings among these cryptocurrencies implying that r (LTC/BTC) = r r [USD/BTC) (USD/LTC]. For this reason, the researchers calculated the ratio between r(LTC/BTC) and r r(USD/BTC) (USD/LTC) for purposes of this study’s analysis. Also, no trading openings imply that this ratio ought to be equivalent to exactly one.

From the analysis, the researchers revealed that the ratio’s mean value is 0.999 during the first period, and 1.000 during the second phase of the study (Clements, 2018). The researchers then proceeded to look at the data’s first percentile as well as the 99th percentile. The analysis showed that during the first period, 98% of the total observations dropped between 1.013 and 0.986. For this reason, less than 2% of the observations had triangular exchange openings producing gross returns above 1% at the closing of the period (ESMA et al., 2018). There is an insignificant difference between the periods since during the second period, 98% of the total observations dropped between 1.012 and 0.985.

A similar procedure was followed for Dash and then for Ripple. For these two, the researchers were only able to examine the second period owing to the fact that there was no USD/XRP or USD/DASH during the first period of the study. For the case of Dash, the ratio’s mean value during the second period of the study is 1.001, and 98% of the total observations during that time dropped between 1.021 and 0.978 (Dupont, 2012). That is, 2% of the total observations permit for a minimum of 2% of gain on a triangular transaction. The outcomes were alike to that of Ripple – the ratio’s mean value is 1.001, and 98% of the total observations dropped between 1.021 and 0.970 (Fleder et al., 2014). Thus, comparing with Litecoin, there are significantly large gross triangular transaction opportunities with Ripple and Dash. It is justifiable that since the volumes that were traded in these legal tenders were lower relative to the Litecoin upon the BTC-e exchange, we can anticipate extra liquid cryptocurreny marketplaces to provide fewer triangular trading openings.

In this section, the researchers examined whether there are profitable openings from trading alike pairs of cryptocurrencies on two distinct exchanges. The researchers examined potential or possible trades entailing USD/BTC owing to the fact that this is the most heavily transacted cryptocurreny pair by volume. Additionally, the study’s data was from closing time, which is midnight GMT. The researchers analyzed the dissimilarities in prices, minus accounting for the costs involved in making trades.

The researchers began by comparing the exchange rate between the BTC and US dollar on Bitstamp and BTC-e, which is the largest ad dominant exchange that is transacting BTC/USD (Fleder et al., 2014). Specifically, the researchers analyzed the ration between r(USD/BTC, at BTC-e) and r(USD/BTC at Bitstamp). No transaction openings would suggest this ratio to be equivalent to 1. Nevertheless, the researchers observed that the ratio takes a variety of values above and below 1, as shown in the Table 8 below.

Table 8: Distribution of Ratio r(USD/BTC, at BTC-E) / [r(USD/BTC, at Bitstamp] (Source: Excel).

From Table 8 above, the ratio’s mean is 0.980 dung the first period and 0.978 during the second period of the study. These findings are not statistically different from 1. Nevertheless, for the trading chance, it is never the average that matters, yet the realized values that fall away from 1 (ESMA et al., 2018). During the first period of the study, the 75th % point of distribution of the data was 0.987, falling below 1. This implies that on a number of days, Bitcoin was comparatively less expensive on BTC-e compared to Bitstamp, and on half of the days during that period, the discrepancy in prices would produce above 2% benefit (Goldberg, 2018). The study found out that there days when Bitcoin was less expensive on Bitstamp, yet those days are fewer, and the yield is above 2% in this regard for only two days (ESMA et al., 2018).

The standard deviation of the ratios was found to increase from the first period’s 0.016 to the second period’s 0.027. The study revealed that this was propelled by a few outliers. During the first period, the 5th % was 0.96. That means that for 5% of the days that were conserved for this discussion, the prices at midnight at the two trading were dissimilar by a minimum of 4%. The lowest value during the first period was found to be 0.930. During the second period, on 10% of the total days that were considered, the prices showed discrepancy by a minimum of 5% and on three days of the study, the discrepancy surpassed 10% with the ratio’s lowest value being 0.87330.

Notwithstanding other factors, it cannot be possible to merely conclude that there were extra trading opportunities during the second phase of the study across the cryptocurrencies. For instance, the median for the second phase of the study was comparatively close to 1 relative to during the first phase of the study. Instead, there were less number of days that registered substantially larger trading openings for cryptocurrencies during the second phase of the study, whereas on most days those openings were comparatively less profitable relative to during the first phase of the study.

Further, the researchers examined at the openings for Litecoin. They compared the exchange rate between LTC and BTC on Bitfinex and BTC-e, owing to the fact that both trade LTC/$. Particularly, the researchers analyzed the ratio between r(USD/LTC, at BTC-e) and r(USD/LTC at Bitfinex during the second period (Fleder et al., 2014). There are no trading openings that would suggest that this ratio be equivalent to 1. Nonetheless, the researchers observed that the mean of the ratio for the data was 0.987 and the 5th % point of the data’s distribution was 0.967 (ESMA et al., 2018). As such, on a number of days during the second period of the study, the closing prices exhibited differences of more than 3%, implying comparatively large gross transaction openings on these days. Cumulatively, this data imply that gross transaction opportunities were greater through transactions or exchanges as compared to during exchanges. This is in agreement with the findings of a study by Gup (2014).

Bitcoin runs an open and permission less blockchain, allowing anybody to join and quit the crytpocurrency’s public connection at their own volition without necessarily requiring some pre-approval by some central person or entity (Goldberg, 2018). All that is required to join the cryptocurrency’s network and add a transaction to a ledger is a computer upon which the pertinent software is installed. Additionally, Bitcoin can directly be converted into fiat currency since it can be bought with as well as directly converted into fiat legal tender on a wide array of cryptocurreny exchanges. Of the cryptocurrencies that are inexistent, Bitcoin is the one that is easily convertible into fiat legal tender.

Bitcoin is also used as a medium of transaction or exchange. Bitcoin, according to Gup (2014), is being accepted as an authentic source of funds by a fairly large number of online traders and merchants, among which different large firms (Goldberg, 2018). For this reason, it can be qualified and quantified as a medium of exchange. Bitcoin is a pseudo-anonymous currency. In most cases, Bitcoin is characterized as an unspecified coin: despite the fact that everyone can verify the chain exchanges on public ledger basis. Nonetheless, this anonymous characteristic is far from being absolute. It is technically feasible, though very expensive and intricate, to recognize the parties that are behind any single Bitcoin transaction by bringing together different factors that accompany such exchanges (Hacker & Thomale, 2017).

Just like Bitcoins, Ethereum also uses open, permission-less blockchain. Also, Ethereum can as well as be directly converted into fiat coin. It is also a medium of exchange. Like Bitcoin, ether is fast being accepted as a medium of exchange by the increasing number of people and merchants using it. Ether is also a pseudo-anonymous currency.

Ripple cryptocurreny runs an open but permissioned blockchain. Ripple, unlike the Ethereum and Bitcoin, runs a permissioned blockchain since Ripple (Labs) Inc., the firm behind Ripple, determines who may role play a transaction validator upon its network (Goldberg, 2018). Since it is accessible and can be viewed by any person, Ripple’s blockchain is regarded public (Shobhit, 2018). Just like Ethereum and Bitcoin, Ripple can also be converted into a fiat coin. It is also used as a medium of exchange. Other than the increasing number of online merchants and traders suing the cryptocurreny, there are speculations and buzzes that Amazon may be trying to employ Ripple in the near future (Hacker & Thomale, 2017). Lastly, Ripple is a pseudo-anonymous currency.

Similar to Bitcoin and Ethereum, Litecoin runs permission-less, open blockchain. It can be directly converted into fiat coin. It also serves as a medium of exchange due to the fact that it is widely used. It is a pseudo-anonymous currency, implying that everyone has the capability of verifying the chain of Litecoin exchanges based on public ledgers, which may make it technically possible to recognize the currency’s sender and/or receiver (Shobhit, 2018). Recently, Litecoin introduced a new knowhow into the world of cryptocurreny, the atomic swap. Asolo (2018) states that the atomic swap allows for P2P cross-chain trade or exchange of a given cryptocurreny for another one, minus the need of a third entity or party (Herlin-Karnell & Ryder, 2017). In practice, the use of atomic swap is not anything easy. Being a new technology that is yet in its infancy, the adoption of the technology needs a lot knowledge in IT (Marshall, 2017).

Monero also joins the category of cryptocurrencies that run permission-less blockchain, is directly convertible into a fiat coin, and can be used as a medium of exchange (Heller, 2017). However, the currency is different from the aforementioned ones because it is an anonymous currency as opposed to being a pseudo-anonymous one. In a pseudo-anonymous currency, exchanges are often openly traceable and verifiable by anyone. In practice, the sending as well as receiving addresses like exchanges could be associated with an individual’s real-life individuality/identity (Asolo, 2018). It is at this point where Monero asserts to be distinct. It places itself as a secure, untraceable, and private cryptocurreny (Herlin-Karnell, & Ryder, 2017). This high level or degree of anonymity is realized through two distinct methods: ring confidential exchanges and stealth addresses.

Dash is among the cryptocurrencies that run permission-less, open blockchain, can directly be converted into a fiat coin, and is used as a medium of exchange (Herlin-Karnell, & Ryder, 2017). Asolo (2018) states that Dash is an (optional) anonymous currency. Dash’s blockchain, just like Bitcoin’s blockchain, is transparent by design and default, implying that its transactions are often openly traceable and verifiable on the blockchain. To provide its utilizers monetary privacy, the cryptocurreny gives the choice to use a feature referred to as PrivateSend, a functionality that obscures the origins of a utilizer’s funds via a process referred to as “mixing” (Heller, 2017).

This chapter aims at providing concluding remarks regarding this study’s aims and research questions based upon the empirical results that are gotten from the research strategy that was employed in chapter three of this work. This chapter also highlights the limitations of the study and scope for further research.

In this paper, the nascent marketplace of cryptocurrencies was investigated. The researchers fundamentally examined competition between various cryptocurrencies, concentrating on Bitcoin, Monero, Ethereum, Ripple, Litecoin, MaidSafeCoin, Dash, and Dogecoin. However, for a deeper understanding, the paper included other cryptocurrencies. Within this environment, network influences play a crucial role. The study’s data were divided into two: between May and September 2013 and between October 2013 and February 2014. During the first period of the study, Bitcoin’s prices were relatively stable, whereas during the second period, it was substantially volatile.

The study found out that during the first period, the popularity of Bitcoin increased against the U.S dollar as well as other cryptocurrencies. However, during the second period, the prices of other currencies increased even the more against the U.S dollar as compared to how Bitcoin did. From this, the paper deuces that it appears that Bitcoin, through its original popularity, generally “opened up” the marketplace for other cryptocurrencies. Simultaneously, Bitcoin relished a first-mover competitive advantage or advantage within an atmosphere that had network influences. Something interesting is that even Litecoin, which is regarded as the second most robust cryptocurreny, dropped substantially against Bitcoin during the third part of the analysis. Overall, as of 31st November 2019, Bitcoin contributed for about 95% of the total cryptocurreny marketplace capitalization.

This study was guided by two hypotheses. Concerning H1, the study has shown that in the long term, it is not vivid whether the substantial strengthening of BTC that Bitcoin has enjoyed over other cryptocurrencies will be adequate to help it keep the dominant position. For instance, latest reports indicate that Litecoin is quickly become extra acceptable by traders and merchants as a lower-cost substitute to Bitcoin. Therefore, we reject the first hypothesis that states that “Bitcoin is to remain the world’s leading cryptocurreny in terms of marketplace capitalization.”

Concerning the second hypothesis, the study has shown that cryptocurrency appears to have moved past the preliminary adoption phase that new know-hows experience. Bitcoin has continued to carve itself a niche marketplace, which could function to help in the advancement of cryptocurrencies further into the mainstream, or can as well be the main cause of the market’s falling. Cryptocurrencies are yet in their infancy stage, and it is hard to see whether they at one time be able to find a true mainstream presence within the world’s marketplace. Bitcoin community is trying whatever possible to push the mainstream via innovation as well as solving traditional challenges. With other cryptocurrencies arising and gaining users and some nations like Iceland beginning to start their own national cryptocurrencies, it is possible that the future holds some place for cryptocurrencies as a principal solution, and Bitcoin will be crucial in paving the way for other cryptocurrencies to thrive. Additionally, Latin America and the European marketplaces are enlarging with Bitcoin and other cryptocurrencies’ transactions, implying a true validity. This assertion leads us to fail to reject second hypothesis, which states that “the use of cryptocurreny is likely to continue increasing globally.”

Undeniably, three data points are insufficient to draw conclusions. In this study, with everyday closing exchange rates, the study only looked at arbitrage openings in a comment a day. They checked whether the discrepancies in prices functioned to allow for profitable triangular opportunities in the BTC-e trade, as well as profitable trading openings across the BTC-e trade along with other transactions at a given time. Such assessment leaves out a number of other possible arbitrage openings, like selling at noon and purchasing at midnight. Another limitation was time constraints as well as issues related to data gathering. The process of gathering information or data entailed issues related to changes in Bitcoin’s values. Therefore, data had to be adjusted in accordance with the constant changes in value. Moreover, owing to the fact that cryptocurreny is an emerging notion, there was limited information, literature, and studies on the technology. Therefore, finding pertinent data or information was considerably difficult.

In addition to the abovementioned limitations, this study does not account for various costs of making transactions; this would influence the realization of the exchange benefits. As such, there is a need that those concerns and issues be investigated in future studies and research. Additionally, there are several topics concerning Bitcoin and other cryptocurrencies that need to be explored. All-encompassing studies ought to be carried out upon the economic impacts of Bitcoin on a long term standing fiat coin performance, as well as compare the outcomes to countries that are starting to employ state-financed cryptocurrencies. Similarly, extra data (over time) will foster more research into competition within the cryptocurreny marketplace and will for sure bring additional insights regarding dynamics of this marketplace.

Arnold, M. (2017). Concerns mount over cryptocurreny competition after banks shun fintechs. Financial Times, 1(12), 23-27.