On the robust drivers of cryptocurrency liquidity: the case of Bitcoin Financial Innovation Full Text

For traders, speculating on short ETFs is still a viable method of profiting from market downturns, as in much the same way as investors, they just opt to ‘buy’ the market. Inverse ETFs are often not thought of as long-term investment vehicles, as the derivatives they are based on will be bought and sold daily by the fund’s manager, which means that there is no guarantee of its performance. Instead, they are commonly used by investors to hedge their share portfolio against more short-term declines. It is similar to shorting a security, except instead of borrowing an asset to sell, you are buying the market.

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In summary, cryptocurrencies are part of an ecosystem based on Blockchain technology. Our study differentiates itself from previous ones by making use of the bibliographic coupling. Literature addressing cryptocurrency traders and investors reveals that despite of the existence of different groups of age, gender, and trading patterns in the cryptocurrency trading, men are the dominant gender.

How to Trade Ethereum (ETH)

While the supply of Bitcoin works as a standard supply, the growth of supply leads to downtrend pressures being exerted on its price. This means that a negative relationship exists between the supply of Bitcoin and its price (Ciaian et al., 2016; Dubey, 2022; Kristoufek, 2015). Geographic analysis considered the location of data collection of the studies included in the review. An understanding of the geographic distribution of research and how different regions or countries contribute to the body of knowledge of cryptocurrency pricing is also included. The imposition of restrictions on cryptocurrency trading by the Chinese government in September 2017 had an impact on cryptocurrency pricing research (Chen & Liu, 2022). However, despite the regulatory challenges, 12 studies were conducted in China and contributed to the literature.

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Unlike the trading mechanisms of standard securities, cryptocurrency peers are mostly order-driven, implying that a trade counterparty may not be available immediately. Hence, the cryptocurrency market’s liquidity supply is endogenous, meaning that traders mostly provide it through order placement. Under harsh financial conditions, investors are not obliged to secure the liquidity necessary for the smooth functioning of the cryptocurrency market (Cheng et al. 2021).

• It also considers changing structural models for financial institutions emerging from the crypto world, as represented by decentralized autonomous organizations (DAOs).
• Our platform caters to cryptocurrency derivatives traders by providing low latency, deep liquidity, and maximum availability.
• Due to high fees during periods of high network load, Uniswap is not a cost-effective solution for participants with smaller funds.
• In both analysis the United States of America present the lowest ratios of the top 10 most cited countries.
• A GRU (Chung et al. 2014) is another gated version of the standard RNN which has been used in crypto trading (Dutta et al. 2020).
• Our main mission is to build bridges between traditional finance and the crypto world and to give investors easy access to the digital asset space.
• On the 20th of November 2014, Tether CEO Reeve Collins announced that the name of their token, Realcoin, would be changed to Tether (USDT).
• Dong et al. (2022) demonstrate that funding liquidity, measured by the federal funds rate, is positively correlated with the illiquidity of cryptocurrencies, suggesting that a contractionary monetary policy can reduce cryptocurrency liquidity.

Economics and usage

Nevertheless, Baldan and Zen (2020) argued that profits and costs were not the factors driving Bitcoin pricing. One possible explanation is that there is insufficient evidence to support the association between Bitcoin price and mining costs. Liu and Tsyvinski (2021) confirmed that electricity and computing costs (mining costs) did not drive cryptocurrency returns. Similar to conventional trading platforms, centralized exchanges typically charge market participants transaction fees that may include deposit, trading, and withdrawal fees. Settling trades “off-chain” creates a number of challenges including concerns regarding interoperability and security risks. Over the last few years, debates regarding the application of federal securities laws to primary cryptocurrency offerings and secondary market trading have taken a sharp turn.

Tether USDt to USD Chart

Instead, the illicit funds were routed through DeFi protocols, which received 17% of all funds sent from illicit wallets in 2021, up from 2% the previous year. That translates to a 1,964% year-over-year increase in total value received by DeFi protocols from illicit addresses, reaching a total of $900 million in 2021. Mining pools, high-risk exchanges and mixers also saw substantial increases in value received from illicit addresses.

Timeline

Leading hardware wallets include Trezor and Ledger, and some software-based wallets like Electrum are considered secure. These provide reinforced security protections like offline storage, encryption, PIN codes, multi-signatures, recovery phrases, and anti-tampering mechanisms. Figure 3 plots the response of US stock market price (lnSM) on positive and negative one standard deviation shocks to investment in Ripple (lnRPL). As shown in the first graph, a positive one standard deviation shock in lnRPL reduces lnSM slowly to a sustained long-run value of about 3.82. Surprisingly, as plotted in the second graph, a negative one standard deviation shock to lnRPL also raises lnSM to approximately 3.84 in the long run.

Types of Financial Tidiness

• Any trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations.
• These findings show that a positive shock on Bitcoin investment causes the stock market to respond positively, whereas a negative shock causes the stock market to respond negatively.
• The committee found that while a CBDC may provide some advantages, it could present significant challenges for financial stability and the protection of privacy.
• The price of Bitcoin lost about 65 percent of its price in a month reaching about 6000 US dollars between January 26, 2018 and February 6, 2018.
• For more information read the Characteristics and Risks of Standardized Options, also known as the options disclosure document (ODD).

Gains from cryptos are generally taxable at a 4% to 6.5% rate on gross income for each digital currency transaction. It has become a large industry and accounts for a considerable portion of the country’s savings and assets. The government has issued regulations regarding cryptocurrencies related to taxation and AML/CFT. The government has proposed legislation which would create a legal and regulatory framework for crypto-assets as a means of payments, investments and transactions.

Real-time cryptocurrency trading systems

The Central Bank of Nigeria[163] has barred banks and financial institutions from dealing in cryptos. The central bank has argued that cryptos are unregulated and not legal tender. Meanwhile the Nigerian Securities and Exchange Commission[164] (SEC) has sought to regulate cryptocurrency investments on the grounds that they qualify as securities transactions.

Cryptocurrency trading

On the other hand, factor such as the risk-free rate, hash rate and the number of projects seem not to be able to explain the excess returns (Lim et al., 2016). Additionally, it is revealed that the interest rates in Bitcoin lending are related to the loan-to-value ratio (S. Zhang et al., 2021). More specifically, when the price of Bitcoin increases by $10,000, the interest rate decreases by 10.7%, fact that encourages borrowers to buy more money, leading to pro-cyclical speculation (S. Zhang et al., 2021). Additionally, evidence highlights positive serial correlation in cryptocurrency prices (Corbet & Katsiampa, 2020). Therefore, evidencing asymmetric reverting patterns in the Bitcoin price returns (Corbet & Katsiampa, 2020).

Thus, investors will benefit from this review when seeking to diversify their portfolios with cryptocurrencies or by designing better trading strategies. The review may also benefit more experienced investors, such as investment managers. This study provides a consolidated discussion of the determinants of cryptocurrency prices and may assist investors to construct cryptocurrency price prediction models. Portfolio managers can effectively trace cryptocurrency price movements, thus avoiding large change events in cryptocurrency prices, which may have a significant effect on the risk and return of individual risky assets.

In January 2022, the CNMV published a circular[105] saying it would begin to regulate rampant advertising of crypto assets, including by social media influencers, to make sure investors are aware of risks. A 2016 law ruled that because cryptocurrencies are not considered currencies, they are not legal tender and are therefore untaxable. The country’s non-habitual tax regime (NHR) has attracted many crypto traders as it allows for exemptions and reductions in tax for a 10-year period for individuals of high cultural or economic worth. “An exchange of cryptocurrency for ’real’ currency constitutes an on-demand, VAT-free exercise of services,” the Portuguese tax authorities have said. In November 2021, with bitcoin prices peaking around the $60,000 level, the total value of all cryptocurrencies surpassed $3 trillion, an increase from approximately $500 billion in December 2020. Today there are more than 16,000 individual cryptocurrencies in circulation, led by bitcoin.

Moreover, it is also revealed that high readability of the whitepapers captures more interest from investors (S. Zhang et al., 2019). Liquidity Mining Scam – Liquidity mining is an investment strategy used to earn passive income with crypto assets. Investors stake their crypto assets in a liquidity pool to provide traders with the liquidity to conduct transactions. This Essay proposes modifying an exemption from registration for exchanges under the regulations governing alternative trading systems (“ATS”). Promulgated in 1998, Regulation ATS offers a set of rules governing emerging alternative trading platforms. The exemption enables the Commission to monitor and supervise newly developing trading venues.

Figure 1 presents time series plots of daily prices for the eight cryptocurrencies. All cryptocurrencies illustrate instances of high price volatility and the highest extreme price jumps is recorded in January 2018. The returns plots of the nine cryptocurrencies are also presented in Figure 2. The returns are characterized by patterns of time-varying volatility clustering where periods of high (low) volatility are followed by periods of high (low) volatility. The time-varying behaviour of cryptocurrencies returns suggests the presence of stylized characteristics normally exhibited by financial time series data.

Cryptocurrency Price Predictions 2024

The Bangladesh Central Bank issued warnings in 2014 and 2017 related to transactions in cryptocurrencies and warned violations could be punishable by up to 12 years in jail under existing money laundering and terrorist financing regulations. Despite prohibitions on the use of cryptocurrencies, Bangladesh has proposed a national blockchain strategy,[117] perhaps signaling a change in the future. Concerns about a foreign flight of local capital are a major concern hindering cryptos, however. In December 2021, Australia said it will create a licensing framework for cryptocurrency exchanges and consider launching a retail CBDC as part of an overhaul of its payment industry. Josh Frydenberg, the Treasurer, said the government would begin consultation in early 2022 on establishing a licensing framework for digital exchanges, allowing the purchase and sale of crypto-assets by consumers in a regulated environment.

• Estonia has been an early crypto frontrunner, with more than 1,300 crypto exchanges.
• Tether remains one of the most popular stablecoins on the market, while providing liquidity for transactions worth millions of dollars in value each day.
• Other issues were also touched on, such as whether a global stablecoin should be regulated differently from other stablecoins and how the stabilization mechanism should be regulated.
• The network boasts a flexible architecture, scalability, and support for millions of transactions per second through dynamic sharding and workchains.
• However, a 10-day cooldown period before unstaking, followed by a two-day window, exists.
• Financial transactions are not controlled, supervised, or regulated by any entity in the country, and this presents a financial risk to those who use it.
• Golang Crypto Trading Bot is a Go based cryptocurrency trading system (Golang 2020).
• A percentage increase in cryptocurrencies will raise stock market by 0.128% in the short ?

4 Does uncertainty affect the cryptocurrency market?

For example, Bitcoin uses a method called “Elliptic Curve Cryptography” to ensure that transactions involving Bitcoin are secure (Wang et al. 2017). Elliptic curve cryptography is a type of public-key cryptography that relies on mathematics to ensure the security of transactions. When someone attempts to circumvent the aforesaid encryption scheme by brute force, it takes them one-tenth the age of the universe to find a value match when trying 250 billion possibilities every second (Grayblock 2018). Regarding its use as a currency, cryptocurrency has properties similar to fiat currencies. E.g. for Bitcoin, the supply will decrease over time and will reach its final quantity sometime around 2140. All cryptocurrencies control the supply of tokens through a timetable encoded in the Blockchain.

Ethereum ETH

For instance, to explore the presence of dynamic patterns of calendar effects such the Turn-of-the-Year effect, the Halloween effect, the weather effect, and the Month-of-the-Year effects (Khuntia & Pattanayak, 2021). Additionally, there is also evidence reporting weak or no interconnectedness in the cryptocurrency market. Evidence also shows no clear indication of a lead-lag relationship between Bitcoin and Ethereum (Sifat et al., 2019). Furthermore, in an analysis of the impact of cryptocurrency issuances on their subsequent returns, it is revealed that Tether issuances seem not to impact subsequent Bitcoin returns (Wei, 2018b). Other studies reveal that bifurcations in the cryptocurrency market also pose a risk, since it weakens the market position and the pricing influence of cryptocurrencies (Tu & Xue, 2019).

21Shares Tezos Staking ETP and 21Shares Solana Staking ETP contribute to staking pools. Bitcoin’s volatility has decreased significantly over time as the asset has matured. Also, it’s important to consider the Sharpe ratio, which shows that on a risk-adjusted basis (returns adjusted for volatility), BTC has outperformed a basket of stocks like the SPY of Gold over the past decade. This statement is assuming a false dichotomy between crypto and traditional finance.

As of September 24, 2024 (five months after the most recent bitcoin halving event occurred) a single bitcoin’s price was around $US63,527. Hedges or protects other investments in the portfolio from unfavorable market movements. Traders Stock Method Max gain access to more expensive investment instruments, which cannot be traded with a small amount of initial capital. The chart above shows the profitability of BTCUSD trading using leverage (green line) and without it (yellow line).

Nikolova et al. (2020) provided a new method to calculate the probability of volatility clusters, especially for cryptocurrencies (high volatility of their exchange rates). The authors used the FD4 method to calculate the Hurst index of a volatility series and describe explicit criteria for determining the existence of fixed size volatility clusters by calculation. The results showed that the volatility of cryptocurrencies changes more rapidly than that of traditional assets, and much more rapidly than that of Bitcoin/USD, Ethereum/USD, and Ripple/USD pairs. Ma et al. (2020) investigated whether a new Markov Regime Transformation Mixed Data Sampling (MRS-MIADS) model can improve the prediction accuracy of Bitcoin’s Realised Variance (RV).

Crypto-assets, cryptocurrencies, central bank digital currencies and non-fungible tokens make up the new “crypto” universe, and each provides unique benefits, as well as regulatory challenges and complexities. This compendium to the report provides a summary of the regulatory picture in each jurisdiction. The summary below is grouped by region and focuses primarily on cryptocurrencies such as bitcoin. It provides an overview for each country, the regulatory state of play and links to the primary financial regulatory authorities or other relevant information. The SEC is reportedly looking into true DAOs such as Uniswap, which operates in the decentralized finance (DeFi) sector as a decentralized exchange (DEX) and is a code-based organization that matches buyers and sellers of cryptocurrency.

Canadian Securities Administrators (CSA)[29] and the Investment Industry Regulatory Organization of Canada (IIROC)[30] have issued guidance requiring crypto trading platforms and dealers in Canada to register with the local provincial regulators. In 2021 Canada adopted a clear registration regime for trading platforms that offer custodial services to Canadian clients. The Ontario Securities Commission has actively enforced the regulations against several unregistered foreign trading platforms. In 2021 digital assets moved from the fringes of the economy and began to enter the mainstream, prompting more widespread public adoption. Commercials for crypto trading platforms blanket network television in the United States and the sector has become a focus of everyday conversation. Wilkins said she saw crypto-assets as the bedrock of the emerging financial ecosystem.

You can also use media coverage and user adoption rates to help you predict cryptocurrency movements when conducting fundamental analysis. Investors need to be cautious of the inconsistent past of payment coins after enormous surges in value. Payment coins that rise by 10,000% or more usually lose 90% or more of their value in the years that follow, with a few notable exceptions (like Bitcoin). Even though both SHIB and DOGE tokens have reached this 90% retracement barrier, there is no justification for their current valuations to hold, according to some of the latest cryptocurrency predictions for 2024.

The cross-sector, cross-border nature of cryptos limits the effectiveness of national approaches. Countries are adopting different strategies, and existing regulations may not allow for national approaches that comprehensively cover all elements of these assets. Importantly, many crypto service providers operate across borders, making the task for supervision and enforcement even more difficult.

The effects of the last halving, which allowed for a reduction in annual inflation from 4% to approximately 2%, are still being felt. Other positive factors for the cryptocurrency include a surge in trading activity since the beginning of the year, as well as its attractiveness among institutional participants following the official approval of the spot Bitcoin ETFs. A significant development in the Cosmos ecosystem that prompted investment was the recent decision to set the maximum inflation rate for the ATOM cryptocurrency at 10% per year. While this may limit the profitability of crypto staking, it will also support the token’s value. The coin is currently trading in a long-term sideways channel, hinting that the cryptocurrency may gain traction in 2024.

The understanding of these factors may assist regulators to effectively formulate monetary policy in response to these challenges. Empirical studies have provided evidence that the cryptocurrency price may also be affected by the Economic Uncertainty Index. A number of studies conducted by Hasan, Hassan, Karim, and Rashid (2022) and Wu, Ho, and Wu (2022) showed a negative relationship between the Cryptocurrency Policy Uncertainty Index and the Bitcoin price. This means that when the cryptocurrency policy uncertainty increases, the Bitcoin price will decrease, when all other variables are kept constant (KaraÖMer, 2022). Similarly, the Economic Uncertainty Index displayed the same negative and significant association with the Bitcoin price (Kalyvas, Papakyriakou, Sakkas, & Urquhart, 2020; Wang, Sarker, & Bouri, 2022).

Bitcoin critics claim that Bitcoin’s rules can be easily changed by alterin Bitcoin’s source code. However, Bitcoin is governed by the software run by nodes, not by the source code. In other words, even if a developer wrote the code to change Bitcoin’s supply, changing the supply would necessitate a hard fork, and it’s extremely unlikely the community would support it.

Sapkota and Grobys (2020) employed portfolio analysis to explore the relationship between mining cost and cryptocurrency pricing. Results indicated that the mining cost from an energy aspect positively impacted cryptocurrency pricing. Chico-Frias (2021) confirmed this impact by demonstrating that mining costs were positively related to cryptocurrency pricing, as Bitcoin mining consumes electricity (Lamothe-Fernández et al., 2020).

The influence of these digital assets on the American and Chinese stock markets reached its maximum during the corona crisis. Similar results were found for the relations between the TrueUSD and American/Chinese stock markets (Figure 5). For US and Chinese investors, Stablecoins (Tether and TrueUSD) are not safe havens and are not used as hedging strategies. In addition, these products will not be included in the diversification portfolios of the US and Chinese investors. Similarly, the gold market receives more shocks than it transmits during 2020 and the first month of 2021 (Figure 3). American and Chinese stock markets are net transmitters of return (volatility) shocks to the gold market.