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Alternative Investments

Michel S. Scharnitzki

Demand for Cryptocurrencies: Economic, Financial and Psychological Determinants

ISBN: 978-3-96146-763-1

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Produktart: Buch
Verlag: Diplomica Verlag
Erscheinungsdatum: 06.2020
AuflagenNr.: 1
Seiten: 52
Sprache: Englisch
Einband: Paperback

Inhalt

After the extraordinary rise of the Bitcoin value in 2017, cryptocurrencies rose in their popularity and gained additional media attention. An increasing number of people were interested in investing in this relatively new asset class. But what is the rational for buying cryptocurrencies? Do people want to make quick cash”? Could cryptocurrencies replace our centralised central bank based monetary system? These questions led to the decision to study the factors that drive the demand for cryptocurrencies. This paper gives a systematic introduction to the Blockchain technology, the underlying technology for the majority of cryptocurrencies. By analysing a questionnaire, this paper studies the influence of economic, financial and psychological factors on the demand for cryptocurrencies. Additionally, the findings give interesting insights in the different behavioural trait of students and junior bankers.

Leseprobe

Text sample: 3.2 Other Cryptocurrencies: In question sixteen, the participants were asked to identify existing cryptocurrencies from six possible choices. All stated answers were correct. Every participant (100%) identified Bitcoin, 54 (77.14%) participants were familiar with Ethereum, Ripple was known by 46 (65.71%) and 41 (58.57%) test takers had heard of Litecoin. According to CoinMarketCap LLC (2018) these are the four most popular cryptocurrencies at the moment. Ethereum and Ripple are briefly introduced in this part. In addition, the Petro, the first cryptocurrency issued by a government is characterized. Ripple is a cryptocurrency invented by OpenCoin, a start-up from the Silicon Valley. Ripple is not a system trying to replace banks rather it provides a new payment solution for them (Boutellier & Heinzen, 2014). According to Ripple (2018) major financial institutions like Santander, American Express and SEB are members of the Ripple network. Ethereum was first implemented in 2015. The platform features other options apart from the currency application. The most important one is the possibility of implementing smart and self-fulfilling contracts (Wood, 2017). As the first national cryptocurrency, the Petro (PTR) was implemented in March 2018. The Petro is an asset backed cryptocurrency, issued by the Venezuelan government (Ministerio del Poder Popular para la Educación Universitaria, Ciencia y Tecnología, 2018). Every Petro is backed by the oil reserves of the country. It is accepted as a medium of exchange to purchase goods and services and the government accepts it for the payment of taxes and fees. Chohan (2018) expressed some concerns regarding the fact that the Petro is issued by a government and not an independent central bank and that the Petro is backed by an extractive asset: the oil reserves of Venezuela. Apart from a currency adaption, the Distributed Ledger technology bears other implementation possibilities. The Economist (2015) examines the application of smart contracts or public registries on a Blockchain based system. However, these applications of the distributed ledger technology will not be further discussed in this paper. 3.3 Cryptocurrencies: Financial Asset or Money? In order to get a better understanding of the driving factors for the demand of cryptocurrencies it is important to understand the expectations of buying cryptocurrencies. In context of this project a central aspect is whether participants see cryptocurrencies as a medium for daily transactions or as an investment. For that purpose, question ten asks the participants what they personally see as advantages of cryptocurrencies. Three possible multiple choice answers were provided. The first answer was: a short-term investment, which 34 (48.57%) answered with yes. 22 (31.43%) participants thought of cryptocurrencies as a long-term investment. Only 24 (34.29%) stated that they saw cryptocurrencies as a new method of payment. This is especially interesting because Nakamoto’s (2008) initial goal was to invent a new payment system. In addition to the given answers, the participants had the possibility to express their own thoughts. The given answers included statements like: take power from the government and banks”, currency without centralized control”, speculation” and insights into Blockchain technology”. 11 (15.71%) participants saw themselves not gaining anything from cryptocurrencies. Krugman (1984) defines money as an asset that fulfils three purposes. (1) It can be used as a unit of account: money provides the terms in which prices are quoted and debts are recorded. (2) It operates as a medium of exchange: money is the medium to buy goods and services. (3) It functions as store of value: money is a way to transfer purchasing power from the present to the future. All three requirements are fulfilled by cryptocurrencies. In an expanding number of places, cryptocurrencies are accepted as payment methods. Cryptocoins or the data of the ownership of cryptocoins are stored on servers and will not rot or get destroyed and can be used for transactions in the future. The purchasing power of one coin changes over time, but the same is true for other national currencies. Prices of goods and services can be labelled in cryptocurrencies. As pointed out by Gandal & Halaburda, (2016), cryptocurrencies may be purchased as a financial asset or a currency. They argue that the majority of investors see cryptocurrencies as a financial asset, which was also confirmed by the observed data. National currencies fulfil all of Krugman’s definitions for money. In addition currencies can be traded in the foreign exchange markets around the globe fulfilling the function of a financial asset. In my opinion cryptocurrencies fulfil also Krugman’s (1984) requirements for money and can be traded as financial assets on various exchanges. Thus, it is not possible to classify them only as money or financial asset.

Über den Autor

Michel S. Scharnitzki studied Economics in his undergraduate at the University of Heidelberg. He started working part time at one of Germany’s largest banks following a semester abroad in California. After his graduation he decided to pursue a Gap Year in order to gain extended work experience in Investment Banking, Corporate Strategy and Asset Management. Scharnitzki went on to do his MSc in Quantitative Finance at the Strathclyde Business School in Glasgow. Beside his interest in decision making processes he also spends time studying the alternative markets and the impact of technological developments on the capital markets.

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