Pioneers or Gamblers, what are the Motivations and Beliefs of Dutch Crypto-investors?

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Pioneers or Gamblers, What are

the Motivations and Beliefs of

Dutch Crypto-investors?

2018

Pepijn Veerman (10819150)

Pepijn.veerman@student.uva.nl

University of Amsterdam

Master Thesis Political Science

-Political Economy-

June 2018

Supervisor: Prof. L. Linsi

2

nd

_{reader: Prof. D. Mügge}

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“

We are all far less rational in our decision-making than standard economic

theory assumes. Our irrational behaviors are neither random nor senseless:

they are systematic and predictable. We all make the same types of mistakes

over and over, because of the basic wiring of our brains.”

(Ariely, 2008)

Abstract

This thesis provides insights in the motivations and beliefs of Dutch crypto-investors. Since the increased interest in the topic last year, a lot was written about the people buying cryptocurrencies. Cryptocurrencies are often seen as a new form of money, but how do they fit in the definition of money? The theoretical framework of this thesis discusses different forms of money and where cryptocurrencies fit in the definition of money. Besides, predictors for several attitudes and beliefs in relation to cryptocurrencies are discussed in order to answer the research question. Finally, this thesis intends to answer the overarching question if there are differences in views and beliefs between the Dutch population and crypto-investors. By means of a survey, different questions, based on the perks of cryptocurrencies, regarding political views, trust in institutions and views regarding e-privacy were answered.

The most striking outcomes of this thesis were the lack of trust of crypto-investors in both the European Central Bank, while they do not differ in trust in political institutions compared to the Dutch average. This implies trust issues with the current financial foundations.

There were no opposing views regarding privacy related issues, but crypto-investors indicate to use software in order to prevent being monitored way more often. Also, because advantages for globalization and trade by using cryptocurrencies, respondents were asked about their views on globalization and free trade. The results show a very positive view on free trade compared to their fellow citizens. Even though their political preferences differ in terms of party voting for, the crypto-investors have very similar views regarding the aforementioned topics, which is noteworthy.

On the other hand, the opinions on regulations regarding cryptocurrencies were divergent. 43% of the respondents saw need for regulations, while 40% indicated that there should be no regulation. However, generally they were very positive about the future of Bitcoin in terms of the value in five years and the amount of transactions globally. In the discussion of this thesis, advice for further research is provided.

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1. Introduction

On the 17th_{of December of last year, one single Bitcoin was traded for $20.089,-, an all-time}

high as of today (coinmarketcap.com, 2018). This milestone was a result of an increased interest in cryptocurrencies by the media, economists, politicians, but the man in the street as well. During the peak of Bitcoin in December 2017 and January 2018, according to research institute Kantar, around 500.000 people in the Netherlands invested in Bitcoin and/or other cryptocurrencies (Multiscope, 2018). This comes down to around 3% of the population. Although statistics in relation to cryptocurrencies are usually estimates, the interest of the Dutch population regarding cryptocurrencies is considered high compared to other European countries (Google Trends, 2018). Recent research into the Dutch crypto-investors led to some insights in the population of Dutch crypto-crypto-investors. The average crypto-investor is a highly-educated male between 25 and 35 years old and did invest on average less than €2.000,- (Multiscope, 2018). Although these outcomes are valuable in getting a picture of the Dutch crypto-investor, it is important to take a deeper dive into this. Motivations for people to invest in a currency beyond the governmental bodies are of great importance for economists, policymakers and social scientist. Crypto-investors are often pictured in the media as risk-takers, sometimes gambling with money they cannot afford to lose. They are not in it for the technology but driven by greed (The Guardian, 2018) (Coppola, 2017). But are there more powers in play than just people wanting to make money? Does the Dutch crypto-investor diverge from the rest of the Dutch population in terms of views, attitudes and beliefs? Do they have less faith in institutions, both financial and political? What were the main reasons for those people start investing in cryptocurrencies? And how do they see the future of the rapidly changing world of cryptocurrencies? By means of a survey among crypto-investors, after which some of the outcomes will be compared to the Dutch average, this thesis intends to find answers to those questions. The conclusions will be used in order to answer the overarching research question of this thesis:

‘Pioneers or gamblers, what are the motivations

and beliefs of the Dutch crypto-investor?’

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Money always have been at the core of societies. From the earliest records of mankind with uncomplicated social and economic structures to the complex financial system as we know of today, money was at the center of human interaction (Ritter, 1995). The theoretical framework of this thesis will provide in an extensive summary on the history of money and the different definitions of money. In general, there are two types of money, commodity and fiat currencies (McLeay, et al., 2014, pp. 4-6). The main distinction between those two can be made by the way money is valued. Commodity money is money with a certain intrinsic value, for example silver coins or money which is backed by a gold standard. Fiat currencies are currencies backed by a governmental body which used its power to valuate and devaluate the currency in favor of it economy, but with the absence of an intrinsic value of the currency itself (Ibid. 12). The aspect of trust in both of those forms of money is substantial, especially for the latter people need to trust institutions and need other people to do the same. Do cryptocurrencies, without a regulating actor involved, fit somewhere in the spectrum of money and if so, how and where?

Cryptocurrencies are decentralized digital currencies, operating on the blockchain, which can be used as a medium of exchange. Every transaction is being controlled by a network of users. Besides, due to the public ledger on which the complete history of transactions is stored, the possibility of double-spending or fraud within the transaction is extradited (Grinberg, 2012). The revolutionary technique behind cryptocurrencies, but as well the immense return on investments of cryptocurrencies in the last years attracted a lot of people to invest in cryptocurrencies. Money was moving from the mainstream currencies into cryptocurrencies, being questioned, critiqued or praised by all kind of stakeholders (The Guardian, 2018) (Bergman, 2018). The three most discussed perks of cryptocurrencies are the fact that there is no financial or governmental institute involved in the distribution of cryptocurrencies, the technique is revolutionary as said above and in favor of a global economy, besides the privacy in transactions for some of the cryptocurrencies is a praised characteristic (Bjerg, 2016). Therefore, by taking those perks into account, one would argue that people investing in cryptocurrencies are positive in relation to subjects related to globalization and world trade. Besides, they are more in favor of innovation and more aware of their (e-)privacy. On the other hand, the fact that the returns on investments were high

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and the main media coverage of cryptocurrencies was about this aspect, one could argue people are only investing to make money out of it. The theoretical framework of this thesis will therefore focus on the determinants and predictors for political and economic attitudes and behavior and for views in general as well. From these theories, hypotheses according the motivations and attitudes of crypto-investors will be composed.

To build up to the conclusions in order to answer the overarching research question, this thesis is divided in several chapters. First a theoretical framework and literature overview will be provided. This chapter will mainly focus on the definition of money and accordingly how cryptocurrencies fit in the definitions of money. Besides, this chapter will focus on the determinants known within the political economy and social science to predict people’s attitudes and beliefs, both political and economic. Other literature in relation to the topic of trust and confidence in both currencies, commodities, financial institutions and cryptocurrencies will be covered as well. Subsequently, the methodology and hypothesis of the research will be provided. Hereafter, the results of the survey, will be analyzed. Finally, conclusions and discussions drawn as a result of this research will be provided and recommendations for future research will be given.

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2. Literature & Theoretical Framework

2.1 Money: From Barter to fiat

From earliest times recorded, money, in some form or another, is at the center of society. It determines policies on both political and economic level of all governments around the world. Money is therefore equal to power and thus it shapes the history of mankind. Although everyone knows to a certain extent what money is, the use of money is so ordinary that the question ‘What is money?’ is not asked too often (Smithin, 2002). In order to answer this comprehensive question to some extent, there will be a brief summary provided on the history of money in the following chapter. Accordingly, the current forms of money as we know of today and their use-cases will be explained.

Most economic textbooks state three core functions of money (e.g. means of exchange, store of wealth and as a unit of accounting), but the first one (means of exchange) is mainly what once drove the rise of money. As stated by Aristotle (Hermele, 2014, p. 6):

“Exchange […] is of natural origin, arising from the fact that some men have too much and others too little for their needs. […] The necessities of life are not all easy to transport: and so men agreed to employ among themselves, for the purposes of mutual exchange, something of intrinsic use and easily applicable to everyday requirements, such as iron, silver, or some other metal. The value of this material was at first determined simply by weight or size, but in course of time it was stamped to save the trouble of weighing and to indicate the amount it represented”

How did it become possible to exchange a piece of paper, money as we know in the current form, which has in itself no value, for goods or services? Philosophers and economist have a certain inconvenience in defining what money really is and how the value of money can be determined (Ritter, 1995). According to the traditional view on what money is, the so called Currency School, in which economist Keynes played a vital role, money is defined as a currency and demand deposits, after which its most important function is to act as a medium of exchange. In general, there are two types of money, commodity money and fiat currencies, in which the value of the currency is determined differently. Nevertheless, the preliminary definition of money, regardless of the type of economic school adhered to,

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money can be seen as anything that is widely used for making payments and accounting for debts and credits (Davies, 1994, p. 29)

2.1.1 Early days

According to the modern science of political economy, under primitive conditions, men lived and will live under barter. But, as life becomes more complicated, barter is no longer sufficient as method of exchange. But, barter was at the core of the development of the exchange of goods and services, and eventually led to the development of money and related financial institutions as we know of today (Davies, 1994, p. 9) (Smithin, 2002, p. 1). Barter is the direct exchange of goods for mutual advantage between two parties, without the use of money. According to the earliest records of mankind, the history of barter is as old as mankind himself. In the simple moneyless communities in the ages of prehistory, but as well in the primitive moneyless communities in more modern times, barter was seen as the best method of trade between two or more parties (Davies, 1994). If a farmer produces enough milk to provide for his family, but does not have enough grain to make bread, while another farmer faces the opposite, there will be trade. How much milk will be exchanged for a certain amount of grain is up to the farmers themselves, but there is no need for the intervention of a third party (money) to ease the trade (ibid.).

But, due to increasing extent and complexity of both life and trade, the scope of barter was exceeded. Therefore, there was need for a certain barter item which could be used as a medium of exchange, but still could be used for the primary purposes as well (Ritter, 1995, p. 134). Usually commodities were chosen by the community in order to overcome the problems of barter exchanges. Those commodities needed to meet certain qualities to be useful as medium of exchange, for example because they were easily stored, they had high value densities or they were more durable. In different points in history, different kinds of commodities were used as medium of exchange. By having a certain exchange rate between those commodities, it was possible for people to use the commodity as ‘money’ in order to exchange them (Davies, 1994). But again, if trade gets more complicated and more commodities are in play, it becomes more difficult to hold on to fixed exchange rates between commodities (Smithin, 2002). If there is trade between three commodities, there are only three exchange rates. So if any of the commodities increases or decreases in value, three rates have to be adjusted. But, if there are for example six

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commodities in play, there are already fifteen different exchange rates. Thousand commodities, will lead to almost 5.000 exchange rates, which makes it almost impossible to adjust over time (Davies, 1994, pp. 15-17). Ironically, the establishment of markets in which commodities were traded, eventually led to the eruption of the problems related to commodities as described above. Besides, by the development from primitive societies to more complex ones, with a more complex economy, there are more reasons for a change in the commodity based trade. Because life became more complex due to intensified trade within and between communities and societies, there was need for authorities and hierarchy (Ritter, 1995). Those authorities needed to raise taxes, pay their soldiers and control the societies. To overcome the practical problems to do so, there was need for one single commodity which acted as money, so called commodity money. A compelling example of a commodity money as such is salt. Roman soldiers during the roman empire were paid in salt (‘sal’). This is where the word ‘salary’ find its origin (Rokade, 2013).

2.1.2 Money

Commodity money is a particular type of currency in which the value of the currency is determined by its intrinsic value. In other words, the value of the currency comes from the material of which the currency is made (McLeay, et al., 2014, p. 12). Commodities as such are gold and silver, whose value is mostly based on the scarcity of the commodity. Gold and silver are the longest reigning and most well-known form of commodity money (Mises, 1953, p. 59). If a currency is backed by a certain commodity, such as gold, they are defined as representative money. A system as such is comparable to the use of commodity money, although there is need for a more regulated system in which the ‘worthless money’ can be redeemed by a central authority in exchange for the commodity. In this system for all the money in circulation, a central authority stores the same value in commodities (Andrei, 2011).

Since 1200 on, all throughout Europe, there were monetary authorities. They claimed their coins or currencies to be a legal tender and therefore a unit of account and a method of exchange (Mises, 1953, pp. 60-70). Most of the countries used a system comparable to Britain’s, generally a duodecimal unit of account. For example, in Britain, 1 pound sterling equaled 20 shillings or 12 pence. The Groat (a small silver coin) was valued at 4 pence. The values of those coins were defined by means of their metal (gold or silver),

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fineness (carat for example) and their weight. Although the monetary authority, usually the monarch, ran the mint and had the authority to define the unit of account and if not, they charged fees for running the mint, the value of the coin was determined by the coin itself (Redish, 1993, pp. 778-779). This leads to several advantages in the financial system. The perks of commodity money as described by Lapavitsas (2000):

[…] “Commodity money can allow obligations to be deferred, adequately settling them later, commercial (or trade) credit becomes possible and several forms of credit instruments can emerge, most notably the bill of exchange. The ability of commodity money to settle debts (and the existence of commercial credit instruments and institutions) also makes possible the systematic advance of banking (or monetary) credit, i.e., the lending of money on condition of repayment (plus interest). Commercial and banking credit relations, pivoting on (and structured by) the process of industrial and commercial accumulation, are the mainstay of the capitalist credit system.”

Over time, problems arose according to commodity/representative money. The fact that the commodities such as gold increased in value made it more difficult to adjust it to smaller amounts. Increase of population, which led to bigger economies, increased the demand of money as well. In order to overcome the several practical issues of commodity money, monetary regimes made the shift to representative money. Representative money is based on the same idea of commodity money, namely intrinsic value within the currency. But instead of having intrinsic value in the currency itself, the money was backed by a certain commodity. So for every amount of money in the economy, there was a certain commodity (mostly gold) stored by the monetary authority, so there was never more money circulating compared to the value stored. A gold standard, in which a currency is pegged to gold, is the most common form of representative money.

After the Second World War, the Bretton Woods agreement of monetary management was signed by the USA, Canada, Western-Europe, Japan and Australia (Bordo, 1993). In the interwar period (1919-1939), mistakes were made to overcome the economic problems after WW I. Due to widely fluctuating exchange rates, collapse of the gold standard and trade restrictions imposed by several countries, large scale deflations and inflations, resulting in economic crises, arose. Several scholars argue that the economic issues led to the populistic outbreak and the following second World War (Polanyi, 1944). To

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avoid the same mistakes, 44 allied nations came together during the end of the WWII (Bordo, 1993) (Garber, 1991). In order to govern the monetary relations among those independent states and mainly rebuild the global economy after two World Wars, they agreed upon a system in which those countries maintained their external exchange rates within one percent, due to tying their currencies to gold and by pegging to the US dollar (which relied on a gold standard itself).

The Bretton Woods agreement led to the establishment of several financial institutions regulating the pegged system, with the International Monetary Fund as foundation. The pegging to the U.S dollar and the gold standard was mainly in order to maintain a certain stability in the global economy (Bordo, 1993, pp. 5-6):

“According to the traditional view, adherence to a (commodity-based) fixed exchange rate regime, such as the gold standard, ensured long-run price stability for the world as a whole because the fixed price of gold provided a nominal anchor to the world money supply. By pegging their currencies to gold, individual nations fixed their price levels to that of the world. The disadvantage of fixed rates is that individual nations were exposed to both monetary and real shocks transmitted from the rest of the world via the balance of payments and other channels of transmission. Also, the common world price level under the gold standard exhibited secular periods of deflation and inflation reflecting shocks to the demand for and supply of gold. However, a well-designed monetary rule could avoid the long-run swings that characterized the price level under the gold standard.”

After 1971, the dollar was no backed by the federal gold reserve of the United States and the currencies of the allied countries were no longer pegged to a gold standard and the U.S. dollar as well. Therefore, those currencies altered into fiat currencies (Garber, 1991).

2.1.3.Fiat currencies

Commodity currencies have been stood against fiat currencies in the history of the debate among economist regarding money. As described above, after the fall of the Bretton Woods system in 1971, the gold standard was abandoned (Garber, 1991). The dollar, as the global currency standard at the time, was not completely backed by the federal gold reserve anymore, which made the currency on its own ‘worthless’. The following paragraph intents to explain how fiat currencies, currencies without a certain intrinsic value or being backed by a certain commodity, work and what role trust plays within a system as such.

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A currency is called a fiat currency if a government or a governmental organization declares the currency, which itself does not have an intrinsic value, as legal tender. The assigned value of the currency is imposed by the government, which uses its power in order to valuate or devaluate the currency, in favor of its economy. If the potential users of the currency do have trust in the assigned agents who regulate the money and even more important, trust the fact that others will do the same, the currency will be used for the aforementioned functions of money. George Simmel, who wrote an influencing article on the valuation of currencies, was more a social philosopher instead of an economist. Nevertheless, his book on the sociological dimensions of the emergence and development of money and the thereto related economy, has been of great influence. According to Simmel, the basis to any monetary order, is trust:

“[…] cannot develop without public confidence in the issuing government, or perhaps in the real value of the coin in relation to its nominal value. The inscription on the coins of Malta non aes sed fides [not metal but trust] indicates very appropriately the element of trust without which even a coin of full value cannot perform its function in most cases”

Those conclusions by Simmer are not only related to fiat currencies, but to commodity and representative money as well. Trust is a vital for a currency in order to succeed. Simmel further develops his argument in order to understand fiat currencies completely, because why would people trust fiat currencies if there is already a trust building problem within commodity money systems?

Austrian School economist, who prefer commodity or representative money over fiat currencies, have warned governments and other economist about the far-reaching consequences of central banking systems based on fiat currencies instead of holding to a gold standard or another commodity (Huerta de Soto, 1995). One of their biggest concerns is the fact that markets as such can easily be manipulated to ones favor. Besides the obvious disadvantages of this system such as inflation and debasement of the currency, wrong signals can be send to investors by adjusting interest rates and easy credit (Hayek, 1976).

The perks of fiat currencies by means of the possibility to adjust the exchange rates and take other measures in the best interest of the economy are historically proven. But,

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this does not take away the fact that especially during those crises, there are trust issues by those who use the currency. Trust in money can, at the core, be subdivided in three different dimensions. The first is related to the liquidity of money, the trust that monetary promises will be kept and the agreed debts will be repaid on time. Secondly, the acceptability of money is what needs to be trusted. People need to trust the fact that money will be widely accepted as a legal means of payment. The third dimension is related to the stability of money (Alexander, 2012) So, for a currency, in order to be widely used, people need to trust that the value of the currency relative to other goods will remain constant, at least to a certain extent, over time. One could argue that the value of a fiat currency lies within the trust people have in the monetary institutions responsible for the mint, distribution and other monetary policies in relation to the currency. Trust therefore manifests itself as a vital feature of money and the thereto related monetary policies. Some argue that cryptocurrencies can be used to overcome the trust related obstacles for money. Due to this technological development, transactions on itself can be more secure. Besides, the need for monetary authorities reduces because of cryptocurrencies according to some. In order to understand how cryptocurrencies work and how they fit in the definition of money, the next chapter will provide in an extensive explanation of cryptocurrencies.

3. Cryptocurrencies

There are currently more than 1590 cryptocurrencies in circulation according to coinmarketcap.com (coinmarketcap.com, 2018). The one with the highest market cap is Bitcoin. Bitcoin is a peer-to-peer electronic, decentralized, partially anonymous payment system that operates as independent. Besides, they can be used to make micro-payments, Bitcoins are highly liquid, can be send over the internet in a fraction of the time of a regular bank transaction with lower transaction costs. Proponents of the technology argue that, due to those characteristics, Bitcoin can be an ideal currency for mainstream global adoption (Bjerg, 2016). Satoshi Nakamoto, the anonymous developer(s) of Bitcoin, published a paper in 2008 explaining the concept of Bitcoin to the public. The paper was titled ‘Bitcoin: A Peer-to-Peer Electronic Cash System’, which led to the first Bitcoin software in January 2009, the point in time when the first Bitcoins came into circulation (Turpin, 2014, p. 337). Both

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supporters and opponents argue whether Bitcoin can be seen as money or not. The Bank of England published a report on cryptocurrencies and asked this question in relation to the economic theories:

[..] From the perspective of economic theory, whether a digital currency may be considered to be money depends on the extent to which it acts as a store of value, a medium of exchange and a unit of account. (Ali et al., 2014: 276)

3.1 Technology

The technological framework of Bitcoin is based on a chain of digital signatures that is stored in a digital ledger installed on the user’s computer. The wallet on his computer generates, controlled by an algorithm, keys used for sending and receiving coins. A transfer of Bitcoins can be arranged by sending them from one private key to another, hereafter the Bitcoin is stored on the private key of the receiver. After the coin is send, it appears in the recipient’s wallet with a recorded history of transactions, including the most recent one. The problem with a digital system as such that it used to be impossible to control for double spending (Bjerg, 2016, pp. 54-56). The technology of Bitcoin counters that problem by having an open source public ledger in which every transaction of a Bitcoin is recorded. A transfer as described above is recorded on the public ledger with a time stamp and bundled with other transactions to form a so called block. After a transaction is proposed by a user, other users of the Bitcoin network are making their computer power available to check for the transaction (Turpin, 2014, pp. 337-338). This check can be seen as a race between computers in order to check for the validity of the transaction (if the Bitcoin is not spend twice). The computers who ‘wins’ this race of validating the transaction by checking the complete open source ledger on double spending, is rewarded with a certain amount of Bitcoin. This is called mining, making CPU power available in order to control transactions and being paid for this service afterwards. The creation of Bitcoins is limited to a maximum of 21 million Bitcoins. After this number is reached, the creation/mining of Bitcoins is terminated and transactions will be paid for with already existing Bitcoins (Bjerg, 2016). Thus, instead of transactions being checked by banks, who are in charge of big centralized ledgers with all the information stored in order to verify transactions, in the decentralized network of Bitcoin, transactions are verified by its users. Because the absence of a central

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authority, it is impossible to hack the system, every transaction is controlled by the complete network. So, in order to commit fraud or manipulation, more than 50% of the computers in the network must be controlled. This is called a 51% attack, which is merely hypothetical

Taking the definition of money as stated above into account, can Bitcoin or other cryptocurrencies with the same technological framework be seen as money? Over time, a lot of countries see Bitcoin and cryptocurrencies differently. The Internal Revenue Service in the United States stated that Bitcoin is a form of barter, based on the market-oriented approach (Ciaian, et al., 2016, p. 884). Recently, a federal judge in the U.S. adjusted this statement slightly and declared Bitcoin a commodity. Finland considers Bitcoin as a (priced) commodity as well, where Germany sees bitcoin as a private currency. Other EU member states are still reserved in making statements concerning cryptocurrencies. The financial institutions in Europe define Bitcoin as a virtual currency (Ciaian, et al., 2016, p. 884).

The way bitcoin works, by being able to send Bitcoins with a certain value over the network to other users, it can be used as a medium of exchange. Because there is no gold or other precious metal backing Bitcoin and the current value of Bitcoin is fluctuating considerably compared to traditional currencies, the store of value of Bitcoin can be called into question. The core aim of Bitcoin is being a form of money without relying on trust in a central authority. Besides the technological framework of Bitcoin, this is the main radical difference from fiat currencies issued by a governing authority. Because there is no central authority as such the amount of Bitcoins is limited, it is not possible to make adjustments to the exchange rate. Because the market is currently in its first stage, some economist argue that the value of Bitcoin will stabilize if the market grows and becomes more mature (Homeland Security, 2014). If so, a broader adoption of Bitcoin will be achieved, what will lead to Bitcoin being a unit of account as fiat currencies we know of today are (Ciaian, et al., 2016, pp. 915-917). Nevertheless, currently Bitcoin fails to meet two of the three criteria in the traditional definition of money (Yermack, 2015). Ciaian et al. provided this overview in order to compare Bitcoin to standard currencies (Ciaian, et al., 2016, p. 889):

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16 Figure 1 BTC characteristics of Bitcoin with respect to standard currencies

The transaction costs and anonymity and privacy of cryptocurrencies, the major perks of cryptocurrencies, will be made clear in the following paragraphs (Ciaian, et al., 2016, p. 884). Afterwards, there will be a chapter dedicated to the expectations which people invested in cryptocurrencies and why. This will done on the basis of the characteristics of cryptocurrencies.

3.2 Global transactions

Currently, there are several possibilities to send money around the globe. International bank transactions, sending physical money or using transactions systems such as PayPal are possible solutions in order to do so, but all have their flaws. The transactions are not safe (for example: double spending, hacking or looting), the transactions are time costly or the transaction costs are very high (Turpin, 2014). Cryptocurrencies tackle most of those problems, but the discussion if bitcoin can become a global currency is present within economics. The reasons why Bitcoin can be a global currency are well elucidated by Ciaian et al (2014):

“In particular, BitCoin may have a high relative comparative advantage with respect to standard currencies in countries with unstable financial system (e.g. in developing countries), and may provide an alternative to standard currencies in countries with poor and not widely available financial services, nonconvertible currency, expensive financial services and high administrative burden in opening an account. In addition, BitCoin may represent a cost-effective remittance system in developing countries, were traditional

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transfers are very expensive and the banking system is underdeveloped and unsecure. Given that BitCoin transfers can be done with relatively minimal cost and resource requirements and are independent of geographical location or banking system in place, they are ideally positioned to serve as an efficient international remittance system.”

In addition:

“[..] Given that BitCoin transfers can be done with relatively minimal cost and resource requirements and are independent of geographical location or banking system in place, they are ideally positioned to serve as an efficient international remittance system” (Ciaian, et al., 2016, p. 916).

Bitcoin, or another cryptocurrency with similar features, would therefore be very suitable for global transactions. The process of globalization, especially for countries with currently an backlog, could be eased by the adoption of cryptocurrencies. Economist argue that if cryptocurrencies are more widely adopted, there is need for regulations as well (Swartz, 2015, p. 335). Others say that especially in countries with underdeveloped banking systems and/or corruption at place, no regulation is in favor of the users. If current investors are indeed more positive about globalization, because of the possibilities of cryptocurrencies. This will be one of the questions answered in this thesis.

3.3 Privacy

Besides the advantage of fast and safe transactions compared to traditional currencies, the privacy of transactions on the blockchain another perk of cryptocurrencies. For bitcoin, the ledger of all transactions is public. Therefore, one would argue that there is no privacy within transactions on the blockchain. But, in contradiction to regular bank transactions, there is no need for a certain identification of the participants of the transaction (Turpin, 2014). As explained in the previous paragraph, the transactions on the Bitcoin network are trust free in the sense that there is no risk of double spending and because transactions need to be confirmed by the network, fraud is practically impossible. But if a wallet address is linked to someone’s identity, all transactions are public. Therefore, there are several cryptocurrencies such as Monero, Verge, Dash and ZCash, who adjusted the technological framework of Bitcoin in the favor of privacy. Most of the privacy coins use some sort of

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encryption of the public ledger, which keeps the principle of the transaction the same, but the public ledger is encrypted. There are as well other solutions for more privacy within the transactions, such as address scrambling methods (White, 2018).

3.4 Disadvantages

Disadvantages of cryptocurrencies are widely discussed in the literature as well. The fact that there is no central authority in charge, besides for most countries there are zero to none regulations implemented, critics say cryptocurrencies are not sustainable. Because of criminal activities, tax evasion and other risks, there is need for authorities to control for transactions and other activities (Homeland Security, 2014, pp. 18-21).

In the previous paragraphs the safety of transactions on the blockchain compared to conventional systems was discussed. Nevertheless, there is a problem with the security of exchanges and wallets on which people trade and store their cryptocurrencies. This means that the transactions are safe, but the accounts on centralized exchanges are not (Medium.com, 2018). The most well-known hack as of today was the hack of Mt. Gox, a centralized crypto-exchange. Till the hack in 2014, Mt. Gox was handling almost 70% of the Bitcoin transactions worldwide. In February 2014, Mt. Gox announced that 850.000 Bitcoins stored on their exchange were missing (Norry, 2017). The current value of those Bitcoins is approx.. 7 billion dollar (coinmarketcap.com, 2018).

Also the scalability of the currencies can be problematic on the long term. The fact that the amount of coins in circulation is often limited by their algorithm is what some praise as one of the perks of cryptocurrencies. But, some economist argue that scalability and bringing more coins in circulation is sometimes necessary, although for the public this is no popular believe (Homeland Security, 2014, pp. 18-24).

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4. Predictors on attitudes related to cryptocurrencies

As described in the previous chapter, there are several characteristics of cryptocurrencies which differ from traditional forms of money. Three major perks of cryptocurrencies were extradited, namely the fact that there is no need for trust in institutions in order to do transactions, transactions are faster than transactions in the current system (especially for global transactions) and the privacy within transactions is secured due to certain algorithms. Therefore, one would argue that investors in cryptocurrencies are likely to have certain motivations and characteristics based on the perks of cryptocurrencies over regular currencies. As later on described in the hypotheses of this research, cryptocurrency investors are expected to have less faith in current financial institutions, are more open to liberal values due to the positive aspects of cryptocurrencies for globalization and trade, but are also more open to technological development and innovation. Besides, people investing in cryptocurrencies are more aware of their (e-)privacy. In the contemporary literature, a lot is written about predictors for people to have characteristics as such. In the following paragraph, besides the literature on the predictors for (e-)awareness, liberal values and attitudes towards innovation and science, the main literature on (predictors of) political views and preferences will be discussed.

4.1 Trust in government and financial institutions

As seen in the previous chapter, trust in political, financial and governmental institutions is vital for fiat currencies to exist and perform properly. Besides, trust in institutions will lead to more social coherence, which in his turn positively affects economic trust, growth and productivity. Therefore, it is important to look at the developments on trust in those institutions.

Trust and institutional trust has been at the center of sociological research, although its definition is a point of much debate. Sabel (1993) argues that the definition of trust is ‘the mutual confidence that no party to an exchange will exploit the other’s vulnerability’, with an institution having good intentions and reasonable competence (Sabel, 1993, p. 1133). According to Simmel, trust in money and the related institutions consists of “a weak form of inductive knowledge,” based on a favorable assessment of probabilities of future events, and an element of almost religious “faith” in the ability of higher-order social institutions to assure the validity of money (Simmel, 2004). Based on statistics and literature

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on institutional trust, there is a long-term trend of decreasing trust in institutions within the Western world. Therefore, in contradiction to times of socio-religious compartmentalization, institutional trust can no longer be taking for granted. Building trust in institutions, is now at central importance of those institutions. Events affecting trust on the short term, such as economic crises or political scandals, but as well the expected long term welfare of the population are of great influence on the institutional trust (Dekker & Gesthuizen, 2015). As mentioned, the long term expectations of someone’s own welfare, besides the short-term political and economic events, are predictors for trust. But, there are more common denominators of great influence on one’s trust in institutions. According to the socio-cultural model, political and institutional trust of citizens is achieved by political socialization. This is an extension of interpersonal trust, so to what extent someone trust somebody else. Furthermore, predictors for trust which are used often are the level of education and age. Younger generations show more trust towards institutions because of a greater internalization of democratic principles, although some of the literature deny the influence of age on institutional trust (Weber & Saris, 2016). Predictors for political views and behavior are similar to the predictors for institutional trust, in the paragraph on predictors for liberal values those predictors will be further elucidated.

Similar to the trend in the Western world, the political and institutional trust within the Netherlands is decreasing over the last decade, which is driven by the financial and Euro-crisis. Nevertheless, compared to other European countries, the trust in the Netherlands in politics, the democracy and institutions is above the European average (Dekker & Gesthuizen, 2015). According to statistics provided by the CBS (Centraal Bureau voor de Statistiek), since the financial crisis in 2008 and the subsequent Euro-crisis Dutch people have less faith in the (financial) institutions on the national and European level (Centraal Bureau voor de Statistiek, 2018). In the literature, trust of people in a currency relies on the institutional mechanisms, in particular the interaction between the assigned agents of monetary trust (in this case the European Central Bank) and the actors in society who have influence on the economy and society (Kaelberer, 2007). Although the European Central Bank argues that their actions are necessary and in favor of the stability of the Euro , people in the Netherlands lost trust in the ECB and the Euro over the last 9 years (Centraal Bureau voor de Statistiek, 2017) (TNS opinion & social, 2017). Taking a closer look at the

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statistics, with the aforementioned determinants for trust taken into account, age and level of education are influencing ones trust in political and economic institutions in the Netherlands.

4.2.1 Commodities and other assets in times of distrust

If people lose trust and confidence in fiat currencies, historically seen, they are more willing to put their fiat money in commodities. For example during and after the recent financial crisis in 2008, there was a higher demand for gold (Anon., 2018). Although there is less demand for commodities such as grain or oil during times of recession (and therefore a lower price for those commodities), some of them, such as gold, keep their intrinsic value in contradiction to fiat money (Ceccheti, 1992).

Although the fiat currencies have historically proven to be favorable over commodity money in times of financial crises, due to the possibility to take measures such as devaluation or influencing exchange rates, there are several socio-economic forces which drive the demand for alternative currencies. Technological development makes it possible to create currencies over the internet, which will be elucidated in the following chapter. Historically seen, the first stages of revolutionary technological development as such is accompanied by a certain hesitation from society. Mainly because of the lack of knowledge according to the development, people are more likely to have negative attitudes towards forces driving technological development.

4.2 Economic attitudes

In western philosophy, the core explanation as driver of human behaviour always have been self-interest. Socio-economic attitudes can be explained by ones feeling how the socio-economic subject will influence their life. The neoclassical socio-economic theorist therefore assume that people will consider the possible outcomes of social-economic forces and rationally choose their opinion on those topics by taking the, mostly economic, consequences into account. Even if people do not have the full and relevant information (as assumed by the neoclassical theory), their attitude still will be shaped by their own interest. Nevertheless, it is not only self-interest what drives people’s attitudes, the sum of public good or interest can be higher than the individual interests added up. Nevertheless, regarding attitudes towards globalization and free trade from the economic perspective,

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people tend to base their opinion mainly on the economic consequences of the force on their individual situation.

Globalization is complex and became a broad concept with several different meanings. Most of the research within social science use the dominant approach to globalization, the economic approach (Bascu, 2007). Globalization, in terms of the economy, is defined by the United Nations as ‘the increasing interdependence of world economies as a result of the growing scale of cross-border trade of commodities and services, flow of international capital and wide and rapid spread of technologies’. Two main drivers for economic globalization, especially since end of the last century are the development of science and technology and production chains being more cross-border due to the spread of market economies. The advancement of science and technologies led to a decrease in costs for production, transportation and communication around the globe. If those advancements of technology are seen as the technological driving force of globalization, market reforms must be seen as the institutional driving force. Because of lowering or total removal of tariffs and barriers for trade, under the framework of the WTO and GATT, more countries are open for trade with other countries without restrictions (Shangquan , 2000, pp. 1-3). Besides an economic side, globalization entitles a cultural and political side as well. The cultural side is often referred to as the amalgamation of cultures around the globe, the political side is often referred to as the spread of the dominant liberal democracy around the world . Because of the fact that the term globalization is a broad concept with different meanings for people, free trade is subjoined to the concepts in relation to liberal values as well.

The concepts of globalization and the thereto related free trade play a role in the political debate, because attitudes of people towards those forces differ widely. Because cryptocurrencies are seen as a tool for faster and more secure global transactions and free trade fits in the concept of global transactions, they fit in the concept of globalization (Grinberg, 2012). Therefore, one of the hypothesis of this thesis will be ‘crypto-investors have more positive attitudes towards liberal values such as globalization and free trade’. It is useful to take a look at the predictors for these attitudes, what kind of people can be expected to be more open and? Do crypto-investors fit in this picture? Because of the need for control variables in the analysis of the survey, this question is relevant as well. According

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to research done by Wolfe and Mendelsohn, main predictors for attitudes towards economic globalization are the level of education of the respondent. Higher educated people tend to have a more positive view towards globalization compared to others. Also, age is a predictor for someone’s view towards globalization. It negatively correlates with a positive attitude towards globalization. In other words, the younger someone is, the more positive he or she is about globalization. Although gender is a predictor for other social and economic topics, there is no significance between males and females in attitudes towards globalization. Hiscox argues income is a predictor for openness to globalization as well. People with higher incomes are in general more competitive in open markets. The factors level of education and income can be explained by the earlier presented idea that attitudes and human behaviour are mainly shaped by self-interest (Hainmueller & Hiscox, 2006). Ariely (2008) and Walter (2010) argue that people will oppose globalization if they think they will be on the side of ‘losers’ of globalization . Attitudes towards free trade, so trade without any barriers or tariffs, are similar to attitudes towards globalization. Although those attitudes are mostly similar, according to Ariely (2008), attitudes towards economic concepts are shaped as well by values learned during ones youth, because of the political preferences of ones parents (Ariely, 2008).

Accordingly to attitudes towards globalization and free trade, there are certain predictors for views towards science, research and innovation. Over the years, ideas and opinions on the importance and value of innovation have changed (Leeuwis, 2004, pp. 791-793). People are in general positive about scientific and technological innovations. They see the benefits of innovation and technological development by means of improvement of the quality of life, better communications and health improvement. But, people are also aware of drawbacks of developments as such. For example data and privacy concerns (elucidated in the next paragraph), growing dependency on technological instruments, unemployment risks, effects on the environment or worsening of relationships are concerns of people regarding contemporary technological development (Eurobarometer, 2015, p. 3). As said, in general people are positive about the technological developments and innovations, but, also for this topic, there are some differences and opposing views within society. Understandably, concerns regarding unemployment due to technological developments are more occurring for people who are less competitive in a more technological advanced

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market. For example low skilled workers, which job can be replaced by robots in the future, have less positive attitudes in relation to innovation. Age is again a predictor for someone’s optimism towards innovation and science. Younger people grew up in the era of the internet and other technological revolutionary developments and are therefore more positive about this (Ibid.).

4.3 Privacy attitudes

Recently, there was an uprising in the public interest in e-privacy due to privacy scandals by big social media companies such as Facebook (Datenschutzconferenz, 2018). In the Netherlands there was a referendum on a proposed law regarding far-reaching authorizations for the government in obtaining data of citizens, which led to a public debate about online privacy as well (van der Pol, et al., 2018). This led to a public debate about the corporate responsibility regarding e-privacy and regarding the authorization for governments to obtain data of citizens, but as well people’s own responsibility regarding their privacy. Research showed people are not aware of what information they are sharing with companies and the government, but they are opposing once they know what they are sharing. The proposed law did not upheld in the Dutch referendum. The question for social scientist are if all the people have the same views and ideas regarding their privacy or are their certain predictors for people opposing companies sharing their data or governments obtaining it. Because cryptocurrencies are seen as a new form of money in which the privacy within transactions play an important role, one hypothesis for this research will question if people investing in cryptocurrencies are more aware of their e-privacy. Therefore, in accordance with the topic of globalization and free trade, it is necessary to look at predictors for awareness of e-privacy. According to , women are more aware of their online privacy compared to men (Dhawan, et al., 2014)

Also age is a predictor for attitudes towards online information sharing. Hoofnagle et al. (2010) conclude that younger people have an aspiration for an increased online privacy. This is remarkable, because according to their survey, younger people are less aware of the information they are sharing online. This contradiction shows that age is a predictor for attitudes towards, but not a predictor for knowledge of e-privacy (Hoofnagle, et al., 2010).

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Recap of theoretical framework and literature

The theoretical framework of this thesis intended explain the forms of money as we know of today. Both commodity money and fiat currencies were explained and placed within their historical context. For those types of currencies, the importance of trust in (financial) institutions was emphasized. This led to the paragraph on cryptocurrencies, an alternative and new form of money which caught great attention recently. Accordingly, institutional trust and the predictors for institutional trust were elucidated, because of the importance of trust for money. As mentioned, if trust in institutions decreases, people are more willing to put their money in alternative assets, commodities and currencies. Besides, due to the characteristics of cryptocurrencies it is important to look at the predictors for attitudes of people. In conclusion, age, level of education and to some extent gender and income are predictors for trust of people in institutions, attitudes and values towards liberal principles and their awareness and valuation of privacy related issues. This theoretical framework lays the foundation for the hypotheses further on in this thesis. The next paragraph will emphasize the relevance, both scientific and social, of this thesis and introduces the overarching research question.

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5. Cryptocurrencies in the Netherlands & Relevance

Cryptocurrencies are still barely regulated compared to the traditional financial powers (Bergman, 2018). In the Netherlands there are currently zero to none specified laws according to cryptocurrencies, besides the regular tax laws on wealth and income (Medium.com, 2018). Because cryptocurrencies are seen as commodities, barter or private money, one could argue there will be increased interest during recession or in times of distrust in the government and financial institutions. Because the exact numbers are not available on who invested in cryptocurrencies (mainly due to its private character), it is difficult to say where crypto-investors come from. But, according to numbers provided by Google Trends, the Netherlands is in the top-5 countries with Bitcoin related searches (Google Trends, 2018). Besides, research center Kantar estimates that 500.000 to 800.000 people from the Netherlands owned cryptocurrencies during the peak in January 2018. This comes down to approximately 5% of the population.

As aforementioned, people are more willing to invest in commodities in times of recession or crises, both political and economic. Besides, a lack of trust in institutions can be a predictor for someone to invest in a commodity. By taking a closer look at Google Trends, I analyzed the trends related with dissatisfaction in a countries political situation (i.e. corruption, warfare) and issues related to the economy such as inflation and economic crises (Figure 2). On the average, the top three countries interested in Bitcoin in the last five years scored very high on those search terms as well. In South-Africa, Nigeria and Ghana, there were both political and economic crises. Slovenia and the Netherlands are strangers in the midst, in terms of dissatisfaction, money issues and crises in relation to the search activity on Bitcoin (Google Trends, 2018).

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Slovenia declared itself ‘the silicon valley for cryptocurrencies’. By having an attractive tax climate and zero to none regulations according cryptocurrencies, several big companies in the crypto-scene chose Ljubljana as their home base (Blockchain World Events, 2017). This gives a reason for the difference with the other countries in the list. As for the Netherlands, there is no explanation as such available at first glance.

Figure 3 Google Trends

Therefore, it is relevant to take a look at the characteristics and motivations of those people. For what reasons did those people invest in cryptocurrencies? The reasons to invest in Bitcoin and the attitudes of those people towards institutions can have certain implications for policymakers in relation to Bitcoin, especially after the growth of the market last year. Seeing Bitcoin as a commodity such as gold or an alternative currency, outside of the existing governmental and financial structures, can imply those people have less trust in the economy and politics. Besides, due to the characteristics of cryptocurrencies, they are partially anonymous and tailored for a global economy, it is interesting to do research on the values of crypto-investors towards liberal and e-privacy related issues. Herein lies the social relevance of this thesis, but as well the scientific. Because cryptocurrencies are a relatively new phenomenon, there is a gap in the existing literature and research on this

0 20 40 60 80 100 120 bitcoin: (4/30/13 - 4/30/18) dissatisfaction, money and crises

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topic. Especially due to the mainstream interest, it is important to take a look at the investors. This thesis intents to contribute to the contemporary debate on the forces driving the uprising of the cryptocurrencies.

6. Methodology

6.1 Methods

In order to answer the overarching research question, this thesis will be based on a quantitative research design. In general, quantitative research is used within the social science in order to test a relationship between theory and reality (CLES, 2011)

It was the British philosopher Karl Popper who once stated that theories can never be proven, but only disproven. How can we be assured that the sun will rise tomorrow? We can only prove that until today, the sun has risen every day, but that does not necessarily mean it will rise tomorrow. So, instead of trying to prove the sun will rise tomorrow, we can compose the hypothesis that the sun will rise every day and falsify and reject this hypothesis on the day it will not. But, it is only possible to reject the hypothesis if there is prove of and are never sure it will ever be rejected of proven otherwise in the future (Popper , 1963). Therefore, in social sciences, because we cannot fully accept a hypothesis (alternative hypothesis), we formulate a null hypothesis. The null hypothesis as the opposite of the alternative, will be rejected by the use of empirical evidence in order to prove indirectly support for our alternative hypothesis (Bhattacherjee, 2012, pp. 129-130). Secondly, another problem with quantitative data within social science research, is the fact that it is never clear what influenced the dependence variable to change. Because it is not possible to measure for all extraneous effects possible, it is difficult to prove a significant relation between two variables. To be able to do so, a statistical result is considered significant if it can be proven that the probability to reject a hypothesis is 5% or less (Gilliland & Melfi, 2010).

After an extensive study of relevant literature and theories on money, trust in institutions, predictors for attitudes towards relevant concepts (innovation, globalization, privacy and liberalism), the hypotheses will be tested by means of a survey. A survey is a research method in which the participants are questioned by the use of a standardized questionnaire or interviews to collect data about people in a systematic manner

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(Bhattacherjee, 2012, p. 73). The intention of the survey is to find striking deviations between attitudes of Dutch cryptocurrency owners towards institutions such as the Dutch government, the Dutch justice system, the Euro or the European union compared to the Dutch average. The same will be done for attitudes towards liberal values such as free trade and globalization. Besides, because one of the major perks of cryptocurrencies is the privacy in online transactions, attitudes of crypto-investors in relation to e-privacy issues will be compared to the Dutch average. Accordingly, the survey intents to find the reasons of people to invest in cryptocurrencies and how they see the future of this technological development. For practical reasons, this survey will be held among crypto-investors instead of a broader random sample of the Dutch population. In order to make it possible to compare the results to the Dutch average, I will use several questions and results of the Eurobarometer on the above specified topics. The Eurobarometer was established in 1974 in order to measure the public opinion on topics regarding the EU and its population. Results of those surveys are published twice a year (European Commission, 2018). The raw data of the survey, suitable for SPSS, which is needed to make a proper statistical analysis, are provided by Gesis. For the survey, presented in the appendix of this document, this thesis made use of Eurobarometer 87.2 and Flash Eurobarometer 443 (Gesis, 2018). The questions used to compare those two groups will be asked in the exact same way, with identical answer possibilities, as in the Eurobarometer. The demographics of my population are asked in order to be used as control variable, this will be explained later on in this paragraph.

Although the Eurobarometer survey was held by face-to-face interviews, the survey for this thesis was distributed online. In order to reach Dutch crypto-investors, the survey was shared in telegram groups (popular among crypto-investors) and distributed to relatives who are invested in cryptocurrencies. As mentioned, due to the fact that it is no random sample, the control variables, such as gender, education and political preferences, will be used in order to create to corresponding groups. In the theoretical framework, predictors for values in relation to cryptocurrencies were explained. This led to the following table:

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Because the literature shows certain predictors for values as trust, economic attitudes, science and innovation, the outcomes of the survey will be controlled for those predictors. Because age, level of education and gender are predictors for almost all the values in the survey and the survey held among crypto-investor is no random sample, the groups are made equal for those characteristics. Because the group of respondents for this survey consisted almost entirely of males between 20-40, the results of the Eurobarometer are filtered on age and gender as well. For level of education, this was harder to do, because there is no distinction in level of education for the Eurobarometer, only age of leaving school. In the results, the controlling for level of education will be explained further. Although the respondent of this survey were not randomly selected, they are a good reflection of the population of crypto-investors. According to research done by Multiscope, which was published on the 8th_{of May 2018, the Dutch crypto-investor is in general a}

highly-educated male between 20-34 (Multiscope, 2018).

The hypotheses for this thesis will be tested by means of a T-Test. A T-Test is used in social science in order to find a significant difference in the mean of two groups (CLES, 2011, p. 29). The survey for this thesis was held among Dutch crypto-investors, this group will be compared to the Dutch population in order to disclose if those groups significantly differ on several topics. As said, this thesis intends to find the motivations and beliefs for people investing in cryptocurrencies.

Predictors

Trust in institutions Age, Level of education

Economic attitudes Age, Level of Education, Political views of parents, gender, income

Science & Innovation

Age, Level of education, competitiveness in labor market

Privacy Age, gender

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6.2 Variables

a. Dependent

The independent variable of my research will be if the respondent invested in a cryptocurrency to some extent.

b. Independent

The dependent variables in my research will be the amount of trust in institutions and the Euro, awareness of e-privacy and the political preferences of the respondents.

6.3 Hypotheses

The hypotheses of this thesis are based on the characteristics, differences and perks of cryptocurrencies over regular currencies. As mentioned, the absence of a central authority, the potential advantages of cryptocurrencies in global trade and the advanced privacy in transactions are used in order to build the hypotheses. Also, the

H0: There is no relation between the lack of trust in institutions between the Dutch crypto-investors and the Dutch population

H1: Dutch people investing in cryptocurrencies have less trust in financial and political institutions.

H2: People investing in cryptocurrencies are more in favor of a liberal market economy (free trade, globalization)

H3: People investing in cryptocurrencies are high educated (positive towards innovation, science, education)

H4: People investing in cryptocurrencies are right oriented on the political spectrum H5: People investing in cryptocurrencies are more aware of their (e)-privacy