Will cryptocurrency be able to become a globally accepted method of payment?

(1)

WILL CRYPTOCURRENCY BE

ABLE TO BECOME A GLOBALLY

ACCEPTED METHOD OF

PAYMENT?

Student: J. Schilder Student number: 10790977 Faculty: Economics and Business Track: Finance

Date: 30-1-2018 Supervisor: C. Sahin

(2)

1

Statement of originality

This document is written by student Jon Schilder who declares to take full

responsibility for the contents of this document.

I declare that the text and the work presented in this document are original

and that no sources other than those mentioned in the text and its references

have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision

of completion of the work, not for the contents.

(3)

2

Abstract

The purpose of this thesis is to examine whether cryptocurrency can become a globally

accepted method of payment. By considering fiat currencies and its alternatives, the

strengths and weaknesses of each of these assets were exposed. Cryptocurrency shows to

be a viable alternative to fiat currencies, solving many of the problems it has. The downsides

are the lack of consumer protection, and it offering a platform for illicit purposes. By

performing a literature review, the scale of regulation for cryptocurrencies, and the

performance of Bitcoin in the functions of money are shown. Bitcoin falls short in all three

functions of money by the high volatility it shows. The opted solution is an increase in

regulation. An event study was performed to examine the short term effect of regulation

policies on the price of Bitcoin. No significant results were found.

(4)

3

1. Introduction ... 4 2.1 Fiat Currencies ... 4 2.2 Gold ... 6 2.3 E-money ... 6 2.4 Cryptocurrency ... 7 3 Literature review ... 9 3.1 Medium of exchange ... 9 3.2 Store of value ... 10 3.3 Unit of account... 10 3.4 Regulation ... 11 4.1 Event Study ... 12 4.2 Findings ... 13 4.3 Discussion ... 20 Conclusion ... 20 References ... 21

(5)

4

1. Introduction

A variety of papers have addressed the asset class of cryptocurrencies. For example, Chuen et al (2017) state that cryptocurrency was classified by some tax authorities as commodities. Accordingly a commodity is defined as a basic good used in commerce that is interchangeable with other commodities of the same type. With commodities often being used as input in the production of other goods and services and the price being set by supply and demand. Burniske and White (2016) have a different definition. They performed a research in order to find if they could place bitcoin in one of three ‘’asset super classes’’ set by Robert Greer (1997). These three ‘’super classes’’ are: capital assets, consumable/transformable assets and store of value assets. The conclusion of this research is that bitcoin shows characteristics of its own unique asset class. They also mention that its potential is beyond the realm of any asset class.

In the current situation the general consensus seems to be that cryptocurrency is no longer classified as an actual currency as the name suggests, but rather as a speculative investment, or a commodity of which the price is determined by supply and demand. The aim of this thesis is to uncover where the potential of cryptocurrencies lie, and what is necessary in order for cryptocurrency to realize this.

This thesis will first consider fiat currencies and the three types of assets that are considered to be its main competitors in terms of currency. These are gold, electronic money and cryptocurrencies. Afterwards a literature review will be performed to uncover what other researchers have found about the way cryptocurrency fulfils the functions of money, and what their ideas are on the possible regulation of cryptocurrency. After that an event study is performed, in order to see if the considered regulation policies have a significant effect on the price of Bitcoin. Finally a conclusion is reached and the research question is answered.

2.1 Fiat Currencies

First consider fiat money, which is defined as a currency of which the material has no significant value, and is not backed by a physical commodity. An example is the dollar, which was been a fiat currency since 1933. Before that, the dollar was backed by gold. According to Eichengreen and Temin (2000) that so called gold standard promised stable prices, while also restraining the financial freedom of governments. They also state

(6)

5 that the exchange rate stability resulting from the emergence of the gold standard propelled foreign

investments to new levels. The gold standard had to be abandoned eventually as a means to combat the Great Depression. When the U.S. government faced mounting unemployment and spiralling deflation as a result of the Great Depression, they failed to stimulate the economy. Their solution was to cut the dollar’s ties with gold, allowing them to pump money into the economy and lower interest rates.

Since the gold standard restricted the U.S. government in their financial freedom, breaking from the gold standard meant the U.S. government was free to increase the money supply. There are some objections against fiat currencies and the freedom it gives to the government, often originating from the Austrian school of economics. According to Polleit (2012), credit expansion leads to artificially lower market interest rates. This artificial lowering of the market rates then leads to an artificial boom cycle. Mises (1971) states that there are two possible outcomes to the indefinitely continuing boom cycles. The first solution being banks continuing their unrestricted policy of credit expansion, and with it cause constant price increases and ever-growing speculation. Similarly to other cases of unlimited inflation this will result in the end of the money and credit system. The other option mentioned by Mises is banks stopping the constant boom cycles before reaching this point, and halting further credit expansion on their own accord. This will also cause a crisis however, which means a depression will follow in both cases.

Another negative effect of the credit expansion by the government is mentioned by Vlasov (2017). He calls government activity in the monetary field parasitic, as inflation takes away from the good of society, while distributing to those wo don’t produce. This is also known as the Cantillon effect, an insight that shows that credit expansion is never neutral. It is always beneficial to those who receive new money early, while it goes at the expense of those who receive it later. This is also stated by Polleit (2012). He adds that the government, as the money producer, logically benefits most from a rise in the money supply.

Schreft (1992) brings forward another downside of fiat currencies: transaction costs. He calls the transaction costs distance related. The greater the distance between two economic agents, the higher will be the cost of the transaction. This makes sense, because when it is impossible to physically hand over the money, a transaction would always require an intermediary such as a bank to transfer the money. When money has to cross borders, it often also requires the currency to be exchanged for the currency of the country it is headed to. The high transaction costs are confirmed by Litwack (2015). According to him these are caused by government regulation, monopolies in certain systems and the fraud protection systems set in place.

(7)

6

2.2 Gold

One alternative to fiat currencies is gold, which is classified as a commodity. The main advantage gold has over other means of payment is that it has actual intrinsic value, which it will never lose since it has numerous practical applications. Dipak et al (2004) state that gold has often been used as a hedge to inflation and other forms of uncertainty. While gold does exhibit significant price volatility in the short run, their research shows that gold is an effective inflation hedge in the long run. The physical form of gold means that it also has some disadvantages. If gold was the globally used medium of exchange, that would require consumers to carry physical gold with them. Holding gold or storing it at home means it is susceptible to theft.

2.3 E-money

Another alternative is e-money. Short for electronic money, e-money is money which only exists in banking computer systems and is thus not held in any physical form. The use of e-money is very practical, since it can be accessed through electronic devices such as mobile phones, and of course through pin and credit cards. A prime example of the demand for a practical and easily accessible payment method is the situation around e-money in Sweden. The proportion of cash payments in the retail sector has fallen from 40% back in 2010 to 15% in 2016. Therefore Sweden is leading the charge to become the first cashless society. The Swedish Riksbank expressed their concern over the digitalization since the Swedish payment market is being entirely run by private actors and are concentrated among a small number of commercial actors, payment services and infrastructures. They believe this will restrain competitiveness in the long run. This coincides with what was brought forward by Litwack (2015). The transaction costs are high due to the monopolization of the market. Fully digitalizing this market would increase that monopolization effect. The Riksbank fears that in the event of a systematic shock, there is a chance that no rapidly available free-standing alternative such as cash is present. The solution for this problem brought forward by the Riksbank is the e-krona. This would be issued in a register-based model and a value-based model. For the register-based e-krona, the value would be stored in accounts in a central database. The value-based e-krona would be similar to how cash is used. The value would be stored locally in an app or card. Although the register-based version is considered to have the biggest potential, a value-based version has to exist to cater the needs of the groups that are unable or unwilling to have e-krona accounts. This digital currency would be tied to the value of the krona. Since it is tied to the value

(8)

7 of the krona this would mean that it is also still subject to the credit expansion of the government. If this e-krona would emerge, the government could choose to increase the supply of money by issuing a small amount of actual banknotes and coins and a relatively large amount of e-krona. This means that it still does not solve the problem of government control and boom-cycles mentioned before.

2.4 Cryptocurrency

The final alternative is cryptocurrency. Cryptocurrency first arrived in the form of Bitcoin in 2008. An anonymous person by the pseudonym of Satoshi Nakamoto published a white paper in which he describes Bitcoin as a payment system utilizing decentralized peer-to-peer cryptocurrency. One of the reasons for the high transaction costs of fiat currencies is the trust model in place. Bitcoin solved this problem with

cryptographic proof. All Bitcoin transactions are anonymous and are recorded on a public ledger known as the blockchain. All of these transactions are verified by network nodes. Essentially these are computers which are connected to the Bitcoin network. These network nodes are called miners because they receive compensation in Bitcoin value for verifying transactions. This compensation is an incentive to keep the network running. Bitcoin can be purchased on special websites, or exchanges, where you can buy them in exchange for fiat currencies. The exchange rate is determined as a function of supply and demand. Cryptocurrency can then be exchanged to anyone that has a cryptocurrency wallet. The wallet is essentially the requisite software. Cryptocurrency is a solution to many of the problems set forward by fiat currencies. As stated by Segendorf (2014), cryptocurrency has low transaction costs. Since it can be exchanged worldwide between any two persons who possess a wallet, it also has very high transaction speeds. On top of that it is anonymous and is entirely independent of governments and banks.

There are also significant downsides to cryptocurrency however. The drawbacks are mainly caused by the lack of user protection. Losing the password to a wallet would result in the loss of all funds it holds. This also means that it is susceptible to hacks. Having the password stolen from a computer, or becoming the victim of a phishing website could also result in the complete loss of funds. The anonymity of cryptocurrency also offers a platform for individuals in the business of money laundering, terrorist financing and other obscure practices. If a cryptocurrency were to take the place of fiat currencies, it would not necessarily have to be Bitcoin. Since the creation of Bitcoin countless other cryptocurrencies have emerged, ready to capitalize on the attention

(9)

8 gathered by Bitcoin. And since the source code for the technology behind Bitcoin was made publicly available, these new currencies were able to modify and arguably even improve upon Bitcoin’s structure. A good example is Ethereum, which is essentially the second generation blockchain and holds significant improvements over Bitcoin in terms of transaction speeds and capacity.

An interesting development is the emergence of cryptocurrencies such as Crypterium, Bankero and Stack which is partnered with Mastercard. These ‘’crypto-banks’’ offer a payment system through which consumers can use cryptocurrencies as a medium of exchange at participating retailer. The platform is designed to offer similar services to conventional financial institutions. These platforms will provide instant cryptocurrency payments through contactless payments via NFC, QR, Applepay, Androidpay and other banking services. This could significantly close the gap between retailers and cryptocurrency users, and help cryptocurrency become a globally accepted method of payment.

(10)

9

3 Literature review

It is typically defined by economists that money should have the following three characteristics mentioned by Ali et al (2014). First of all money has to be a store of value. An asset can be a store of value when it is not perishable and it makes it possible to transfer ‘’purchasing power’’ from today to some future date.

The second function money should have is as a medium of exchange. This means it should be an instrument to purchase goods or trade goods between parties. Finally money should be a unit of account, meaning it is a unit of measurement for the value of goods, services and other transactions.

3.1 Medium of exchange

Dwyer (2014) states that, partly due to its anonymity, it is difficult to estimate Bitcoin’s use as a medium of exchange. He adds that it would be even more difficult to compare these estimates to those of physical currencies that are currently in use.

Despite that, Yermack (2013) argues that Bitcoin has made significant steps towards becoming a medium of exchange. This is largely due to the increasing amount of (online) merchants who are willing to accept Bitcoin as a means of payment.

Luther and Olson (2014) confirm these findings by stating that Bitcoin has managed to gain increasing acceptance, despite the network effect problem it faces. This is the problem faced by retailers who are reluctant to accept Bitcoin as a method of payment due to small size of the user base.

Additional findings suggest this network effect problem has become less significant in more recent years. Hileman and Rauchs (2017) performed a benchmarking study to estimate the number of unique active users of cryptocurrency wallets. The number of active users of cryptocurrency wallets has increased from 0.3 – 1.3 million in 2013 to 2.9 - 5.8 million in 2017. It must be noted that these numbers are only estimations, because they claim it is impossible to know the exact number of people using cryptocurrency.

Ali et al (2014) address that the role of cryptocurrency as a medium of exchange could be potentially undermined by retailers who are reluctant to accept cryptocurrencies due to their volatility. This is because they are not rewarded for the extra risk of holding cryptocurrency caused by that volatility. According to Luther and Olson (2014) an increase in the number of intermediaries has helped to reduce this problem. These

(11)

10 intermediaries accept bitcoin from customers on behalf of retailers. Afterwards they pay retailers in their preferred currency.

3.2 Store of value

According to Yermack (2013) Bitcoin fails to satisfy the criteria of being a store of value. This is because Bitcoin exhibits very high volatility in a time series. He also states that for any currency to be a reliable store of value it should have minor volatility. The difference in volatility comes forward in his research, were Bitcoin’s exchange rate volatility is relatively high at 133% when compared to the 8-12% of fiat currencies. It is also a lot higher than the 22% volatility of gold, which he states is often used as an alternative to fiat currencies as a store of value.

In concordance with the previous study, Kubát (2015) says Bitcoin’s function as a store of value is cancelled by the high volatility it shows. However, in the research he performed it was shown that the volatility had decreased in 2014 compared to the years before that.

Reviewing an even more recently performed study by Katsiampa (2017), exchange rate volatility continued to decrease in 2015 and 2016 and got closer to the volatility level of fiat currencies.

Golumbia (2015) also addresses the problem of Bitcoin’s volatility as the main issue in becoming a store of value. He claims the lack of regulation causes extreme boom and bust cycles responsible for said volatility. If Bitcoin were to become more regulated it could very well become a stable store of value. Golumbia adds that from a certain point of view, Bitcoin could function better as a store of value then fiat currencies do right now. This argument is led by the fact that central bankers can manipulate the value of currency while the

decentralized Bitcoin can’t be controlled.

3.3 Unit of account

Cheah and Fry (2015) state that the speculative nature and the high level of volatility undermine the potential use of Bitcoin as a unit of account.

Yermack (2013) also states that Bitcoin fails as a unit of account due to its high volatility. Therefore there has been no use of Bitcoin as a unit of account for loans, consumer finance credit, mortgages and debit cards. White (2015) mentions one place where the use of Bitcoin as a unit of account has been overlooked: the

(12)

11 altcoin market. Most of the smaller cryptocurrencies that came into existence after the emergence and

popularity of Bitcoin were classified as altcoins. Because it is impossible to buy most of the altcoins with fiat currencies, Bitcoin acts as a vehicle currency for this market. This is similar to the way the dollar is used as the vehicle currency for transactions on the foreign exchange market. Exchanging dollars or euros for Bitcoins makes it possible to buy the lesser known altcoins with said Bitcoins. Because these altcoins have their value expressed in Bitcoins, that makes it the unit of account for the altcoin market.

3.4 Regulation

Hughes and Middlebrook (2014) explain that the difficulty in regulating cryptocurrencies lies in answering the questions of where it is located and when and where a transaction takes place. They also express the

importance that each ‘’brand’’ of cryptocurrency emphasizes on different attributes, and will require a

different regulatory scheme. They add that cryptocurrency will most likely be regulated as money transmission, and will be aimed at eliminating complete anonymity from the transactions. This is in concordance with what was brought forward by Marian (2015). She names two reasons why cryptocurrencies are useful for nefarious purposes. Firstly, because the owners of cryptocurrency are not identified by name, but rather by a set of letters and numbers representing the cryptocurrency address, it is difficult to identify those individuals who seek to use cryptocurrency for illicit purposes, such as money laundering, tax evasion and such. Secondly, because the regulatory policies in place make sure that intermediaries enforce ‘’’know your customer’’ rules, and are also aimed at preventing tax evasion. Cryptocurrencies eliminate the need for those intermediaries. Marian acknowledges the innovative potential in tremendous opportunities for innovation and development of cryptocurrencies, while also warning of the illicit behaviour it facilitates. The conceptual regulatory framework brought forward by her is therefore aimed at disrupting the criminal utility of cryptocurrencies while

(13)

12

4.1 Event Study

In order to measure the impact of regulation on Bitcoin price an event study was performed. The event study as set out by MacKinlay (1997) states that the abnormal return of a security around an event can be

interpreted as the impact of that event on the stock price. It calculates the normal return based on historical returns. If the difference in normal and actual return is significant, this would be proof of an event-driven impact. The following formula is used for the event date:

ARit = Rit – E(Rit )

E(Rit) = ui + δit

CAR = Σ ARit tcar = CARi / Scar S²CARi = S²Ari * L2

S²Ari = ( 1 / ( Mi – 2 ) ) * Σ ( ARit ) ²

Mi refers to the number of non-missing returns. L2 is the amount of days in the event window.

ARit Is the abnormal return, Rit is the actual return and E(Rit ǀXt ) is the expected return for time t. CAR is the

cumulative abnormal return. The constant mean return model was chosen for this research. This model assumes that a given security has a constant mean return through time. Since it is difficult to compare Bitcoin to a market, it makes more sense to calculate the expected return based only on the price of Bitcoin, and thus not using a market model. Even though the constant mean return model is arguably the simplest model, it was brought forward by MacKinlay (1997) that it often yields similar results to those of more intricate models. According to MacKinlay the estimation window should be at least 265 days. For this research the estimation window will be formed by the 265 days prior to the event window. An event window, in which the abnormal returns compared to the normal returns are calculated, also needs to be set. The chosen event window is 20 days, 5 prior to the event and 15 after the event. The closing prices for Bitcoin were obtained from Quandl. For some dates the closing prices of Bitcoin are missing. The data for those dates was removed, and the estimation window extended by the amount of missing days, to make sure the length of the estimation window would

(14)

13 remain 265 days. The first two events are in 2014 and 2015. Because the competition for Bitcoin has only started to increase in the more recent years, the decision was made to only perform the event study on the returns of Bitcoin, and thus not its main competitors like Ethereum.

4.2 Findings

As mentioned before it is difficult to regulate cryptocurrency. Many countries have stated they have plans of regulating cryptocurrency but very few have actually put regulation policies in place. This thesis will evaluate what are considered to be the most relevant regulation policies currently in place and the news that is considered to have had an actual impact.

(15)

14 Event 1

7 March 2014, Japan

On March 7 2014 the Japanese government forbids commercial banks to provide customers with

cryptocurrency, stating that Bitcoin is not a currency. They also state that it currently can’t be fully regulated as being a currency, but don’t rule out the idea of a regulatory framework in the future if it could be supported by other countries.

SOURCE:QUANDL WWW.QUANDL.COM

FIGURE 1:CAR FOR BITCOIN FOR THE PERIOD 2-3-2014 UNTIL 21-3-2014

-0,200 -0,150 -0,100 -0,050 0,000 0,050 0,100 0,150 0,200 2 -3 -2 0 1 4 3 -3 -2 0 1 4 4 -3 -2 0 1 4 5 -3 -2 0 1 4 6 -3 -2 0 1 4 7 -3 -2 0 1 4 8 -3 -2 0 1 4 9 -3 -2 0 1 4 1 0 -3 -2 0 14 11 -3-20 14 1 2 -3 -2 0 14 1 3 -3 -2 0 14 14 -3-20 14 1 5 -3 -2 0 14 1 6 -3 -2 0 14 1 7 -3 -2 0 14 1 8 -3 -2 0 14 1 9 -3 -2 0 14 2 0 -3 -2 0 14 2 1 -3 -2 0 14 C u mu lat iv e ab n o rmal r et u rn s Date

Event 1 CAR

(16)

15

Table 1

This table shows the descriptive statistics for the first event, for the period of 2-3-2014 until 21-3-2014

Date BTC price BTC returns AR CAR t-value CAR

2-3-2014 566,2400 -0,0022 -0,0022 -0,0022 -0,0005 3-3-2014 677,6900 0,1968 0,1968 0,1946 0,0435 4-3-2014 673,0000 -0,0069 -0,0069 0,1877 0,0420 5-3-2014 669,9900 -0,0045 -0,0045 0,1832 0,0410 6-3-2014 669,5700 -0,0006 -0,0006 0,1826 0,0408 7-3-2014 632,7900 -0,0549 -0,0549 0,1277 0,0286 8-3-2014 620,0000 -0,0202 -0,0202 0,1075 0,0240 9-3-2014 640,0000 0,0323 0,0323 0,1397 0,0312 10-3-2014 629,3900 -0,0166 -0,0166 0,1232 0,0275 11-3-2014 632,1000 0,0043 0,0043 0,1275 0,0285 12-3-2014 634,9500 0,0045 0,0045 0,1320 0,0295 13-3-2014 641,0100 0,0095 0,0095 0,1415 0,0316 14-3-2014 630,4200 -0,0165 -0,0165 0,1250 0,0279 15-3-2014 637,2400 0,0108 0,0108 0,1358 0,0304 16-3-2014 634,9900 -0,0035 -0,0035 0,1323 0,0296 17-3-2014 621,1100 -0,0219 -0,0219 0,1104 0,0247 18-3-2014 612,0000 -0,0147 -0,0147 0,0958 0,0214 19-3-2014 611,2000 -0,0013 -0,0013 0,0944 0,0211 20-3-2014 587,9800 -0,0380 -0,0380 0,0565 0,0126 21-3-2014 570,0000 -0,0306 -0,0306 0,0259 0,0058

Note: Significance of CAR indicated by ***p<0.01, **p<0.05, *p<0.1

The t-value of the CAR is not significant. However, it can still be seen that the news had a negative price effect. One possible explanation for the insignificant results is the sudden rise in the price on the days prior to the event. It is also possible that the event had a very small impact. If the trading volume of the banks which were forced to stop trading cryptocurrency was small, it makes sense that shutting down those banks would not have a large impact on the prices of the global Bitcoin market. If not from banks there would still be other cryptocurrency exchanges available from which people could buy cryptocurrencies.

(17)

16 Event 2

18 September 2015, United States.

On this date the United States Commodity Futures Trading Commission (CFTC) decided that Bitcoin will be classed as a commodity in the U.S. along with gold and oil. As a result of this, multiple platforms were forced to stop trading Bitcoins since they were no longer complying with its regulations.

-0,040 -0,030 -0,020 -0,010 0,000 0,010 0,020 0,030 1 3 -9 -2 0 15 1 4 -9 -2 0 15 1 5 -9 -2 0 15 1 6 -9 -2 0 15 1 7 -9 -2 0 15 1 8 -9 -2 0 15 1 9 -9 -2 0 15 2 0 -9 -2 0 15 2 1 -9 -2 0 15 22 -9-20 15 2 3 -9 -2 0 15 2 4 -9 -2 0 15 25 -9-20 15 2 6 -9 -2 0 15 2 7 -9 -2 0 15 2 8 -9 -2 0 15 2 9 -9 -2 0 15 3 0 -9 -2 0 15 1 -1 0 -2 0 15 2 -1 0 -2 0 15 C u mu lat iv e ab n o rmal r et u rn s Date

Event 2 CAR

(18)

17

Table 2

13-9-2015 229,66 -0,021849312 -0,02147 -0,569126 -0,02147 14-9-2015 229,71 0,000217713 0,000598 0,0158566 -0,02087 15-9-2015 230,03 0,001393061 0,001773 0,0470143 -0,0191 16-9-2015 228,34 -0,007346868 -0,00697 -0,184676 -0,02606 17-9-2015 232,17 0,016773233 0,017154 0,4547331 -0,00891 18-9-2015 233,12 0,004091829 0,004472 0,118557 -0,00444 19-9-2015 230 -0,013383665 -0,013 -0,344707 -0,01744 20-9-2015 230,16 0,000695652 0,001076 0,0285265 -0,01636 21-9-2015 226,15 -0,017422662 -0,01704 -0,451779 -0,03341 22-9-2015 230,42 0,018881273 0,019262 0,5106159 -0,01415 23-9-2015 229,42 -0,004339901 -0,00396 -0,104963 -0,0181 24-9-2015 233,86 0,019353151 0,019734 0,5231251 0,001629 25-9-2015 235,22 0,005815445 0,006196 0,164249 0,007825 26-9-2015 233,81 -0,005994388 -0,00561 -0,148822 0,002211 27-9-2015 232,41 -0,005987768 -0,00561 -0,148647 -0,0034 28-9-2015 239,14 0,028957446 0,029338 0,777729 0,025941 29-9-2015 236,94 -0,009199632 -0,00882 -0,233791 0,017122 30-9-2015 236,2 -0,003123154 -0,00274 -0,072708 0,014379 1-10-2015 237,15 0,004022015 0,004402 0,1167063 0,018782 2-10-2015 237,77 0,002614379 0,002995 0,0793907 0,021777

The t-value of the event is not significant. A negative price effect can be seen, but after a few days the price actually starts increasing again. The explanation for this could possibly be the same as for the previously discussed event. If the trading volume for the exchanges that were shut down were relatively small, or there were plentiful alternative cryptocurrency exchanges available, that could mean that the event had little to no impact.

(19)

18 Event 3

28 December 2017, South-Korea

The South Korean government concluded that the abnormal situation of speculation could no longer continue and warned it might close some cryptocurrency exchanges due to ‘’irrationally overheated’’ trading. This would be done by directing law-enforcement to close some exchanges. This is not an event where actual regulation was established but it had a considerable effect on the cryptocurrency market. The impact of the news was huge since South-Korea is responsible for a large percentage of the total trading volume.

-0,300 -0,250 -0,200 -0,150 -0,100 -0,050 0,000 0,050 0,100 2 3 -1 2 -2 01 7 2 4 -1 2 -2 01 7 2 5 -1 2 -2 01 7 2 6 -1 2 -2 01 7 2 7 -1 2 -2 01 7 2 8 -1 2 -2 01 7 2 9 -1 2 -2 01 7 3 0 -1 2 -2 01 7 3 1 -1 2 -2 01 7 1-20 18 2 -1 -2 0 1 8 3 -1 -2 0 1 8 4- 1-20 18 5 -1 -2 0 1 8 6 -1 -2 0 1 8 7 -1 -2 0 1 8 8 -1 -2 0 1 8 9 -1 -2 0 1 8 1 0 -1 -2 0 18 1 1 -1 -2 0 18 C umul at iv e a bn o rm al r e tur ns Date

Event 3 CAR

(20)

19

Table 1

23-12-2017 14619 0,043484592 0,032100692 0,638562423 0,032100692 24-12-2017 14157,87 -0,031543197 -0,042927097 -0,853926471 -0,010826404 25-12-2017 13911,28 -0,017417168 -0,028801068 -0,572924698 -0,039627472 26-12-2017 15764,44 0,13321276 0,12182886 2,423478329 0,082201388 27-12-2017 15364,93 -0,02534248 -0,036726379 -0,730578813 0,045475009 28-12-2017 14470,07 -0,058240422 -0,069624321 -1,385000508 -0,024149312 29-12-2017 14340 -0,008988899 -0,020372799 -0,405265518 -0,044522111 30-12-2017 12640 -0,118549512 -0,129933411 -2,584697963 -0,174455522 31-12-2017 13880 0,098101266 0,086717366 1,725023592 -0,087738156 1-1-2018 13443,41 -0,031454611 -0,04283851 -0,852164271 -0,130576666 2-1-2018 14678,94 0,091905997 0,080522098 1,601784323 -0,050054569 3-1-2018 15155,62 0,032473734 0,021089835 0,419529148 -0,028964734 4-1-2018 15143,67 -0,000788486 -0,012172386 -0,24213896 -0,04113712 5-1-2018 16928 0,117826788 0,106442889 2,117413181 0,065305769 6-1-2018 17149,67 0,013094872 0,001710973 0,034035496 0,067016742 7-1-2018 16124,02 -0,059805816 -0,071189715 -1,416140079 -0,004172973 8-1-2018 14999,99 -0,069711524 -0,081095423 -1,613189191 -0,085268396 9-1-2018 14403,51 -0,03976536 -0,051149259 -1,017485688 -0,136417656 10-1-2018 14890,02 0,033777183 0,022393284 0,445457983 -0,114024372 11-1-2018 13243,83 -0,110556601 -0,121940501 -2,425699132 -0,235964872

For this event it was chosen to take the news of possible regulation, instead of an actual regulation policy put into place. As could be seen in the previous events, the events had almost no impact. A possible explanation for that could be that the trading platforms that were shut down were not trading significantly large enough volumes of cryptocurrency. Therefore this event, where there was a threat of the actual shutdown of multiple cryptocurrency exchanges trading a significant volume, was chosen because it was thought to have had an actual effect. However, for this event it can again be seen that there was no significant effect.

(21)

20

4.3 Discussion

It can be concluded that these events had no significant effect on the price level in the short run. Future research could focus on an extended estimation window, which could provide an insight on the long term effect of regulation policies on Bitcoin prices. As discussed, one of the ways to reach the lower level of volatility in Bitcoin prices could be more regulation. So another option for future research could be to focus on the effect of regulation policies on the volatility. If a cryptocurrency were to become an actual currency, it would not necessarily have to be Bitcoin. Therefore another research could also focus on the price of one or more of the alternative cryptocurrencies.

Conclusion

Cryptocurrency is a viable alternative to fiat currencies. It has solutions to some of the problems set by fiat currencies: the government causing artificial boom cycles and the high transaction costs. There are still definitive negative sides to cryptocurrency however, such as the lack of user protection. Also, the anonymity it provides means it’s the perfect tool for activities such as money laundering, terrorist financing and tax evasion. The literature review shows that Bitcoin has already made significant steps towards becoming an actual currency, but is undermined by the high volatility in its price. It is also discussed that the way to reduce the volatility is through more government regulation. The emergence of the cryptocurrency banks is another interesting development, which has the potential to further reduce the gap between cryptocurrency users and retailers and increase the use of cryptocurrency as a medium of exchange. It is not guaranteed that

cryptocurrency can become a globally accepted method of payment, but it is clear that the ideal conditions for this to happen would be the implementation of a regulatory framework that can offer both a reduction in the price volatility and an increase in the transparency in order to reduce the use of cryptocurrency for money laundering and other negative activities.

(22)

21

References

Ali, R. & Barrdear, J. & Clews, R. & Southgate, J. (2014). The Economics of Digital Currencies, Bank of England Quarterly Bulletin, 3.

Baek C. & Elbeck M. (2015). Bitcoins as an investment or speculative vehicle? A first look, Applied Economics

Letters, 22(1) 30-34.

Cheah, E. & Fry, J. (2015), Speculative bubbles in Bitocin Markets? An empirical investigation into the fundamental value of Bitcoin, Economics Letters, 130(C), 32-36.

Chuen, K. & Lee, D. & Li, G. & Yu, W. (2017). Cryptocurrency: a new investment opportunity. Singapore

University of Social Sciences.

Dwyer, G. (2015), The economics of Bitcoin and similar private digital currencies, Journal of Financial Stability, 17, 81-91.

Eichengreen, B. & Temin, P. (2000). The Gold Standard and the Great Depression. Contemporary European

History, 9(2), 183-207.

Ghosh, D. & Levin, E. & MacMillan, P. & Wright, R. (2004). Gold as an inflation hedge? Studies in Economics and

Finance, 22(1). 1-25.

Golumbia, D. (2015). Bitcoin as Politics: Distributed Right-Wing Extremism. MoneyLab Reader: An Intervention

in Digital Economy Amsterdam: Institute of Network Cultures, 10, 117-132.

Hileman, G. & Rauchs, M. (2017). Global Cryptocurrency Benchmarking Study. Cambridge Centre for Alternative

Finance.

Hughes, S. & Middlebrook, S. (2014). Regulating Cryptocurrencies in the United States: Current Issues and Future Directions. William Mitchell Law Review, 40(813)

Katsiampa, P. (2017). Volatility estimation for Bitcoin: A comparison of GARCH models, Economics Letters, 158, 3-6

Kubat, M. (2015). Virtual currency bitcoin in the scope of money definition and store of value. Procedia

(23)

22

Litwack, S. (2015). Bitcoin: Currency or fool’s gold: comparative analysis of the legal classification of bitcoin. Temple International Comparative Law Journal. 29(2), 309-348.

Luther, W. & Olson, J. (2015). Bitcoin is memory, Journal of Prices & Markets, 3(3), 22-33.

MacKinlay, C. (1997). Event studies in economics and finance, Journal of Economic Literature, 35(1), 13-39.

Marian, O. (2016). Conceptual Framework for the Regulation of Cryptocurrencies. University of Chicago Law Review Dialogue 82, 53-68.

Mises, L. (1971). The Theory of Money and Credit.

Polleit, T. (2012). The Fiasco of Fiat Money. Mises Daily Articles

Schreft, S. (1992). Transaction Costs and the Use of Cash and Credit. Economic Theory, 2(2), 283-296.

Segendorf, B. (2014). What is Bitcoin? Sveriges Riksbank Economic Review 2014(2), 71-89. Vlasov, V. (2017). The Evolution of E-Money. European Research Studies. 20(1), 215-224. White, L. (2015). The market for cryptocurrencies, Cato Journal, 35(2), 383-403.

Yermack, D. (2013). Is Bitcoin a real currency? An economic appraisal, National Bureau of Economic Research, 19747

Will cryptocurrency be able to become a globally accepted method of payment?