Abstract
Over the past two decades, the diffusion of technological innovations introduced to the finance industry has been inconceivable. Internet, at the end of the 20th century, brought e-commerce, later e-payments, and more recently, e-money. Such innovations in digital world increase the impact on the business world, and so might do cryptocurrencies, currently spreading out across the globe. To this end, this chapter builds up an across-the-board synthesis of current investment trends and analysis, aiming to lead a way forward for research on this uncharted breed of alternative finance assets looming anew.
TopIntroduction
When reflecting upon the recent developments in alternative finance, there is nothing more, no doubt, that has intrigued academics, investment professionals, institutions and the general public than the next brand new asset class that did not exist a decade ago namely “cryptocurrency”. But why is it called this way? More importantly why is it an investment and in particular an alternative one? And, be that as it may, then what kind of alternative investment? It is broadly established that alternative investments are linked to “non-traditional” approaches contrary to the “traditional” ones which academia and industry usually associate with investments in (a) securities and (b) cash. These fundamental questions will be approached by this chapter.
The first ever cryptocurrency was proposed by the pseudonymous Satoshi Nakamoto back in 2008 in a paper made publicly available on an internet forum. Note that the term “cryptocurrency” never appears in the original paper. It is not a term coined by the creator of Bitcoin rather it emerged later on by community members. It is argued that Satoshi Nakamoto interest was to invent the first payment system without intermediary (the Blockchain) rather than a revolutionary currency per se (the Bitcoin). Interesting enough, note that the title of his work underlines the “cash system” rather the “asset” wherein he decided to name it after the latter (Bitcoin: A peer-to-peer electronic cash system). Until today, the identity of the author whose 9-page work spawned an (alternative) asset market of USD 813 bil. market cap and of USD 44 bil. daily (24h) volume (peaked on January 7th, 2018) remains an enduring mystery. Bitcoin v.01 open-source software was uploaded on January 9th, 2009. Such cash systems operating via peer-to-peer (open) networks epitomize the new concept branded as socialization of Finance.
In principle, the centerpiece of this sophisticated breakthrough allows the record, validation and storage of information of unique value to be securely and transparently distributed but not copied (thus retaining the property of uniqueness of the asset) across network's participants (peers) making the need for a third party (middleman) acting as custodian/gatekeeper to ensure trust obsolete. The last part spells out very simply what exactly Bitcoin's innovation has resolved. Marc Andreessen, the computer scientist who co-authored Mosaic, that is the first widely used Web browser has argued that Bitcoin in 2008 may have fueled the next technological revolution following Personal Computers in 1975 and the Internet in 1993 for its potential to “be programmed to record virtually everything of value and importance to humankind” (Tapscott & Tapscott, 2016).
The remaining of this chapter is organized as follows. The next section offers broad definitions and historical events of the topic as well as delivers a useful literature review into the discussion. Then, the investments opportunities in cryptocurrency asset markets and ecosystems are presented and analyzed accordingly. Last sections sum up limitations, challenges, research the way forward and conclude.
Key Terms in this Chapter
Node: Any electronic devise that connects to the distributed ledger network whereby contribute and use resources. There are two types of nodes i.e. the full-node and the lightweight-node. Wallets are operating through nodes.
Crypto-exchanges: Market makers that emerged to facilitate trade between cryptocurrencies.
Lightweight-node: She does need to download the shared database (Blockchain). Instead, can join the network and effectively rely upon full-nodes operations. The downside is that it is less secure compared to being a full-node.
Cryptocurrency: An asset of digital nature that is recorded and transferred on a Blockchain. Cryptocurrency is a monetary application of Distributed Ledgers and part of crypto-assets which may also by non-monetary such as votes and real assets.
Protocol: The protocol describes the rules within the distributed ledger network. By way of example the determination of the supply schedule of cryptocurrencies (frequency, new units etc.) is written in the protocol.
Blockchain: A shared database between the nodes of a distributed ledger network where all past transactions are recorded in a chronological order.
Fork: A fork is a disagreement between nodes. In case disagreement are significant (over the protocol and the algorithm) this is called hard-fork. If not that significant, this is called soft-fork.
Hard-Fork: In a hard-fork the Blockchain results to a permanent divergence from the previous version of the Blockchain, though the latter still operates along the old path. This essentially creates two Blockchain, and the nodes who endorse the disagreement can upgrade to the new version while the others can continue to follow the old one.
Consensus Algorithm: A mechanism that enables the distributed network to reach an agreement over the true state of the Blockchain, thus which transactions are valid.
Satoshi Nakamoto: The alias used by the unidentified person or group of persons who published a paper with the title “Bitcoin: A peer-to-peer electronic cash system” in 2008 upon which Bitcoin as open-source software as developed.
Full-node: They form the backbone of the network for that they fully verify the rules enacted by the algorithm and the protocol of the distributed ledger. The requirement and downside is that the entire shared database need to be downloaded and continuously updated.
Distributed Ledgers: A software that includes a shared database (the Blockchain) and a digital asset (the Cryptocurrency). The latter is optional.