The Impact of Cryptocurrency on the Stock Market

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11/10/2024 Email Marketing

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A one-minute advertisement costing nearly $14 million, which featured nothing more than a floating QR code, drove more than 20 million hits to Coinbase’s landing page within one minute, according to Bitcoin Magazine. The FSB raised[14] potentially serious concerns about financial stability in a recent paper. Given the international and diverse nature of the crypto-asset markets, it has advocated that regulatory authorities prioritize cross-border and cross-sectoral cooperation. Financial stability risks could escalate rapidly, and the FSB is clear that a ”timely and pre-emptive evaluation of possible policy responses” is required.

Turtle trading system in Cryptocurrency market

Thirdly, there are high volatility spillovers among cryptocurrencies; however, decentralized Bitcoin exchanges present higher volatility than the centralized exchanges. We also found that there is a strong connectedness among cryptocurrencies in periods of high market uncertainty, and weak connectedness in periods of low market uncertainty. Other main findings are that the price behavior of cryptocurrencies supports the negotiation hypothesis, that Bitcoin prices cluster around round numbers, and reveal a strong and positive association between sentiment and price clustering. Another important highlight shows that cryptocurrencies’ dynamic behavior reveals different degrees of long-range dependence and follow different stochastic processes.

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Therefore, evidencing that it is possible to generate abnormal profits for these cryptocurrencies with the use of algorithmic trading strategies at 1 min or 60 min trading (Aslan & Sensoy, 2020). In addition, evidence also reveals that a Bitcoin market populated with high frequency traders (HFTs) at five-minute frequency, reveals to be inefficient (Manahov & Urquhart, 2021). Hence, the higher the frequencies, the lower the pricing efficiency of Bitcoin is (Guégan & Renault, 2021). We found evidence supporting the existence of efficiency in the cryptocurrency market. For instance, evidence reveals a significant low volatility premium, indicating that the cryptocurrency market is more efficient than expected (Burggraf & Rudolf, 2020), and becoming more efficient over the years (Alvarez-Ramirez & Rodriguez, 2021). Evidence also shows that the average price delay tends to decrease, implying that the efficiency in the cryptocurrency market is improving (Köchling et al., 2019b).

How to predict cryptocurrency prices using fundamental analysis?

Cardano also works like Ethereum to enable smart contracts and decentralised applications, which ADA, its native coin, powers. Unlike some other forms of cryptocurrency, Tether (USDT) is a stablecoin pegged to the value of US$1. This is achieved by having a 1-1 backing between the token and USD  which hypothetically keeps a value equal to one of those denominations because one token should always be able to be redeemed for one dollar. In theory, this means Tether’s value is supposed to be more consistent than other cryptocurrencies, and it’s favoured by investors who are wary of the extreme volatility of other coins.

7 Investment properties of the cryptocurrency market

Therefore, preventing the theft of private keys is crucial to maintaining digital asset security. Both intrinsic and relative valuation methods can be applied to digital assets, but the specific method should differ based on the type of asset. For Proof-of-Work Assets like Bitcoin, we can estimate a price floor using the mining cost of production. For Proof-of-Stake Assets like Ethereum, we can conduct an intrinsic valuation based on a discounted cash flow (DCF) method. At the risk of overgeneralizing, private blockchains are backed by incumbents in their respective industries, while public blockchains (what we generally refer to as “crypto”) are backed by the disruptors.

Supply chain & procurement technology

• This showed that cryptocurrency was “not a safe haven for criminals,” said Lisa Monaco, deputy attorney general.
• The process allows for potential yields of up to 12.22%, but the exact yield depends on the quantity of AAVE tokens and the duration of the lock-up period.
• In July 2022, Tether, alongside peer-to-peer data network Hypercore and its sister company Bitfinex, collaborated on a social media app called Keet.
• In the end of 2020, the University of Economics Ho Chi Minh City and the Whu Otto Beisheim School of Management were the most cited institutions.
• Brauneis et al. (2021a) show that this measure fails to reflect the time-series variability in cryptocurrency liquidity.
• This is implemented under the assumption that the innovations distributions of cryptocurrencies returns are skewed, heavy-tailed and leptokurtic.
• ETH is a $432 billion market as of today, and its daily trading volume exceeds $15 billion.

A study by Harris and Sollis [29] opined that the procedure also gives estimates that are capable of reducing the problems posed by endogeneity in regression. First its approach to bounds testing as regards cointegration may declare the absence of cointegration even when present for small samples (say time points less than or equal to 80) thereby misleading some empirical results. More so, the conventional ARDL models regularly possess complex dynamic structures that are characterized by first differences and lags of first differences, several lags, concurrent values and so on. This complexity makes it difficult in the interpretation of the impacts of the independent variable on the regressors [14] . Gil-Alana, Abakah & Rojo (2020) investigate the relationship between cryptocurrencies and stock market indices. The study analysed the connection between the statistical properties of six main market cryptocurrencies and six stock market indices.

Best Cryptocurrencies to Day Trade

Although the literature provides evidence that the supply of cryptocurrency has a significant effect on the price, demand-side drivers have a stronger impact on cryptocurrency prices (Ciaian et al., 2016, Ciaian, Rajcaniova, & Kancs, 2016). An increase in the number of Bitcoins available for transactions may result in Bitcoin price volatility and a massive speculative price bubble (Ciaian et al., 2016). The growth of a transactional need for Bitcoin leads to an increase in price (KaraÖMer, 2022). For example, Bitcoin trading against the US dollar has increased exponentially since July 2010 (Polasik et al., 2015).

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Indeed, during these periods, American and Chinese investors turn to the gold market to reduce their risk exposure and minimize the impact of the crisis on their portfolios. This precious metal is thus a safe haven for all participants in the selected markets. The introduction of gold, Bitcoin and Ether into traditional diversified financial portfolios offers hedging and diversification benefits for American and Chinese investors. Table 4 shows that the total return (volatility) spillover index indicates for the US stock market in combination with other assets is 54.89% (89.27%). The value indicates that more than 54% of the 30-days-ahead forecast error variance comes from spillovers among the markets.

I. Secondary Market Trading

A centralized cryptocurrency exchange is a for-profit business that facilitates cryptocurrency trading. Users deposit their funds directly into a pooled wallet that is controlled by the exchange; the exchange takes custody of traders’ deposited assets and the exchange directly engages in matching buy and sell orders. Coinbase, Gemini, Bittrex, and Binance are all examples of centralized exchanges.

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Many such firms, if not most, are outside the regulatory perimeter and have often found stepping into the regulated world challenging. One example of this is Binance, which has suffered multiple setbacks in its attempts to become regulated in several jurisdictions. One challenge to the model, however, is its democratic nature which can make DAOs overly deliberate and result in a slower process compared with more traditional organizations. It found that mistakes had not stemmed from regulatory grey areas or misinterpretations of risk, regulation or compliance. Rather, the Co-operative Group’s board lacked the skills, knowledge or understanding required to manage a bank. It did not know what management information to expect, did not understand the role of the regulator and fundamentally did not understand banking.

For more information read the Characteristics and Risks of Standardized Options, also known as the options disclosure document (ODD). Alternatively, please contact IB Customer Service to receive a copy of the ODD. Before trading, clients must read the relevant risk disclosure statements on our Warnings and Disclosures page.

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Cryptocurrency pricing research appears to be more active in Europe than in other locations, suggesting significant academic interest in the region. Extending the geographic coverage by encouraging research to focus on developing countries and perhaps exploring the development of financial technologies and their effect on the cryptocurrency market could be useful for the field. Much of the literature focused on Bitcoin, suggesting that it remains the most popular and widely researched cryptocurrency. As a pioneer and the first cryptocurrency, Bitcoin has received significant attention from researchers, investors and the general public (Wang & Vergne, 2017). The earliest article on cryptocurrency pricing was published in 2014, indicating that research remains in the early stages of development.

The South African Revenue Service considers cryptocurrencies such as bitcoin to be intangible assets rather than currency or property. They are taxed as long-term or short-term income ranging from 18% to 40% allowing for deduction of costs. The Securities and Exchange Commission of Thailand regulates cryptocurrencies under an Emergency Decree on Digital Asset Businesses B.E. Under the decree, digital asset businesses are required to apply for a license, monitor for unfair trading practices, and are considered “financial institutions” for AML purposes among others.

Technical analysis

This significant accumulation is largely attributed to seizures from cybercriminals and darknet market operations. Managed by various federal agencies, including the Justice Department and the IRS, these bitcoins are securely stored offline in hardware wallets. This unique position highlights a contrast between the U.S. government’s role as a major Bitcoin holder and other entities that might speculate on its value, showcasing a strategic yet cautious approach to managing seized digital assets. Block Inc., formerly known as Square, is a diverse financial services and mobile payment company founded by Jack Dorsey and Jim McKelvey.

• In addition, investigating the efficiency in the cryptocurrency market from a structural break perspective, and volatility spillovers, evidence reveals that the cryptocurrency market systematically present structural breaks (Canh et al., 2019).
• The approval of an Ethereum ETF provides institutional investors with new investment opportunities.
• The transition to Ethereum 2.0 offers a number of advantages, including high transaction speed, low fees, and high scalability.
• The Cardano platform’s distinctive two-tier architecture – comprising the Cardano Computational Layer and the Cardano Settlement Layer – enables the platform to fulfill this objective.
• Then they highlighted the potential social and economic impact of human-computer interaction in digital agency design.
• The most common research methods applied were the vector autoregression model and the autoregressive distributed lag model, with other types of models used in various studies.
• Corbet et al. (2019) gave a systematic analysis of cryptocurrencies as financial assets.
• When choosing a cryptocurrency, it is advisable to consider the latest trends.

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The reviewed literature mentions that Bitcoin and Ethereum conditional covariance is significantly affected by cross-products of previous news or shocks, and by previous covariance terms. The explosive behavior in the returns of Bitcoin, Ripple, and Stellar is originated in the upper tails of the returns distributions (Cai et al., 2021). In addition, there are also indications of co-movements in the time frequency space where Bitcoin leads the relationship with Dash, Monero and Ripple (Mensi et al., 2019a, 2019b, 2019c).

Economics

Traditional business metrics such as liquidity ratios, which measure the solvency of traditional companies, are no longer relevant. The essence of blockchain projects and cryptocurrency, respectively, is that no one company or entity should own or be responsible in any way for the project. The Financial Market Authority (FMA) has warned[58] investors that cryptocurrencies are risky and that the FMA does not supervise or regulate virtual currencies, including bitcoin, or cryptocurrency trading platforms. As well, given that NFTs and DeFi have received growing attention, strategic asset allocation in NFT and DeFi markets can be studied and the role of traditional and digital safe havens and hedges during war crisis times. In addition, Latin America has seen impressive levels of cryptocurrency adoption over the last few years.

Additionally, it is highlighted that there are hedge and diversification properties in Bitcoin that hold unconditionally (Rehman, 2020), nonetheless are challenged by the high levels of idiosyncratic shocks to Bitcoin (Rehman, 2020). Consequently, cryptocurrencies may be seen as diversifiers against other non-digital asset classes in general (Milunovich, 2018), and against commodities in particular (Huynh et al., 2021). Reviewing the literature we further understand that cryptocurrencies are correlated in a whole, with higher volatility spillovers among them (Canh et al., 2019), and also that they present volatility clustering (W. Zhang et al., 2018). We also understand that the volatility component seems to be driven by the level of popular interest in cryptocurrencies and major market developments (Chaim & Laurini, 2019). Further evidence on Bitcoin efficiency reveals that after the introduction of Bitcoin futures, Bitcoin spot market became more efficient (Kim et al., 2020; Köchling et al., 2019a).

South Koreans were early bitcoin pioneers and have been enthusiastic traders and investors in cryptos. In 2021, total trading volumes for cryptos in South Korea surpassed that of the domestic equities market. Regulators in South Korea have taken a cautious approach to cryptocurrency exchanges and companies.

As of December 20, 2019, there exist 4950 cryptocurrencies and 20,325 cryptocurrency markets; the market cap is around 190 billion dollars (CoinMaketCap 2019). Figure 4 shows historical data on global market capitalisation and 24-h trading volume (TradingView 2021). The blue line is the total cryptocurrency market capitalization and green/red histogram is the total cryptocurrency market volume. The total market cap is calculated by aggregating the dollar market cap of all cryptocurrencies.

Today, many other cryptocurrencies are available, including Ethereum, Litecoin, and Ripple. Cryptocurrencies are digital currencies that use cryptography to secure their transactions and control the creation of new units. While cryptocurrencies have been around for over a decade, it is still considered relatively new technology and can be challenging to navigate when first getting started. This approach allows investors to gain exposure to Bitcoin’s price movements and the cryptocurrency market’s potential growth while minimizing some of the risks involved with direct cryptocurrency ownership, such as security and regulatory concerns. The optimal choice depends on your risk tolerance, investment goals and the state of the market.

In addition, the reviewed literature present evidence showing that reversal effects are more evident among cryptocurrencies with less liquidity and smaller market capitalization (Kozlowski et al., 2021). These effects are driven by market inefficiency as well as a compensation for liquidity (Kozlowski et al., 2021). It is also evidenced that liquidity factors, contribute to the explanation of excess returns (Lim et al., 2016). Furthermore, the existence of a weak positive correlation between returns and volume suggests that a misinterpretation among investors may cause extreme price movements, and illiquidity in the cryptocurrency markets (Chan et al., 2022).

Troster et al. (2019) performed general GARCH and GAS (Generalized Auto-regressive Score) analysis to model and predict Bitcoin’s returns and risks. The experiment found that the GAS model with heavy-tailed distribution can provide the best out-of-sample prediction and goodness-of-fit attributes for Bitcoin’s return and risk modeling. The results also illustrated the importance of modeling excess kurtosis for Bitcoin returns. Pairs trading is a trading strategy that attempts to exploit the mean-reversion between the prices of certain securities.

Users can stake cryptocurrencies such as Kucoin Shares (KCS), Bitcoin, and Ethereum on Kucoin to earn yields. Funding options include various crypto assets, coins and rewards are distributed automatically. Focus on cryptocurrencies with a market capitalization of less than $1 billion that have not yet been listed on major exchanges such as Binance or ByBit. Bitcoin remains the most popular cryptocurrency with the highest trading volume and market cap.

As the ICO market transforms the financial services ecosystem, regulators must clearly articulate which attributes of offerings and platforms trigger liability. A new class of assets has revolutionized capital raising, redefining antiquated notions of the terms “coins” and “tokens,” and capturing an increasingly significant role in financial markets. Celebrated by cryptoenthusiasts, blockchain-based coin offerings expand opportunities for entrepreneurs to raise capital and individual, retail, and institutional investors to invest. Last year alone, issuers launched more than two-thousand initial coin offerings (“ICOs”), raising more than $11.4 billion.

Such assets offer hedging and diversification benefits for the US and Chinese investors. Tether and TrueUSD are far from being safe havens during the COVID-19 crisis and do not offer diversification benefits for American and Chinese investors. In addition, speculators may opt for a spread strategy to improve their portfolio returns in both traditional and digital markets. Then, we examine the results of the dynamic analysis based on the rolling window spillover index estimation. Tables 4 and 5 show the static total and directional returns and volatility spillover indices for the US and Chinese stock markets, respectively.

• The Digital Asset Business Act[148] and the Companies and Limited Liability Company Initial Coin Offering Amendment Act, passed in 2018, defines digital assets and provide standards governing ICOs and digital asset businesses.
• Ljung-Box test indicates that neither the non-linear dependence nor the long memory dependence is present in residual series at 95% confidence level.
• Section 15A of the Exchange Act empowers national securities associations with similar rulemaking authority over their members.
• For new users and developers, understanding and using this system can present a challenge.
• Traders can take a position on the price of a declining economy by opting to short a currency.
• The Securities and Futures Act is also applicable to public offerings and issues of digital tokens.
• The platform supports smart contracts and decentralised applications (dApps) and is extremely popular for NFT trading.
• Cases like these demonstrate that the DOJ “can follow money across the blockchain, just as we have always followed it within the traditional financial system,” said Kenneth Polite, assistant attorney general of the DOJ’s Criminal Division.

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

Lawmakers in Chile are working to develop a regulatory and oversight framework for cryptocurrencies and to potentially recognize bitcoin as legal form of payment[44]. With a growing number of cryptocurrency exchanges in the country, and in the absence of a legal framework, the Central Bank and the Financial Market Commission[45] has said that existing regulations are applicable to cryptocurrencies. In June 2021 financial authorities said crypto-assets are not legal tender and not considered currencies under existing laws, warning that financial institutions that operate with them are subject to sanctions. On the risks inherent in the use of so-called ‘virtual assets’ as a means of exchange, as a store of value or as another form of investment,” the statement said.

Empirical evidence suggests that cryptocurrencies share most of the stylized facts with financial time series, such as stocks and currencies returns. Cryptocurrencies are also known to be highly volatile and exhibit extreme price jumps compared to traditional financial securities like currencies and are leptokurtic. Osterrieder and Lorenz [4] suggests that Bitcoin returns not only exhibit higher volatility than conventional fiat currencies but also non-normal and heavy-tailed characteristics. Another important feature of cryptocurrencies is that as opposed to sovereign currencies in a one-money economy there are several types of such cryptocurrencies available in the market.

Thus, future studies may consider other high-quality journals to allow investors or policymakers to obtain a more comprehensive understanding of cryptocurrency pricing. Future studies could also research the connections between traditional finance and the cryptocurrency market to improve the depth of research. Several studies have demonstrated that gold, as a macro-financial factor, has a significant and positive effect on the Bitcoin price. Based on deep learning methods, Lamothe-Fernández et al. (2020) showed that gold positively affected Bitcoin pricing.

Liquidity generally describes the amount of time and effort that is required to identify a ready and willing counterparty to a securities trade at a relatively stable price without sensitivity to the volume of the purchase or sale order. Because of their role matching buyers and sellers, exchanges are an organic repository of real-time information regarding market transactions. Stock Method Max Exchanges aggregate information regarding bids (the maximum price that a buyer will pay to purchase a security) and asks (the minimum price that a seller will accept) and reflect the economic impact of new information on securities pricing. Based on the supply and demand dynamic, price discovery establishes the current market-share price for a given security.