What is the utility of cryptocurrencies?

Details

Supervisors

Cornuel, Eric

Faculty

Louvain School of Management

Degree label

Master [120] en sciences de gestion

Abstract

Cryptocurrencies are digital currencies encrypted for safety. They are decentralized, it means users of the network validate the transactions. These transactions are encrypted to protect the identities of users. Transactions are registered in the blockchain: a public ledger that stores all transactions ever made since its creation. Miners (users of the network) receive rewards to verify transactions and insert them in the blockchain. These mining rewards are the tool used to issue new currency. The “mining rewards” of most cryptocurrencies decrease at a predetermined rate and stop at a predetermined moment, thus decreasing the pace of money creation before putting an end to it. The price of cryptocurrencies solely relies on supply and demand. The prices thus tend to increase over time, as supply is slowly created and/or limited. Such currencies are illegal in some countries, considered assets in some and currency in others. There are almost no barriers to creating a cryptocurrency, there are thus 830 cryptocurrencies. This market is very concentrated: the top 3 cryptocurrencies own 85% of market shares (Bitcoin – 56%, Ethereum 16% - Ripple 13%). The market grew 1295% in the last 2 years, making it a $53.6 billion market on May 11th, 2017. Cryptocurrencies offer advantages such as low fees and high speed. They also allow financial inclusion of individuals excluded from the global financial system. Their confidentiality protects individuals from authoritarian regimes and protects consumers from commercial tracking. Their decentralized systems reduce risk of fraud, corruption, human mistakes, and hacking (it is technically more difficult to hack a system functioning with a blockchain, than to hack a centralized register such as a bank) Most cryptocurrencies’ supplies are deflationary. As their price is only determined by supply and demand, their price will always increase. This, coupled with high volatility, decreases their utility as a mean of exchange. This situation corroborates claims that cryptocurrencies are assets or commodities, but not a mean of exchange. There are however numerous ways to consume with cryptocurrencies, and at least two ways to invest: ICOs and ETFs. ICOs are a new way for organizations to raise capital without red tape and without minimal size, it is at the crossroads between an IPO and crowdfunding. ETFs are not yet legal but may become funds in cryptocurrencies whose shares can be traded on the stock market. The tested hypothesis was “Bitcoin has been a safe-haven currency since January 2014”. A “safe-haven currency” appreciates when stock markets are in distress. Empirical research during that timeframe has refuted our hypothesis because of a lack of correlation between the VIX, which indicates unrest in stock markets, and the price of Bitcoin in times of distress in the markets.