On the robust drivers of cryptocurrency liquidity: the case of Bitcoin Financial Innovation Full Text

One of the largest Bitcoin transactions ever recorded involved moving 500,000 BTC in November 2011. However, large transactions are common on the blockchain and often involve exchanges or large traders moving funds between wallets. Hut 8 Mining Corp is one of North America’s oldest, largest, and innovation-focused digital asset miners, headquartered in Canada. The company is engaged in the mining of cryptocurrencies, with a significant focus on Bitcoin, utilizing both green energy and traditional power sources to optimize mining efficiency and sustainability.

Financial stability and regulatory challenges

All results are based on a vector autoregressive model of order 2 and generalized variance decompositions of 30-day-ahead forecast errors. Long-and-short term trading research There are significant differences between long and short time horizons in cryptocurrency trading. In long-term trading, investors might obtain greater profits but have more possibilities to control risk when managing a position for weeks or months.

• This is because these are stablecoins – cryptocurrencies pegged to the price development of an external asset.
• E.g. for Bitcoin, the supply will decrease over time and will reach its final quantity sometime around 2140.
• First, we examine both return and volatility spillover between the US and Chinese stock market indices, gold and cryptocurrencies before and during the COVID-19 pandemic crisis.
• On March 2, 2020, we rebranded our ETP line to 21Shares to, among other things, differentiate our product line.
• It is also most interesting that the EtherDelta platform continues to operate (although with exceptionally limited trading activity) and the Commission has not taken any further action.
• Third, we calculate the Diebold and Yilmaz (2012) indexes over a period ranging from August 2018 to January 2021 that covers several turbulence events, including the drop in oil prices and the COVID-19 pandemic.

2 The role of liquidity in the cryptocurrency market

Favor projects that have been time-tested or that offer unique capabilities not easily copied and have the promise of widespread adoption. Use dollar-cost averaging for crypto, which is making small, recurring purchases on a set schedule, such as weekly or monthly. Automate these purchases through an exchange rather than buying manually each time. Erika Rasure is globally-recognized as a leading consumer economics subject matter expert, researcher, and educator. She is a financial therapist and transformational coach, with a special interest in helping women learn how to invest.

• However, it’s important to note that the cryptocurrency market is highly volatile, and rankings can change rapidly.
• That report highlighted the need for policymakers, regulators and firms all to play their part in ensuring that cryptos are as “safe” as possible, not only in terms of investment risk but also with regards to regulatory certainty and cyber resilience.
• Hence, the APARCH (1, 1) model has the highest number of passes and is therefore considered to be the most appropriate model in forecasting VaR for the Bitcoin.
• As a result, will buy relatively more crypto when prices drop and less when they rise, reducing the impact of volatility.

Bitcoin (BTC)

Ethereum largely remained in the background in 2023 as Bitcoin and numerous other cryptocurrencies experienced surges in popularity. Although it increased by an impressive 80%, it was not one of the best cryptocurrencies to buy, when we look at other well-known altcoins such as Avalanche, which increased by 250%, and Solana, which increased by more than 900%. The experiment of using Bitcoin as workable money in El Salvador hasn’t been well received by the locals. Just $126 million of the more than $7 billion in remittances that were received into El Salvador from overseas in 2022 ended up in Bitcoin accounts. According to industry experts, other crypto projects have surpassed Bitcoin in terms of network and usability, therefore its competitive advantages have diminished.

Tether analytics

The conditional and unconditional coverage tests are used to backtest the accuracy of VaR forecasts. Finally, a comprehensive out-of-sample comparison is implemented to investigate the effects of long memory in the volatility process as well as the asymmetric responses to historical values of the return series to forecast volatility. Unfortunately, the majority of recent studies have focused entirely on the Bitcoin behaviour or a few other cryptocurrencies and specifically on the in-sample modelling framework. Trucios [23] estimated the one step-ahead-ahead volatility forecast using several GARCH-type models and also estimate Value-at-Risk taking into consideration the presence of outliers. Naimy and Hayek [24] compare the one-step-ahead volatility forecasting ability of the GARCH, the EWMA, and the EGARCH models with normal, Student’s t and generalized error distributions.

Keywords and databases

• Remember, you should have some trading experience and knowledge before you decide to trade based on cryptocurrency forecasts and price predictions.
• Motivated by the practical implications of cryptocurrency liquidity, numerous studies have explored liquidity dynamics in different market states and across trading venues.
• However, cryptocurrencies are not like stocks and can’t be analyzed using the same metrics.
• The exceedances involve counting the number of actual realized returns that exceed the VaR forecast, and comparing this number with the hypothetically expected number of exceedances for a given probability.
• The conclusions of this study are of extreme importance for researchers, investors, regulators, and the academic community in general.

The maker then creates an order specifying a desired exchange rate, expiration time, and cryptographically signs their exchange order with their private key. The order is not broadcast across the blockchain network, rather it is distributed across a communication medium. Centralized exchanges create single points of failure and face a number of risk management concerns. International media coverage has chronicled the cybersecurity breaches at Mt. Gox, Shapeshift, Bitfinex, Poloniex, QuadrigaCX, and Bithumb. Hackers stole more than $4 billion in cryptocurrencies from centralized exchanges between 2011 and 2017.

• 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).
• As shown in the first graph, a positive one standard deviation shock in lnRPL reduces lnSM slowly to a sustained long-run value of about 3.82.
• Ahlem Lamine holds a PhD in Finance from the University of Sfax (Tunisia), Faculty of Economics and Management, teaching Finance, and Portfolio management.
• Corbet et al. (2019) gave a systematic analysis of cryptocurrencies as financial assets.
• Jalan et al. (2021) studied the performance of five gold-backed Stablecoins during the 2020 global pandemic and compared them to Bitcoin, Tether and gold.
• In an event study, Yue et al. (2021) establish that cryptocurrency liquidity tends to rise (decline) following announcements of good (bad) global news.
• The risk of loss in online trading of stocks, options, futures, currencies, foreign equities, and fixed income can be substantial.

Bubbles and Crash Analysis

A cryptocurrency is a digital asset that can circulate without the centralised authority of a bank or government. According to CoinMarketCap, there are more than two million cryptocurrency projects out there that represent the entire $US2.23 trillion crypto market. The distinctive feature of the spot market is that it deals with trades backed by real assets. A traditional spot market is the commodities market (oil, metals, grains), where all trading is done through an order book. It’s assumed that all trades on the spot market are backed by crypto on a 1-to-1 basis. In addition, with the private key completely secure, users can now hold their assets online and no longer need cumbersome cold-storage devices.

Indirect Bitcoin Exposure

A percentage increase in cryptocurrencies will raise stock market by 0.128% in the short ? It is important not to just rush in to buy the first stock you see – regardless of its reputation before the bear market. Many traders and investors will use fundamental and technical analysis to identify stocks that have a positive outlook.

Tether Enters the Latin American Market

Any transaction involving purchase, sale, investment, etc. involves a Blockchain native token or sub-token. Blockchain is a platform that drives cryptocurrency and is a technology that acts as a distributed ledger for the network. The network creates a means of transaction and enables the transfer of value and information. Cryptocurrencies are the tokens used in these networks to send value and pay for these transactions. They can be thought of as tools on the Blockchain, and in some cases can also function as resources or utilities.

Who Are The Founders Of Tether?

The Argentina Securities and Exchange Commission[38] (CNV) will be the regulatory body with oversight responsibilities. It plans to maintain a national registry of operations, with transactions reported to the Financial Information Unit for compliance with AML requirements. The Canada Revenue Authority (CRA) generally treats cryptocurrency like a commodity for purposes of the Income Tax Act. Policymakers are all-too aware of the need for a coherent approach to cryptos. “Global crypto regulation should be comprehensive, consistent and coordinated,” according to the IMF. There is also concern that crypto firms can, and are, being used as conduits for facilitating financial crime.

Why You Should Trade Crypto With Leverage

Exchanges that cater to specific regions may experience varying levels of liquidity based on local demand and trading activity. Brauneis et al. (2022) show that Bitcoin liquidity disparities between trading venues are more substantial and persistent than those in stock markets. They also find that liquidity is linked much more to blockchain activity and exchange-specific factors than to global factors. This paper investigates the dynamic linkages between stock markets, cryptocurrencies and gold. We analyze volatility return and risk spillover effects between these markets using the Diebold and Yilmaz (2012) spillover index. Our empirical results show statistically significant risk spillovers among financial markets, which intensified during the recent COVID-19 crisis.

The Gennaro and Goldfeder MPC Algorithm

To operate under this exemption, an ATS must comply with the requirements in Rules 300–303 of Regulation ATS. According to the Commission, Coburn knew or should have known that his actions would contribute to EtherDelta’s violations. Coburn developed the EtherDelta platform on July 8, 2016 Stock Method Max as a smart contract, a digital currency exchange that verifies, executes and enforces transactions based on predetermined conditions. BNB is the native cryptocurrency of BNB Chain, a public decentralized network developed by Binance, the largest cryptocurrency exchange by trading volume.

Beyond Bitcoin

Katsiampa et al. (2018) found extreme dependence between returns and trading volumes. Evidence of asymmetric return-volume relationship in the cryptocurrency market was also found by the experiment, as a result of discrepancies in the correlation between positive and negative return exceedances across all the cryptocurrencies. Lamon et al. (2017) used daily news and social media data labeled on actual price changes, rather than on positive and negative sentiment. By this approach, the prediction on price is replaced with positive and negative sentiment. The experiment acquired cryptocurrency-related news article headlines from the website like “cryptocoinsnews” and twitter API. Weights are taken in positive and negative words in the cryptocurrency market.

The Impact of Cryptocurrency on the Stock Market

In this section, we conduct additional checks to ensure the validity of the empirical evidence. Specifically, Abdi and Ranaldo’s (2017) bid/ask spread estimator is adopted to assess the sensitivity of our results to alternative liquidity proxies. The elastic net algorithm of Zou and Hastie (2005), a variable shrinkage and selection technique, is used to verify whether our results are driven by the methodology applied in the main analysis.

Non-fungible tokens

Some of the GARCH-models selected at 95% level still perform well at 99% level. The APARCH (1, 1) model still gives the best fit for Bitcoin and Ethereum; EGARCH (1, 1) model for Moreno; CSGARCH (1, 1) for Dash. Litecoin, Stellar and also Bitcoin have several best fitting models including; GARCH (1, 1), CSGARCH (1, 1), AVGARCH (1, 1), APARCH (1, 1) and TGARCH (1, 1). Finally, EGARCH (1, 1) and CSGARCH (1, 1) give the best fit for NEM and GARCH (1, 1) and GJR (1, 1) for Ripple. The accuracy of the different fitted GARCH-type models considered in the study is assessed by using exceedances percentages at 95%, 97.5%, and 99% confidence levels. The exceedances involve counting the number of actual realized returns that exceed the VaR forecast, and comparing this number with the hypothetically expected number of exceedances for a given probability.

4 Does uncertainty affect the cryptocurrency market?

Regarding average publications per year, the Economic Letters is the most cited Journal around the year 2019. Additionally, we reveal that of the 138 analyzed studies 18.84% were solo-authored and 81.16% were co-authored. The solo-authored studies contributed with 27.76% of citations (1070) and the co-authored with 72.24% (2785). This shows evidence that solo-authored studies present a higher citations per publications ratio (41.15) compared with the co-authored studies (24.86). The information criteria values for GARCH-type models fitted over for the sample period with selected innovations distributions.

2019 is the year when more articles were published (46) and, also the year with the highest number of citations (1,530). As expected, recent years present fewer citations, given that older articles have more probabilities of having more citations. Additionally, we evidence a very low correlation (0.07) coefficient between publications and citations over time. These results highlight the novelty of this field of knowledge and, also a growing interest of the academia in the cryptocurrency market.

A wealth of scholarly, industry, and media commentaries offer proposals that address the application of federal securities laws to ICOs. This burgeoning literature presumes that developing legal standards applicable to primary offerings may offer a path for resolving questions regarding the legal standards applicable in secondary market trading. Finally, our evidence contributes to a common understanding and identification of the factors affecting Bitcoin liquidity. Since such factors could be a source of liquidity-related concerns, the results may benefit central banks and international bodies responsible for maintaining financial stability. Instead of directly interacting with the blockchain, you invest your crypto assets on a centralized staking platform, which handles the process on your behalf, allowing you to gain rewards without direct blockchain involvement.