Overview of cryptocurrency development and digital mining process.

A cryptocurrency is a digital, encrypted asset used for trading (Helter, 2022). When American
cryptographer David Chaum published a conference paper explaining an early type of
anonymous cryptographic electronic money in 1983, the concept for cryptocurrencies first came
to light (Jones 2022). The idea was to create a kind of money that could be distributed
anonymously and without the need for centralized organizations (i.e., banks). Based on his
original concepts, Chaum created a prototype cryptocurrency called DigiCash in 1995. Before
money could be delivered to a destination, it needed certain encryption keys and user software to
withdraw money from a bank (Jones, 2022). It can be used in exchange for products, services,
and investments in a manner like fiat currencies. Governments issue fiat currency, like the
existing monetary system. The core tenet of cryptocurrency value is that if enough people
believe it to be valuable, then its value will increase (Helter, 2022). A national currency that is
not linked to the price of a good like gold or silver is known as a fiat currency. Fiat money's
value is mostly determined by the public's confidence in the currency's issuer, which is typically
the government or central bank of that nation (IG, 2022).

Networks of specialized computers create and release new Bitcoin through the mining process,
which also verifies new transactions (Coinbase, 2022). It is the method used by Bitcoin and
many other cryptocurrencies to create new coins and validate new transactions. It makes use of
sizable, decentralized computer networks that verify and safeguard blockchains globally. The
network's computers receive new coins in exchange for using their processing power. It is a
positive feedback loop: the miners protect and secure the blockchain, the blockchain distributes
the coins, and the coins provide the miners incentive to protect and secure the blockchain
(Coinbase, 2022). However, crypto mining also entails adding bitcoin transactions to a
distributed ledger and validating them on a blockchain network. The most significant benefit of
crypto mining is that it stops dispersed network users from spending digital currency twice. A
digital currency faces difficulty since it is simple to manipulate digital systems. Therefore, only
verified miners are permitted to update transactions on the digital ledger using Bitcoin's
distributed ledger (Freemanlaw, 2022). As a result, miners now have the additional duty of
protecting the network against double spending. The majority of cryptocurrency mining software
includes a mining pool, but nowadays, crypto enthusiasts can also sign up online to build their
own mining pools. Miners are free to switch pools whenever they need to since some pools give
higher rewards than others (Freemanlaw, 2022).

Bitcoin, which was developed by an unidentified programmer or group of programmers under

the moniker Satoshi Nakamoto, helped cryptocurrency gain popularity in 2008. Cryptocurrencies
have gained popularity since the release of Bitcoin in 2009. People that need to transmit money
across borders without interference from banks or governments are using Bitcoin more and more
frequently (Nigeria, 2021).

Advantages and limitations of cryptocurrencies

There are numerous advantages to using and creating cryptocurrencies. Cryptocurrency can be
used by anyone. All that is required is a computer, smartphone, and an internet connection.
Comparing the process of creating an account at a conventional financial institution to that of
setting up a bitcoin wallet, the latter is incredibly quick. There is no need to verify your ID
(Bylund, 2022). Most cryptocurrency payments settle in minutes, and some even in seconds. In
contrast, bank wire transfers can be much more expensive and frequently take three to five
working days to complete. However, several things affect cryptocurrency mining. The mining
rig's hash rate, electric power consumption, and overall costs are the most crucial aspects to
consider regardless of whether a prospective miner opts for CPU, GPU, ASIC, or cloud mining
(Freemanlaw, 2022). The asset class of cryptocurrencies is currently recognized as being
uncorrelated. Theoretically, cryptocurrency markets operate mostly independently of other
markets, and their price movement is typically influenced by reasons different from those that
drive stocks, bonds, and commodities (Nibley, 2022). The primary benefit of cryptocurrencies is
that they do not require a central bank to coordinate their operations in order to function.
However, this is also one of these investments' main drawbacks. Most transactions are
irreversible since there is no central bank or exchange that handles all of them. Cryptocurrency
investments are maintained in digital wallets with digital password protection. The money held
in the digital wallet may become inaccessible to them and there will be data loss if the owner
deletes these passwords and is unable to restore them on his own. There is no financial flow
produced when it comes to cryptocurrency. The investor only stands to win if they can locate a
buyer of the currency who is prepared to make a greater offer. Due to this, cryptocurrency
investors are susceptible to market whims (MSG, 2022).

OBJECTIVES

● Compare the volatile cryptocurrencies and fiat currencies to examine the possibility of
cryptos replacing the fiat currencies in the near future.
● Compare the volatile cryptocurrencies and commodities to examine their ability to
provide a digital mining space to challenge or complement the mining commodities.
● Compare the volatile financial markets to cryptocurrencies to examine if cryptos will
retain or increase in value in the upcoming years

Analyse whether cryptocurrencies can be used as a safe-haven for volatile financial markets,
such as stock markets during the COVID-19 crisis. You have to collect data and compare the
performance of major cryptocurrencies and 2 major stock market indices of your choice pre and
during the COVID-19 period

Safe-haven investments are thought to be uncorrelated or negatively associated with other assets
or portfolios during periods of market turbulence. They are anticipated to maintain or perhaps
rise in value during such periods. Investors can create portfolios that lessen market risk by using
safe haven assets. (Ji, Zhang, and Zhao,2020). Wang et al. (2019) looked at the possibility of
using Bitcoin as a safe haven or hedging asset. They undertook an examination of the mean and
volatility spillover effects between Bitcoin and significant assets. They found that, on average,
Bitcoin has a high rate of return, high volatility, and weak correlations with other assets based on
daily data about Bitcoin and six other significant financial assets. Contradictory to the definition
of a safe haven, Wang et al. (2019) claimed that Bitcoin can be used to diversify portfolios that
include FX, but it cannot be considered a safe haven for commodities and gold.

Wang et al. (2019) examined the possibility of cryptocurrencies acting as a hedge or safe haven
for 30 worldwide indexes from a dynamic and thorough perspective. Based on daily data from
April 2013 to November 2018, they discovered that, at times, cryptocurrency is not a hedge but a
safe haven for several international indices. The safe haven effect is greatest in developed
markets and in subgroups with higher market capitalisation and liquidity. Furthermore, Wang,
Ma, and Wu (2020) found that while the majority of stable currencies function as good
diversifiers in typical market circumstances, they can also work as safe havens in certain
circumstances. Therefore, as Wang et al.(2019) suggested the state of an economy plays a great
role in determining whether cryptocurrencies can be used as a safe-haven.

An analysis of the effects of economic policy uncertainty (EPU) on Bitcoin (BTC) markets was
done by Wang et al. in 2020. BTC was used to create value-weighted composite indices for the
British Pound (GBP) and the United States dollar (USD). Their study's findings indicate that
returns are noticeably higher on days with the highest EPU. In contrast to the United Kingdom
(UK) EPU, the United States (US) EPU raises BTC volatility and trading volume after spike
days. The UK BTC market is impacted by the US EPU as well. Similarly, using the DCC-
GARCH model and dummy variable regression, Wang, Ma, and Wu (2020) found that stable
coins function as diversifiers, hedges, and safe havens when compared to conventional
cryptocurrencies. They contrasted typical cryptocurrencies with USD-pegged and gold-pegged
stable coins, as well as their risk-distribution properties with the underlying assets. As safe
havens, both USD-pegged and gold-pegged stable coins outperform their equivalent underlying
assets, and the safe haven quality of stable coins varies with market conditions.

As a result of the ongoing COVID-19 pandemic, the global financial system has been rocked and
there has been great turmoil. Facing unprecedented risks in the markets, people have increasing
needs to find a safe haven for their investments. (Ji, Zhang and Zhao, 2020). Several authors,
such as Wang, Ma, and Wu, (2020) claim that due to the steep volatility of cryptocurrency
prices, investors with low risk tolerances avoid adding cryptocurrencies to their portfolios. It is
difficult for investors to gain stable returns or maintain value with cryptocurrency due to its high
volatility. As Wang et al. (2019) noted, while Bitcoin has a higher return than other assets, it also
has a higher volatility. Nevertheless, the government's economic policies play a significant role
in determining the overall economy, such as fiscal, monetary, and tariff policies. Direct
government intervention in the capital markets may have far-reaching effects when the economy
is in recession. (Wang et al., 2020).
Traditional currency vs cryptocurrency characteristics (transactions, functions and risk
exposure)

Traditional currency is a type of money that is centralized, supported, and maintained by a

recognized government agency, such as the US Federal Reserve or the SARB (TradeStation,
2020). It is acknowledged as a medium of trade, a store of value, and an accounting unit.
However, money also represents a social bond that ensures a community's coherence by allowing
transactions and assigning monetary worth to things within that society (Orzi, 2017). The value
of fiat money is determined by the relationship between supply and demand as well as the
stability of the issuing government, rather than the value of the commodity supporting it (Chen,
2022). Fiat money runs the danger of depreciating in value owing to inflation or possibly losing
all of its value in the event of hyperinflation since it is not backed by actual reserves like a
national stockpile of gold or silver (Anderson, 2022). The rate of inflation can double in a single
day in some of the worst cases of hyperinflation, such as in Hungary soon following World War
II. Furthermore, a country's currency will lose value if people stop believing in it.

Although the idea of digital money has been around since the late 1980s, the first decentralized
cryptocurrency to be a success is Bitcoin, which was introduced in 2009 by the mysterious (and
as of yet unidentified) creator Satoshi Nakamoto(Corbet et al., 2020). Cryptocurrency is a type of
money that is decentralized, not supported, or maintained by a recognized government agency,
such as the US Federal Reserve or the SARB.A cryptocurrency, or virtual money, allows users to
make virtual payments for products and services without the use of a centrally controlled,
dependable authority. Cryptographic techniques are used by cryptocurrencies to secure valid,
one-of-a-kind transactions. Cryptocurrencies rely on the transmission of digital information. By
decentralizing the currency and releasing it from hierarchical power structures, Bitcoin advanced
the digital coin market. On a peer-to-peer network, people and companies instead exchange the
coin electronically(Farell, 2015).

The market for cryptocurrencies has expanded quickly. This market enables businesses to be
traded without being listed on stock exchanges and to raise funding without working with
venture capitalists. The full spectrum of cryptocurrencies available on the crypto market
includes well-known ones like Bitcoin, Ethereum, and Ripple as well as considerably less
popular ones. On the cryptocurrency market, there are two points of view. The majority of the
coins—possibly all of them—represent fraud and inflated values, to start. The second is that the
blockchain technology embedded in coins may prove to be a significant innovation, and that
some coins may be investments in the future of this technology ( Liu et al., 2022).

Transactions

There is a possibility of currency freezing because traditional currency is only operational five
days a week and because of transaction restrictions. Users must disclose their names, addresses,
phone numbers, and many other personal details in order to conduct transactions using a
traditional currency system. Therefore, a hostile user will be able to quickly breach the account
information of the traditional money system using internet technology (Qrius, 2020). Every
transaction involving cryptocurrencies is documented as blocks in a blockchain, a sizable open
ledger. All cryptocurrency users will be aware of the transaction details because they are public,
but the user's identity will never be revealed, ensuring their anonymity. A national transaction
would take two to three working days to complete in a regular banking system, and there would
be significant transaction costs. It will take 15 days to process an international transaction, and
the transaction charge will be significantly greater. A national transaction in a cryptocurrency
network like bitcoins is free of transaction fees. Due to the 24/7 operation of the bitcoin system,
the transaction will likewise happen instantly or within 24 hours. There will be a small
transaction fee associated with conducting an international transaction (NDTV Business Desk,
2022). This basically indicates that compared to regular currencies, cryptocurrencies have
substantially lower transaction costs.

Functions

To use cryptocurrencies, you need a cryptocurrency wallet. These wallets can be a

software that is a cloud-based service or is stored on your computer or on your mobile
device (Oswego.edu, 2021). To understand how cryptocurrency works, one needs to
first understand three terminologies – blockchain, decentralization, and cryptography
(Vaidhyanathan, 2022).
GRAPHS

The graphs above show the plots of return series for four major cryptocurrencies, two fiat
currencies, two commodity markets and two stork market indices, where there is evident
clustering of the volatility, indicating that the volatility may be forecasted. It can be shown that
fluctuations in volatility over time tend to cluster financial returns, which is also a sign of long
memory. In other words, it's common for big changes to be followed by bigger changes, and vice
versa for small changes to be followed by smaller changes (Amudha and Muthukamu, 2018). All
graphs are extremely volatile except for Crude oil. This is due to the substantial decrease in
crude oil prices from 2014 to 2016, which highlights the increased level of uncertainty in the
crude oil market. Thus, given the crucial role that crude oil plays in the global economy, the
issue of controlling the oil price risk is one that economists, policymakers, and other market
participants are very eager to address (Oyuna and Yaobin, 2021).

Amudha, R. and Muthukamu, M.(2018). Modeling symmetric and asymmetric volatility in the
Indian stock market. Indian J. Finance. 2018, 12, 23–36.

Oyuna, D. and Yaobin, L. (2021). Forecasting the Crude Oil Prices Volatility With Stochastic
Volatility Models. SAGE Open, 11(3). https://doi.org/10.1177/21582440211026269

Table 9 interpretations

Table 9 shows the selected cryptocurrencies compared against the selected stock market indices
before Covid-19, and the results are shown. The α shows the coefficients for the variables
selected to compare performance, and although a 16.23% presence of variance shock is visible
for bitcoin before Covid-19, Table 10 shows an increase to 2.54%. For a leverage effect, the
sign, magnitude and statistical significance of gamma is looked at. The leverage parameter γ is
positive at 0.05000 for dogecoin only indicating the presence of the leverage effect in the
variance-generating process.

Constants c and alpha must be greater than 0 for variance equation coefficients to be non-
negative and beta must be greater than 0 (e.g., coefficient of GARCH(-1)) alpha + gamma > 0.
Hence, the variance model remains valid even if gamma = 0 if alpha + gamma >= 0. As noted by
Wilhelmsson (2006), the non-negativity condition is not violated because the past shock
GARCH term (0.821994) confirms that the variance is stationary statistically significant (at 1%)
and their sum is near unity, indicating that volatility persists.

In GARCH(1,1) models, volatility persistence is given by β+α<1. All variables have a

conditional variance less than 1. There was a volatility persistence of less than 1 for the stock
market indices before and during the crash. According to Beg and Anwar (2012), stock prices
may experience volatility only for a few hours, but other financial assets may experience it
longer.

Beg, A.B.M.R.A. and Anwar, S. (2012). Detecting volatility persistence in GARCH models in
the presence of the leverage effect. Quantitative Finance, 14(12), pp.2205–2213.
doi:10.1080/14697688.2012.716162.

‌Wilhelmsson, A. (2006). Garch forecasting performance under different distribution assumptions.

Journal of Forecasting, 25(8), pp.561–578. doi:10.1002/for.1009.
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