Academic articles on bitcoin minerals
If the file that contains this information is altered or lost, say as a result of a hard disk failure, a computer virus, or hacking, the bitcoin associated with the keys is lost. This has been reported by several users, according to the report. Cyber-attacks have even targeted exchanges that serve to facilitate bitcoin transactions, causing the value of bitcoins to plunge.
On another level, bitcoin has no intrinsic value and can be seen as an example of a Ponzi scheme because early users and owners can only receive fiat currency for bitcoin they own if new users enter the community and are willing to buy bitcoin using a fiat currency.
From a law enforcement perspective, the anonymity of bitcoin accounts makes it ideal for money laundering, tax evasion, and black market trading of contraband goods Brustein ; Goldberg To date, there has been very little academic research on the economic aspects of bitcoin.
Four reasons help explain the paucity of research. One is the relative obscurity of bitcoin to those outside of the computing and cryptography community Lee Another is that the number and value of bitcoins created so far have been quite small in relation to the size of the global economy Velde Bitcoin is also difficult to use for the payment of goods and services in the physical world, and, as per records available from the website blockchain.
Finally, many bitcoin enthusiasts and active members of the community that govern the mining of bitcoins and maintain the records of their transactions are extremely skeptical of central banks entrusted with the management of fiat currencies. Mainstream economists generally have little respect for these views and may have, by extension, ignored something favored by these groups Lee However, the sharp spike in bitcoin price in attracted attention from the popular press.
In line with the mining of additional bitcoins and their rapidly rising value, the number of daily transactions has mushroomed to tens of thousands. In late March , FinCEN announced steps to extend monitoring of money laundering activities to include companies that deal in bitcoins. These firms must keep more detailed records of bitcoin transactions and report high volume transactions Satter Grinberg examined the economic aspects of bitcoin and pointed out that bitcoin has a competitive advantage in micropayments because it is divisible to eight decimal places.
In addition, it is competitive in the online gaming world because it is not tied to any one particular issuer such as Facebook credits, Linden dollars, and World of Warcraft WoW gold, which are controlled by Facebook, Second Life, and Blizzard Entertainment, respectively. However, bitcoin is also vulnerable to the emergence of a competing virtual currency because barriers to entry and start-up costs are extremely low or a crisis of confidence caused by abuse of discretionary authority by the leaders of the bitcoin community Grinberg Currently, the electronic money directive of the European Union does not offer such clarity because bitcoin may qualify to be exempt from the regulation Jacobs However, it appears that legislators are moving toward introducing regulations that would make bitcoin transactions more secure and transparent even though the use of bitcoins for economic transactions is extremely limited, especially if illegal activities are excluded.
Velde , in his capacity as senior economist of the Chicago Federal Reserve, concluded his discussion of bitcoins with an intriguing possible scenario that bitcoins could eventually form the basis of a new monetary system. In a throwback to the gold standard era, money will not be based on a fiat currency and central banks will have only limited flexibility in its creation. However, the quantity of money would not be affected by the geological and political uncertainties associated with physical gold.
In particular, this study examines whether bitcoin has the three main attributes of a currency: This paper also investigates the value of bitcoin as an investable financial asset by incorporating it in portfolios that include major world currencies, U.
This study assesses whether the inclusion of bitcoins in such an investment portfolio enhances its efficiency. Daily closing prices and trading volume of bitcoins was taken from bitcoincharts. Gold is often considered a good hedge and a safe haven currency during times of extreme financial distress Bauer and Lucey Hence, in addition to major world currencies, we also compared bitcoin price returns to gold price returns.
We obtained daily price quotes for gold from the Bloomberg Professional database. To assess portfolio performance of bitcoins when this asset is included in a diversified portfolio with major asset classes, we needed proxy portfolios of various asset classes. For this part of the study, we included major indexes representing each asset class. This index evaluates the U. For the final part of the analysis, we needed investable assets representing these asset classes in order to capture market capitalization data.
Exchange traded funds ETFs provided the solution. In an attempt to examine if bitcoin behaves like a currency, we examined the distributional properties of its returns along with those of other major currencies and gold.
Another objective of the analysis presented here was to examine whether bitcoins can serve to enhance portfolio performance metrics. As mentioned earlier, we examined portfolios formed with indices representing currencies, stocks, bonds, real estate, commodities, and the fear index with and without the addition of bitcoins to these portfolios. Optimum portfolios were examined after a simulation of 1, trials in which random weights for each asset class were drawn in each trial; then the portfolio that optimized each examined measure was selected for illustration.
Consistent with most investor preferences, we chose to examine long-only portfolios. At first, we examined portfolios that minimized the total variance. This objective was defined as: The optimization of asset weights w pi in each portfolio p was conducted subject to the constraints that the portfolio is fully invested all asset weights sum up to 1 and that each asset weight is greater than or equal to zero long-only portfolios. We examined two versions of the minimum variance portfolio: The latter optimization procedure minimized the negative variance of long-only portfolios under the assumption that investors choose to ignore positive deviation and are only concerned about minimizing the negative deviation in portfolio returns.
We also measured portfolio efficiency with the Sharpe ratio and the Sortino ratio. These measures maximize risk- adjusted excess returns. The optimization process may be defined as: We used the risk-free rate RFR as the target return in the optimization process. Next, following post-modern portfolio theory, we examined the portfolios that maximize the measured Omega ratio. The Omega ratio is based on the proportional distribution of returns above and below a specified target. Among its many advantages see Shadwick and Keating , the one that pertains most to an investor is that it minimizes the potential for extreme losses.
In the portfolio optimization process using the Omega ratio, we used zero as the target to differentiate positive from negative returns. The optimization process can be defined as: Where, F x dx represents the respective cumulative distribution functions. As mentioned earlier, 1, trials were conducted for each portfolio over the sample period in order to select the optimal portfolio weights. The probability of loss is simply the relative frequency with which a negative return is observed in the 1, trials.
The final part of the analysis used the Black-Litterman approach to examine whether bitcoins remain in an investment portfolio even after incorporating various pessimistic views regarding the performance of bitcoins. Data enters the Black-Litterman model from two sources: Historical returns and co-variances were used to produce baseline forecasts that were supplemented with quantified views. A vector of revised expectations, conditioned on these views, was then entered into the model to produce optimum portfolio weights.
To begin with, one must start with a neutral portfolio. Black and Litterman suggested starting with the equilibrium market capitalization weighted portfolio. We used ETFs rather than indices for this part of the analysis. Also, lacking a suitable ETF to represent the value of the U. Starting with the neutral market capitalization weighted portfolio, we employed the Black-Litterman approach to tilt the portfolios reflecting various pessimistic views regarding bitcoin returns over the next period.
We focused on these pessimistic views regarding bitcoins because we were interested in observing whether bitcoins are still a consequential part of an optimal portfolio after model expectations have been revised to incorporate these pessimistic outcomes.
The limited number of daily bitcoin transactions, although growing rapidly, suggests that this asset fails in serving as a medium of exchange capable of being traded for a wide variety of goods and services.
Nor are bitcoins used much as a unit of account. In fact, even merchants that accept bitcoins still price their goods and services in sovereign fiat currencies, such as the U. So, bitcoin does not have the key attributes of a currency and instead should be regarded as a very illiquid financial asset. All other examined currencies, as well as gold, provided U.
The Japanese yen is unique in its negative average daily return, attributable to the weakness of the Japanese currency relative to the U. The large daily returns for bitcoin were also accompanied by larger risk, as evidenced by its standard deviation, which was the highest of all currencies examined, as well as that of gold.
While bitcoin returns do not suffer from skewness, it is highly leptokurtic, indicating a fat tailed distribution. This underscores the risk inherent in bitcoins, which was not evidenced in most of the examined currencies, except for the Swiss franc. Gold returns also demonstrate high kurtosis. However, given that gold returns have a much smaller standard deviation, bitcoin was the most risky currency or pseudo currency examined.
The correlation of daily returns between bitcoins and other assets are shown in Tables 2A and 2B. From Table 2A, it is worth noting that daily bitcoin returns have very low or insignificant correlations with other world currencies. Correlations among the other currencies examined were quite large and statistically significant.
Returns from the Japanese yen had the lowest correlation with other currencies, but these correlations were still larger than those of bitcoins and all were statistically significant. As shown in Table 2B, bitcoin returns also had a very low correlation with gold returns.
These results reinforce the conclusion that bitcoin does not behave much like a currency. Table 2B also demonstrates that bitcoin had low or insignificant correlations with major investable asset classes, such as stocks, bonds, real estate, commodities, and the fear index.
It is remarkable that almost all of the daily returns of major currencies and various asset classes in Tables 2A and 2B had a negligible impact on the daily returns of bitcoins. This indicates that bitcoins could serve as a potent diversifier for an investment portfolio. Table 3A shows the metrics of optimal portfolios formed with major asset classes, excluding bitcoins.
Table 3B shows optimal portfolios formed with the inclusion of bitcoins. To minimize daily noise, we examined weekly portfolio returns over the sample period July to December One thing that is startling to note is that the remarkable run-up of bitcoin values in the short sample period caused the optimal portfolios those with maximum Sharpe and Sortino ratios in Table 3B to be comprised entirely of bitcoins.
Table 3A demonstrates a similar trend with stocks when portfolios were formed without bitcoins. Together, optimization of the Sharpe and Sortino ratios are heavily influenced by high returns. Both Tables 3A and 3B demonstrate that the probability of loss is minimal with portfolios that maximize Omega. Comparing Tables 3A and 3B also demonstrates that portfolio returns are higher, and the risk probability of incurring a loss is much lower, when bitcoins are added to an investment portfolio with every portfolio optimization measure examined.
Figure 1 provides a visual depiction of portfolios that maximize the Omega ratio on a quarterly basis. For this analysis, we used daily returns in order to obtain enough observations during each quarter. For as long as that counter above keeps climbing, your computer will keep running a bitcoin mining script and trying to get a piece of the action. Your computer is not blasting through the cavernous depths of the internet in search of digital ore that can be fashioned into bitcoin bullion.
The size of each batch of coins drops by half roughly every four years, and around , it will be cut to zero, capping the total number of bitcoins in circulation at 21 million.
But the analogy ends there. What bitcoin miners actually do could be better described as competitive bookkeeping. Miners build and maintain a gigantic public ledger containing a record of every bitcoin transaction in history. Every time somebody wants to send bitcoins to somebody else, the transfer has to be validated by miners: If the transfer checks out, miners add it to the ledger.
Finally, to protect that ledger from getting hacked, miners seal it behind layers and layers of computational work—too much for a would-be fraudster to possibly complete. Or rather, some miners are rewarded. Miners are all competing with each other to be first to approve a new batch of transactions and finish the computational work required to seal those transactions in the ledger. With each fresh batch, winner takes all. As the name implies, double spending is when somebody spends money more than once.
Traditional currencies avoid it through a combination of hard-to-mimic physical cash and trusted third parties—banks, credit-card providers, and services like PayPal—that process transactions and update account balances accordingly. But bitcoin is completely digital, and it has no third parties.
The idea of an overseeing body runs completely counter to its ethos. The solution is that public ledger with records of all transactions, known as the block chain. If she indeed has the right to send that money, the transfer gets approved and entered into the ledger.
Using a public ledger comes with some problems. The first is privacy. How can you make every bitcoin exchange completely transparent while keeping all bitcoin users completely anonymous? The second is security. If the ledger is totally public, how do you prevent people from fudging it for their own gain? The ledger only keeps track of bitcoin transfers, not account balances. In a very real sense, there is no such thing as a bitcoin account. And that keeps users anonymous. Say Alice wants to transfer one bitcoin to Bob.
That transaction record is sent to every bitcoin miner—i. Now, say Bob wants to pay Carol one bitcoin. Carol of course sets up an address and a key. And then Bob essentially takes the bitcoin Alice gave him and uses his address and key from that transfer to sign the bitcoin over to Carol:. After validating the transfer, each miner will then send a message to all of the other miners, giving her blessing. The ledger tracks the coins, but it does not track people, at least not explicitly.
The first thing that bitcoin does to secure the ledger is decentralize it. There is no huge spreadsheet being stored on a server somewhere. There is no master document at all. Instead, the ledger is broken up into blocks: Every block includes a reference to the block that came before it, and you can follow the links backward from the most recent block to the very first block, when bitcoin creator Satoshi Nakamoto conjured the first bitcoins into existence.
Every 10 minutes miners add a new block, growing the chain like an expanding pearl necklace. Generally speaking, every bitcoin miner has a copy of the entire block chain on her computer. If she shuts her computer down and stops mining for a while, when she starts back up, her machine will send a message to other miners requesting the blocks that were created in her absence.
No one person or computer has responsibility for these block chain updates; no miner has special status. The updates, like the authentication of new blocks, are provided by the network of bitcoin miners at large. Bitcoin also relies on cryptography.