The Fundamentals of Cryptocurrencies
EMANUEL SOARES1, GUALTER COUTO2, PEDRO PIMENTEL2
1School of Business and Economics,
University of Azores,
9500-321 Ponta Delgada,
PORTUGAL
2School of Business and Economics and CEEAplA,
University of Azores,
9500-321 Ponta Delgada,
PORTUGAL
Abstract: - Cryptocurrencies lately are something that has been gaining notoriety as a way of creating value.
This paper was a study of the due perception of Cryptocurrencies and their taxonomy and regulation and a
hypothesis case of its implementation. In that regard, this study tries to separate Cryptocurrencies and
Blockchains.
It also analyzed the barriers to the implementation of a Central Bank Digital Currency that is in parity with a
fiat currency, even though, there isn’t a real scenario where this was applied yet.
It also evaluated the gains of a portfolio of assets with Cryptocurrencies, where it is shown that it is possible to
have a good portfolio with considerable returns. As for the portfolio of Cryptocurrencies, it has a return of
257,62% and a risk of 0,5424 with the following proportions, 9,7% on DOGE, 1,8% on XRP, 34% on ETH,
and 54,5% on BTC, considering the criteria of maximization of the return per increment of risk.
In final regards, a suggestion of a Cryptocurrency that can solve nowadays problems in different industries,
such as security and entertainment, as well as trying to answer the “Fundamentals of Cryptocurrencies”.
Key-Words: - Blockchain, Cryptocurrencies, Digital Assets, Markets, Security
Received: March 27, 2023. Revised: July 6, 2023. Accepted: July 15, 2023. Published: July 27, 2023.
1 Introduction
Cryptocurrencies are a market that recently has been
gaining notoriety. Currently, there is a lot of
knowledge to explore including its taxonomy and
regulation.
In this study, there was a distinct approach to the
concepts of Cryptocurrencies and Blockchain
because Blockchain is something that has evolved a
lot, considering its various forms of consensus and
given structure. As for Cryptocurrencies, given their
growing presence in the markets, it was studied if
these can replace fiat currencies.
It was important to try to perceive what
Cryptocurrencies are and everything that is related.
For that, it was necessary to find differences and
similarities among other currencies, like Fiat
currencies, as well as recent advances in technology,
such as Blockchain. The objective is to try to give
some common ground about these, given that this
theme is still growing.
It also studied the point of view of investing in a
portfolio of assets with Cryptocurrencies and their
profitability. The data collected was from February
27 of 2019 to February 27 of 2021. The values
obtained were positive in terms of profitability and
risk, considering the volatility of Cryptocurrencies
where, too, it is indicated that there is a trade-off for
each increase in profitability in relation to risk. The
method adopted was through CAPM, to obtain an
optimal Cryptocurrencies portfolio that could justify
an investment. CAPM is a model that can give a
better understanding of having a portfolio of assets
and its given profitability. Other models can assure
a different look to investment in a given wallet, but
in this case study we decided to choose the criteria
of maximization of the Sharpe Ratio which gives an
idea of how much is it worth investing in a given
wallet compared to the risk associated with it. Other
models include APT which has more variables.
The results obtained show that a portfolio of
assets with Cryptocurrencies is of high value, with
an expected return of 257,62 % and 0,5424 for the
standard deviation. As for the Sharpe Ratio of 4,7, it
determines that for each unit of risk, there is an
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increase in return of 4,7 which is, more than four
times.
Regarding Cryptocurrencies in a social context,
given the lack of control of Cryptocurrencies and
their respective security, it is a bit pragmatic given
the criminal activity underlying these, still, some
Cryptocurrencies rose interest to investors in
different areas given the number of services they
produce, so they are worth not only for being a
currency. Still, this paper is not meant to show that a
cryptocurrency can substitute a fiat currency both
have different properties something that will be
studied in the paper, and, last and more important
the high energy costs of mining Bitcoin make it
difficult to replace the current fiat currencies. But
there is the potential for Cryptocurrencies to
improve society in many different areas of
developers and researchers making good use of the
advantages of Cryptocurrencies brought, for
example, Blockchain. Such results show that even
though the reality is always changing, it is difficult
to ignore the impact that Cryptocurrencies have on
our society, from the perspective of the investor as
well as for those who are interested in developing
them.
Finally, the suggestion of a Cryptocurrency can
change the paradigm of Cryptocurrencies in relation
to its perception and solve other problems in various
industries of society, such as security and leisure.
2 Literature Review
2.1 Fundamentals of Cryptocurrencies
Cryptocurrencies have been gaining notoriety
today for their versatile way of generating value.
Although now their taxonomy is something that is
yet to be defined, and there isn’t a consensus on its
legalization, they are present in several financial
markets, and some of them work in different trading
hours.
Currently, it is present that Cryptocurrencies can
replace Fiat currencies something that will be
analyzed, as well as the various strands that the
underlying technology, namely, Blockchain can
innovate not only the economic sector as well as
other areas of science. The integration of
Cryptocurrencies into a portfolio of assets is a
challenge to their potential and presence in global
markets.
As for the Cryptocurrencies that will be analyzed
in this paper, they are Bitcoin (BTC), Ethereum
(ETH), Ripple (XRP), and Dogecoin (DOGE). As
for Bitcoin (BTC), it was the pioneering
Cryptocurrency developed by Satoshi Nakamoto in
2008. Some Cryptocurrencies may serve as a means
of exchange or form of payment even though they
aren’t generated by Banks, [5]. Ethereum is a
Cryptocurrency, according to CoinDesk it is based
on the mining of a resource named “ether” that
allows participants to perform Smart Contracts as
well as other activities. Both work through a
Permissionless Blockchain and one of their traits
like other Cryptocurrencies is their immutability
once created.
Ripple is a Cryptocurrency that works similarly
to a trading market that allows users to make instant
payments in Cryptocurrencies as well as Fiat
currencies, according to source Ripple, without a
banking account resembling, by its nature the
appearance of a digital asset, works in a
Permissioned Blockchain.
Finally, Dogecoin (DOGE), is a Cryptocurrency
that according to Coindesk as well started as
something that was not supposed to generate value,
but its one-minute Proof-of-Work (PoW), along
with its interactive way of "mining" its
Cryptocurrency, made it very interesting. The
reason why this currency is being mentioned is due
to the issue of supply of a given Cryptocurrency
which is a barrier already verified in
Cryptocurrencies such as BTC and ETH thus being
a target of analysis.
With four Cryptocurrencies with different
aspects to be taken into analysis, to better
understand what a Cryptocurrency is, first, there
was a study on what is Blockchain.
2.2 Blockchain Technology
Blockchain consists of a network of blocks with
properties very intrinsic in their design. A
blockchain is a form of permanent transaction
registration, which requires the approval of users
who are part of the Blockchain so that they can be
registered, and depending on the form of consensus
of the members of the Blockchain, time or method,
a new block is generated that validates all
transactions previously made by confirming that the
hash of the new block, the hash is the randomly
generated code that confirms all transactions, is
equal to the hash of the previous block, which then
validates the new block by solving an algorithm by
the people who are "mining" a certain
Cryptocurrency, [13].
The process of "mining” is the resolution of an
increasingly complex algorithm, using a computer,
having better effectiveness the better the
components of the computer, namely the graphics
card and processor.
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Still, nothing is bulletproof, for example, at the
core of the internet is the concept of all its users
being connected to a server, however, to date there
have been major leaks of information, this happens
because of the nature of the internet in which its
users connect to a server, and hackers take the
opportunity to change the "link" between the user
and the domain, and thus steal the information of its
users or even from the people who provide the
website. Decentralization, which is the base
property of Blockchain, makes it more difficult for a
Blockchain to be a target of hacking unlike what
happens on the internet, [13].
So, with Blockchain it is more difficult to steal
information, because at its foundations of
Blockchain is encryption and trust between its users,
reinforcing trust through various consensus that
allows the validation of transactions that are
recorded, thus building a Distributed Ledger
Technology (DLT). The information in the DLT is
stored in decentralized blocks and visible to all its
participants, [2].
However, all technologies have their flaws and
one of the flaws of Blockchain Technology is Forks,
that happens, when more than 50% of the people
integrated into a Blockchain hold more than 50% of
the computational power of the respective
Blockchain, changing it, [4].
Forks can be divided into Soft Forks and Hard
Forks. Soft Forks happen when there are changes in
a Blockchain, an example is, changing the size of
the record of operations in a given block. As for
Hard Forks when they happen, they can generate
new Cryptocurrencies, something that has
previously happened with Bitcoin, resulting in
Bitcoin Cash, [7]. So, Hard Forks can be useful if
everyone who is "mining" a given Cryptocurrency
wants to change the code or the properties of the
Blockchain of the Cryptocurrency, but it can be a
form of hacking something that could be harmful to
the holders of a particular Cryptocurrency.
Although the pioneering Cryptocurrency, BTC,
was based on a Permissionless Blockchain, which
means, anyone can change the code and can "mine"
the Cryptocurrency, it has some flaws in how to
establish a hierarchy, similar to those already
existing in companies, that can transmit security and
reliability to its participants.
In these regards, it was taken as an approach to
the differences between a Permissioned Blockchain
and a Permissionless Blockchain.
2.3 Permissionless Blockchain and
Permissioned Blockchain
One of the properties of Cryptocurrencies is
Blockchain and it can be worked through
Permissionless or Permissioned Blockchain.
Cryptocurrencies that work on a Permissionless
Blockchain are more attractive, since there are fewer
barriers to the entry of persons who choose this
Cryptocurrency, even though they are less safe
given the anonymity of users, so if people are stolen
it will be harder to track.
So, it becomes important for people and
companies to have the choice to be able to develop
applications or store their possessions safely, and
the closest solution was through a Cryptocurrency
that has a Permissioned Blockchain Platform, [11].
Although the immutability of a Blockchain is
something that transmits a lot of security, its
immutability prevents the dynamics in the creation
of a Blockchain because for this it is necessary to
always create a new Blockchain, since you can’t
change it once developed, [11].
Although cryptocurrencies may leverage many
people’s wealth, they can not only be forked which
can cause its miners to lose credibility of what has
been recorded on the blockchain, as well as holders
for example bitcoin losing their wallet which has
caused the loss of many people’s savings, [12].
Also, the recent collapse of the Hedge Fund FTX,
made it more insecure for people to hold their
savings in a crypto bank leaving many customers
and investors in a loss of billions of dollars.
Then in a brief analysis, there is a need to make
Blockchain Technology more dynamic, technology
that is associated with the creation of various
Cryptocurrencies. So, there is a need to evaluate the
taxonomy of Cryptocurrencies and the possibility of
them being able to replace fiat currencies and assess
the benefits that society can take from Blockchain
Technology.
Taking the aforementioned into consideration,
recent studies question the possibility of central
banks implementing their own Cryptocurrency that
works in parity with the fiat currency, which might
replace the fiat currency. The next chapter goes
through a short review of the concepts of a Central
Bank as well as the possibility of a Central Bank
Digital Currency (CBDC).
2.4 Implementation of a Central Bank
Digital Currency
The management of the monetary policy is carried
out by central banks, which means, the number of
coins, banknotes to be produced or the volume of
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currency to be produced is decided by them. Central
banks also take into account the management of
interest rates and inflation present in the various
economies, [3].
The properties of a fiat currency and a
Cryptocurrency are different, for example, the
management of the supply. In the case of
Cryptocurrencies, by default given their varied
forms of consensus, by other words their validation
time intervals of another new block on the
respective Blockchain, their stock will be
predictable or, given their costly form in terms of
the "mining" process, this will eventually have its
supply limit reached. Thus, the principle of markets
being efficient is not verified because they are
predictable.
Although Cryptocurrencies have interesting
properties such as their immutability when created
as well as, reliability in the registration of all
transactions, and because they are decentralized
giving more security to their participants, they do
not have the same properties as fiat currencies.
The obstacles encountered for the
implementation of a CBDC are in the monetary
policies that currently govern Fiat currencies. Given
what has been described in relation to
Cryptocurrencies according to their acquisition of
them being done by solving complex algorithms, in
other words, “mining" or through financial markets,
there is no way to give the guarantee to regulators
that, if necessary, the people who hold certain
Cryptocurrency will have the same behavior
according to Fiat currencies. Even if a bank
produces a certain Cryptocurrency and it was with a
Permissioned Blockchain so that there could be, a
regulatory body and a hierarchy that transmits
security to its participants, there is the risk of central
banks being the target of thefts, [3]. The authors of
the article leave open the hypothesis of the
implementation of a CBDC by each Central Bank,
[3].
On the other hand, there is the hypothesis that
implementing a CBDC will be much more
challenging than imagined due to monetary law,
[14]. Looking towards a reform of central bank law
some of the things mentioned below raise
fundamental questions and thoughtful discussions
must be taken into solution in political organs with a
very rigid law analysis. Aside from that, according
to the above the ability of a state to be involved in
the reform of monetary law to accommodate CBDC
emissions could be limited by the constitution. In
the first scenario, a CBDC token that could match
the monetary mass or notes would take a lot of
effort. So the countries would need to first take the
status of legal tender, [14]. An option is to go step
by step and limit the entities that could have access
to this CBDC such as the state, public bodies, and
merchants beyond a certain size and firms with
authorized activities, such as banks. The next step
would be to classify a CBDC as a token so it could
be a new way for this token to have privileges of
private law so there could be circulation among
people. And lastly, and more important authorities
should see any definition of all cybernetic crimes to
ensure it covers all CBDC crimes.
However, there is a study that analyzes situations
similar to the implementation of more than one
currency in an economy of a country which
speculates various types of results in the
implementation of it where a comparative approach
to the case of Cryptocurrencies will be made, [8].
2.5 Ecology of Money and Collaborative
Economy
The concept of "Ecology of Money" is the
hypothesis of several currencies, in a country being
divided by region and hierarchically in terms of the
economic needs of each citizen, [8].
A plural monetary system would give more
resilience to economic crises, and these currencies
would work in parallel with the economy, so having
a more diverse system of currencies, it could reduce
economic growth, which is somewhat detrimental
given the scarcity of resources, [8].
On the other hand, a more diverse economic
system will be more resilient and stable to financial
crises, because if a certain currency were to generate
a crisis others could replace this, [8]. One example
is the case of WIR in Switzerland which functions
as a complementary currency and has an important
role to play in countering economic cycles that help
stabilize the economy. WIR is a currency that helps
small and medium-sized enterprises to buy goods
and services, [8].
An interesting note is that there is a phrase from
Tobin that states that “money will only make sense
if it is accepted by a certain number, [8]. That is, if
there is acceptance of complementary currencies, in
this case, Cryptocurrencies, it is possible to see a
new economic scenario that can solve various crises
in different sectors, given the segmentation made by
several currencies.
The benefits of a Collaborative Economy, are in
various areas such as food, accommodation,
transportation, as well as other goods and services,
[5]. The Collaborative Economy changes the market
concept in the sense that it involves P2P exchanges
on the Internet, with purchases, resales, and
donations in a monetary way.
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With regards to the conclusion of Collaborative
Economy, is that Collaborative Economy today has
a great impact on being able to live in a more
collaborative society, which reduces the
development of monopolies and can change the way
of managing platforms in different areas of science,
[5]. Also, it isn’t set aside from the hypothesis that
Blockchain Technology can improve the decisions
of organizations, increase the storage capacity of
information, and reduce the risk of fraud and legal
care given the creation of Smart Contracts, [5].
From the analysis made between the concepts of
Ecology of money and Collaborative Economy,
although both articles say that it is premature to
conclude, nowadays it is remarkable the increase of
Cryptocurrencies presence, the evolution of
Blockchain Technology, something that may have
been accelerated given the pandemic situation that is
lived because much of the labor activity is closed,
and there seems to be an increased acceptance of a
safer society, with a greater focus on the sharing of
goods and services produced.
Lastly a note of Cryptocurrencies on the aspect
of audit and its benefits, as well as the exchange
ratio for Fiat currencies and Cryptocurrencies.
2.6 Cryptocurrencies under Audit and
Exchange Rate Ratio
Cryptocurrencies, considering the underlying
Blockchain Technology, have the property of
immutably storing the registration of all
transactions. Blockchain Technology has brought
an innovative way to exchange information, [4].
Blockchain Technology allows users to validate
transactions, which are stored in blocks using
Cryptography, [4].
One advantage of Blockchain is increased
transparency, since the participant obtains a copy of
the ledger records facilitating access to information,
[4]. More control is also gained through the form of
consensus on the part of the participants, for
example, Proof-of-Work (PoW), something that is
recorded in several blocks. There is also a reduction
in error and fraud as transactions are automatic and
there is a cost reduction and the data has more
security because it is encrypted once validated.
Finally, more transparency in the delivery of assets,
considering that there is a history that can be seen
by the participants, and they can see how the
products were developed and thus transmit more
security to investors who intend to buy the products.
From the point of view of audit, it is impossible
to change the recorded information, using
encryption, which reduces human error thus
allowing greater security to regulators, [4].
Figure 1 illustrates an example of the
architecture of a "Permissioned Blockchain" which
is structured as the simple form of a Blockchain for
Audit purposes, where the nodes are the
participants, [4].
Fig. 1: Blockchain Ecosystem
According to Figure 1, it contains the Auditor's
Ecosystem, the Company Ecosystem, and the Public
Administration node, where the link between both
Ecosystems is made and where all the information is
stored. The access of the various elements for each
participant is made through encryption that thus
solves the problem of privacy, [4].
Still, there has been some tough hacking
according to sources from Crystalblock, even
though it might be possible to create a safe
blockchain. Some of them are Mt Gox in 2011 the
first major breach and many others incurred like
Binance and Coincheck.
Finally, Blockchain Technology can make it
more efficient to make money, in assets, and
transaction information, also improving issues such
as privacy and security, [1].
From a security point of view, there are still
security flaws for those who have Cryptocurrencies
and may be the target of hacking, [4]. In addition,
given the anonymity present in Blockchain
Technology some use this Cryptocurrency for
criminal activities.
Regarding the exchange ratio between fiat
currencies and Cryptocurrencies, since
Cryptocurrencies are not available by governments,
they act as complements to fiat currencies, [1]. ETH
is a good asset to have in the investment portfolio,
while Cryptocurrency BTC serves to leverage the
number of people who own this market, [1].
Also, from Binance, it is important to note
trading markets like FTX or Binance which have
been around for a long time and make it possible for
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traders to trade fiat currencies and cryptocurrencies
with derivatives such as futures and options and
with other current tools that have existed in former
trading markets and give also the ability to create a
token, this without the help of an intermediary.
Now after analyzing both Blockchain and
Cryptocurrency and all their benefits and flaws as
well as similarities and differences, it was now
studied the expected return of a portfolio of
Cryptocurrencies as well as a few scenarios and
their implications for investors given the obtained
results.
3 Method of Analysis
3.1 Calculation of Return and Standard
Deviation
To calculate the Expected Return as well as the
Standard Deviation of the four Cryptocurrencies
BTC, ETH, XRP, and DOGE, information was
taken from the source Coindesk about their closing
price. To this end, a coincident date, 27/02/2019,
was used for the 4 Cryptocurrencies to compare
them more efficiently.
The value of the annual return was calculated
through the compound annual growth rate, [6].
1 (1)
Subsequently, the standard deviation will be
calculated, through the daily yields of the respective
Cryptocurrencies, [9].
(2)
Next, to obtain annualized values, taking into
account that Cryptocurrencies are subject to
financial markets 24 hours a day, the standard
deviation was annualized by multiplying the whole
of days in a year, through the following equation:
(3)
3.2 Approach by Capital Assets Pricing
Model (CAPM)
To obtain an optimal portfolio with the set of assets,
BTC, ETH, XRP, and DOGE, it was calculated the
annual return and standard deviation. Initially taking
into account that the information collected so far
was up until February 27, 2021, an American
report in 2020 was chosen, obtained in Kroll.
The formula for calculating the expected return
of the Markowitz assets portfolio is, [10].
(4)
For standard deviation, [10].
(5)
3.3 Markowitz Border and MVP
To obtain the Markowitz Border as well as the
MVP, a set of calculations were done using
Microsoft Excel Solver. First, the objective was to
obtain the MVP, and for that using a set of
restrictions while minimizing the value of Standard
Deviation, a value for the expected return was
achieved.
From there, both the Efficient Border and
Inefficient Border were calculated with a series of
restrictions using the value obtained as the MVP as
the starting point, for example, the sum of
proportions being equal to one and not negative.
The restrictions were the same for both, for the
Efficient Border the objective was to maximize the
expected return in comparison to the increase of
risk, and for the Inefficient Border, the objective
was the opposite.
With the values obtained, then it could be finally
drawn the Markowitz Border and thus proceed to
the calculation of the Capital Market Line.
3.4 Capital Market Line Calculation (CML)
For the calculation of the capital market line (CML),
in Microsoft Excel a line was made with
combinations of proportions, using a solver. The
CML equation is:
CML:
(6)
From the above-mentioned equation, it can be
concluded that CML is a line, more specifically the
line of the Capital Assets Pricing Model (CAPM)
that is intended to determine.
However, there is currently no information on
how to determine CML, but it is known that Sharpe
Ratio is the slope of the CML line.
Sharpe Ratio =
(7)
Using Microsoft Excel, more specifically Solver,
Sharpe Ratio is maximized by changing the
proportions of the portfolio, with the restrictions of
non-negativity and the sum being equal to one,
obtaining the point of tangency, from a line
originated in , to the efficient border of
Markowitz, [10]. In this point of return, it has its
optimal value on the efficient border of Markowitz,
representing the optimal market portfolio (P).
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This way, it is already possible to draw the line
of the CAPM, because we have two points, the point
where is and the optimal market portfolio. To
have a more complete CML, another point was
added that was obtained, giving an arbitrary value to
, by solving the following equation:
(8)
As for the calculation of a portfolio that is
composed equally of all assets, also including the
risk-free asset, the following equations were used:
(9)
(10)
As for , it will have a value of zero considering
that it is a risk-free asset, and it has no risk, so its
standard deviation is zero. This approach will give a
better insight into where to put our savings, namely
in the optimal portfolio or put it in the . It’s a case
scenario where it will also give a better idea of how
worth it is to invest in this portfolio also taking into
consideration its risk.
4 Data
4.1 Statistical Inference of Collected Data
Considering the information collected from 27
February 2019 to 27 February 2021 for the
calculation of the annual returns of each of the
Cryptocurrencies, as well as the remaining
parameters of analysis.
The following Table 1 was drawn up, which
demonstrates the results obtained for all assets.
Table 1. Sample Representation of Cryptocurrencies
BTC
ETH
XRP
DOGE
Days
365
365
365
365
Quote
27/02/2019
3 772,94 €
131,67 €
0,30770 €
0,001944 €
Quote
27/02/2021
46 642,61 €
1 495,81 €
0,44170 €
0,050144 €
Annual
Return
251,60%
237,05%
19,81%
407,88%
Average
Daily
Standard
Deviation
0,037964
0,04656098
0,0536748
0,11497138
Annualized
Standard
Deviation
0,725305902
0,889546356
1,0254557
2,19652519
Given Table 1, it is possible to see the quotes
which gave the possibility to calculate the Annual
Return, showing high values of profitability being
the most notable Cryptocurrency DOGE with a
return of 407,88%. Through these values stated in
Table 1, it is also noted the values for the average
standard deviation, which gives a better insight into
how risky it is to invest in a given Cryptocurrency,
is riskier to invest in DOGE with a value of 2,2 and
being BTC the more rewarding when comparing
risk and return with values of 251,6% and a risk of
0, 72. Also, it is possible to note the difference in
the closing price of BTC and ETH throughout the
years, which can be deducted and will have some
weight in the optimal market portfolio obtained later
in this study.
4.2 CAPM Data
The data for Sharpe Ratio will be illustrated in
Table 2.
Table 2. Data for Sharpe Ratio
DO
GE
BTC
ETH
XRP
Sum
DO
GE
BTC
ETH
XRP
0,21
9385
0,78
7081
0,92
9908
0,92
0522
2,85
6895
0,09
6644
0,54
487
0,34
0653
0,01
7834
257,
62%
0,54
24
From the representation of Table 2, what can be
obtained is the investment proportions for each of
the Cryptocurrencies which are respectively, 1,8 %
in XRP, 9,7% in DOGE, 34 % in ETH, and 54,5%
in BTC, which, optimal return (P), is 257,62 % with
a standard deviation of 0,5424. The optimal
portfolio (P) was obtained by maximizing the
Sharpe Ratio equation and this portfolio (P), is also
on the Efficient Border of Markowitz.
Finally, the data for CML are explained in Table
3.
Table 3. Data for CML
CML
Expected Return
Standard deviation
Rf
2,50%
0,0000
P
257,62%
0,5424
O
289,42%
0,6100
5 Results Analysis
5.1 CAPM
The analysis of the results obtained from the CAPM
considers CML and its Sharpe Ratio, as well as a
portfolio composed of a risk-free asset, analyzed
below in Figure 2.
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Fig. 2: Capital Markets Line (CML)
The CML chart translates what was intended to
be obtained with CAPM, which is, the portfolio
composed of Cryptocurrencies and a risk-free asset.
The option of having a portfolio with a composition
consisting exclusively of a risk-free asset provides a
return of 2.5%. Any wallet that results from the
combination of Cryptocurrencies and a risk-free
asset is located along the CML, generating different
expected yields for different risk exposures.
The optimal market portfolio (P) was obtained
by maximizing the Sharpe Ratio from where the
expected return value is 257,62% with a standard
deviation of 0,5424. This consists of 4
Cryptocurrencies, BTC, ETH, DOGE, and XRP
with the following proportions: 9,7% in DOGE,
1,8% in XRP, 34% in ETH, and the remaining 54,5
% in BTC.
As for the value of the Sharpe Ratio obtained it
was 4,7 this means, the return obtained by each unit
of risk is 4,7.
The analysis of the graph obtained with the CML
and Markowitz Efficient Border is illustrated in the
following Figure 3 and commented on below, [10].
Fig. 3: Graph CML and Markowitz Border
Figure 3 shows the objective result, which
illustrates the CAPM line, CML, as well as the
Markowitz Border, and the optimal market portfolio
(P) which maximizes the Sharpe Ratio, [10].
The results obtained, allowed us to conclude that
it is possible to have a portfolio with assets with
Cryptocurrencies in the same way as it does for any
other portfolio of assets, from where the proportions
to be invested are 9,7% in DOGE, 1,8% in XRP,
34% in ETH and 54,5% in BTC with an expected
return of 257,62 % and a standard deviation of
0,5424 previously illustrated in Table 2.
Lastly when compared to the return obtained for
an investment portfolio with assets such as
Facebook, Amazon, Apple, Microsoft, and Google
(FAAMG), according to Portfolioslab, which has a
return on the portfolio, as of July 11, 2021, of
25.19%. The portfolio with Cryptocurrencies
relative to the FAAMG portfolio is about 10 times
more profitable. As for the Sharpe Ratio it is 1,67,
while the wallet with Cryptocurrencies is 4,7. So, it
is shown that the potential of Cryptocurrencies is
notorious, given that they have much more
significant gains than in traditional markets, even
compared to the best companies in the technology
sector.
From the values obtained, it can be concluded
that the expected return having a value of 257,62%
and a standard deviation of 0,5424 is an acceptable
value that instills a good investment opportunity
given the difference between profitability and risk.
As for the proportions, given the increasing
appreciation of Cryptocurrencies BTC and ETH,
these have more weight in the optimal market
portfolio.
If, for example, an investor wanted to invest part
of his wealth in a risk-free asset and the remaining
Cryptocurrencies, 20 % in each, he would see his
wealth be along the CML line, in other words, he
wouldn’t have to become indebted to the risk-free
asset to obtain yields in excess of (P). The values
obtained were an expected return of 206,59% and a
standard deviation of 0,4339. The next Figure 4
illustrates these results.
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Fig. 4: Portfolio with P and risk-free asset
In conclusion, from the investors' point of view,
for any investment, there is always a risk regardless
of what we are investing. In the specific case of
Cryptocurrencies, it is a volatile market, with
different trading conditions, even with financial
instruments equal to those already existing, where it
is traded 24 hours a day. Considering the results
obtained it is shown that the greater the gain, the
greater the risk, and there is always the same direct
relationship between risk and return, identical to the
reality of other traditional financial markets, through
the portfolio of assets that can be held.
In the context of the analysis carried out
previously, considering that Blockchain Technology
has drastically changed the way one looks at
society, the hypothesis of the creation of a
Cryptocurrency could benefit society.
From a less formal perspective, one person can
see Blockchain Technology as the wheel. Having
Blockchain Technology arisen with Bitcoin, this
technology has been evolving since its invention, in
a sense that potentiates the improvement of people's
quality of life. Since the creation of Bitcoin, other
Cryptocurrencies have emerged that have used the
benefit of Blockchain Technology and have
developed applications and other ways to improve
the social context in various areas such as logistics
of an asset, Smart Contracts, or other productive
activities.
Bitcoin can be seen as "digital gold", still, given
the costly expenditures in terms of electricity and its
limitation in its stock, it is predictable that it will
eventually lose value with the emergence of other
more efficient Cryptocurrencies.
This way raises the idea of a Cryptocurrency that
can solve in many ways the problems that society
faces in various areas. Based on the act of the
internet in which we connect directly to the servers
there is thus a possibility to see our information
being stolen, something that by the decentralized
nature of Blockchain Technology can give more
security.
Taking into account what was mentioned, arises
the idea of a Cryptocurrency called "Speed of
Sound" (SoS), which aims to solve this problem,
from the perspective of security as well as other
various areas, such as restaurants, leisure such as
movies, games, bookstores among others. As its
name implies, SoS has the purpose of having a PoW
corresponding to the speed of sound. Also, the stock
issue can be something that can hinder the duration
of a Cryptocurrency and so arose the premise of this
Cryptocurrency having an unlimited stock. As a
whole, SoS would be a digital asset that would give
its users security, given its PoW, because whenever
there was an attempt to steal information, it would
be emitted for example the sound of an alarm that
would block this attempt to steal information and
alert its users of it.
This idea comes in a pandemic context
considering that many people are currently using the
internet and that many of them have lost some
contact with other people and, with activities they
did in a pre-pandemic context and saw their
information stolen. It could also be used to emit
sounds in other aspects such as the purchase of a
good or service, or the sound of a cash register
would be emitted, when sending a message would
be emitted the respective sound of sending the
message, among others. This may be an idea of
giving more life to technology and, consequently,
more safety to people.
Through the analysis done so far,
Cryptocurrencies are worth what they produce as
any asset which means the idea was to incorporate
this Cryptocurrency as a digital asset. Thus, this
could be a way to properly reclassify
Cryptocurrencies in relation to their taxonomy and
what they might be worth as a productive asset.
Finally, this new notion of Cryptocurrency can
change the way Cryptocurrencies are seen, from
their integration in the markets as well as in a more
social context and their regulation.
6 Conclusion
Currently, Cryptocurrencies are a theme much
addressed by everyone given their innovative nature
and because they still have much to explore.
Cryptocurrencies are crypto of encryption and
currency because they can be exchanged. Currently,
there is still confusion about what Cryptocurrencies
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are, which somehow makes it impossible to properly
have their taxonomy as well as their legalization.
One of the objectives of this paper was to try to
solve this problem. It is known that an asset is worth
what it produces, and this should be the approach of
Cryptocurrencies. However, Bitcoin is an asset that
serves only as a record of transactions but given its
form of consensus of validation of new blocks on
the Blockchain, it becomes very safe and impossible
to change, thus justifying its growing value.
In this study with the given literature, it was
possible to have a better understanding of the proper
functioning of a cryptocurrency by separating
blockchain and having an approach towards fiat
currency, to know if there was any possibility to
have cryptocurrencies as legal tender, as well as a
replacement of fiat currency. So, after researching
the literature at the time, it is known that there is the
possibility for cryptocurrencies to be accepted as
legal tender and there is also space for them in the
fiat market, by understanding better how Blockchain
works, and its restrictions to supply and forms of
mining gives a better approach to fiat currencies.
However, other Cryptocurrencies have appeared
since Bitcoin, which have brought improvements to
new forms of consensus, the type of Blockchain,
and what they produce, such as the case of
Ethereum or Ripple.
Due to this huge appreciation of Cryptocurrency
markets, there is interest on the part of central banks
to adopt this new premise. However, the properties
of fiat currencies and Cryptocurrencies are different,
so there is a barrier that makes it impossible to
implement for the time being, a Cryptocurrency that
operates in parity with its fiat currency.
There is a need to distinguish Cryptocurrencies
from Blockchain Technology. Blockchain
Technology has been something that has been
evolving immensely. Cryptocurrencies have been
valuing their respective consensus in "mining", and
effectively for what they produce.
However, there is the problem of "mining"
because, in the acquisition of a given
Cryptocurrency, it is not possible to have the same
control as there is with a fiat currency, in terms of
regulation and also in terms of currency supply. For
this reason, it was addressed to Cryptocurrency
Dogecoin which has an unlimited supply of
Cryptocurrency with a fast PoW.
It was also important to evaluate the return of a
portfolio of assets with Cryptocurrencies. Through
the CAPM method, with a portfolio of
Cryptocurrencies and with a risk-free asset, it was
possible to obtain results that demonstrate that it is
possible to obtain a good portfolio of assets with
low volatility, compared to the gains obtained.
Considering the literature review carried out, it
was proposed the creation of a Cryptocurrency.
Although without programming notions, it is based
on the resolution of security problems as well as
other sound utilitarian ways to give another more
materialized perspective of Cryptocurrencies.
As for the benefits of this study, it allows a better
understanding of Cryptocurrencies as well as
Blockchain. It makes it easier to understand the
advantages of Cryptocurrencies in society and their
impact if they were to be considered legal tender.
As for the limitations of this study, it goes
through the controversy generated by the theme
itself that it tried to resolve by addressing
Blockchain and Cryptocurrency differently.
Possibly, over time it is possible that there will be a
greater integration of both, and this might happen in
an early stage through the implementation of a
CBDC and by forms of validation of blocks less
harmful to the environment. As for Blockchain
Technology, it seems to already have a place in
society and whether through Cryptocurrency or not,
this will certainly evolve over the next times to
come.
As for the developed study, Cryptocurrencies
have been gaining their place in society and their
presence should remain. A suggestion for the future
of Cryptocurrencies, given the issue of "mining" in
relation to electricity spending and supply
predictability, may include having an unlimited
supply and making it possible to be acquired as
assets and thus having their fair value.
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Contribution of Individual Authors to the
Creation of a Scientific Article (Ghostwriting
Policy)
-Emanuel Soares conducted, conceptualization, data
curation, formal analysis, investigation,
methodology, project administration, resources,
software, validation, visualization, writing – original
draft, writing – review & editing.
-Gualter Couto carried out, conceptualization,
methodology, validation, resources, visualization,
supervision, project administration, funding
acquisition, and writing – review & editing.
-Pedro Pimentel carried out, conceptualization,
methodology, validation, resources, visualization,
supervision, project administration, funding
acquisition, and writing – review & editing.
Sources of Funding for Research Presented in a
Scientific Article or Scientific Article Itself
This paper is financed by Portuguese national funds
through FCT–Fundação para a Ciência e a
Tecnologia, I.P., project number UIDB/00685/2020.
Conflict of Interest
The authors have no conflict of interest to declare.
Creative Commons Attribution License 4.0
(Attribution 4.0 International, CC BY 4.0)
This article is published under the terms of the
Creative Commons Attribution License 4.0
https://creativecommons.org/licenses/by/4.0/deed.en
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