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You read a lot about cryptocurrencies these days, especially bitcoin.

My question: Do you see something fundamentally different about them compared to other asset classes, i.e. other currencies, from a quantitative point of view?

If yes, could you give some good references which discuss those characteristics?

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    $\begingroup$ @Quantuple: Fair enough. I deliberately left it open but basically I want to know whether it is just another currency or something fundamentally different, i.e. some strange combination of a currency with option-like characteristics or whatever... Do we need new quantitative instruments for dealing with it or do we know everything there is to know when we know how to trade Euro-Dollar (and its derivatives). Is it clearer now? $\endgroup$ – vonjd Oct 9 '17 at 13:38
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    $\begingroup$ Yes, at least for me it is :) $\endgroup$ – Quantuple Oct 9 '17 at 13:43
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    $\begingroup$ As you probably already know the volatility of returns is very large, much larger than for conventional currencies. $\endgroup$ – noob2 Oct 9 '17 at 14:02
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    $\begingroup$ I am by no means an expert, but here are my 2 cents. The main point for me is that Bitcoin and other crypto-currencies are not really a currency, but rather a commodity: 1) modern currencies of most OECD are characterized by unrestricted and discretionary supply management by Central Banks (CB), whereas Bitcoin's supply is constrained (and as such I see it as very similar to gold); 2) AFAIK there is no CB for Bitcoin, hence again long-term Bitcoin payoffs would not behave as rate payoffs (which is normally the case for normal currencies, which long-term are driven by rate differentials). $\endgroup$ – Daneel Olivaw Oct 9 '17 at 16:26
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    $\begingroup$ Bottom line: in my opinion crypto-currencies are much closer to commodities (i.e. gold, platinum, etc.) than to currencies, and its modeling and trading should (probably) reflect this. $\endgroup$ – Daneel Olivaw Oct 9 '17 at 16:29
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There is something very fundamental to Cryptocurrencies, especially the one you want to talk about, i.e. Bitcoin. I suggest you a very good reading, "Academic Pedigree of Cryptocurrency." There is a method of registering every transaction happening on Bitcoin Peer-to-Peer reviewed distributed network, which is called a "Public Ledger." Every Miner is basically a ledger, who earns a reward by the distributed network for recording certain number of transactions, collectively known as a 'Block.' This is why miners' startup are usually referred to as "Block Chain."

In our normal currency system, the "Ledger Work" is done through Banks. You might have heard (if I am not Wrong!) that a check is a ledger, but a private ones. This is why Banks work by charging you, because they have to power up the system with your money. In Bitcoin or any other CC network, the work is not only public, but also done without any intermediate structure. So, You can directly send your money (bitcoins,) and not worry about it. It is secure! Than, every transactions is on public ledger, so every user with a unique user key, and pass key can have access to his bitcoins, and privacy of this ownership is entirely dependent on user. You wanna publish you crypto-wealth, well! Go On! But you don't really have to do this.

Now, you will start to connect the dots, and make a whole picture that explains the difference itself. Our everyday Banking Structures are fueled by a whole banking, and financial infrastructure, which is than either controlled or governed by some central department, for which you are charged. Obviously, Money is Fuel for Economy. But as you see, Bitcoin have no central controlling system, even its inventor (named as Satoshi Nakamuto) have no control over it. Now, let's discuss the fluctuating price for such CC, like Bitcoin. Its highly unstable prices attract our attention, when we get to hear that people with thousand of bitcoins are now Millionaires, just because they've mined a lot in past. The truth is, that this currency is still experimental. Its price is totally governed by the exchange rates of markets, and totally determined on the basis of Demand & Supply of Market. One bank added a support for FOREX in Bitcoins, and prices climbed up to USD 5,000. Sudden rush to sell increased the supply in market, and the prices went back to USD 3,000. There will be a time, when its prices will get stable, but for that to happen, we need a lot more people to adopt CryptoCurrency as their common transaction medium.

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There is a new paper out which is quite interesting and which basically says that cryptocurrencies are indeed a new asset class, potentially useful as a diversifier of conventional asset classes:

Corbet, Shaen and Meegan, Andrew and Larkin, Charles James and Lucey, Brian M. and Yarovaya, Larisa, Exploring the Dynamic Relationships between Cryptocurrencies and Other Financial Assets (November 13, 2017). Available at SSRN: https://ssrn.com/abstract=3070288

Abstract
We analyse, in the time and frequency domains, the relationships between three popular cryptocurrencies and a variety of other financial assets. We find evidence of the relative isolation of these assets from the financial and economic assets. Our results show that cryptocurrencies may offer diversification benefits for investors with short investment horizons. Time variation in the linkages reflects external economic and financial shocks.

Another new paper states that "investors should view cryptocurrencies as risky, competing and somewhat illiquid bets on potential improvements over conventional ways of doing business worldwide, not stores of value." (Source: https://www.cxoadvisory.com/30892/currency-trading/cryptocurrency-primer/):

Kim, Seoyoung and Sarin, Atulya and Virdi, Daljeet, Crypto-Assets Unencrypted (January 31, 2018). Journal of Investment Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3117859

Abstract
With the recent surge in crypto-activity, a natural question arises as to what exactly a “cryptocurrency” is and how to value and assess these digital assets. In this paper, we provide an overview of the history and technology underlying cryptocurrencies. We also present information on the volume, size, and volatility of this emerging asset class, which we compare to major fiat currencies and commodities. Finally, we provide a framework for valuing crypto-assets, discuss the still-evolving regulatory environment for this asset class, and discuss the mechanics of investing in cryptocurrencies.

Another paper finds that "the body of crypto-asset research, based on arguably immature market data, suggests considerable obstacles to widespread investment and adoption." (source: https://www.cxoadvisory.com/31066/currency-trading/crypto-asset-research-survey/):

Corbet, Shaen and Lucey, Brian M. and Urquhart, Andrew and Yarovaya, Larisa, Cryptocurrencies as a Financial Asset: A Systematic Analysis (March 18, 2018). Available at SSRN: https://ssrn.com/abstract=3143122 or http://dx.doi.org/10.2139/ssrn.3143122

Abstract
This paper provides a systematic review of the empirical literature on the major topics that have been associated with the market for cryptocurrencies since their development as a financial asset in 2009. Despite astonishing price appreciation in recent years, cryptocurrencies have been subjected to accusations of pricing bubbles central to the trilemma that exists between regulatory oversight, the potential for illicit use through it's anonymity within a young underdeveloped exchange system, and infrastructural breaches influenced by the growth of cyber criminality. Each influence the perception of the role of cryptocurrencies as a trustworthy credible investment asset class and legitimate of value.

The next paper "indicates that investors may benefit from adding crypto-assets to their portfolios, with even a fixed 1% allocation offering material Sharpe ratio improvements." (Source: https://www.cxoadvisory.com/31159/currency-trading/diversify-with-crypto-assets):

Krueckeberg, Sinan and Scholz, Peter, Cryptocurrencies as an Asset Class? (April 14, 2018). Available at SSRN: https://ssrn.com/abstract=3162800 or http://dx.doi.org/10.2139/ssrn.3162800

Abstract
Cryptocurrencies show characteristics of a distinct asset class based on strong internal correlation, an absence of correlation with any traditional asset class as well as strong market liquidity, while market stability has room for improvement. We find that for investment purposes cryptocurrencies can be distinguished into cryptographic coins and tokens. Adding a 1% allocation of cryptocurrencies to traditional portfolio structures leads to significant and persistent risk weighted outperformance. These results support the careful introduction of cryptocurrencies into the asset management mainstream.

The next paper "indicates that crypto-assets have little or no relationships to traditional asset classes, exhibit some predictability based on short-term momentum and investor attention and are more important (positively or negatively) for some industries than others." (Source: https://www.cxoadvisory.com/31471/currency-trading/crypto-asset-risks-and-returns):

Liu, Yukun and Tsyvinski, Aleh, Risks and Returns of Cryptocurrency (August 6, 2018). Available at SSRN: https://ssrn.com/abstract=3226952 or http://dx.doi.org/10.2139/ssrn.3226952

Abstract
We establish that the risk-return tradeoff of cryptocurrencies (Bitcoin, Ripple, and Ethereum) is distinct from those of stocks, currencies, and precious metals. Cryptocurrencies have no exposure to most common stock market and macroeconomic factors or to the returns of currencies and commodities. In contrast, we show that the cryptocurrency returns can be predicted by factors which are specific to cryptocurrency markets – there is a strong time-series momentum effect and proxies for investor attention strongly forecast cryptocurrency returns. Finally, we create an index of exposures to cryptocurrencies of 354 industries in the US and 137 industries in China.

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