85th International Atlantic Economic Conference

March 14 - 17, 2018 | London, United Kingdom

Economic analysis of cryptocurrency as an alternative asset class

Friday, 16 March 2018: 4:00 PM
Andria van Der Merwe, Ph.D. , NA, Compass Lexecon, Chicago, IL
The objective of this paper is to assess the viability of cryptocurrency as an alternative asset class. Our analysis provides a comprehensive overview of the current market microstructure for cryptocurrency spot and derivative transactions. We will also compare the cryptocurrency market structure with that of established financial products along dimensions of price formation, market liquidity and market quality.

The public option of cryptocurrency runs the gamut from comparisons to the 1637 tulip bulb mania in Holland to cryptocurrency being the currency of the future with the power to disrupt existing payment systems. The price of bitcoin, the most talked about cryptocurrency, has increased more than 700% during 2017. Billions of dollars are invested in cryptocurrencies globally. Most economists remain skeptics, silently agreeing with JPMorgan Chase Chief Executive Officer Jamie Diamond that bitcoin is a fraud. In light of the recent developments, such as the Chicago Mercantile Exchange (CME) and Chicago Board Options Exchange (CBOE) plans for listing bitcoin futures for trading, this paper adds to the academic debate by performing a rigorous economic assessment of the cryptocurrency market.

Our analysis will utilize historical data on several established financial derivatives including interest rate futures, S&P500 index futures and spot markets reported by Quandl and several cryptocurrency including bitcoin. These data will be augmented with CME and Bloomberg information. We will look at basic measures of market liquidity including bid-ask spread, the Amihud measure of trade volume relative to price changes, execution time, zero trade days and others. We will also study the role or need for intermediation and the dynamics of price discovery.

This paper will improve current understanding at a critical juncture in the cryptocurrency landscape. As an economist, is cryptocurrency a viable alternative asset class?