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?