Moneo offers great advantages for consumers and retailers. Benefits for consumers are: greater transaction speed and potential benefit in the form of a discount on future purchases. Consumers do not have to have an exact amount of cash each time. There will be many mistakes in cash recovery. The owners of the Moneo card should carry fewer bank cards, especially if the features of debit and credit cards are included, and thus they would feel more secure [12]. Traders would receive cash before sending material goods or services, loyalty to customers would increase, the process of payment at the place of purchase would be speeded up, thereby reducing the processing costs of the transaction itself. If the benefit of using Moneo cards would be greater than the cost, retailers could pay to customers to use such a card [11]. If we make comparison between Moneo and POS, it turns out that the former has significant advantages over the POS. Namely, debit and credit cards are not as effective a payment method for low value transactions as transaction-related costs become higher for retailers

ing, as well as the costs associated with managing money in financial institutions.

**2.4. Reasons for Blockchain occurrence**

to eventually become a substitute for cash.

Once the chip is full, the user does not need to require an ATM or an exact amount of cash. Additionally, the problem of stealing or losing money is reduced to a minimum. An e-money transaction does not require an intermediary at present because the money expressed in units (called bits) is electronically transferred from the buyer to the seller. The amount of money that has been paid is prepared at the seller's terminal, i.e. his account is transferred to the financial institution from time to time.

Payment with e-money reduces transaction costs, and time is shortened compared to other forms of payment. Humphrey and colleagues estimate that the cost of using electronic money amounts to one third to half of the cost of paying paper money. When all transactions in one country would be carried out electronically, it would be possible to save more than 1% per year BDP.

#### **2.3. A brief history of digital currency**

From the era of barter economy, metal and coins to gold and silver, continuing to the modern monetary systems and checks, and ending with the latest developments in the global currency, such as the introduction of cryptocurrency like Bitcoin, have passed centuries. Each type of money plays a crucial role in transactional activities in some period of time. As human society and markets developed in particular, there was a need for more sophisticated instruments for the exchange of goods. In this regard, the introduction of cryptocurrency revolutionized the international payment system in a size that only a few years ago was unimaginable. The cryptocurrency is a digital or virtual currency that uses cryptography for security. Cryptocurrency is hard to forge because of this security feature. The determining characteristic of cryptocurrency, and probably the most attractive, is its organic nature as the fact that it is not issued by any central authority. Cryptocurrencies have their own advantages and disadvantages. The main benefits of using cryptocurrencies are that they transfer the funds more easily between two parties in the transaction [5]. These transactions are facilitated through the use of public and private keys for security purposes. These fund transfers are carried out with minimal processing costs, allowing users to avoid the large fees for online transactions charged by most banks.

There are two reasons for the emergence of electronic money and digital currencies. The first, according to the Austrian School of Economic Analysis money is a "social institution" subject to the already initiated institutional change and is interpreted as a consequence of a spontaneous evolution that should overcome the shortcomings of the swap and the double coincidence of desires [6, 7]. Today e-money is the last stage of this development and represents an additional degree of institutional change [8].

Their main role is to support online e-commerce, enable transactions, reduce their costs, or replace the payment of money and coins in retail. The second reason for the emergence of e-money is the information revolution, which is characterized by the integration of electronic information processing and telecommunication technologies, which reduces the geographical differences by means of which information can be transmitted to the whole world. The information revolution has changed the financial sector, making payment modes more secure and more efficient, giving an additional reason for the emergence of new monetary innovations [9].

Unlike the information revolution, the emergence of e-money is a new way of processing information for transferring purchasing power. Many financial innovations are not a new form of money, but a different way of using existing money in transactions [10]. Regardless of the consequences of the mentioned technological development, the nature of the money is still identical i.e. money serves as a means of exchange, as an asset and as a value. The nature of the money will never change, so the money will remain only an intermediary in the exchange of goods and services. e-Money card is a different payment method that allows electronic transfer of the value from the card to the terminal or from the card in the wallet, both in real time and through networks [11]. It is considered that e-money is the most important achievement that transfers the predetermined monetary value so it can be used for more transactions of lesser value. e-Pocket consists of a microcomputer that contains information about the monetary value that can be used. It is a higher degree of technological development compared to magnetic tape cards. Also, the e-pouch is more secure, which can reduce deception because cards with a chip can be more difficult to abuse than magnetic tape cards.

#### **2.4. Reasons for Blockchain occurrence**

**2.2. e-Payment and transaction costs**

26 Blockchain and Cryptocurrencies

financial institution from time to time.

**2.3. A brief history of digital currency**

tional degree of institutional change [8].

year BDP.

any fees, thanks to the special POS mechanism [4].

In classical trade payments require at least one buyer and one seller, both having to have accounts in banks that are connected through clearing houses. Payments with traditional instruments such as checks require intervention of a financial intermediary like bank. Payment with e-money is similar to the traditional scheme—there are two parties—one or two banks. However, the whole process becomes more efficient and easier. The transaction does not require any code and cannot exceed the previously defined amount. If the amount that is on the chip is fully spent, the card can be automatically refilled at the merchant, without charging

Once the chip is full, the user does not need to require an ATM or an exact amount of cash. Additionally, the problem of stealing or losing money is reduced to a minimum. An e-money transaction does not require an intermediary at present because the money expressed in units (called bits) is electronically transferred from the buyer to the seller. The amount of money that has been paid is prepared at the seller's terminal, i.e. his account is transferred to the

Payment with e-money reduces transaction costs, and time is shortened compared to other forms of payment. Humphrey and colleagues estimate that the cost of using electronic money amounts to one third to half of the cost of paying paper money. When all transactions in one country would be carried out electronically, it would be possible to save more than 1% per

From the era of barter economy, metal and coins to gold and silver, continuing to the modern monetary systems and checks, and ending with the latest developments in the global currency, such as the introduction of cryptocurrency like Bitcoin, have passed centuries. Each type of money plays a crucial role in transactional activities in some period of time. As human society and markets developed in particular, there was a need for more sophisticated instruments for the exchange of goods. In this regard, the introduction of cryptocurrency revolutionized the international payment system in a size that only a few years ago was unimaginable. The cryptocurrency is a digital or virtual currency that uses cryptography for security. Cryptocurrency is hard to forge because of this security feature. The determining characteristic of cryptocurrency, and probably the most attractive, is its organic nature as the fact that it is not issued by any central authority. Cryptocurrencies have their own advantages and disadvantages. The main benefits of using cryptocurrencies are that they transfer the funds more easily between two parties in the transaction [5]. These transactions are facilitated through the use of public and private keys for security purposes. These fund transfers are carried out with minimal processing costs, allowing users to avoid the large fees for online transactions charged by most banks. There are two reasons for the emergence of electronic money and digital currencies. The first, according to the Austrian School of Economic Analysis money is a "social institution" subject to the already initiated institutional change and is interpreted as a consequence of a spontaneous evolution that should overcome the shortcomings of the swap and the double coincidence of desires [6, 7]. Today e-money is the last stage of this development and represents an addiAlthough cash is a quick and efficient payment method, the disadvantages of its use are numerous. Keeping cash is followed with many costs, including fraud, money loss, depositing, as well as the costs associated with managing money in financial institutions.

The purpose of e-money is replacing the cash in transactions of small values, thus avoiding its shortcomings, for example French experience with Moneo. Moneo is designed to reduce the cost of keeping cash and purchasing power to be temporarily transferred in a more efficient manner. This structure should be applied to various retail transactions of lesser value in order to eventually become a substitute for cash.

Moneo offers great advantages for consumers and retailers. Benefits for consumers are: greater transaction speed and potential benefit in the form of a discount on future purchases. Consumers do not have to have an exact amount of cash each time. There will be many mistakes in cash recovery. The owners of the Moneo card should carry fewer bank cards, especially if the features of debit and credit cards are included, and thus they would feel more secure [12]. Traders would receive cash before sending material goods or services, loyalty to customers would increase, the process of payment at the place of purchase would be speeded up, thereby reducing the processing costs of the transaction itself. If the benefit of using Moneo cards would be greater than the cost, retailers could pay to customers to use such a card [11].

If we make comparison between Moneo and POS, it turns out that the former has significant advantages over the POS. Namely, debit and credit cards are not as effective a payment method for low value transactions as transaction-related costs become higher for retailers and buyers, and e-money can be used with much lower costs. Paying for e-money is followed by much lower costs compared to other payment methods, primarily credit and debit cards. Another argument that accompanies the Moneo card is that it has a newer encryption technology compared to other cards, which increases security and limits the possibility of fraud. Because Moneo does not require any authorization or identification of the buyer, it allows additional reduction in transaction costs. The new technology of digital payments and currencies will allow real property to be used as a means of exchange.

the Ripple network. The company has a positive cash flow relationship and owns a huge shop on the XRP (Ripple Market), which is periodically released on the market. Investors who believe that cryptocurrencies can reach peak, are looking for others that could provide a greater return in the long run. However, the company has made some significant milestones in recent months. By the end of October 2017, Ripple licensed its Blockchain technologies to more than 100 banks. Its real attraction is the Ripple XRP system, which is ideal for banks because of its liquidity, speed and efficiency since the transaction lasts only 4 seconds, like no

Blockchain and Digital Currency in the World of Finance http://dx.doi.org/10.5772/intechopen.79456 29

However, the support for cryptocurrencies like Ripple is certainly superfluous and is something that should be understood by potential buyers and sellers because it gives those financial institutions a much higher level of control over Ripple than most other cryptocurrencies in the market. Bitcoin, Ethereum and other cryptocurrencies are completely decentralized, meaning that no one has real control over the network, Ripple's nodes are handled by Ripple Labs. These independent servers do not have to provide calculations for work evidence, such as Bitcoin, nodes simply validate transactions by themselves like traditional banks. Although the value of the Ethereum is not like Bitcoin, it is great for trading, and some of its more

Ethereum functions as well as most other cryptocurrencies. Ethereum token—Ether, works similar like Bitcoin. You can buy and sell with confirmation of transactions that are handled through the block. It is completely decentralized, without bank securing of the certificates needed to check the transactions. "Diggers" around the world fulfill this role by running powerful calculation algorithms. Completing these algorithms, the gob is rewarded with Ether, much like digging a Bitcoin that rewards with Bitcoin. As far as Ethereum and Bitcoin have some similarities, however, both platforms have different goals. Bitcoin is a strictly digital currency, designed to function as a means of payment or a warehouse with value, Ethereum takes a greater approach. Ethereum functions as a platform through which people can use ether tokens to create and execute applications and more importantly smart deals. Smart contracts are contracts written in the code, which the creator transfers to the block. Each time one of those contracts is executed, each node of the network executes it, set to Blockchain [16]. Thus, it is preserved in the public book, theoretically protected from evidence. Like other cryptocurrencies, Ethereum is prone to wild fluctuations in value. While Ethereum has risen high late, it is also susceptible to falls as well as other cryptocurrencies.  From here we will conclude what are the advantages of the cryptocurrencies [17]:

nor taxes, nor governments can control the exchange of money between.

there is no possibility of developing inflation in the system.

• No inflation—the maximum number of coins is strictly limited (for example, 21 million in Bitcoin). Since there are neither political forces nor corporations that can change this order,

• Peer-to-peer cryptocurrency network—in such networks there is no master server, which is responsible for all operations. The exchange of information (in this case—money) is between 2 and 3 or more software customers. All installed by programmers-users who are part of the network. Each client stores a record of all transactions executed and the number in each wallet. Transactions are made from hundreds of distributed servers. Neither banks

other cryptocurrency transaction.

advanced features give exciting potential for the future.

How much e-money will be used depends largely on the motivation of its publishers, consumers and traders [13–15]. Consumers' demand will depend on the advantages and disadvantages of e-money in the form of payment, issuers' fees, consumer confidence in the use of e-money, ease of use, merchants' readiness to accept e-money. Motivation for the issuers covers the revenues from the collected fee from card users (traders and consumers), income from investing the remaining amount of money, i.e. for banks—issuers, savings of less retained cash, in the range in which e-money replaces cash). Potential shortcomings for publishers can be expected costs for future regulation. The willingness of retailers to accept e-money is closely related to the fee that will be charged by publishers or operators. For consumers and retailers the most important will be their willingness to embrace new technology. Most researchers believe that the use of e-money will be moderate in the short and medium term, while in the long run e-money can be very widespread.

#### **3. The potential of cryptocurrency**

There are different and confronted opinions regarding the future of cryptocurrencies in general. The optimistic view of the use of cryptocurrencies is supported by the fact that they easily transfer funds between two parties in the transaction. These transactions are facilitated by the use of public and private keys for security purposes. These fund transfers are made with minimal processing costs, allowing users to avoid large fees charged by most banks. In addition, many countries have begun to accept Bitcoin as a valid currency. In particular, countries that aim to get rid of cash have a very friendly approach to encryption. The argument that the promoters use for Bitcoin is the market capitalization of Bitcoin, ether and other cryptocurrencies, claiming that the cryptocurrency market has become very large and powerful, and the ban would be expensive for each country. Today, the total value of all cryptocurrencies has reached a record of value of more than \$ 390 billion. This means that the market value of cryptocurrencies is greater than the value of the Citigroup. The new record was reached in December when the most famous cryptocurrency Bitcoin grew to \$ 19,000.

Among other significant cryptocurrencies are Ripple and Ethereum. The cryptocurrency Ripple, designed for banks and global money transfers, has seen a major feat in the value of its digital currency that has risen in recent months. On December 10, the company had a market capitalization of just over \$ 9 billion. In the end of December, its market value rose to a mere 51%, with a total value of \$ 18.1 billion. Today it is worth \$ 39 billion. Ripple's cryptocurrency is adopted by banks and other financial institutions. These companies believe that Ripple's system offers better prices and is more secure than other digital currencies, including Bitcoin. It allows users to send, receive and hold any currency in a decentralized way through the Ripple network. The company has a positive cash flow relationship and owns a huge shop on the XRP (Ripple Market), which is periodically released on the market. Investors who believe that cryptocurrencies can reach peak, are looking for others that could provide a greater return in the long run. However, the company has made some significant milestones in recent months. By the end of October 2017, Ripple licensed its Blockchain technologies to more than 100 banks. Its real attraction is the Ripple XRP system, which is ideal for banks because of its liquidity, speed and efficiency since the transaction lasts only 4 seconds, like no other cryptocurrency transaction.

and buyers, and e-money can be used with much lower costs. Paying for e-money is followed by much lower costs compared to other payment methods, primarily credit and debit cards. Another argument that accompanies the Moneo card is that it has a newer encryption technology compared to other cards, which increases security and limits the possibility of fraud. Because Moneo does not require any authorization or identification of the buyer, it allows additional reduction in transaction costs. The new technology of digital payments and

How much e-money will be used depends largely on the motivation of its publishers, consumers and traders [13–15]. Consumers' demand will depend on the advantages and disadvantages of e-money in the form of payment, issuers' fees, consumer confidence in the use of e-money, ease of use, merchants' readiness to accept e-money. Motivation for the issuers covers the revenues from the collected fee from card users (traders and consumers), income from investing the remaining amount of money, i.e. for banks—issuers, savings of less retained cash, in the range in which e-money replaces cash). Potential shortcomings for publishers can be expected costs for future regulation. The willingness of retailers to accept e-money is closely related to the fee that will be charged by publishers or operators. For consumers and retailers the most important will be their willingness to embrace new technology. Most researchers believe that the use of e-money will be moderate in the short and medium term,

There are different and confronted opinions regarding the future of cryptocurrencies in general. The optimistic view of the use of cryptocurrencies is supported by the fact that they easily transfer funds between two parties in the transaction. These transactions are facilitated by the use of public and private keys for security purposes. These fund transfers are made with minimal processing costs, allowing users to avoid large fees charged by most banks. In addition, many countries have begun to accept Bitcoin as a valid currency. In particular, countries that aim to get rid of cash have a very friendly approach to encryption. The argument that the promoters use for Bitcoin is the market capitalization of Bitcoin, ether and other cryptocurrencies, claiming that the cryptocurrency market has become very large and powerful, and the ban would be expensive for each country. Today, the total value of all cryptocurrencies has reached a record of value of more than \$ 390 billion. This means that the market value of cryptocurrencies is greater than the value of the Citigroup. The new record was reached in

Among other significant cryptocurrencies are Ripple and Ethereum. The cryptocurrency Ripple, designed for banks and global money transfers, has seen a major feat in the value of its digital currency that has risen in recent months. On December 10, the company had a market capitalization of just over \$ 9 billion. In the end of December, its market value rose to a mere 51%, with a total value of \$ 18.1 billion. Today it is worth \$ 39 billion. Ripple's cryptocurrency is adopted by banks and other financial institutions. These companies believe that Ripple's system offers better prices and is more secure than other digital currencies, including Bitcoin. It allows users to send, receive and hold any currency in a decentralized way through

December when the most famous cryptocurrency Bitcoin grew to \$ 19,000.

currencies will allow real property to be used as a means of exchange.

while in the long run e-money can be very widespread.

**3. The potential of cryptocurrency**

28 Blockchain and Cryptocurrencies

However, the support for cryptocurrencies like Ripple is certainly superfluous and is something that should be understood by potential buyers and sellers because it gives those financial institutions a much higher level of control over Ripple than most other cryptocurrencies in the market. Bitcoin, Ethereum and other cryptocurrencies are completely decentralized, meaning that no one has real control over the network, Ripple's nodes are handled by Ripple Labs. These independent servers do not have to provide calculations for work evidence, such as Bitcoin, nodes simply validate transactions by themselves like traditional banks. Although the value of the Ethereum is not like Bitcoin, it is great for trading, and some of its more advanced features give exciting potential for the future.

Ethereum functions as well as most other cryptocurrencies. Ethereum token—Ether, works similar like Bitcoin. You can buy and sell with confirmation of transactions that are handled through the block. It is completely decentralized, without bank securing of the certificates needed to check the transactions. "Diggers" around the world fulfill this role by running powerful calculation algorithms. Completing these algorithms, the gob is rewarded with Ether, much like digging a Bitcoin that rewards with Bitcoin. As far as Ethereum and Bitcoin have some similarities, however, both platforms have different goals. Bitcoin is a strictly digital currency, designed to function as a means of payment or a warehouse with value, Ethereum takes a greater approach. Ethereum functions as a platform through which people can use ether tokens to create and execute applications and more importantly smart deals. Smart contracts are contracts written in the code, which the creator transfers to the block. Each time one of those contracts is executed, each node of the network executes it, set to Blockchain [16]. Thus, it is preserved in the public book, theoretically protected from evidence. Like other cryptocurrencies, Ethereum is prone to wild fluctuations in value. While Ethereum has risen high late, it is also susceptible to falls as well as other cryptocurrencies.

From here we will conclude what are the advantages of the cryptocurrencies [17]:

• Unlimited possibilities for a transaction—each of the wallet holders can pay to everyone, anywhere and any amount. The transaction cannot be controlled or prevented, so you can make transfers anywhere in the world wherever a user is placed with a wallet.

• Lack of knowledge—people are not aware of how to use cyberattacks and hence be exposed to hackers. The technology is somewhat complex and therefore we need to educate our-

Blockchain and Digital Currency in the World of Finance http://dx.doi.org/10.5772/intechopen.79456 31

• There is no way to cancel the payment—if you're mistaken for someone using the cryptocurrency, then there is no way to get a refund of the amount paid. All you can do is asking the person to return the funds and if your request is denied, then just forget the money. • Major risks for investing in cryptocurrencies that need to be considered in the medium and

Many experts believe that the list of deficiencies in crypto-voltages is much longer and related to the risk of money laundering, terrorist financing and other illegal activities, the lack of a central publisher, which means that there is no legal formal guarantee person in the case of bankruptcy, and the like. Although it is very difficult to predict, many academics and professionals in this topic argue that the future of cryptocurrency is bright because it will remove trade barriers and intermediaries, reduce transaction costs, thereby boosting trade and the economy.

Analyzing the process of money accepting, shows that money is usable as individuals believe that others will be used them for different needs in society. Krueger believes that individuals will accept the e-money system as long as its value is compounded and not reduced drastically [19]. The fact that the individual accepts the money stems from what others accept. Anticipating factor is the key determinant of accepting money. Acceptance, trust and anticipation are the basic factors that enable the spread of the network. However, these factors are not enough because the size of the network also requires interdependence of demand, which means that the network must reach the minimum required size before it reaches a balance. Economides and Himmelberg such a minimal magnitude of the network determinate as "critical mass" [20]. Oliver defined the critical mass as "a smaller segment of the population that wants to make a big contribution to collective action, while most work little or nothing" [21]. A critical mass or starting base plays a key role in the development of the network.

Electronic money cards, like other innovations that involve creation of a network between the manufacturer and the consumer, are a product that inevitably involves the network externality must touch the critical mass of the user before starting to use it successfully. The indicated phenomenon in literature is called a two-sided market. The development of the payment instrument first depends on two types of externalities associated with their application and use. The outsourcing of the network exists because the average consumer benefits from such an instrument, only if other consumers and traders use the same payment instrument. Additionally, the total benefit from the use of e-money card exceeds the usage limit realized by the individual consumer. By accessing one user to the network, the benefits for other users are increased.

Thus, the user's critical mass will be achieved when the demand-side dependency between retailers and consumers will not be more economically significant, i.e. when the expectations

**5. Anticipation of Bitcoin acceptance and "critical mass"**

selves before investing.

long term.

### **4. The omission and risks of cryptocurrencies**

Cryptocurrency opponents argue that cryptocurrencies are highly unstable, can be used for money laundering or financing illegal activities. In this regard, Humphrey, for example, is giving reasons why the cryptocurrency is not a viable electronic currency [18] . He notes that Bitcoin is illiquid and has shown price volatility and that the discounted monetary value of Bitcoin is zero. Further, he notes that the currency does not have a central issuer, and that there is no financial or economic basis for its creation. They are:

Many experts believe that the list of deficiencies in crypto-voltages is much longer and related to the risk of money laundering, terrorist financing and other illegal activities, the lack of a central publisher, which means that there is no legal formal guarantee person in the case of bankruptcy, and the like. Although it is very difficult to predict, many academics and professionals in this topic argue that the future of cryptocurrency is bright because it will remove trade barriers and intermediaries, reduce transaction costs, thereby boosting trade and the economy.

#### **5. Anticipation of Bitcoin acceptance and "critical mass"**

• Unlimited possibilities for a transaction—each of the wallet holders can pay to everyone, anywhere and any amount. The transaction cannot be controlled or prevented, so you can

• No borders—payments made in this system are impossible for cancelation. Coins cannot be forged, copied or spent twice. These opportunities guarantee the integrity of the field system. • Decentralization—there is no central controlling authority in the network, the network is alluded to all participants, each computer crypto-valued member is a member of this system. This means that the central government has no power to dictate rules to cryptocurrency owners. And even if some part of the network goes offline, the payment system will

• Anonymity—completely anonymously and at the same time completely transparent. Each company can create an infinite number of crypto address addresses, regardless of name,

• Transparency—Bitcoin stores the history of transactions that have ever happened. It is called a sequential block of blocks or a blockhead. The block keeps information about everything. So, if the company publicly uses the Bitcoin address for example, then everyone can see how much Bitcoin is owned. If the address of the company is not publicly confirmed, then nobody will ever know that it belongs to this company. For full anonymity, companies

• Bitcoin's open digging code applies the same algorithms used in online banking. The only difference in online banking is the disclosure of information to users. All information about the transaction in the BTC network is shared (like, when), but there is no data for the recipi-

• Transaction speed—the ability to send money everywhere and everyone within minutes

Cryptocurrency opponents argue that cryptocurrencies are highly unstable, can be used for money laundering or financing illegal activities. In this regard, Humphrey, for example, is giving reasons why the cryptocurrency is not a viable electronic currency [18] . He notes that Bitcoin is illiquid and has shown price volatility and that the discounted monetary value of Bitcoin is zero. Further, he notes that the currency does not have a central issuer, and that

• Strong instability—almost all the ups and downs of the value of some cryptocurrencies.

• Difficult to understand—crypto-valves are relatively new and come with a learning curve. People end up investing without proper knowledge and are losing money for something

ent or the sender of the currencies (no access to the owner's personal data).

after the network of the crypto-currency will process the payment.

make transfers anywhere in the world wherever a user is placed with a wallet.

continue to function steadily.

30 Blockchain and Cryptocurrencies

address, or any other information.

use the unique bitcoin address for each transaction.

**4. The omission and risks of cryptocurrencies**

there is no financial or economic basis for its creation. They are:

This instability creates the problem in the short term.

they have not learned.

Analyzing the process of money accepting, shows that money is usable as individuals believe that others will be used them for different needs in society. Krueger believes that individuals will accept the e-money system as long as its value is compounded and not reduced drastically [19]. The fact that the individual accepts the money stems from what others accept. Anticipating factor is the key determinant of accepting money. Acceptance, trust and anticipation are the basic factors that enable the spread of the network. However, these factors are not enough because the size of the network also requires interdependence of demand, which means that the network must reach the minimum required size before it reaches a balance. Economides and Himmelberg such a minimal magnitude of the network determinate as "critical mass" [20]. Oliver defined the critical mass as "a smaller segment of the population that wants to make a big contribution to collective action, while most work little or nothing" [21]. A critical mass or starting base plays a key role in the development of the network.

Electronic money cards, like other innovations that involve creation of a network between the manufacturer and the consumer, are a product that inevitably involves the network externality must touch the critical mass of the user before starting to use it successfully. The indicated phenomenon in literature is called a two-sided market. The development of the payment instrument first depends on two types of externalities associated with their application and use. The outsourcing of the network exists because the average consumer benefits from such an instrument, only if other consumers and traders use the same payment instrument. Additionally, the total benefit from the use of e-money card exceeds the usage limit realized by the individual consumer. By accessing one user to the network, the benefits for other users are increased.

Thus, the user's critical mass will be achieved when the demand-side dependency between retailers and consumers will not be more economically significant, i.e. when the expectations of the consumer benefit will not significantly change depending on the new members of the network [22]. Consumer benefits will increase when more merchants accept the new payment instrument, while the commercial benefit will increase if consumers use the new instrument more often. Additionally, the attractiveness of such an instrument can be reduced due to the incompatibility and competitiveness of the composition, as in the case of video recorders a few decades ago [23].

users (a significant proportion of the value of the products or network refers to its other participants). This concept has positive spiral. It is often mentioned in relation to products used in digital technology, i.e. with products whose use significantly increases with the increase in

Blockchain and Digital Currency in the World of Finance http://dx.doi.org/10.5772/intechopen.79456 33

Farrell et al., for the first time presented the Economic Analysis of the Network Outsourcing [24, 27]. They classified the network externalities into two groups-direct and indirect. Direct network externalities exist when increasing the size of the network increases the number of other users with whom it can be completely "communicated". In such a network there are inactions and complementarity between users of the same product or service. Indirect network externalities exist when increasing the size of the network increases the supply of

Network externality introduces dynamic elements for network users when deciding on entering the network, as well as for manufacturers of such products when making a production decision [16]. Consumers in the decision to enter the network must take into account the size of the network for the future. The companies are motivated to invest in building a network

Five years ago Bitcoin showed the opportunity for being anonymous. But this is changing starting with Federal Bureau of Investigation (FBI) and other law enforcement, for example. The biggest part of Bitcoin users are law-abiding people motivated by privacy concerns. Also there are people that see the anonymity as a tool for financial crime. This was a reason to show attempt for virtual currency regulation. It's well known that Governments are grappling with the virtual currencies as it continues to gain popularity. So, in 2013 the U.S. Department of Treasury issued Guide how to use digital currency and money transmitters. In that time was taken some steps for Bitcoin regulation, meaning that cryptocurrency should be threaten as a taxable property. Conducting transactions in digital currencies has emerged as one of the preferred payment methods because it provides anonymity and privacy. At the begging as it previous mention in the text, digital currency was subject of

Bitcoins are transferred between transacting parties without an intermediary, thus offering providing level of privacy and anonymity. A public ledger contains the transactions as cryptographic representations, but no personal information is recorded. Exchanging Bitcoins in a transaction is much like exchanging cash, but through the Internet. In attempting to regulate digital currencies is that doing so dismantles a technology that fosters privacy. Regulation erodes the privacy linked with digital currency. Think of it as transacting in an account that is protected by strong secrecy laws. In order to regulate those transactions, the system has to eliminate the secrecy. Regulation of digital currencies would undermine the system as an enabler of privacy and reduce its appeal. Users who seek the opportunity of privacy in digital currencies will look to other venues to conduct their business, in countries with less regulation. But the consequence of regulation of digital currency will be enabling privacy violations

the number of consumers.

interest for criminals.

products or services available for network users.

from which they would make a lease later.

**7. Financial privacy: could Bitcoin hide the criminals?**

The use and distribution of the network is a complex issue because the interdependence of demand will remain an obstacle until the network reaches a critical mass, either independently or with the help of a regulator. According to the analyses of Katza and Shapira the growth of the network in its nature can be self-fulfilling [24]. Accomplish a critical mass in using Blockchain is not easy because traders must invest in special POS devices to be able to use e-money; and consumers will have to use e-money in a retail transaction as a substitute for coins and paper money. The goal of this problem is to convince a large number of users to start using e-money.

One of the reasons that few people use this payment method is precisely the habit of using cash for a retail transaction. At the same time, the banks' habits in carrying out a transaction may be the reason for the slow implementation of new insurances. Consumers gained confidence in financial intermediaries over time, and therefore did not get used to doing a transaction without their presence. Therefore, consumers are not ready for change. More consumers need more time to get to know the functioning of the new payment system. Accordingly, most of them would look forward to seeing the development of the situation because they want to gain more confidence before accepting innovation. As each phenomenon goes through stages of development, it is possible to expect further progress and an economy without cash using the digital economy.

#### **6. Technology adoption in the presence of "network externalities"**

The use of e-money is a complicated phenomenon and firstly depends on the interactions between users of products and services.

According to Schmalensee the network can be defined as a composition of directly or indirectly coupled nodes [25]. Schmalensee considered that the main hallmark of the network is the fact that there is a network externality. The above concept is often applied in economic literature; also often appears in the literature on industrial organizations and public finances [20, 26].

From a user's perspective, Bitcoin is a mobile application or a computer program that provides personal money, Bitcoin, and allows users to send and receive Bitcoins through them. This is the way how Bitcoin works for the most users. The network of Bitcoin is sharing a public book called "block chain". This book contains any transaction ever processed, allowing the user's computer to verify the validity of each transaction. The authenticity of each transaction is protected by digital signatures and corresponds to the sent address, allowing for all users to have complete control over the sent Bitcoins from their own Bitcoin addresses. So, anyone can perform processing of transactions using computer with specialized hardware, and earn Bitcoins for this service.

The term "network externalities" refers to the product or service to get better value for consumers, as many people use them and thus continuously increases the number of network users (a significant proportion of the value of the products or network refers to its other participants). This concept has positive spiral. It is often mentioned in relation to products used in digital technology, i.e. with products whose use significantly increases with the increase in the number of consumers.

Farrell et al., for the first time presented the Economic Analysis of the Network Outsourcing [24, 27]. They classified the network externalities into two groups-direct and indirect. Direct network externalities exist when increasing the size of the network increases the number of other users with whom it can be completely "communicated". In such a network there are inactions and complementarity between users of the same product or service. Indirect network externalities exist when increasing the size of the network increases the supply of products or services available for network users.

Network externality introduces dynamic elements for network users when deciding on entering the network, as well as for manufacturers of such products when making a production decision [16]. Consumers in the decision to enter the network must take into account the size of the network for the future. The companies are motivated to invest in building a network from which they would make a lease later.

### **7. Financial privacy: could Bitcoin hide the criminals?**

of the consumer benefit will not significantly change depending on the new members of the network [22]. Consumer benefits will increase when more merchants accept the new payment instrument, while the commercial benefit will increase if consumers use the new instrument more often. Additionally, the attractiveness of such an instrument can be reduced due to the incompatibility and competitiveness of the composition, as in the case of video recorders a

The use and distribution of the network is a complex issue because the interdependence of demand will remain an obstacle until the network reaches a critical mass, either independently or with the help of a regulator. According to the analyses of Katza and Shapira the growth of the network in its nature can be self-fulfilling [24]. Accomplish a critical mass in using Blockchain is not easy because traders must invest in special POS devices to be able to use e-money; and consumers will have to use e-money in a retail transaction as a substitute for coins and paper money. The goal of this problem is to convince a large number of users to start using e-money. One of the reasons that few people use this payment method is precisely the habit of using cash for a retail transaction. At the same time, the banks' habits in carrying out a transaction may be the reason for the slow implementation of new insurances. Consumers gained confidence in financial intermediaries over time, and therefore did not get used to doing a transaction without their presence. Therefore, consumers are not ready for change. More consumers need more time to get to know the functioning of the new payment system. Accordingly, most of them would look forward to seeing the development of the situation because they want to gain more confidence before accepting innovation. As each phenomenon goes through stages of development, it is possible to expect further progress and an economy without cash using the digital economy.

**6. Technology adoption in the presence of "network externalities"**

The use of e-money is a complicated phenomenon and firstly depends on the interactions

According to Schmalensee the network can be defined as a composition of directly or indirectly coupled nodes [25]. Schmalensee considered that the main hallmark of the network is the fact that there is a network externality. The above concept is often applied in economic literature; also often appears in the literature on industrial organizations and public finances [20, 26]. From a user's perspective, Bitcoin is a mobile application or a computer program that provides personal money, Bitcoin, and allows users to send and receive Bitcoins through them. This is the way how Bitcoin works for the most users. The network of Bitcoin is sharing a public book called "block chain". This book contains any transaction ever processed, allowing the user's computer to verify the validity of each transaction. The authenticity of each transaction is protected by digital signatures and corresponds to the sent address, allowing for all users to have complete control over the sent Bitcoins from their own Bitcoin addresses. So, anyone can perform processing of transactions using computer with specialized hardware, and earn

The term "network externalities" refers to the product or service to get better value for consumers, as many people use them and thus continuously increases the number of network

few decades ago [23].

32 Blockchain and Cryptocurrencies

between users of products and services.

Bitcoins for this service.

Five years ago Bitcoin showed the opportunity for being anonymous. But this is changing starting with Federal Bureau of Investigation (FBI) and other law enforcement, for example. The biggest part of Bitcoin users are law-abiding people motivated by privacy concerns. Also there are people that see the anonymity as a tool for financial crime. This was a reason to show attempt for virtual currency regulation. It's well known that Governments are grappling with the virtual currencies as it continues to gain popularity. So, in 2013 the U.S. Department of Treasury issued Guide how to use digital currency and money transmitters. In that time was taken some steps for Bitcoin regulation, meaning that cryptocurrency should be threaten as a taxable property. Conducting transactions in digital currencies has emerged as one of the preferred payment methods because it provides anonymity and privacy. At the begging as it previous mention in the text, digital currency was subject of interest for criminals.

Bitcoins are transferred between transacting parties without an intermediary, thus offering providing level of privacy and anonymity. A public ledger contains the transactions as cryptographic representations, but no personal information is recorded. Exchanging Bitcoins in a transaction is much like exchanging cash, but through the Internet. In attempting to regulate digital currencies is that doing so dismantles a technology that fosters privacy. Regulation erodes the privacy linked with digital currency. Think of it as transacting in an account that is protected by strong secrecy laws. In order to regulate those transactions, the system has to eliminate the secrecy. Regulation of digital currencies would undermine the system as an enabler of privacy and reduce its appeal. Users who seek the opportunity of privacy in digital currencies will look to other venues to conduct their business, in countries with less regulation. But the consequence of regulation of digital currency will be enabling privacy violations because in such a circumstances business and individuals have to share information with the government and others [28]. These potential risks of having no regulation for digital currency distract many users in the world because there is no confidence [29].

• Free up working capital—the need for banks to hold reserves will be minimized as the money held for use as reserves will be available for other purposes thus optimizing intra-

Blockchain and Digital Currency in the World of Finance http://dx.doi.org/10.5772/intechopen.79456 35

• Transaction efficiency—cryptocurrency transactions are fast and immediate—they improve efficiency by cutting out the middle man and avoiding lengthy back-office reconciliation

• Transaction security—central bank-issued cryptocurrency transactions can be tracked pro-

• Over and above these benefits, a central bank-issued cryptocurrency can have a much larger impact on the wider economy and for all market participants because it can:

• Boost economic growth—a central bank issued cryptocurrency can permanently boost

• Act as an enabler for mobile and digital commerce—it can replace current immediate payment models by delivering the currency into the market in a more immediate, efficient and

• Ensure stability in the financial system—a cryptocurrency can help maintain financial stability and provide policy makers with more effective tools to smooth out financial booms and busts. In periods of high inflation for fiat currencies, banks can hold cryptocurrencies,

• Work as a crypto-reserve currency—commercial banks can keep a portion of their reserves in cryptocurrency rather than in fiat currency, thus complementing the fractional reserve

• Effectively monitor the supply of money—a central bank issued cryptocurrency can help policy makers control the amount of money in the economy, as well as the supply of the cryptocurrency. This is currently not possible as banks create money by using deposits as loans. • Lower costs—cryptocurrencies will enable the banking system to cut the costs of banknote issuance, circulation and handling. In addition, transaction costs will be significantly

• Allow for traceability—transactions in central bank issued cryptocurrencies can be tracked, and simultaneously ensure that the users information remains protected, thus protecting privacy. A central bank issued currency follows KYB and KYC procedures which will allow

Taking in an account that in the world of digital currency is needed regulation, increasing the attractiveness of using cryptocurrencies is found in support by central bank. The central bank with its authority and confidence that it has from the market participants, needs to do some

At the beginning, central bank is the most relevant factor to define the framework and standards for all participants. Regarding this, central bank can create and give policy guidance

tecting security. Security is also enhanced as there is no double spending.

day liquidity.

processes.

economic growth.

effective manner.

banking system.

thus protecting their wealth.

reduced especially for cross border transactions.

the central bank to identify users when there is a need to.

reforms in the moment of deploying a cryptocurrency [31].

A regulatory framework for digital currencies is more than need for public protection and combating criminal activities. However, caution should be exercised to avoid stifling the development of an innovative technology. Regulation of digital currencies should be sufficiently balanced with privacy, business development and innovative technology.

## **8. The way forward: technology revolution and monetary evolution**

#### **8.1. Key success factors**

The current cryptocurrency market is highly competitive and fragmented. Experts identified more factors that will determinate and rise the attractiveness and confidence in using cryptocurrency [30]:

The cryptocurrencies should be:

Cryptocurrencies will undoubtedly benefit market participants.

The benefits include [10, 29]:

• Free up working capital—the need for banks to hold reserves will be minimized as the money held for use as reserves will be available for other purposes thus optimizing intraday liquidity.

because in such a circumstances business and individuals have to share information with the government and others [28]. These potential risks of having no regulation for digital currency

A regulatory framework for digital currencies is more than need for public protection and combating criminal activities. However, caution should be exercised to avoid stifling the development of an innovative technology. Regulation of digital currencies should be suffi-

The current cryptocurrency market is highly competitive and fragmented. Experts identified more factors that will determinate and rise the attractiveness and confidence in using crypto-

ciently balanced with privacy, business development and innovative technology.

• Instantly liquid—liquidity should be instantly generated or generated

• Add purpose to economic activity (commerce) and have sustainable value

• Immediate asset availability—the cryptocurrency will be available immediately for con-

• Immediate access to liquidity—the cryptocurrency will be highly liquid—liquidity gener-

• Trusted—backed by a lender of last resort (e.g. a central bank)

• Free from fractional reserve banking in its crypto-form

• Transparent with transaction finality (directly or remotely)

• Be legitimate—a competent authority to impose these standards

sumers and businesses to spend, without any waiting period.

Cryptocurrencies will undoubtedly benefit market participants.

• Secure and immutable—cannot be double spent

• Have standards to enable interoperability

The benefits include [10, 29]:

ated instantly on demand.

**8. The way forward: technology revolution and monetary evolution**

distract many users in the world because there is no confidence [29].

**8.1. Key success factors**

34 Blockchain and Cryptocurrencies

• Cost effective to issue • Available immediately • Governed and regulated

The cryptocurrencies should be:

currency [30]:

• on demand

Taking in an account that in the world of digital currency is needed regulation, increasing the attractiveness of using cryptocurrencies is found in support by central bank. The central bank with its authority and confidence that it has from the market participants, needs to do some reforms in the moment of deploying a cryptocurrency [31].

At the beginning, central bank is the most relevant factor to define the framework and standards for all participants. Regarding this, central bank can create and give policy guidance where all players will know policy and regulation very clear. Central bank following KYB and KYC procedures ensures control of financial criminal. In the moment when central bank issued cryptocurrency under legal framework it will have the status of legal tender.

by central banks. So, we should be thinking in using this tool more efficiency for the world economy, supportive than understanding them as possibility to disrupting the financial system. More detail, central bank has the authority to bring participants together and will increase the attractiveness of fiat money for exchange in clearing, payments and settlement. In this moment some experts asked two question according cryptocurrency and central banks. The first is linked with the deepness and preciseness of policy and economic implications of launching a central bank-issued cryptocurrency. The second issue is focused on impact of

Blockchain and Digital Currency in the World of Finance http://dx.doi.org/10.5772/intechopen.79456 37

[1] Cohen BJ. The Future of Money, Chapter Seven. Princeton: Princeton University Press;

[2] Bounie D, Abel F. Les déterminants de la détention et de l'usage des instruments de paiement: éléments théoriques et empiriques. Revue d'Economie Financière. 2006;**83**:159-173

[4] Baddeley M. Using E-cash in the new economy: An economic analysis of micropayment

[5] David P. Positive feedbacks and research productivity in science: Reopening another black box. In: Grandstrand O, editor. Economics of Technology. London: Elsevier Science;

[7] von Hayek F. Denationalisation of Money: An Analysis of the Theory and Practice of

[8] Schmitz SW. The institutional character of electronic money schemes: Redeemability and the unit of account. In: Latzer M, Schmitz SW, editors. Carl Menger and the Evolution of Payment Systems: From Barter to Electronic Money. Cheltenham, UK and Northampton,

[9] Goodhart CAE, Krueger M. The impact of technology on cash usage. The Magazine of

[3] European Central Bank. The Blue Book. Bucharest: European Central Bank; 2005

systems [online]. Journal of Electronic Commerce. 2004;**5**(4):239-253

[6] Menger C. On the origin of money. Economic Journal. 1892;**2**(83):239-255

Concurrent Currencies. Londres: Institute of Economic Affairs; 1976

central bank-issued cryptocurrency on the banking system.

Address all correspondence to<EMAIL_ADDRESS>
Goce Delcev University, Shtip, Macedonia

**Author details**

Tatjana Boshkov

**References**

2004

1994. pp. 65-89

MA: Edward Elgar; 2001

De La Rue. 2001;(4):9-11

The role of central banks raises more for all users in the economy. In the traditional way, central bank has no direct connection with consumers, which is a big difference when central bank issued cryptocurrency and has direct link with market participants.

#### **9. Conclusion**

The chapter was intended to provide an analysis for the use of cryptocurrencies in general and especially Bitcoin. The research has shown that the future of cryptocurrencies can be bright if some institutional-formal conditions are met. The advantages of using cryptocurrencies in trade facilitation, cost reduction and others are recognized by the majority of academics. Bitcoin and other cryptocurrencies have the potential to replace traditional and new payment methods. But in order to achieve this and become the dominant force in the global payment system, they must provide a distinctive individual value, deal with and overcome a number of critical challenges, such as formal regulatory issues. It is unlikely to happen in a short period of time. Also, banks should carefully consider the technology underlying these cryptocurrencies as a potential generic new way of transferring ownership of the value over the long term. On the other hand, we have seen that cryptocurrencies as a new rise in society constitute a new way of transparent and fluid flow of resources that can spur every economy.

The advances in information and communication technology enabled the development of new forms of electronic payment, both in the real world with card products and in the virtual world (software products). The reason for the growing prevalence of these products is precisely their great perceptions compared to the traditional way of payment. However, statistics confirm that the evolution of e-money is in the initial phase, and that cash is still the most important form of payment for retail transactions. Cash has not yet been replaced by any form of electronic payment. One of the reasons is precisely the fact that e-money is a rather sophisticated form of payment that requires some investment in new technology among retailers, as well as developing new experiences among the users. Therefore, the use of electronic money does not extend significantly.

Because Bitcoin is controlled by all users, and they are free to choose the software of their choice. Therefore, in order to maintain compatibility, users must change this, that is, they should use software that meets the same rules. Only Bitcoin can work properly with a complete consensus among all users. Ripple enabled us to look at how banks began to use it, in order to become more polyclinic in their work. The Ethereum has enabled us to get to know the extra possibilities of cryptocurrencies through Smart Arrangements. They could relieve individuals of the limitations of the legal system and big business.

Taking in account the success of cryptocurrencies, there is opinion that consumers, consortiums or large financial institutions would not be successful in launching cryptocurrencies. Further, here is believed that its success will be greater if the digital currencies are lunched by central banks. So, we should be thinking in using this tool more efficiency for the world economy, supportive than understanding them as possibility to disrupting the financial system. More detail, central bank has the authority to bring participants together and will increase the attractiveness of fiat money for exchange in clearing, payments and settlement. In this moment some experts asked two question according cryptocurrency and central banks. The first is linked with the deepness and preciseness of policy and economic implications of launching a central bank-issued cryptocurrency. The second issue is focused on impact of central bank-issued cryptocurrency on the banking system.

#### **Author details**

where all players will know policy and regulation very clear. Central bank following KYB and KYC procedures ensures control of financial criminal. In the moment when central bank

The role of central banks raises more for all users in the economy. In the traditional way, central bank has no direct connection with consumers, which is a big difference when central

The chapter was intended to provide an analysis for the use of cryptocurrencies in general and especially Bitcoin. The research has shown that the future of cryptocurrencies can be bright if some institutional-formal conditions are met. The advantages of using cryptocurrencies in trade facilitation, cost reduction and others are recognized by the majority of academics. Bitcoin and other cryptocurrencies have the potential to replace traditional and new payment methods. But in order to achieve this and become the dominant force in the global payment system, they must provide a distinctive individual value, deal with and overcome a number of critical challenges, such as formal regulatory issues. It is unlikely to happen in a short period of time. Also, banks should carefully consider the technology underlying these cryptocurrencies as a potential generic new way of transferring ownership of the value over the long term. On the other hand, we have seen that cryptocurrencies as a new rise in society constitute a new way of transparent and fluid flow of resources that can spur every economy. The advances in information and communication technology enabled the development of new forms of electronic payment, both in the real world with card products and in the virtual world (software products). The reason for the growing prevalence of these products is precisely their great perceptions compared to the traditional way of payment. However, statistics confirm that the evolution of e-money is in the initial phase, and that cash is still the most important form of payment for retail transactions. Cash has not yet been replaced by any form of electronic payment. One of the reasons is precisely the fact that e-money is a rather sophisticated form of payment that requires some investment in new technology among retailers, as well as developing new experiences among the users. Therefore, the use of electronic money

Because Bitcoin is controlled by all users, and they are free to choose the software of their choice. Therefore, in order to maintain compatibility, users must change this, that is, they should use software that meets the same rules. Only Bitcoin can work properly with a complete consensus among all users. Ripple enabled us to look at how banks began to use it, in order to become more polyclinic in their work. The Ethereum has enabled us to get to know the extra possibilities of cryptocurrencies through Smart Arrangements. They could relieve

Taking in account the success of cryptocurrencies, there is opinion that consumers, consortiums or large financial institutions would not be successful in launching cryptocurrencies. Further, here is believed that its success will be greater if the digital currencies are lunched

individuals of the limitations of the legal system and big business.

issued cryptocurrency under legal framework it will have the status of legal tender.

bank issued cryptocurrency and has direct link with market participants.

**9. Conclusion**

36 Blockchain and Cryptocurrencies

does not extend significantly.

Tatjana Boshkov

Address all correspondence to<EMAIL_ADDRESS>
Goce Delcev University, Shtip, Macedonia

#### **References**

[10] White LH. The technology revolution and monetary evolution. In: Dorn JA, editor. The Future of Money in the Information Age. Washington, D.C.: CATO Institute; 1996

[26] Economides N. Economics of networks. International Journal of Industrial Organization.

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[27] Farrell J, Saloner G. Standardization, compatibility and innovation. RAND Journal of

[28] Iwai K. 1997. Evolution of money. In: Paper Presented at the Workshop on Evolution

[29] Stavins J. A comparison of social costs and benefits of paper check presentment and ECP with truncation. New England Economic Review (July/August). 1997;**12**:27-44

[30] Rahn RW. The future of financial privacy: Private choices versus political rules. In: The

[31] Mokyr J. Are we living in the middle of an industrial revolution? Federal Reserve Bank

1996;**14**:673-700

Economics. 1985;**16**:70-83

and Economics; Certosa di Pontignano, Siena

of Kansas City Economic Review. 1999;(14):31

Future of Money and Financial Privacy, Chapter 6. 2000

[26] Economides N. Economics of networks. International Journal of Industrial Organization. 1996;**14**:673-700

[10] White LH. The technology revolution and monetary evolution. In: Dorn JA, editor. The Future of Money in the Information Age. Washington, D.C.: CATO Institute; 1996 [11] Chakravorti S, Victor L. Payment instrument choice: The case of prepaid cards. Economic

[12] Gerald S. The Electronic Purse: An Overview of Recent Development and Policy Issues.

[13] BIS. Implications for Central Banks of the Development of Digital Money. Basel: Bank of

[14] BIS. Survey of Developments in Electronic Money and Internet and Mobile Payments.

[15] BIS. Statistics on Payment and Settlement Systems in Selected Countries. Basel: Bank of

[16] Klenow JP. Evidence on Learning and Network Externalities in the Diffusion of Home

[17] Centi JP. Currency competition and the monetary union. Unpublished PhD dissertation.

[18] Humphrey D, Kim M, Vale B. Realizing the gains from electronic payments: Costs, pricing and payment choice. Journal of Money, Credit and Banking. 2001;**33**(2):216-234 [19] Krueger M. Toward a moneyless world. In: Paper Prepared for the International Atlantic

[20] Economides N, Himmelberg C. Critical mass and network evolution in telecommunications. In: Brock G, editor. Toward a Competitive Telecommunication Industry: Selected Papers for the 1994 Telecommunications Policy Research Conference. Mahwah, NJ:

[21] Oliver PE, Marwell G, Teixeira R. A theory of the critical mass. I. Interdependence group heterogeneity, and the production of collective action. American Journal of Sociology.

[22] Osterberg W, Thomson J. Network externalities: The Catch-22 of retail payment innova-

[23] Stavins J. Effect of consumer characteristics on the use of payment instruments. Federal

[24] Katz ML, Shapiro C. Technology adoption in the presence of network externalities.

[25] Schmalensee R. On antitrust issues related to networks. In: Testimony Before the Federal Trade Commission, Hearings on Global Competition/High-Tech Innovation, December

tions. In: Economic Commentary. Federal Reserve Bank of Cleveland; 1998

Reserve Bank of Boston New England Economic Review. 2001:20-31

Computers. Federal Reserve Bank of Minneapolis and NBER; 2002

Perspectives. 2006;**2Q**:29-44

International Settlements; 1996

International Settlements; 2006

Aix-Marseille University; 1979

Lawrence Erlbaum; 1995. pp. 47-63

1985;**91**:522-556

1. 1995

Basel: Bank of International Settlements; 2004

Economic Conference Vienna; March 16-23, 1999

Journal of Political Economy. 1986;**94**:822-841

Bank of Canada; 1996

38 Blockchain and Cryptocurrencies

**Chapter 3**

Provisional chapter

**Cryptocurrency Returns**

Cryptocurrency Returns

Mike Cudd, Kristen Ritterbush, Marcelo Eduardo and Chris Smith

Mike Cudd, Kristen Ritterbush, Marcelo Eduardo and Chris Smith

http://dx.doi.org/10.5772/intechopen.80397

dously high risk and return.

Keywords: cryptocurrency, bitcoin, returns, risk

Abstract

1. Introduction

Additional information is available at the end of the chapter

One of the most significant innovations in the world of finance has been the creation and evolvement of cryptocurrencies. These digital means of exchange have been the focus of extensive news coverage, especially the Bitcoin, with a primary focus on the tremendous potential return and the high level of accompanying risk. In this chapter, we examine the risk-return pattern for an array of cryptocurrencies, contrasting the pattern with those of conventional currency and equity investments. We find the measures of cryptocurrency returns and risk to be a very high multiple of those of conventional investments, and the pattern is determined to be robust relative to the time frame. Consequently, cryptocurrencies are determined to provide an alternative to investors that involves tremen-

DOI: 10.5772/intechopen.80397

This chapter is comprised of three sections. First, the risk-return characteristics of a broad array of cryptocurrencies are examined for a short holding period (i.e., the past year). Many of the cryptocurrencies are relatively new and were introduced at some point during the year 2017. Consequently, initially restricting the examination of cryptocurrency performance to the 2017 calendar year permits the inclusion of many of the new cryptocurrencies, which also provides a risk-return profile that is relevant to short-term investors. In addition, this provides an initial comparison of how these performance characteristics vary across the various cryptocurrencies. Second, the short-term performance of the largest four cryptocurrencies is contrasted with the performance of the largest four conventional currencies, and with the SP500 equity index. This provides a more focused performance profile of cryptocurrencies versus more conventional

> © 2016 The Author(s). Licensee InTech. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and eproduction in any medium, provided the original work is properly cited.

© 2018 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use,

distribution, and reproduction in any medium, provided the original work is properly cited.

Additional information is available at the end of the chapter

**Chapter 3** Provisional chapter

#### **Cryptocurrency Returns** Cryptocurrency Returns

Mike Cudd, Kristen Ritterbush, Marcelo Eduardo and Chris Smith Mike Cudd, Kristen Ritterbush, Marcelo Eduardo and Chris Smith

Additional information is available at the end of the chapter Additional information is available at the end of the chapter

http://dx.doi.org/10.5772/intechopen.80397

#### Abstract

One of the most significant innovations in the world of finance has been the creation and evolvement of cryptocurrencies. These digital means of exchange have been the focus of extensive news coverage, especially the Bitcoin, with a primary focus on the tremendous potential return and the high level of accompanying risk. In this chapter, we examine the risk-return pattern for an array of cryptocurrencies, contrasting the pattern with those of conventional currency and equity investments. We find the measures of cryptocurrency returns and risk to be a very high multiple of those of conventional investments, and the pattern is determined to be robust relative to the time frame. Consequently, cryptocurrencies are determined to provide an alternative to investors that involves tremendously high risk and return.

DOI: 10.5772/intechopen.80397

Keywords: cryptocurrency, bitcoin, returns, risk

#### 1. Introduction

This chapter is comprised of three sections. First, the risk-return characteristics of a broad array of cryptocurrencies are examined for a short holding period (i.e., the past year). Many of the cryptocurrencies are relatively new and were introduced at some point during the year 2017. Consequently, initially restricting the examination of cryptocurrency performance to the 2017 calendar year permits the inclusion of many of the new cryptocurrencies, which also provides a risk-return profile that is relevant to short-term investors. In addition, this provides an initial comparison of how these performance characteristics vary across the various cryptocurrencies. Second, the short-term performance of the largest four cryptocurrencies is contrasted with the performance of the largest four conventional currencies, and with the SP500 equity index. This provides a more focused performance profile of cryptocurrencies versus more conventional

© 2016 The Author(s). Licensee InTech. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and eproduction in any medium, provided the original work is properly cited. © 2018 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

investments. Lastly, the risk-return profile is extended to the past 3 years to obtain a sense of the long-term pattern of performance. In this case, the examination is restricted to the only two cryptocurrencies that were publicly traded over this period; the Bitcoin and the Litecoin.<sup>1</sup> Again, the performance of the cryptocurrencies is contrast against the performance of the four major conventional currencies and the SP500 to provide a glimpse into the sustainability of the cryptocurrency risk-return patterns through longer periods of performance observation.

3. Short-term cryptocurrency performance comparison

Cryptocurrency

Conventional currency

Table 1. Currency names.

However, the system did not go live until July 2015 [15].

Stocks

4

Many of the cryptocurrencies only began publicly trading in the latter half of 2017 (refer to the inset in Table 1 providing the month of initial trading).4 Only the Bitcoin and Litecoin were in

Cryptocurrency Returns

43

http://dx.doi.org/10.5772/intechopen.80397

ETC Ethereum Classic

GBP British Pound

SP500 SP500 Stock Index

For example, the Ethereum cryptocurrency was introduced in late 2013, funded by an online crowdsale in 2014.

QTUM QTUM OMG OmiseGo

EUR Euro CHF Swiss Franc CAD Canadian Dollar

BTC Bitcoin ETH Ethereum XRP Ripple BCH Bitcoin Cash LTC Litecoin ADA Cardano XLM Stellar NEO NEO EOS EOS VEN Vechain IOT IOTA DASH Digital Cash TRX Tronix XEM NEM XMR Monero LSK Lisk

#### 2. The cryptocurrency phenomenon and unconventional sources of risk

Through the cryptocurrency phenomenon, investors have been introduced to a whole new vocabulary consisting of terms such as block-chain, hash, nonce, proof-of-work, nodes, and other terms that apply to the cryptocurrency market structure [1]. The financial press addresses such topics as the irreversible design of cryptocurrency transactions (consensus protocol), the role of distributed cryptographic proof replacing the need for trust (i.e., the distributed ledger and transaction verification), privacy (i.e., anonymity), and the potential haven for transfers of illegally obtained funds, among others. Moreover, historically high returns offered by cryptocurrency investments over their limited lives have attracted the interest of speculating investors, as well as casual observers. The potential returns are enormous relative to those of more conventional investments, such as foreign currencies and the stock market, and the risks are commensurately higher.

Unconventional sources of risk also exist for the cryptocurrency market. Some researchers question the underlying foundation and source of value of cryptocurrencies [2–4]. The cryptocurrency market is also being pressured for adequate disclosure by the City of New York, targeted by the SEC, and more recently accused of market manipulation.<sup>2</sup> Even daytime talk shows have impacted the cryptocurrency market with negative comments by the world's most influential investor, Warren Buffett.<sup>3</sup>

Some studies suggest that the addition of cryptocurrencies to conventional investment portfolios may offer some diversification benefits [5], while other studies find limited diversification benefits to short-term investors [6], and some researchers question whether adding the Bitcoin to a conventional portfolio adds value [7]. Cryptocurrency investments are also observed to follow an asymmetric return pattern with fat distribution tails [8]. Furthermore, the largest cryptocurrency, the Bitcoin, is observed to be the most efficient of the cryptocurrencies [9].

Before proceeding to the examination of cryptocurrency performance, some of the more common names for the currency tickers are provided as a guide in navigating the graphics presented in this chapter (see Table 1).

<sup>1</sup> One study finds the Bitcoin and Litecoin to be the safest of the various cryptocurrencies [10].

<sup>2</sup> See [11–13].

<sup>3</sup> See [14].

#### 3. Short-term cryptocurrency performance comparison

investments. Lastly, the risk-return profile is extended to the past 3 years to obtain a sense of the long-term pattern of performance. In this case, the examination is restricted to the only two cryptocurrencies that were publicly traded over this period; the Bitcoin and the Litecoin.<sup>1</sup> Again, the performance of the cryptocurrencies is contrast against the performance of the four major conventional currencies and the SP500 to provide a glimpse into the sustainability of the cryptocurrency risk-return patterns through longer periods of performance observation.

2. The cryptocurrency phenomenon and unconventional sources of risk

surately higher.

42 Blockchain and Cryptocurrencies

most influential investor, Warren Buffett.<sup>3</sup>

this chapter (see Table 1).

1

2

3 See [14].

See [11–13].

Through the cryptocurrency phenomenon, investors have been introduced to a whole new vocabulary consisting of terms such as block-chain, hash, nonce, proof-of-work, nodes, and other terms that apply to the cryptocurrency market structure [1]. The financial press addresses such topics as the irreversible design of cryptocurrency transactions (consensus protocol), the role of distributed cryptographic proof replacing the need for trust (i.e., the distributed ledger and transaction verification), privacy (i.e., anonymity), and the potential haven for transfers of illegally obtained funds, among others. Moreover, historically high returns offered by cryptocurrency investments over their limited lives have attracted the interest of speculating investors, as well as casual observers. The potential returns are enormous relative to those of more conventional investments, such as foreign currencies and the stock market, and the risks are commen-

Unconventional sources of risk also exist for the cryptocurrency market. Some researchers question the underlying foundation and source of value of cryptocurrencies [2–4]. The cryptocurrency market is also being pressured for adequate disclosure by the City of New York, targeted by the SEC, and more recently accused of market manipulation.<sup>2</sup> Even daytime talk shows have impacted the cryptocurrency market with negative comments by the world's

Some studies suggest that the addition of cryptocurrencies to conventional investment portfolios may offer some diversification benefits [5], while other studies find limited diversification benefits to short-term investors [6], and some researchers question whether adding the Bitcoin to a conventional portfolio adds value [7]. Cryptocurrency investments are also observed to follow an asymmetric return pattern with fat distribution tails [8]. Furthermore, the largest cryptocurrency, the Bitcoin, is observed to be the most efficient of the cryptocurrencies [9].

Before proceeding to the examination of cryptocurrency performance, some of the more common names for the currency tickers are provided as a guide in navigating the graphics presented in

One study finds the Bitcoin and Litecoin to be the safest of the various cryptocurrencies [10].

Many of the cryptocurrencies only began publicly trading in the latter half of 2017 (refer to the inset in Table 1 providing the month of initial trading).4 Only the Bitcoin and Litecoin were in

Table 1. Currency names.

<sup>4</sup> For example, the Ethereum cryptocurrency was introduced in late 2013, funded by an online crowdsale in 2014. However, the system did not go live until July 2015 [15].

existence and publicly trading prior to 2015.<sup>5</sup> For this reason, cryptocurrency risks and returns are examined for different time segments.<sup>6</sup>

2017 (i.e., it increased eightfold in value over the 4-month period). The SP500 risk-return performance is also included as a source of contrast. Note how each of the cryptocurrency measures of

Monthly return 0.8 1.8 30.8 Standard deviation of return 1.8 1.6 25.4

British Pound (%) SP500 (%) Bitcoin (%)

Cryptocurrency Returns

45

http://dx.doi.org/10.5772/intechopen.80397

return and risk massively exceed those the SP500 index for the year 2017.

Graph 1. Major Cryptocurrency Risk-Return Pattern: 2017.

We begin by reviewing cryptocurrency returns for the year of 2017 in table form (see Chart 1). The horizontal bar chart provides both an analog and digital view of the enormous monthly returns and risks associated with the various cryptocurrencies. For example, the Tronix cryptocurrency (TRX) provided a 1049% monthly return over its roughly 4 months of trading ending the year

Chart 1. Cryptocurrency Risk-Return Performance: 2017.

5 Source [16].

<sup>6</sup> All cryptocurrency, conventional currency, and SP500 returns are determined from adjusted prices obtained through [17].

2017 (i.e., it increased eightfold in value over the 4-month period). The SP500 risk-return performance is also included as a source of contrast. Note how each of the cryptocurrency measures of return and risk massively exceed those the SP500 index for the year 2017.

existence and publicly trading prior to 2015.<sup>5</sup> For this reason, cryptocurrency risks and returns

We begin by reviewing cryptocurrency returns for the year of 2017 in table form (see Chart 1). The horizontal bar chart provides both an analog and digital view of the enormous monthly returns and risks associated with the various cryptocurrencies. For example, the Tronix cryptocurrency (TRX) provided a 1049% monthly return over its roughly 4 months of trading ending the year

All cryptocurrency, conventional currency, and SP500 returns are determined from adjusted prices obtained through [17].

are examined for different time segments.<sup>6</sup>

44 Blockchain and Cryptocurrencies

Chart 1. Cryptocurrency Risk-Return Performance: 2017.

5

6

Source [16].

Graph 1. Major Cryptocurrency Risk-Return Pattern: 2017.

A different visual of the risk-return tradeoff across the various cryptocurrencies and the SP500 is presented in the form of a line graph (see Graph 1). As expected, there is a positive relationship between risk and return, with cryptocurrencies displaying higher monthly returns also carrying higher standard deviations of monthly return (i.e., higher risk). This graphic also depicts how the cryptocurrencies dominate the SP500 in terms of massively higher return and risk values.

largest conventional currencies, and the SP500 stock index. The four largest cryptocurrencies by market capitalization (as of the end of 2017) are the BTC, LTC, DASH, and XMR. The four dominant conventional currencies consist of the British pound (GBP), the Euro (EUR), the Swiss franc (CHF), and the Canadian dollar (CAD). Chart 2 presents the mean monthly returns and standard deviations of return for the 2017 calendar year for selected investments across different investment classes. Again, note how the risk and return measures for the cryptocurrencies dwarf

Cryptocurrency Returns

47

http://dx.doi.org/10.5772/intechopen.80397

For the sake of a brief, but more focused and isolated contrast, consider the returns and standard deviations of return solely on the Bitcoin, the British Pound, and the SP500 below for 2017:

While the Bitcoin return is roughly 17 times that of the SP500, its risk in terms of the standard deviation of monthly return is also commensurately higher. Note that the SP500 and the British pound are relatively sedate investment alternatives when compared to the Bitcoin, and the

The relationship between risk and return across these investments in different asset classes can be displayed in the form of a line graph (see Graph 2). Again, observe the positive relationship between risk and return. Moreover, note that the positive risk-return relationship is clearly present within the cryptocurrencies themselves, with the most well-known cryptocurrency, the Bitcoin, demonstrating the least volatility and lowest average return among the cryptocurrencies

Bitcoin is the most conservative investment alternative among the cryptocurrencies.

those of other conventional currencies, as well as those of the SP500.

Graph 2. Mean monthly return (%) among investment group alternatives: 2017.

displayed.

Another contrast and sense of scale is obtained by comparing returns across different investment classes. For this purpose, we restrict our review to the four largest cryptocurrencies, the four

Chart 2. Major Cryptocurrency vs Conventional Currency Risk-Return Performance: 2017.

largest conventional currencies, and the SP500 stock index. The four largest cryptocurrencies by market capitalization (as of the end of 2017) are the BTC, LTC, DASH, and XMR. The four dominant conventional currencies consist of the British pound (GBP), the Euro (EUR), the Swiss franc (CHF), and the Canadian dollar (CAD). Chart 2 presents the mean monthly returns and standard deviations of return for the 2017 calendar year for selected investments across different investment classes. Again, note how the risk and return measures for the cryptocurrencies dwarf those of other conventional currencies, as well as those of the SP500.

A different visual of the risk-return tradeoff across the various cryptocurrencies and the SP500 is presented in the form of a line graph (see Graph 1). As expected, there is a positive relationship between risk and return, with cryptocurrencies displaying higher monthly returns also carrying higher standard deviations of monthly return (i.e., higher risk). This graphic also depicts how the cryptocurrencies dominate the SP500 in terms of massively higher return and risk values.

46 Blockchain and Cryptocurrencies

Another contrast and sense of scale is obtained by comparing returns across different investment classes. For this purpose, we restrict our review to the four largest cryptocurrencies, the four

Chart 2. Major Cryptocurrency vs Conventional Currency Risk-Return Performance: 2017.

For the sake of a brief, but more focused and isolated contrast, consider the returns and standard deviations of return solely on the Bitcoin, the British Pound, and the SP500 below for 2017:

While the Bitcoin return is roughly 17 times that of the SP500, its risk in terms of the standard deviation of monthly return is also commensurately higher. Note that the SP500 and the British pound are relatively sedate investment alternatives when compared to the Bitcoin, and the Bitcoin is the most conservative investment alternative among the cryptocurrencies.

The relationship between risk and return across these investments in different asset classes can be displayed in the form of a line graph (see Graph 2). Again, observe the positive relationship between risk and return. Moreover, note that the positive risk-return relationship is clearly present within the cryptocurrencies themselves, with the most well-known cryptocurrency, the Bitcoin, demonstrating the least volatility and lowest average return among the cryptocurrencies displayed.

Graph 2. Mean monthly return (%) among investment group alternatives: 2017.

#### 4. Long-term cryptocurrency performance comparison

The potential sustainability of the risk-return pattern offered by cryptocurrencies is examined by observing a longer period of performance. The risk and return of cryptocurrencies, conventional currencies, and the SP500 stock index are presented for a 3-year period, 2015–2017 (refer to Chart 3). Since the Bitcoin (BTC) and Litecoin (LTC) were the only cryptocurrencies trading throughout the 2015–2017 time period, only these two cryptocurrencies are included in this long-term performance compared to more conventional investments.7

Note that while the differences in performance between cryptocurrencies and other investments for this 3-year period are somewhat less striking than for the explosive year 2017, there still exists an enormous performance gap. Returns on the two cryptocurrencies (BTC and LTC) are roughly 10 times those of the comparative investments, and likewise, the levels of risk (i.e., standard deviation of monthly returns) are comparably higher.

The long-term performance contrast is also presented in the form of a line graph (see Graph 3). Note that the two cryptocurrencies (BTC and LTC) display risk and return values that are high

Cryptocurrency Returns

49

http://dx.doi.org/10.5772/intechopen.80397

Whether examining performance for the explosive year 2017, or for a longer period, cryptocurrencies offer another alternative to investors that involves considerably higher risk and commensurately higher return than typical of conventional investments. Compared to the high average returns and standard deviations of return of cryptocurrencies, investment in conventional currencies or the stock market (SP500) appears relatively sedate by comparison. Cryptocurrency returns have averaged a level equal to roughly 20 or more times those of conventional currencies or equity investment. Although cryptocurrencies offer the attraction of enormously high returns, cryptocurr-

multiples of those of the SP500 or conventional currencies.

ency investment is also accompanied by substantially higher risk.

5. Summary

Graph 3. Monthly performance: 2015-2017.

Chart 3. Investment monthly performance: 2015-2017.

<sup>7</sup> The Bitcoin and Litecoin began publicly trading on February 5, 2013.

Graph 3. Monthly performance: 2015-2017.

The long-term performance contrast is also presented in the form of a line graph (see Graph 3). Note that the two cryptocurrencies (BTC and LTC) display risk and return values that are high multiples of those of the SP500 or conventional currencies.

#### 5. Summary

4. Long-term cryptocurrency performance comparison

48 Blockchain and Cryptocurrencies

long-term performance compared to more conventional investments.7

standard deviation of monthly returns) are comparably higher.

Chart 3. Investment monthly performance: 2015-2017.

The Bitcoin and Litecoin began publicly trading on February 5, 2013.

7

The potential sustainability of the risk-return pattern offered by cryptocurrencies is examined by observing a longer period of performance. The risk and return of cryptocurrencies, conventional currencies, and the SP500 stock index are presented for a 3-year period, 2015–2017 (refer to Chart 3). Since the Bitcoin (BTC) and Litecoin (LTC) were the only cryptocurrencies trading throughout the 2015–2017 time period, only these two cryptocurrencies are included in this

Note that while the differences in performance between cryptocurrencies and other investments for this 3-year period are somewhat less striking than for the explosive year 2017, there still exists an enormous performance gap. Returns on the two cryptocurrencies (BTC and LTC) are roughly 10 times those of the comparative investments, and likewise, the levels of risk (i.e.,

> Whether examining performance for the explosive year 2017, or for a longer period, cryptocurrencies offer another alternative to investors that involves considerably higher risk and commensurately higher return than typical of conventional investments. Compared to the high average returns and standard deviations of return of cryptocurrencies, investment in conventional currencies or the stock market (SP500) appears relatively sedate by comparison. Cryptocurrency returns have averaged a level equal to roughly 20 or more times those of conventional currencies or equity investment. Although cryptocurrencies offer the attraction of enormously high returns, cryptocurrency investment is also accompanied by substantially higher risk.

#### Author details

Mike Cudd<sup>1</sup> , Kristen Ritterbush<sup>2</sup> , Marcelo Eduardo<sup>1</sup> \* and Chris Smith<sup>1</sup>

\*Address all correspondence to<EMAIL_ADDRESS>

#### References

[1] Maese V, Avery A, Naftalis B, Wink S, Valdez, Yvette D. Cryptocurrency: A primer. Banking Law Journal. 2016;133:468-471

[14] https://www.cnbc.com/2018/01/10/buffett-says-cyrptocurrencies-will-almost-certainly-

Cryptocurrency Returns

51

http://dx.doi.org/10.5772/intechopen.80397

end-badly.html

[17] https://finance.yahoo.com/

[15] https://en.wikipedia.org/wiki/Ethereum

[16] https://en.wikipedia.org/wiki/History\_of\_bitcoin

Author details

50 Blockchain and Cryptocurrencies

, Kristen Ritterbush<sup>2</sup>

Law Journal. 2016;133:468-471

2016;20(4):569-588

Letters. 2018;165:58-61

transparency-1523980862

Economic Letters. 2018;164:109-111

\*Address all correspondence to<EMAIL_ADDRESS>
1 School of Business, Mississippi College, Clinton, MS, USA

2 School of Business, University of Arkansas, Fayetteville, AR, USA

of Risk Management in Financial Institutions. 2017/2018;11(1):4-9

tion with Bitcoin. Journal of Asset Management. 2015;16(6):365-373

of the Bitcoin. Decision Support Systems. 2017;95:49-60

, Marcelo Eduardo<sup>1</sup>

[1] Maese V, Avery A, Naftalis B, Wink S, Valdez, Yvette D. Cryptocurrency: A primer. Banking

[2] Antoncic M. Bitcoin and other cryptocurrencies: Tulip mania or the next amazon? Journal

[3] Li X. The technology and economic determinants of cryptocurrency exchange rates: The case

[4] Harwick C. Cryptocurrency and the problem of intermediation. The Independent Review.

[5] Briere M, Oosterlink K, Szafarz A. Virtual currency, tangible return: Portfolio diversifica-

[6] Corbet S, Meegan A, Larkin C, Lucey B, Yarovaya L. Exploring the dynamic relationships between cryptocurrencies and other financial assets. Economic Letters. 2018;165:28-34

[7] Chowdhury S. Is bitcoin the "Paris Hilton" of the currency world? Or are the early investors onto something that will make them rich? Journal of Investing. 2016;25(1):64-72

[8] Phillip A, Chan J, Peiris S. A new look at cryptocurrencies. Economic Letters. 2018;163:6-9

[9] Brauneis A, Mestel R. Price discovery of cryptocurrencies: Bitcoin and beyond. Economic

[10] Gkillas K, Katsiampa P. An application of extreme value theory to cryptocurrencies.

[11] https://www.wsj.com/articles/sec-launches-cryptocurrency-probe-1519856266

[12] https://www.wsj.com/articles/new-york-pushes-crypto-exchanges-for-more-

[13] https://www.wsj.com/articles/u-s-regulators-demand-trading-data-from-bitcoinexchanges-in-manipulation-probe-1528492835?mod=djemalertNEWS

\* and Chris Smith<sup>1</sup>

Mike Cudd<sup>1</sup>

References

**Section 3**

**Impact of Cryptocurrencies in Gaming**

**Impact of Cryptocurrencies in Gaming**

**Chapter 4**

**Provisional chapter**

**Cryptocurrencies in the Ludic Economies: The Case of**

**Cryptocurrencies in the Ludic Economies: The Case of**

Games have their own economic models. Today, players can not only collect digital currencies, but they can also use real currencies to buy virtual goods. Business models in games such as freemium and in-app purchases, for example, sustain this structure. Within this context, there is also the expansion of models outside the game realm like eSports, which happens in the form of tournaments. With this, there is constant exchange of value that emerges from games, which could also include the use of cryptocurrencies. In this chapter, we give an overview of the current state of the art of economic models within games and eSports. The current chapter aims to situate and analyse the application of these business models derived from games, e-sport and the future of ludic

**Keywords:** games, cryptocurrencies, ludic economies, eSports, economic models

Games and eSports market are increasing every year, including the mobile sector that is competing directly with the traditional platforms and consoles. According to [1], by 2020, the eSports industry will reach 1.65 billion US dollars. Similarly, a study by [2] on the global games market forecasts that '2.3 billion gamers across the globe will spend \$137.9 billion on games in 2018. Digital game revenues will take 91% of the global market with \$125.3 billion'. The same trend can also be observed in the video game consumer market performance, with an increase of value from downloadable contents (DLC) in comparison to usual package models (see **Figure 1**). Most

of the time, this revenue is earned through the selling of virtual goods within games.

© 2016 The Author(s). Licensee InTech. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

© 2018 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use,

distribution, and reproduction in any medium, provided the original work is properly cited.

DOI: 10.5772/intechopen.80950

**Contemporary Game Cultures**

**Contemporary Game Cultures**

Leonardo José Mataruna-dos-Santos and

Leonardo José Mataruna-dos-Santos and

Additional information is available at the end of the chapter

Additional information is available at the end of the chapter

http://dx.doi.org/10.5772/intechopen.80950

Vanissa Wanick

**Abstract**

economies.

**1. Introduction**

Vanissa Wanick

#### **Cryptocurrencies in the Ludic Economies: The Case of Contemporary Game Cultures Cryptocurrencies in the Ludic Economies: The Case of Contemporary Game Cultures**

DOI: 10.5772/intechopen.80950

Leonardo José Mataruna-dos-Santos and Vanissa Wanick Leonardo José Mataruna-dos-Santos and Vanissa Wanick

Additional information is available at the end of the chapter Additional information is available at the end of the chapter

http://dx.doi.org/10.5772/intechopen.80950

#### **Abstract**

Games have their own economic models. Today, players can not only collect digital currencies, but they can also use real currencies to buy virtual goods. Business models in games such as freemium and in-app purchases, for example, sustain this structure. Within this context, there is also the expansion of models outside the game realm like eSports, which happens in the form of tournaments. With this, there is constant exchange of value that emerges from games, which could also include the use of cryptocurrencies. In this chapter, we give an overview of the current state of the art of economic models within games and eSports. The current chapter aims to situate and analyse the application of these business models derived from games, e-sport and the future of ludic economies.

**Keywords:** games, cryptocurrencies, ludic economies, eSports, economic models

#### **1. Introduction**

Games and eSports market are increasing every year, including the mobile sector that is competing directly with the traditional platforms and consoles. According to [1], by 2020, the eSports industry will reach 1.65 billion US dollars. Similarly, a study by [2] on the global games market forecasts that '2.3 billion gamers across the globe will spend \$137.9 billion on games in 2018. Digital game revenues will take 91% of the global market with \$125.3 billion'. The same trend can also be observed in the video game consumer market performance, with an increase of value from downloadable contents (DLC) in comparison to usual package models (see **Figure 1**). Most of the time, this revenue is earned through the selling of virtual goods within games.

© 2016 The Author(s). Licensee InTech. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. © 2018 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Cryptocurrencies are decentralised currencies that rely on cryptography to secure their safety and trust; these are powerful mathematical protocols (e.g. blockchain) that avoid 'cheating' or fraud [11]. Blockchain is a decentralised transaction and data management technology developed first for *Bitcoin* [12]. The authors [13] reinforce that the term cryptocurrency can be seen either as currency or as a 'synthetic commodity money', which 'resembles fiat money in having no nonmonetary value (but also) resembles commodity money in being not just contingently but absolutely scarce' [14]. Online and social media factors are currently related to the time intervals of cryptocurrency prices; thus it was observed 'that cryptocurrencies are

Cryptocurrencies in the Ludic Economies: The Case of Contemporary Game Cultures

http://dx.doi.org/10.5772/intechopen.80950

57

One of the most popular cryptocurrencies is *Bitcoin* that dominates the cryptocurrency markets and presents researchers with a rich source of real-time transactional data [16]. *Bitcoin* is a decentralised currency [11] that relies on peer-to-peer (P2P) cash system and network consensus. Thus, cryptocurrencies are 'agreed' currencies that rely on algorithms to be trustable. The mechanics of cryptocurrencies like *Bitcoin* are similar to a game. Metaphorically speaking, mining could be the effort that one has in the game to progress and the currency is the virtual reward that could be exchanged for something else. With that, games and money have a lot in common. For instance, cryptocurrencies allow individuals to have fun while earning money [17]. This association is part of a rewarding experience, which is a core mechanic in games. Hence, like in a game, 'real' money becomes a reward. Considering this, with many advances on technology and games, there is an opportunity to explore the application of cryptocurrencies in games. How can designers and developers implement cryptocurrencies in their game business models? What are the main characteristics of cryptocurrencies in games? What are the main challenges? In light of these questions, this chapter aims to understand the features and current state of the art that dwells within the profitable market of games and eSports.

The term ludic economies is a critical reflection on the parallels between play and economic models [18]. These relationships could be understood through comparisons towards 'capitalist' thinking through the accumulation of resources. The 'capitalisation' refers to the action of collecting points, coins, digital currency or other incoming, just for getting rich or to enhance the score. The 'monetisation' refers to the points or money collected in the game which can be used to buy items such as clothes, guns, powers and others that will provide more power or capacity to collect more money or incomings. According to [19], there are three revenue models to consider: Freemium is 'coined through the contraction of "free" and "premium". It refers to a revenue model which enables consumers to have a certain product or service for free and getting revenue from additional features provided, usually to a small percentage of the user base'; premium is 'basing income on a transaction with a given price which is agreed, and many times paid for, prior to getting the product or service'; and subscription is the 'model based on periodic payments in return for a periodic or continuous service and/ or product deliveries'. These models have been used historically in the video game industry, and, theoretically, they would fit personal computer video games and the specific genre of Multiplayer Online Battle Arena (MOBA). Some game companies are studying ways to imple-

prone to experience intervals of bubble-like price growth' [15].

**2. Ludic economies, economic models and virtual goods**

ment cryptocurrencies for payments of the three revenue models.

**Figure 1.** Video game consumer market value worldwide from 2011 to 2019, by distribution type (in billion US dollars) [1].

With technological advances, game developers and designers have found an opportunity to explore the business of virtual goods in order to increase their revenue stream, particularly through in-app purchases (IAP). One example is the freemium model [3]. For example, in the mobile game *Clash of Clans*, players can buy 'time' to have their goods ready for battle (e.g. players can pay to get their house built quicker), relying on players' impatience to progress in the game [4]. No wonder, *Clash of Clans*' creators earn more than 15 million per day using this game-business model [5]. Considering this, it is possible to understand the intersection between economics and games in two ways: one as a game structure (e.g. collecting coins, accumulation of goods) and another through microtransactions (e.g. buying time or goods to progress in the game). This opens the door to possible problems that could affect the player experience. For example, players might buy their way up in the leaderboard using real money, or they might buy power-ups to win battles inside the game or even use cheat codes to have as much virtual money as they can. In fact, some websites offer online auctions for powerups of some games following the tendencies of online auctions. Actions were very were very popular in the early days of Internet commerce, but today online sellers mostly use posted prices [6]. This is not an official market developed by the gaming industry; however, there is an emerging and potential economy around power-ups (selling and buying), with physical currencies and/or cryptocurrencies that require attention. It notes that complex games, especially massively multiplayer online role-playing games (MMORPGs), contain narrative and mechanisms that mimic real economic activities, such as production, trade and consumption [7]. Those factors can contribute to this 'emerging economy' using the auction system.

Virtual goods are not the only venue that could be explored in games business models. Since there are many transactions involved in games, this could also open the opportunity to explore cryptocurrencies. It mentions the gamification techniques as a strategy used to incentivize participation in mobile crowd-sensing applications that can be conveyed by cryptocurrencies [8]. The effectiveness of cryptocurrency gamification schemes depends considerably on a large set of interrelated factors from community-related (number of participants) to cultural or motivational factors [9]. According to [10], if societies want to adopt cryptocurrencies, it is necessary to think differently about past sources, investments and revenues (including sustainability).

Cryptocurrencies are decentralised currencies that rely on cryptography to secure their safety and trust; these are powerful mathematical protocols (e.g. blockchain) that avoid 'cheating' or fraud [11]. Blockchain is a decentralised transaction and data management technology developed first for *Bitcoin* [12]. The authors [13] reinforce that the term cryptocurrency can be seen either as currency or as a 'synthetic commodity money', which 'resembles fiat money in having no nonmonetary value (but also) resembles commodity money in being not just contingently but absolutely scarce' [14]. Online and social media factors are currently related to the time intervals of cryptocurrency prices; thus it was observed 'that cryptocurrencies are prone to experience intervals of bubble-like price growth' [15].

One of the most popular cryptocurrencies is *Bitcoin* that dominates the cryptocurrency markets and presents researchers with a rich source of real-time transactional data [16]. *Bitcoin* is a decentralised currency [11] that relies on peer-to-peer (P2P) cash system and network consensus. Thus, cryptocurrencies are 'agreed' currencies that rely on algorithms to be trustable. The mechanics of cryptocurrencies like *Bitcoin* are similar to a game. Metaphorically speaking, mining could be the effort that one has in the game to progress and the currency is the virtual reward that could be exchanged for something else. With that, games and money have a lot in common. For instance, cryptocurrencies allow individuals to have fun while earning money [17]. This association is part of a rewarding experience, which is a core mechanic in games. Hence, like in a game, 'real' money becomes a reward. Considering this, with many advances on technology and games, there is an opportunity to explore the application of cryptocurrencies in games. How can designers and developers implement cryptocurrencies in their game business models? What are the main characteristics of cryptocurrencies in games? What are the main challenges? In light of these questions, this chapter aims to understand the features and current state of the art that dwells within the profitable market of games and eSports.

#### **2. Ludic economies, economic models and virtual goods**

With technological advances, game developers and designers have found an opportunity to explore the business of virtual goods in order to increase their revenue stream, particularly through in-app purchases (IAP). One example is the freemium model [3]. For example, in the mobile game *Clash of Clans*, players can buy 'time' to have their goods ready for battle (e.g. players can pay to get their house built quicker), relying on players' impatience to progress in the game [4]. No wonder, *Clash of Clans*' creators earn more than 15 million per day using this game-business model [5]. Considering this, it is possible to understand the intersection between economics and games in two ways: one as a game structure (e.g. collecting coins, accumulation of goods) and another through microtransactions (e.g. buying time or goods to progress in the game). This opens the door to possible problems that could affect the player experience. For example, players might buy their way up in the leaderboard using real money, or they might buy power-ups to win battles inside the game or even use cheat codes to have as much virtual money as they can. In fact, some websites offer online auctions for powerups of some games following the tendencies of online auctions. Actions were very were very popular in the early days of Internet commerce, but today online sellers mostly use posted prices [6]. This is not an official market developed by the gaming industry; however, there is an emerging and potential economy around power-ups (selling and buying), with physical currencies and/or cryptocurrencies that require attention. It notes that complex games, especially massively multiplayer online role-playing games (MMORPGs), contain narrative and mechanisms that mimic real economic activities, such as production, trade and consumption

**Figure 1.** Video game consumer market value worldwide from 2011 to 2019, by distribution type (in billion US dollars) [1].

[7]. Those factors can contribute to this 'emerging economy' using the auction system.

sustainability).

56 Blockchain and Cryptocurrencies

Virtual goods are not the only venue that could be explored in games business models. Since there are many transactions involved in games, this could also open the opportunity to explore cryptocurrencies. It mentions the gamification techniques as a strategy used to incentivize participation in mobile crowd-sensing applications that can be conveyed by cryptocurrencies [8]. The effectiveness of cryptocurrency gamification schemes depends considerably on a large set of interrelated factors from community-related (number of participants) to cultural or motivational factors [9]. According to [10], if societies want to adopt cryptocurrencies, it is necessary to think differently about past sources, investments and revenues (including The term ludic economies is a critical reflection on the parallels between play and economic models [18]. These relationships could be understood through comparisons towards 'capitalist' thinking through the accumulation of resources. The 'capitalisation' refers to the action of collecting points, coins, digital currency or other incoming, just for getting rich or to enhance the score. The 'monetisation' refers to the points or money collected in the game which can be used to buy items such as clothes, guns, powers and others that will provide more power or capacity to collect more money or incomings. According to [19], there are three revenue models to consider: Freemium is 'coined through the contraction of "free" and "premium". It refers to a revenue model which enables consumers to have a certain product or service for free and getting revenue from additional features provided, usually to a small percentage of the user base'; premium is 'basing income on a transaction with a given price which is agreed, and many times paid for, prior to getting the product or service'; and subscription is the 'model based on periodic payments in return for a periodic or continuous service and/ or product deliveries'. These models have been used historically in the video game industry, and, theoretically, they would fit personal computer video games and the specific genre of Multiplayer Online Battle Arena (MOBA). Some game companies are studying ways to implement cryptocurrencies for payments of the three revenue models.

A classic example of 'capitalisation' occurs in *SuperMario Bros* (Nintendo®), in which players need to collect coins while jumping and fighting enemies. Also, in the classic board game *Monopoly*, players start with a specific amount of money and then buy houses, charge rent and upgrade their belongings. These models are inherent in the mechanics of these games. Although in *SuperMario Bros* players cannot 'buy' anything in the game, there is still an accumulation of 'capital' that could be traded to extra health, new avatar clothing or others. This helps to create an in-game economy or a micro-economy inside the game, supported by game mechanics and player psychology. Considering this, mechanics that might favour currency exchange are object collection through accumulation, trading systems (with virtual or real money) and mastery through accumulation (e.g. players could collect a bunch of abilities/ power-ups). In fact, Nintendo® also created a new version of *SuperMario* for iPhone and Android, called *SuperMario Run*. In the new game for mobile, the personage collects coins to exchange for elements in the game. It is available in the same game, the 'Toad Rally Ticket', a kind of currency to exchange for the opportunity to play special phases or mini-rally. You may have to pay one 'Rally' ticket to enter a race, but you can earn back what you paid, plus more, if you win a 'Rally'. In the game *Need for Speed* (2015), the player can collect points, convert it into money and use it to upgrade the car before the race. In this case, the concept of monetarism according to the definition of [20], who present an 'economic theory based on the view that the quantity of money is the main determinant of money incomes', is applicable.

**2.1. Virtual goods in games**

or real money (through in-app purchases).

**2.2. Cryptocurrencies in games**

sure this currency is trustable?

examples in the market (see **Figures 2** and **3**).

Virtual goods are 'in-game objects' that players can use only in the game, like avatar clothing styles, power-ups, extra lives, weapons, places and time (p1) [23]. Virtual goods can be bought by real money or in-game currency. For example, in the popular farm game *Farmville*, players can trade in the game, earn money from their farm and use this money to buy goods, but they can also buy these goods using real money. The willingness to buy a virtual good will then depend on the player. For instance, [24] has found when players have fun with the game, they would be less keen to buy virtual goods. On the other hand, if players play the game with more frequency, they tend to buy more virtual goods. Thus, purchasing virtual goods in games can be subjective. Also, in the same study, the author found that social interaction influences people's intention to buy virtual goods [24]. It is also important to note that games are rewarding systems and game currencies reflect those rewards. For example, you can only get coins in *SuperMario Bros* if you jump in the right position. Therefore, it is possible to say that virtual goods are in-game rewards, which could be a new character ability, new clothing, new scenarios/arenas/environments and objects that could be purchased by in-game currency

Cryptocurrencies in the Ludic Economies: The Case of Contemporary Game Cultures

http://dx.doi.org/10.5772/intechopen.80950

59

Cryptocurrencies are currencies supported by agreed protocols [11]. Thus, in a game, a cryptocurrency is a currency that allows players to make exchanges inside the game, which may also involve 'real' money. *The Sims* is a great example of using virtual money inside a game. The game itself mimics the real world; players can go to work, earn their salary and buy objects for their house. However, according to [25] players may wish to cheat in the game to get as much money as they can. In fact, a simple code in the game can give more than 1000 *simoleons* to the player 'for free'. With that, becoming a 'cheater' in the game can be easy and acceptable since the codes are public. Thus, how to protect the dignity of the currency? How to prevent cheating? In sports games, there is no cheat code list. However, on the perspective of [26] in games like FIFA, developed by EA for mobile platforms, there is a constant use of in-app purchases inside the game. This suggests that if a player would like to have more power-ups, he/she could pay for it. Thus, what cryptocurrencies and games have in common is their rewarding system. The difference between them is on the path towards earning this currency and the player's values and intentions, since while playing games, players tend to exercise their values [27]. This means that if players feel like cheating and if the game allows this behaviour, they might do it. Thus, how can we make

Regarding cryptocurrency and games, it is possible to mention strong market correlations between *Bitcoin* and other gaming currencies. Some currencies in the blockchain carry in their names the terminology 'games' or description in their profiles and using the games as principles in the market. Using *Bitcoin* as comparative parameter, it is possible to observe some

[28] remembered that 'gaming cryptocurrencies could change the face and economies of gaming and they are growing on an industry-wide scale to new all-time highs every day'.

Remembering the precursor games, since beginning the Mario Bros® arcade version in 1983, designed by Shigeru Miyamoto and Gunpei Yokoi, the same developers of *Donkey Kong* (first arcade where the character *Mario* appears as coadjutant, early 1980s) used basic concepts of capitalisation described by [21], when the personage collects coins in the route, breaking boxes or eliminating adversaries [22]. However, Nintendo® launched in 1985 the platform for video games and since then used concepts in more than 70 versions of the *Super Mario* series, such as *Odyssey*, *Galaxy*, *World* and others. With this, games would have their own economic model, be it using real or digital money. For instance, with just a click, players can buy a very valuable item in the game by just using their credit card. [19] comments:

*Paying customers are offered either to progress at a faster pace or a certain advantage also available to non-playing users willing to invest enough time into the game. In light of this, some games function with a dual currency system. Hard currency is obtained only by putting money into the game and soft currency is only obtained through time spent in game or logons (or though other mechanism such as number of wins). Offers for sale can be priced then in one or both of these currencies, determining then what can be bought with money, with time or with either one or the other* (p.6) [19]*.*

For instance, 'pay to win' is an option that can be applied for cheating or winning, escaping hard stages, collecting more sources or enhancing the revenue. For example, in the game *Candy Crush*, the user can buy power-ups to destroy barriers in hard stages or extra movements and additional life, to follow to the next stage increasing the revenue. The game also provides free power-ups in different stages for promoting a power-up testing. For multiplayer games, as player(s) versus player(s) (PvP), it is not ethically accepted in the western countries [19]. That action provides a customer engagement and a transformation in the consumer behaviour of users. A kind of power-up dependence is generated for further improvement of performance, promoting a consumer who is continuously engaged and the usage of currency conversion for digital or virtual money.

#### **2.1. Virtual goods in games**

A classic example of 'capitalisation' occurs in *SuperMario Bros* (Nintendo®), in which players need to collect coins while jumping and fighting enemies. Also, in the classic board game *Monopoly*, players start with a specific amount of money and then buy houses, charge rent and upgrade their belongings. These models are inherent in the mechanics of these games. Although in *SuperMario Bros* players cannot 'buy' anything in the game, there is still an accumulation of 'capital' that could be traded to extra health, new avatar clothing or others. This helps to create an in-game economy or a micro-economy inside the game, supported by game mechanics and player psychology. Considering this, mechanics that might favour currency exchange are object collection through accumulation, trading systems (with virtual or real money) and mastery through accumulation (e.g. players could collect a bunch of abilities/ power-ups). In fact, Nintendo® also created a new version of *SuperMario* for iPhone and Android, called *SuperMario Run*. In the new game for mobile, the personage collects coins to exchange for elements in the game. It is available in the same game, the 'Toad Rally Ticket', a kind of currency to exchange for the opportunity to play special phases or mini-rally. You may have to pay one 'Rally' ticket to enter a race, but you can earn back what you paid, plus more, if you win a 'Rally'. In the game *Need for Speed* (2015), the player can collect points, convert it into money and use it to upgrade the car before the race. In this case, the concept of monetarism according to the definition of [20], who present an 'economic theory based on the view that the quantity of money is the main determinant of money incomes', is applicable. Remembering the precursor games, since beginning the Mario Bros® arcade version in 1983, designed by Shigeru Miyamoto and Gunpei Yokoi, the same developers of *Donkey Kong* (first arcade where the character *Mario* appears as coadjutant, early 1980s) used basic concepts of capitalisation described by [21], when the personage collects coins in the route, breaking boxes or eliminating adversaries [22]. However, Nintendo® launched in 1985 the platform for video games and since then used concepts in more than 70 versions of the *Super Mario* series, such as *Odyssey*, *Galaxy*, *World* and others. With this, games would have their own economic model, be it using real or digital money. For instance, with just a click, players can buy a very

valuable item in the game by just using their credit card. [19] comments:

*what can be bought with money, with time or with either one or the other* (p.6) [19]*.*

for digital or virtual money.

58 Blockchain and Cryptocurrencies