Cryptocurrencies and assets, opportunities and risks

Abstract

Chapter 2 analyses the nature of cryptocurrencies and assets and considers the key element of the peer-to-peer basis on which they operate: they are removed them from direct control by centralised governmental bodies. It considers the blockchain systems they are all based on and provides a simple explanation of the way in which they operate. The legal status of cryptocurrencies is analysed and the hard and soft forks on which they operate are explained. The chapter goes on to consider the volume of trading and price volatility of cryptocurrencies over recent years, together with price variations in cryptos relative to other geographic areas and also relative to fiat currencies. The Black-Scholes formula is briefly considered in terms of its impact regarding trading in options based on commodities and whether the opportunity exists for similar trading structures to be used in relation to cryptocurrencies. The chapter moves on to cryptoassets and in particular Initial Coin Offerings (ICOs) and examines their scale of use and the developments in the business areas in relation to which they are issued. Finally, the chapter provides a summary of the key risks in relation to cryptocurrencies and assets, namely: regulatory risk, security risk, insurance risk, fraud risk, market risk, tax and legal risks and the speed of trading issue.