Advanced Studies of Financial Technologies and Cryptocurrency Markets

256 Pages·2020·8.741 MB·English

by  Lukáš Pichl, Cheoljun Eom, Enrico Scalas, Taisei Kaizoji

Lukáš Pichl
Cheoljun Eom
Enrico Scalas
Taisei Kaizoji   Editors
Advanced Studies
of Financial
Technologies and
Cryptocurrency
Markets
Advanced Studies of Financial Technologies
and Cryptocurrency Markets
áš
Luk Pichl Cheoljun Eom
(cid:129) (cid:129)
Enrico Scalas Taisei Kaizoji
(cid:129)
Editors
Advanced Studies
of Financial Technologies
and Cryptocurrency Markets
123
Editors
Lukáš Pichl(Deceased) CheoljunEom
Department ofNatural Sciences Department ofBusiness Administration
International Christian University PusanNational University
Mitaka,Tokyo,Japan Busan, Korea (Republicof)
EnricoScalas Taisei Kaizoji
Department ofMathematics Department ofEconomics andBusiness
University of Sussex International Christian University
Brighton, UK Mitaka,Tokyo,Japan
LukášPichlisDeceased
ISBN978-981-15-4497-2 ISBN978-981-15-4498-9 (eBook)
https://doi.org/10.1007/978-981-15-4498-9
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Contents
Financial Innovations and Blockchain Applications: New Digital
Paradigms in Global Cybersociety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Lukáš Pichl, Cheoljun Eom, Enrico Scalas, and Taisei Kaizoji
Financial Contagion through Asset Price and Interbank Networks . . . . 11
Jun Sakazaki and Naoki Makimoto
Optimal Portfolios on Mean-Diversification Efficient Frontiers . . . . . . . 35
Adeola Oyenubi
Time Series Prediction with LSTM Networks and Its Application
to Equity Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Ken Matsumoto and Naoki Makimoto
A Response Function of Merton Model and Kinetic Ising Model. . . . . . 89
Masato Hisakado and Takuya Kaneko
Bitcoin’s Deviations from Satoshi’s World . . . . . . . . . . . . . . . . . . . . . . . 101
Naoyuki Iwashita
Hodge Decomposition of Bitcoin Money Flow . . . . . . . . . . . . . . . . . . . . 117
Yoshi Fujiwara and Rubaiyat Islam
Time Series Analysis of Relationships Among Crypto-asset
Exchange Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
Takeshi Yoshihara, Tomoo Inoue, and Taisei Kaizoji
The Optimal Foreign Exchange Futures Hedge on the Bitcoin
Exchange Rate: An Application to the U.S. Dollar and the Euro. . . . . . 163
Zheng Nan and Taisei Kaizoji
Time Series Analysis of Ether Cryptocurrency Prices: Efficiency,
Predictability, and Arbitrage on Exchange Rates. . . . . . . . . . . . . . . . . . 183
Lukáš Pichl, Zheng Nan, and Taisei Kaizoji
v
vi Contents
Estimating the Proportion of Informed Traders in BTC-USD Market
Using Spread and Range . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
Ping Chen Tsai and Shou Huang Dai
Forecasting of Cryptocurrency Prices Using Machine Learning. . . . . . . 211
Vasily Derbentsev, Andriy Matviychuk, and Vladimir N. Soloviev
Bitcoin and Its Offspring: A Volatility Risk Approach. . . . . . . . . . . . . . 233
Walter Bazán-Palomino
Financial Innovations and Blockchain
Applications: New Digital Paradigms
in Global Cybersociety
LukášPichl,CheoljunEom,EnricoScalas,andTaiseiKaizoji
Abstract Cryptocurrencies—digital assets—are discussed from the viewpoint of
themediumofexchange andthestoreofvaluewithafocusonBitcoin.Theissue
oftrusttowardstheunitofaccountsisviewedintheperspectiveofhistoricalevents
including fiat currency reforms in the past all over the world. It is argued that a
major test of the present global financial system and its emerging new technology
alternativeshasnotoccurredyet.Thenotionofintrinsicvalueofcurrencyisstrongly
attached to the stability of the social and economic system, which landscape will
be probably drastically altered in the next few decades due to the rise of artificial
intelligence.Thechaptersinthisbookwhicharefocusingonthecurrentaspectsof
financialinnovationsalsopointoutthepossibledirectionsanddilemmasthefuture
maybringus.
· · · ·
Keywords Money Cryptoasset Cryptocurrency Blockchain Currency
· · ·
reform Financialcrisis Timeseriesprediction Machinelearning
B
L.Pichl( )·T.Kaizoji
GraduateSchoolofArtsandSciences,InternationalChristianUniversity,Osawa3-10-2,Mitaka,
Tokyo181-8585,Japan
e-mail:[email protected]
T.Kaizoji
e-mail:[email protected]
C.Eom
SchoolofBusiness,PusanNationalUniversity,Busan46241,RepublicofKorea
e-mail:[email protected]
E.Scalas
DepartmentofMathematics,SchoolofMathematicalandPhysicalSciences,Universityof
Sussex,BrightonBN19QH,UK
e-mail:[email protected]
©SpringerNatureSingaporePteLtd.2020 1
L.Pichletal.(eds.),AdvancedStudiesofFinancialTechnologies
andCryptocurrencyMarkets,https://doi.org/10.1007/978-981-15-4498-9_1
2 L.Pichletal.
1 Introduction
Theoriginsofnumeracy,theabilitytocountandworkwithnumbers,arehistorically
documentedbyarcheologicalfindingsoftallysticks(Ifrah2000).Scientificprogress
hasalwaystransformedthesociety—intheexampleofthetally,wherethenumber
ofobjectsisrepresentedbythe(countof)notchesonthetallystick—notonlythe
tallyservedasanumberrepresentationobject,itoftenhadthetransactionfunction
ofbeingconvertibleinthecountedobject.Thishasbeenespeciallythecasewhen
thetallywasendorsedbyahigh-rankingmemberofthesociety.Thematerialform
ofmoney,asiswellknown,isthereforetightlyrelatedtothecurrentlevelofscience
andtechnologyandgoeshandinhandwithtrust.Inourexampleofthetallystick
moneyprecursor,itisthetrustthatatalaterpointoftimethetallycanbeconverted
totheunderlyingobject(storeofvalue)orwouldbeacceptedasameansofpayment
insteadofthephysicaldeliveryoftherepresentedgoods.Onefeatureofmoneythe
individualtallystickdoesnotnecessarilyhaveishoweverthegeneralunitofaccounts
property—theuniversalapplicationofthesamecountingunit,i.e.theemergenceof
moneyinthemodernsenseofthewordasamediatorofalleconomictransactions
(see,e.g.Weatherford1998).
Therequirementformediatingalleconomictransactionscanbemetbyusinga
highlymarketableasset,whichfirstnaturallyappearedintheformofgrainorlive-
stock, before it was substituted with precious metals. The latter step would not be
possiblewithoutsocialhierarchyinwhichtheobjectsofdesireweresetbytheupper
classthatcontrolledthecommunityandtheuseofitstechnology.Aboutthreethou-
sandyearsagoinChina,bronzemodelsreplicatingcowrieshellsappearedasmoney
(Kerr2013).IntheIronAge,coinsmintedfrompreciousmetalsthatrepresentedthe
notionofeconomicvalueappearedintheancientMediterraneanarea(Pavleketal.
2019),wheresystemofacommodity-based legaltenderhasprevailedthroughthe
medievaltimes.Ourdiscussionthisfarwasbasedonthehistoryofnumeracyandits
relationtomoney;however,numeracygoeshandinhandwithliteracy.Promissory
notes to deliver money, based on trust and the legal system framework, have first
been documented in China during the Han dynasty (von Klaproth 1823), and first
precursors of paper money appeared as early as in the seventh century during the
Tangdynasty(Pickering1844).Thisabstractionoffinancialvaluefromtheunder-
lying value of coin metal asset decoupled the trust in the economic system from
the asset value of the legal tender—money went even more abstract and modern
currencieswereborn.Still,thepromissorynotefeatureofpapermoneybytheobli-
gation to convert banknotes to gold on demand persisted in the world for quite a
longtime—convertibilityofUSdollartogoldwasofficiallyterminatedbytheUS
PresidentRichardNixonaslateasin1971(cf.ZoellerandBandelj2019).Instead,
thenationalmotto“InGodWeTrust”ontheUSdollarbanknotesillustratesthetruth
oftheincompletehumancontrolframeworkandtheuncertainfuturethathasbeena
partofmoneynotionsinceitsinception.
FinancialInnovationsandBlockchainApplications:NewDigital… 3
Whomisitthereforethatwetrustconsideringthestoreofvaluefunctionoffiat
currencies? A mainstream answer would perhaps emphasize the role of the gov-
ernmentandtheroleofthecentralbankineachcountry;intoday’sinterconnected
world, a true cyberworld of computerized financial system, perhaps also a rising
globalfinancialorder.Inthegoldstandardworld,itwastheBrettonWoodssystem
at global scale; at present, various institutions influence the dynamics of the inter-
twinedcompetingworldfinancialsystem,suchastheInternationalMonetaryFund,
the World Bank, but also European Central Bank, Asian Infrastructure Investment
Bank,andothers,basedontheregionandviewpoint.
Whatdoesmoneymeantoday?HereisthequotationofPetrSýkora,co-founder
ofthecharitablefoundationGoodAngelintheCzechRepublic(Petka2013):
Moneytodayisjuststoredastheonesandzerosinacomputersystem.Itdoesnothaveto
betheretomorrow…
LetustakeCzechoslovakia asahistoricalexamplehowasuddencurrencyreform
canruinpersonalsavings—thereisaninfamousquotationbyalocalspokesmanof
communistpartyinthecityofPilsen(May29,1953)(Ule1965)
Our currency is firm. Trust the party, Comrades. The rumors about a reform have no
justification…
followed the next day by the official public announcement of currency reform on
May 30th, 1953, which largely deprived the population of cash and bank savings
andresultedinlocalrebellionsagainsttheregime.Theconversionratesoftheold
currencytothenewonevariedfrom1:5to1:50,basedontheamount;thegovernment
alsorealizedabankruptcyastheobligationfromallgovernmentbondstotheirholders
wascancelled.
Since currency reforms feature nonlinear conversion between the old and new
currencybasedonthedepositedamountleadingtoarbitraryrelocationoffinancial
resources(KrishnaandLeukhina2019),theyarepopularwithtotalitarianregimes
such as the one during the socialist regime period in Czechoslovakia. Similar loss
of savings occurred in Russia during the currency reform of the summer 1993
which wiped out the value of savings of general population using a combination
ofconversionrestrictionswithhighrateofinflation(cf.Desai2005).
Theglobalfinancialcrisisof2008hasresultedintrilliondollarlossesalloverthe
world,beitinthehousevalueandrelatedpersonalmortgagebankruptcieswhenthe
US housing bubble burst; or the evaporated retirement savings of US citizens; the
extreme losses of European Banks that naively propelled the sub-prime mortgage
financialderivativeprices;inbriefthewholeworldsankintoanaftermath,arecovery
fromwhichhasbeenparticularlylongandpainfulinEurope(cf.Farmer2012).
Theabove-mentionedcurrencyreformsandfinancialcrisesserveusheretoclaim
thattheprobabilityofmajordisruptioninthetimevalueoffiatcurrencies,evenif
itweretobeonceinalifetime—isnotnegligible.Timesofhyperinflation,suchas
thecurrentoneinVenezuela,attesttothelossofpublictrustintheofficialcurrency,
andtheneedforanalternativesolution—beitaforeigncurrency,acommodity,or,
aswediscussinthenextsection—perhapsevenacryptocurrency.
4 L.Pichletal.
2 AlgorithmicInnovationsinDigital Finance
Money in the world moves to the cyberspace by getting digital form. The conse-
quencesofsuchachangeincludedetailedexpenditureandrevenuetracesindatabases
offinancialinstitutions,andtheshifttowardsthecashlesssociety,atrendespecially
pronouncedinScandinaviancountriessuchasSweden,wherecardsandmobileapps
insmartphonesarebyfarthemostcommonmeansofpayment.Proposalsforcitizen
accountsdirectlywiththecentralbankarealsopopularasdiscussedinthefollowing.
2.1 FiatCurrencies—ProsandCons
Whenafiatcurrencygoescompletelydigital,whichhasnotyetoccurredintheworld
nevertheless, the central financial institution gains the technical means to cut each
individualofftheeconomicsystem.Theyalsogainthefullfinancialrecordofindi-
vidualbehavior.Informationhasbecomethemostvaluedcommodityofourtimes
and its possession results in power. This asymmetric relation of an individual and
the financial institution may be convenient when privacy is protected, and general
securitymeasuresfunctionbutturnstoadisasterincasesofsuccessfulcyberattacks.
Itisintheverynatureofthetrustedbookkeepingpartythatdigitalmoneycannotbe
provedcompletelysecure.Technically,redistributionoffinancialwealthcaneasily
beimplementedbyalteringthefinancialrecordsaccordingtoanyalgorithmdeemed
aslegal,beitforinstance(nonlinear)negativeinterestratestofightdeflationinthe
formofinstantaneous currency reformsusingcentralbankdigitalcurrency (Bind-
seil2019).Asthesophisticationofthedigitalfinancialsystemsincreases,therisks
associatedwiththemalfunctionofthecentralizedfinancialsystemgraduallydeepen.
2.2 Cryptocurrencies—ProsandCons
The year 2008 is not only known for the Great Recession; it is the year when a
breaking article entitled “Bitcoin: A Peer-to-Peer Electronic Cash System” pub-
lishedunderthenameofSatoshiNakamotoappeared(Nakamoto2008).Thework
solvedthedoublespendingproblemofdigitalmoney—howtoguaranteethatdigi-
talmoneyisnotspentseveraltimes—bypublishingtheever-growingentirerecord
ofalltransactionsprotectedbyencryptionintheformofblockchain.Accordingto
Nakamoto,“Thenetworktimestampstransactionsbyhashingthemintoanongoing
chainofhash-basedproof-of-work,formingarecordthatcannotbechangedwithout
redoingtheproof-of-work”.Incentivetomaintainthecryptographicintegrityofthe
blockchainisgivenbyrewardingthecreatorofthenewblockwithafixedamount
of Bitcoin (mining process) or by using transaction fees. As long as the majority
of the computational nodes participates in the blockchain consensus mechanism,