Fintech and Crypto Session 9 and 10

Doubled, negative

Netscape’s Navigator was so ubiquitous that its stock price \[blank\] on the day of its IPO, despite the company’s profits being \[blank\]

Announcement of a recession in Japan (following tightening monetary policy and investors cashing out)

What made the NASDAQ bubble burst?

Correlation (x,y) \* sigma stock/sigma S&P

What’s the formula for a stock’s beta?

Standard Deviation (ln(r1/r0))\* Sqrt(252), 252 trading days per year

How do you calculate annualized volatility of something?

Low transaction fees, fast transaction speed, and no business hour restrictions

What makes Bitcoin unique compared to other methods of transferring money?

Property rights, no one

Another thing that makes blockchain unique is the creation of \[blank blank\], that provide ownership guarantees but are controlled by \[blank blank\]

Scarcity, 21 million

Another thing that makes blockchain unique is the creation of digital \[blank\], because there will never be more than \[blank blank\] bitcoin.

Cryptography

\[Blank\] assure that no one can take that person’s holding of this scarce asset, bitcoin, away without his/her authorization

Counterfeited, scarcity, ownership

Without the blockchain, NFTs can be \[blank\] easily- blockchain guarantees their \[blank\] value and proves \[blank\].

Rules, conditions

Crytpoasset-powered blockchains allow users to effectively program money with certain \[blank\] and \[blank\]

Instantaneously, reviewed, enforced, cost

Digital contracts can be created \[blank\], \[blank\] and \[blank\] easily, and at a low cost

Intermediaries

Blockchains allow many complex transactions to be executed without the need for trusted \[blank\].

Escrow

Using smart contracts, if Alice transfers a NBA card to Bob, but only after her parents agree, it looks like an \[blank\] account.

Trust

Using smart contracts, if Alice transfers an NBA card to Bob, but only after the LA Lakers’ game tonight, it looks like a \[blank\].

Contract

Using smart contracts, if Alice sends an NBA card to Bob, but only if LeBron James makes a game-winning shot; if not, Bob sends another NBA card to Alice, it looks like a \[blank\]

Do anything a general computer can do

Ethereum is designed to be “Turing Complete,” which means their smart contract can be programmed to…

Secure

The simpler a blockchain is, the more \[blank\] the technology is

Simplicity

Bitcoin’s \[blank\] makes it extremely secure- gives people confidence to invest large sums of money

High-risk, high-return

Compared to BTC, Ethereal is a typical \[blank-blank\], \[blank-blank\] investment proposition

Ripple, another blockchain

What is XRP?

Quasi, 36

XRP blockchain is \[blank\]-centralized. It’s maintained by \[blank\] node(s), which work(s) together to process transactions. Ripple Labs also controls the \[blank\] of XRPs and maintains oversight of the ecosystem.

Fast, government oversight

XRP is extremely \[blank\], capable of processing transactions at a pace that matches Visa’s, but they are subject to greater \[blank blank\]- payments can be censured, reversed, and seized

Bitcoin is the best choice of blockchain for someone looking for digital gold, XRP is for investors who are interested in fast payment and international remittances

When should one invest in BTC vs XRP?

Security, programmability, speed, governance, development funding, privacy, consensus mechanism, and specific use cases

What are some of the characteristics of crypto assets that differ them from each other? (8)

How to handle upgrades and settle disputes

What does a cryptoasset’s governance entail?

Whether a centralized entity should help develop the crypto-ecosystem

What does a crypto asset’s development funding entail?

Whether transactions on a blockchain should be public, pseudonymous, or anonymous

What does a crypto asset’s privacy entail?

Technical and incentive architecture to maintain a blockchain, and high energy use in mining

What does a crypto asset’s consensus mechanism entail?

Whether the blockchain provides general capabilities or focuses on a specific use case

What does a crypto asset’s specific use case characteristic entail?

Largest

For crypto assets, the winner in each market is the \[blank\] one

Network effects

Blockchains are systems that have \[blank blank\]- the more people that use them, the better they are

Liquidity, development, regulatory, popularity

For blockchains, more assets leads to greater \[blank\], which leads to more \[blank\] activities, which leads to more \[blank\] framework, which leads to more support from institutional custody and trading firms, which leads to greater \[blank\]

Specialization

While many crypto assets may be similar, some degree of \[blank\] exists, similar to competition among social media companies

New crypto assets are not fungible with existing ones, just as foreign countries creating new currencies do not affect the scarcity of the USD or Euro

Why doesn’t the existence of an unlimited number of crypto assets threaten the scarcity value of one such as Bitcoin?

Blockchains that simply copy and paste the original bitcoin code with some trivial features

What are bitcoin forks?

Tech, network

Bitcoin’s value is less a patent-worthy secret \[blank\], and more the \[blank\] that emerges around it

Well-known global brand, secured by largest network of computing power in the world, supported by an industry of mining and chip manufactures, participated by many software developers, fund custodians, and liquidity providers, integrated with dozens of payment tools, and has millions of investors from ETFs

What gives Bitcoin its value? (6)

Liquid

Bitcoin has the most \[blank\] market

Stress

Bitcoin has liquidity mainly from HFT; it tends to disappear quickly during times of \[blank\]

Volatility

HFT market makers tend to back off when volatility is elevated

Pro-cyclical

In the US Treasury bond market, liquidity in 30-year bonds is more prone to flight; Bitcoin is subject to the same \[blank-blank\] liquidity dynamics

Store of value, unit of account, and medium of exchange

What are the 3 traditional uses of a currency?

Volatility

High \[blank\] of cryptocurrencies makes them poorly suited to the three traditional uses of a currency

Pegged by the issuer to the local currency

What are stable coins?

Currency reserves

For a stablecoin to be completely stable, it needs to be backed by \[blank blank\].

100%

A coin backed \[blank\] by currency reserves would not be profitable for the issuer

Run

A coin backed by less than 100% cash reserves or by reserves held in more volatile assets could leave holders in the lurch in the very possible event of a \[blank\] on the stable coin

Profits, stable

A stable coin mostly backed by currency reserves allows the issuer to skim \[blank\] off the top and leave the currency \[blank\] until most of the coin holders want their money back

Infringe on their territory and add an unnecessary risk to economic stability

Why are central banks hostile to stablecoins?

US dollar, fiat

Bitcoin is most commonly quoted in \[blank blank\], but most of the trading is not against \[blank\] currency

Stablecoins

One half of all BTC trades are against \[blank\]

US Dollar

Tether’s USDT is pegged 1:1 to the \[blank blank\].

Cross-border, inter-exchange

Relying on stable coins pegged to fiat currency is more efficient for \[blank-blank\] transfers and \[blank-blank\] arbitrage trading

USD

What’s the most common peg for a stable coin?

Direct access

Most crypto-exchanges do NOT have \[blank blank\] to the US banking system

Stability

Trading in bitcoin vs. USDT exposes the broader Bitcoin ecosystem to the \[blank\] of this peg

Liquidity

Without USDT, the market would lose access to its largest pools of \[blank\]

Regulatory

Concerns about the long-term stability of USDT invites more \[blank\] attention as potential financial stability risks increase

Stablecoin Tethering and Bank Licensing Enforcement

The \[blank\] Act was recently proposed to reduce the run risk of USDT

Lying about the cash it had in reserves to guarantee its dollar peg

What did the New York attorney general accuse Tether of?

Speed

Stablecoins have the advantage of \[blank\] over their traditional bank counterparts

Stablecoins are centralized and managed by the company that created them

Why are stable coins faster than Bitcoin?

Bitfinex

\[Blank\] tapped into Tether’s dollar reserves because they’re both owned by the same company

Blockchain

\[Blank\] technology that underpins cryptocurrencies can be a solution to financial and economic problems

Digital currencies

The rise of cryptocurrencies has pressured some central banks to use their own \[blank blank\]

Central bank digital currency

What does CBDC stand for?

Blockchain generated considerable excitement, despite confusion about how it works or could be used; price swings appear to be driven by momentum rather than by changes in fundamentals

What are some signs that cryptocurrency’s volatility could trigger risks to global financial stability, like the tech and housing bubbles? (2)

Chow Test

What test do we use to test for speculative Bubbles?

Split the sample into two parts, and the assumption is that the the two alphas and two betas should be equal

How do you perform a Chow Test?

F

Chow’s Test statistic follows a \[blank\]-distribution

If the Chow test statistic you calculated is greater than the F-critical value, reject the null hypothesis (that the regression line is continuous)

How do you use the Chow test statistic?

Public and decentralized

A permissionless blockchain is \[blank\] and \[blank\]

Bitcoin and Ethereum

What are some examples of permissionless blockchains?

Private and more centralized

Permissioned blockchains are \[blank\] and \[blank blank\]

Private group of users

Who are the degrees of consensus, transparency, and anonymity controlled by in a permission blockchain?

Customizability, fewer

Permissioned blockchains have \[blank\] for specific users and better performance due to \[blank\] nodes

Limited

Some blockchains are relatively \[blank\]; Ripple’s blockchain transactions are processed by a \[blank\] set of entities

One

Most of Ripple XRP is owned by \[blank\] company

Privately guided

Other blockchains are decentralized but still \[blank blank\]

Consortium, oversee

Diem (formerly Libra) blockchain is managed by a \[blank\] of dozens of members. Facebook established the Diem Association to \[blank\] the currency

Permissionless

Most exciting advances and new capabilities have emerged from \[blank\] blockchains and its crypto assets, like digital gold, smart contracts, and digital scarcity

Permissioned, incremental, enhances

Private companies can use \[blank\] to reduce back-office costs to increase transparency in supply chains. This use is \[blank\] rather than fundamental and \[blank\] the functionality of existing systems.

NO

Do permissions private blockchains need a cryptocurrency?

To incentivize miners to provide PoWs

Why does a permissionless blockchain such as bitcoin always need a cryptocurrency?

Maintain

Permissionless blockchain always needs cryptocurrency to provide the economic incentive for miners to \[blank\] the network

Private company

In a permission blockchain, a \[blank blank\] can set up, maintain, and control the distributed network and database

Incentives, participate, privileges, rules, reverse

On permission blockchains, private companies provide the economic \[blank\], decide who gets to \[blank\], determine what \[blank\] members get, and change the \[blank\] and \[blank\] transactions

Third-party

Centralized exchanges act as a \[blank-blank\] between a buyer and a seller

Company

Centralized exchanges are operated and controlled by a \[blank\].

Centralized exchanges

99% of all crypto transactions go through \[blank blank\]

User-friendly and reliable

What are some of the benefits of centralized crypto exchanges?

Money is deposited in custodial accounts

How are centralized exchanges more friendly to users?

Exchange company is responsible for security

Why are centralized exchanges more reliable?

Hacking risk and transaction fees

What are the downsides to centralized exchanges?

Single point of failure

Why do crypto exchanges have a greater hacking risk?

High costs for services and convenience

How do transaction fees on crypto exchanges differ from their decentralized counterparts?

Decentralized exchanges

\[Blank blank\] allow users to execute peer-to-peer transactions without the need for a third party or an intermediary

Distributed P2P

Decentralized exchanges are \[blank blank\] networks, mitigating hacking risk

Anonymity, privacy

Decentralized exchanges give users greater \[blank\] and \[blank\]- they don’t require customers to fill out AML and KYC forms

Complexity, lack of fiat payments, and liquidity struggles

What are some of the downsides of decentralized crypto exchanges?