Behavioral Finance and Cryptocurrency Market

A General Perspective Of The Cryptocurrency Market

According to the “European Central Bank” (2012), computer-generated money known as Cryptocurrencies is explained as “a type of digital money that is issued (released) by its developers and generally controlled by them, accepted and used among members of a particular virtual community” (p. 16). Due to dealing in encoded form and decentralized nature, it is known as Cryptocurrency.

Cryptocurrencies are electronic notes which use encoded techniques for the authentication and verification of a transaction (Khan et al. 2020). The cryptocurrency market is a rapidly evolving and highly volatile space that refers to “the decentralized digital currencies that use encryption techniques to regulate the generation of units and verify the transfer of funds” (Shretryia & Kalra, 2021). It is a relatively new market that has emerged over the past decade as a result of advances in computer technology and cryptography. Cryptocurrencies like Bitcoin, Litecoin, Dogecoin, Ripple, and Ethereum have received worldwide acceptance and have gained the attention of global players. This attention is due to the volatility of the exchange rates in terms of the distribution of world currency (Zhu et al, 2021). Therefore, cryptocurrencies are a kind of digital assets which are managed by a network. In general terms, these currencies utilize “distributed ledger technology” (DLT) to log, control, and for verifying a transaction they use encoded code which leads to the generation of new units of currency (Trivedi et al., 2021; Zhu et al, 2021). Like various physical currencies, these newly created currencies in the form of coins are used as a medium of exchange. The return yields from cryptocurrency investments are only generated via price rise. As a result, these assets are drawn from speculation which can be seen in the high capriciousness rate (Zhu et al, 2021).

The cryptocurrency market is characterized by various features:

• 1.

  Decentralization: Cryptocurrencies work on scattered networks. It is neither controlled by any central authority nor government authority.

• 2.

  Volatility: Cryptocurrency prices are known to be highly volatile and can experience significant fluctuations in a short period. This makes the market highly attractive to speculative investors.

• 3.

  Lack of Regulation: The cryptocurrency market is largely unregulated, which has led to concerns about market manipulation, fraud, and other illicit activities.

• 4.

  Technological Advancements: Cryptocurrencies are based on cutting-edge technology, including blockchain and distributed ledger systems. This has led to the development of new financial instruments and investment opportunities in the market.

• 5.

  Limited Adoption: Despite its growth, cryptocurrency usage is still relatively limited and has not yet achieved widespread adoption. This limits the market's liquidity and stability.