Abstract
The rapid proliferation of digital currencies has ignited significant interest in understanding investor behaviour and the regulatory challenges within this evolving financial landscape. The study seeks to elucidate the factors that influence investor behaviour in the cryptocurrency/digital currency market and explore the regulatory implications associated with digital currency investments. A systematic approach was adopted to identify, review, and analyze relevant scholarly articles from reputable databases. The selected articles span various dimensions of the cryptocurrency/digital currency ecosystem, including investor behaviour, market efficiency, technological innovation, and regulatory measures. It reveals that investor behaviour in the digital currency market is influenced by a complex interplay of emotions, market sentiment, and information asymmetry. Additionally, market efficiency theories are being reconsidered in light of the highly volatile nature of cryptocurrencies. Regulatory challenges encompass issues related to fraud, pump-and-dump schemes, and legal ambiguity.
Top1. Introduction
In recent years, the rapid emergence and growth of cryptocurrencies have revolutionized the financial landscape, challenging traditional notions of value, exchange, and investment. The allure of potential high returns, technological innovation, and decentralized financial systems has drawn significant attention from investors, policymakers, and researchers alike. As the digital currency market continues to evolve, it brings forth a multitude of questions and complexities, ranging from investor behaviour patterns to regulatory frameworks.
The aim of this study is to conduct a comprehensive literature review that delves into the multifaceted realm of cryptocurrency/Digital Currency investment, with a particular focus on investor behaviour and its regulatory implications. By analysing a wide array of scholarly articles and research papers published over the past five years, the study intend to render a comprehensive overview of the key findings, emerging trends, and unresolved challenges in this dynamic field.
1.1 Research Context and Significance
The surge in interest surrounding digital currencies, exemplified by the meteoric rise of Bitcoin and the proliferation of alternative cryptocurrencies, has prompted researchers to examine various aspects of the cryptocurrency/Digital Currency market. Our review synthesizes insights from a diverse array of scholars who have investigated investor behaviour, market efficiency, regulatory measures, and technological innovations within the context of digital currencies.
1.1.1 Investor Behaviour in the Cryptocurrency/Digital Currency Market
Understanding investor behaviour is crucial for comprehending market dynamics and predicting price movements. Scholars such as Choi, Kang, and Yoon (2022) have explored herding behaviour in cryptocurrency/Digital Currency markets, shedding light on how crowd psychology can lead to market bubbles and crashes. Additionally, studies by Sukumaran, Bee, and Wasiuzzaman (2022) and Kumar (2021) have investigated factors influencing investor decisions and adoption patterns among different demographics, thereby revealing the intricate interplay of emotions, information asymmetry, and rational decision-making.
1.2 Market Efficiency and Technological Innovation
The efficient market hypothesis, which posits that asset prices replicate all available information, has been a subject of debate within the context of cryptocurrencies. Scholars like Chen, Lepori, Tai, and Sung (2022) and Chen and Fauzi (2023) have examined the applicability of market efficiency theories to the highly volatile cryptocurrency/Digital Currency market. Additionally, the brunt of central bank digital currencies (CBDCs) on financial markets and the broader economy has been explored by Barrdear and Kumhof (2022), Auer and Tercero-Lucas (2022), and Andolfatto (2021), underscoring the potential implications of digital currency adoption.
Regulatory Frameworks and Implications: Cryptocurrencies' decentralized nature has prompted policymakers worldwide to grapple with developing appropriate regulatory frameworks. Researchers such as Corbet, Hou, Hu, and Oxley (2021) have highlighted the risks associated with pump-and-dump schemes and underscored the need for effective regulatory mechanisms. The legal and regulatory aspects of digital currencies in various jurisdictions have been explored by Goncharov, Sadkov, and Sadkov (2023) and Gupta (2022), offering insights into the evolving landscape of legal and regulatory challenges.
Key Terms in this Chapter
Cross-Border Collaboration: Involves coordinated efforts and cooperation between different countries and regulatory authorities to create a cohesive and consistent approach to digital currency regulation, addressing the global nature of cryptocurrency transactions.
Investor Behaviour: The study of how individuals make decisions regarding the allocation of their financial resources in the context of the cryptocurrency market, incorporating both rational decision-making and psychological biases.
Volatility: The degree of variation in the price of a cryptocurrency over time, reflecting the market's sensitivity to various factors and the potential for significant price fluctuations.
Cryptocurrency Investments: Refers to the act of allocating capital to digital currencies, involving the purchase and holding of cryptocurrencies as financial assets.
Behavioural Finance Theories: A field of study that combines insights from psychology and economics to understand and explain financial decision-making, including the application of these theories to analyse investor behaviour in the digital currency market.
Regulatory Frameworks: Refers to the set of rules, guidelines, and policies established by governments and regulatory bodies to govern the operation and conduct within the digital currency space, aiming to balance innovation and investor protection.
Innovation and Protection Balance: The need for a harmonious equilibrium between fostering technological innovation in the digital currency space and implementing protective measures to mitigate risks, ensuring the sustainable growth and development of the ecosystem.