Explain the concept of cryptocurrency and discuss how its

associated to behavioural finance in the foreign exchange market.

Lecturer Name: Mr Avinash Odit

Nellan Seevam: BACF19A/PT 1903_19304

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Explain the concept of cryptocurrency and discuss how its associated to
behavioural finance in the foreign exchange market.

Cryptocurrency is a virtual or digital currency way that makes use of cryptography for
security and work on a decentralized technology known as blockchain. The
cryptographic techniques are used to secure the transaction and add more control
while creating a new unit that prevent the transaction from unauthorised tampering or
duplication. The majority cryptocurrencies use the blockchain technology which
makes the transaction more secure and transparent. Every block in the blockchain
holds certain information which is connected in a chronological order. Generally, they
are not control like financial institution or the central bank that is a single entity.
Alternatively, it depends on a distribution network of computers to record and
validate activities. There are privacy and anonymity in the transaction while they are
recorded in the public ledger where the identities of participants are frequently
pseudonymous, meaning that transaction can be traced. Cryptocurrency is a peer-to-
peer transaction, transaction take place directly between member where
intermediaries like banks are not present and this led to a probable cheaper and
faster transaction. The only form of cryptocurrency is in digital and is represented in
a blockchain and most important that does not have a physical counterpart like coins
or paper money. Cryptocurrency is globally accessible that is anyone can access
thought the internet connection without the need for conversion the currency. Many
cryptocurrencies have a pre-established supply cap that is certain coin that can ever
be created. The most well-known cryptocurrency created in 2009 is the Bitcoin. Apart
from a medium of exchange, cryptocurrency can serve in different purpose like
tokenizing real-world asset, enabling smart contracts and smooth decentralized
applications. Yet the cryptocurrency can be highly volatile and different jurisdictions
with regulatory landscape which can influence the adoption and use.

Cryptocurrency has established a new element to the financial behaviour, merging

the element of investment, technology adoption, speculation, financial empowerment
and risk management. Behaviour finance theory and Classical finance theory are two
contradiction financial theories. Classical finance theory declares that prices will not
be affected by behaviour finance factor because of neutralized demand by
arbitragers’ transaction; hence decrease in possible impact of emotional investors. In
contrast, Almansour, 2017, presume that the asset price are affected by the
behaviour finance factors. The conflicts in the financial market give raise most
investors to explore for new opportunity to invest. Cryptocurrency market is a recent
investment platform where investors can invest their capital along with the common
financial equity markets. Organisation and individual give special attention to the
evolution of the cryptocurrency market and Bitcoin is one among. Bitcoin have been
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showing bubble behaviour because of the difference with the prime value of Bitcoin
and the exchange rate. Bubble behaviour of bitcoin increases the market inefficiency
hence the Fad is the notion of experience in the Bitcoin which produce a mixture of
different market news and can create a powerful effect on the Bitcoin price volatility.
Robert schiller explained that bubble behaviour is an increase in the volatility as a
result of trading increases.

Cryptocurrency can have both positive and negative effect on the financial behaviour
and depend on the regulatory stance, level of cryptocurrency adoption and the
overall economic landscape. It can play an alternative mean of value transferring
across the world where countries with a strict control of its currency. Financial
services can be provided to people who lack access to the traditional banking
infrastructure which include individual without formal identification or remote areas.
Cryptocurrencies help in countries with high remittance fees the opportunity to be
more cost effective and efficient method to send remittances around the world. It can
act as a potential challenge for the central bank ability to manage the money supply
and implement money policy if it gets an extensive adoption as a medium of
exchange or store value. Cryptocurrency can have a great impact in the tax revenue
where the government can develop new tax policies to capital gain, address income
and other tax implication that concern the cryptocurrency transaction.

Countries deemed crypto-friendly can attract investment from individuals and

institutions looking to enter the digital asset market. This could affect capital flows
and local investment trends. Adopting blockchain technology and creating an
enabling environment for cryptocurrency-related businesses and startups can boost
economic growth and innovation. The volatility and speculative nature of
cryptocurrencies may pose risks to financial stability, as sudden market fluctuations
may affect investor sentiment and have unintended consequences for traditional
financial markets. Cryptocurrencies have been associated with fraudulent schemes,
money laundering and other illegal activities. Governments may need to improve
regulatory frameworks to address these issues. As the cryptocurrency market grows,
ensuring consumer protection becomes increasingly important. Investors need clear
information about the risks and potential losses associated with cryptocurrencies.
The adoption of cryptocurrencies can encourage countries to invest in blockchain
technology and related research, and may also promote technological advancement
in other fields. Cryptocurrencies can facilitate cross-border commerce by providing a
fast and cheap way to process transactions without intermediaries or the traditional
banking system. Perception of cryptocurrencies within a country can influence public
behaviour. Positive emotions and awareness can lead to greater acceptance, while
negative emotions can hinder growth. It is worth noting that the impact of
cryptocurrencies on a country’s financial behaviour can vary widely, depending on
factors such as the degree of adoption, regulatory decisions, technological
infrastructure, and macroeconomic context. Governments and policymakers must
carefully weigh the potential benefits and risks when formulating policies related to
cryptocurrencies and blockchain technology.

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There are some potential benefits to using cryptocurrencies, but keep in mind that
these benefits may vary depending on the particular cryptocurrency and its use case.
Cryptocurrencies operate on a decentralized network. This means that cryptocurren-
cies are not controlled by a single entity such as a central bank. This reduces the risk
of government intervention, censorship and manipulation. Cryptocurrencies use
strong cryptography to protect transactions and wallets, making them highly secure
and difficult to counterfeit or hack. Transactions on blockchain are often transparent
and tamper-proof. Cryptocurrency transactions can be cheaper than traditional finan-
cial systems, especially for international transfers. This is especially beneficial for
cross-border transactions that can incur high fees through traditional banking chan-
nels. Anyone with an internet connection can access and use cryptocurrencies, potentially
providing financial services to the unbanked or low-banked. Unlike traditional banking
systems, which may require days for international transfers, cryptocurrency transac-
tions can be processed quickly, frequently in just a few minutes. By eliminating the
need for middlemen like banks, cryptocurrency holders have direct ownership and
control over their digital assets. This enables one to have more financial control. Be-
cause cryptocurrencies allow for borderless transactions, it is simple to send money
to anyone in the world without having to convert it first. The rise of cryptocurrencies
has paved the way for cutting-edge technologies like decentralized applications
(DApps) and smart contracts, which can automate and streamline various processes
in a safe and open manner. Despite the fact that transactions are visible on public
blockchains, some cryptocurrencies offer enhanced privacy features that let users
conduct transactions in a more anonymous manner. Cryptocurrencies have attracted
interest as potential investment assets, offering potential for profit and opportunities
for diversification. It's crucial to keep in mind that the market can be volatile and is
very speculative. Due to the high transaction costs associated with traditional pay-
ment methods, micropayments are made possible by cryptocurrencies. In order to
close the gap between financial inclusion and exclusion, cryptocurrencies can offer
financial services to people who do not have access to conventional banking sys-
tems. While cryptocurrencies have these benefits, it's important to keep in mind that
they also carry risks and difficulties, such as regulatory uncertainty, volatility, the
possibility of scams, and technological vulnerabilities. It is advised to do extensive
research, comprehend the particular cryptocurrency you are interested in, and take
your risk tolerance and financial objectives into account before using or investing in
cryptocurrencies.

Utilizing cryptocurrencies entails some risks and drawbacks. The price of cryptocur-
rencies can be extremely volatile, with large price swings occurring quickly. Users
who depend on stable pricing may experience uncertainty and possible losses as a
result. In many nations, the regulatory environment for cryptocurrencies is still devel-
oping. The legality and use of cryptocurrencies may be impacted by shifting laws or
legal ambiguities. While some people appreciate cryptocurrencies' decentralized na-
ture, it can also present problems like a lack of consumer protection and the potential
for misuse in illicit activities. Although cryptocurrencies employ robust cryptography,
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their digital nature leaves them open to hacking, phishing scams, and other online
threats. A user may lose access to their money if their private keys are stolen. Once
a cryptocurrency transaction has been verified on the blockchain, it cannot be un-
done. There is frequently no way to undo a transaction that was sent to the incorrect
address or that was a part of a scam. Despite growing in popularity, cryptocurrencies
are still not widely used as a form of payment. Their usefulness for routine transac-
tions is therefore constrained. non-technical users, using cryptocurrencies can be
technically challenging. It can be difficult to set up wallets, manage private keys, and
comprehend how blockchain transactions operate. Consumer protections like
chargebacks and fraud protection are frequently offered by traditional financial sys-
tems. In the world of cryptocurrencies, these safeguards are less common, making
users more susceptible to fraud and mistakes.
A user may lose permanent access to their funds if they misplace their private keys
or lose access to their cryptocurrency wallet. There is no central organization that
can assist with access or password recovery. Some cryptocurrencies require signific-
ant energy consumption for mining and transaction processing, especially those that
use Proof of Work (PoW) consensus mechanisms like Bitcoin. This prompt worries
about the environment. Because cryptocurrency transactions are decentralized and
largely anonymous, scams, Ponzi schemes, and fraudulent Initial Coin Offerings
(ICOs) have become more prevalent. Cryptocurrencies lack the physical form of con-
ventional money. This may make them more difficult for some people to understand
and may discourage some groups from adopting them. Some cryptocurrencies have
scalability issues, which means they may find it difficult to process a large number of
transactions quickly, resulting in long processing times and higher fees during busy
times. Due to the relatively low market capitalization and lack of regulation, the
cryptocurrency market is susceptible to manipulation, which can result in pump-and-
dump schemes and other types of market manipulation.

Cryptocurrency market consists of unsophisticated trader which set off a bubble

behaviour in Bitcoin prices. Herding, Mimetic contagion and Fads are factors that
make a high volatility in the Bitcoin price. Sentiments, Feelings and Bias are factors
that control the irrational investors to decide in preceding the financial markets. Data
concerning Bitcoins can be obtained form different source by investors. The liquidity
of the market rises because of the trader noise which is present in the market, which
can explain a speedy hike in the volume of Bitcoin Trading and finally lead to
unpredictability due to lack of anonymity, regulation and high risks. The financial
behavior of cryptocurrency makes reference to how institution, individuals, investors
and markets depend on and determine concerning cryptocurrencies. They are virtual
or digital currencies that employ cryptography for security and work on a
decentralized technology, normally a blockchain. It is often subject to an important
price volatility that can result to either a substantial gain or losses for investors.
People are interested to cryptocurrency because of investment opportunities, aiming
to buy now at a low price and sell in the future at a higher price. This can result to a

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market crashes and bubbles. Holding is a word used in the cryptocurrency world
which represent the strategy of holding the investment for a long period of time
irrespective of the short-term fluctuation and believe in the long-term possibilities of
the technology and the value proposition. Cryptocurrency facilitate the buying and
selling of different cryptocurrencies where investors engage in the swing trading, day
to day activities and arbitrage to profit from different exchange. Prices can fluctuate
base on trading pattern and volumes. Market news, sentiment, social media
discussion and regulatory development are factors that influence the market. A rapid
change in the price can due to positive or negative news.

Initial coin offering was a famous method for blockchain project to make up fund by
giving tokens to investors in return for Ethereum or Bitcoin. Because of regulatory
scam and concerns the ICO have disappeared resulting an alternative model.
Around the world regulatory bodies and government have taken different ap-
proached to regulate the Cryptocurrencies which can impact the financial behavior of
both the institution and individual investors. Stablecoins are designed cryptocurrency
which have a relatively stable value and are normally fixed to a fiat currency. The
main aim of stablecoins is to minimize the price volatility which associates with other
cryptocurrencies. Decentralized finance concerns the change to recreate the tradi-
tional financial service like the borrowing, trading, lending and smarter contacts and
more decentralized technologies. The platform got attention for the potential disrup-
tion to the traditional financial systems. A key factor to understand the financial be-
havior can be the level of online purchase, adoption of cryptocurrency in the every-
day transaction, remittance and other financial activities. Instances of market manip-
ulation, Nascent and less regulates nature of cryptocurrency market, fraudulent ac-
tivities, pump-and dump scheme are factors that affect the financial behavior of cryp-
tocurrencies which is characterized by a mixture of regulatory development, techno-
logical innovation, speculative trading and the role of the cryptocurrencies in the
broader financial landscape.

According to conventional financial theory, the actions of investors have little impact
on asset prices. The justification for this is that it is based on investor demand, which
will be offset by trades and arbitrageurs' transactions. Investors think they make
logical, rational decisions about their investments (Almansour, 2017). However, the
behaviour finance theory contends that the actions of investors have a significant
impact on asset prices. This suggests that behavioural financial factors significantly
influence the investment choices that investors make in the cryptocurrency market.
The cryptocurrency market is currently in a bubble due to unreliable traders, which
makes the market ineffective. Thus, noise traders offer a hypothesis for why
behavioural finance theories like herding, prospect, and heuristic theories are crucial
for understanding the cryptocurrency market.

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