*2.1. Terminology and Basic Concepts*

The digital era has gradually changed monetary regimes. Regarding the terms of the 'cryptocurrency market', there is the digital exchange, which provides the platform for nonphysical coins or notes. Therefore, the exchange status exists in online form. Noticeably, the transactions have continued with the innovative terminology 'cryptography'1. This work should be conducted to secure the previous transactions, which are required to record as well as update the electronic ledger-known as a 'blockchain'.

'Cryptocurrency' refers to the 'digital coin' which operates in the previous aforementioned context. In this following part, we will focus on summarizing characteristics of some typical cryptocurrencies in our studies. One of the coins worth mentioning is Bitcoin, first introduced in 2009 by Satoshi Nakamoto. Especially, there were many skeptics that the Bitcoin price climbed up after its ten-year existence.

<sup>1</sup> It becomes one of popular practices to perform the verification for historical online confirmation among trading parties.

Afterwards, Ethereum came to the market with new functions and differences to Bitcoin. For instance, Ethereum demonstrates a decentralized platform which supports smart contracts to save trading time as well as transaction cost. Therefore, technically different from Bitcoin, Ethereum allows the users to program without any possibilities of third-party intervention, fraud, etc. Meanwhile, Ripple was born for the purpose of a real-time gross settlement system. Therefore, Ripple is likely to generate the currency and remittance network, which freely enables trading transactions. In addition, Litecoin is also known as the 'peer-to-peer network'. This coin is also built on the fundamental concept of Bitcoin but it is also an open-source without any central authorization. Similarly with Ethereum, Stellar has some noticeable features such as an open-source, decentralized protocol. In addition, this coin gradually fosters the transferring process with cross-border transactions of many cryptocurrencies. In brief, there are some commonly shared technical characteristics among these cryptocurrencies, such as (i) decentralized platform, (ii) the usage of cryptography for security, (iii) anonymous transactions, and (iv) quick confirmation.

Time after time Bitcoin and its sequential coins (Ethereum, Ripple, Litecoin, Stellar, etc.) have attracted the investors' attention. Therefore, these coins have gradually become the emerging financial asset class (Brandvold et al. 2015; Polasik et al. 2015). In terms of 'cryptocurrency market', we would like to address some concerns. First, contradictory to traditional monetary regimes, these cryptocurrency prices are wholly depended on perception as well as willingness to pay by investors. It is very intuitive to consider that all investors are 'peer-to-peer' participants in the market having no central control Sovbetov (2018). Second, the majority of cryptocurrencies represents the limitation in mining or producing new ones. This means that the limited supply is one of important traits. Coin miners tend to consume large amounts of energy as well as computer memory to generate a 'reward', meaning a new coin. Thus, it is deterministic, meaning that the coin stake can be generated in this way, not depending on the wealth. Therefore, the increase in prices can be explained by the supply–demand of trading investors. Thus, the movement of this market mainly depends on investor behavior. Third, the hashes of current blocks for one coin (which mainly influences the current price) are the mathematical function deriving from Nakamoto (2008):

> *Hash o f current block* = *f*(*<sup>θ</sup><sup>t</sup>*−1, *φ*, Φ)

In which, *θ* is the hash, *φ* is the difficulty level of mining the coin, and Φ is the random key generated in the current process (Φ is uniquely specific for one stage). This cryptocurrency market has past memories, difficulties in market, and typical characteristics in each transaction stage.

Furthermore, based on the aforementioned characteristics, this market is quite different from the stock market. We will discuss the three distinct features of these differences. First, the cryptocurrency market is traded 24/7, while the stock market is off during holidays, Saturday, and Sunday. Second, some stock exchanges regulate the upper lower bound for trading, whereas the cryptocurrency market is free to trade. This means that the cryptocurrency has high volatility which allows for an increase in price of up to 100 times. Third, the stock has intrinsic value, which is mainly based on the operating income or financial activities. Meanwhile, the cryptocurrencies have no intrinsic or tangible value. This kind of asset is mainly based on the fundamental concept of 'hash of current block', which is aforementioned by determinants in the previous function.

### *2.2. Bitcoin and Cryptocurrency Markets*

From the policy-makers' perspective, there is an opposite view to criticize cryptocurrencies, which impedes the stability and development of financial markets. It derives from the studies of Gandal et al. (2018), Lo and Wang (2014), and Velde (2013). However, the development of Bitcoin, as well as other cryptocurrencies, still happens with many warnings and restrictions.

When it comes to economic characteristics, many studies doubted whether Bitcoin is a kind of currency or not. Bouri et al. (2017b) admitted that Bitcoin is considered as a 'peer-to-peer' environment that allows the alternative financial asset to be easily traded. However, Yermack (2015) disagreed with previous studies. This study claimed that Bitcoin should be not used as money, whereas Polasik et al. (2015) looked at Bitcoin as a mean of exchange, not reflected entirely as a monetary currency. On the other hand, Selgin (2015) supposed that Bitcoin is a kind of counterfeit commodity money.

There are also inconclusive findings regarding investors' behaviors in cryptocurrency markets, especially Bitcoin, in terms of forecasting their prices. Cheah et al. (2018) emphasized that Bitcoin shows an uncertain cointegration relationship with other assets. Mainly, this study indicated the inefficiency and informational nonhomogeneity in Bitcoin markets. These results are similar to the studies of Ciaian et al. (2016), Katsiampa (2017), and Urquhart (2017). Interestingly, there are some researches that have evaluated the microscopic structure in the Bitcoin market. In more detail, while Dyhrberg et al. (2018) initially examined the transaction costs as well as liquidity from market structures, Li and Wang (2017) conducted an empirical study to examine the technological and economic determinants of cryptocurrency exchange rates. These studies provided insights of large factors such as news public interest (Google search, Wiki views, Twitter, Facebook, and Forum), user volume trading (volume and frequency), Bitcoin amount, hash rate, difficulty in other markets (Gold and stocks), financial stress, and economy fundamentals. Moreover, Koutmos (2018b) and Wei (2018) also employed the bivariate VAR models to further investigation regarding transaction activity as well as growing microstructure in cryptocurrency markets. Also, Li and Wang (2017) pointed out the role of attention in Bitcoin returns. Nasir et al. (2019) contributed to the existing literature stating that Google search engines could be used to forecast Bitcoin returns in one-week shock. However, this element failed to explain why Bitcoin is volatile.

Regarding the interconnection between Bitcoin and other financial indices, Kristoufek (2015) used wavelet functions to prove that Chinese market indexes are likely to be a determinant of Bitcoin returns. This conclusion is also similar to the study of Bouoiyour and Selmi (2015). Meanwhile, Briere et al. (2015) figured out that Bitcoin has high volatility but it can be taken as a hedged instrument due to their relationship with conventional assets and unconventional assets. This study suggested the optimal ratio of Bitcoin in the portfolio is ~3 percent. By using the quantitative graphs, Ji et al. (2018a) confirmed that Bitcoin is useful for hedging purposes. In addition, Dyhrberg (2016) tested this characteristic of Bitcoin by univariate GARCH models (Generalized Autoregressive Conditionally Heteroscedastic models). Afterwards, this type of investment seems effective to hedge against the volatility of U.K. currency and equities. Interestingly, the following studies also supported the previous findings such as Bouri et al. (2017b), Balcilar et al. (2017), etc.

One of Bitcoin's features that has attracted many scholars' attention is 'bubble and speculation'. Cheah and Fry (2015) argued that Bitcoin is an only speculative asset because it does not convey any economic value. Moreover, Cheung et al. (2015) indicated that Bitcoin has speculative bubble features, which many investors use to exploit Bitcoin returns. This shares the same result with the study of Corbet et al. (2018).

In the scope of this study, we briefly summarize Bitcoin and cryptocurrencies studies based on five main points: (i) legal and policy-makers; (ii) currency or not; (iii) behaviors in markets; (iv) interconnection between cryptocurrency and other financial assets; and (v) speculative and bubble.
