Cryptocurrencies: Key Risks and Challenges

Sonia Arsi, Soumaya Ben Khelifa, Yosra Ghabri and Hela Mzoughi

Chapter 7 in Cryptofinance:A New Currency for a New Economy, 2021, pp 121-145 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Cryptocurrencies are witnessing a growing interest from investors and the media. They are increasingly perceived as a new class of assets through added benefits, such as hedging capabilities and diversification. However, this does not preclude the fact that cryptocurrencies can be risky assets. Within such a context, diverse studies were carried out at various risk levels. Our chapter bridges this gap and tries to reconcile varying positions on risk across cryptocurrencies. Particularly, we provide a detailed overview on the main risks to be considered by crypto-traders, namely, technology, fraud, legal, market, liquidity, and COVID-19 pandemic risks. The main findings show that the occurrence of any technological failure tends to raise insecurity and distrust in the cryptocurrency technology. This fact can be even further spoiled through fraud schemes and fake trading volumes. Additionally, the legal framework of the cryptocurrencies is still inconclusive. In terms of market risk, these crypto-assets are riskier than fiat currencies and there is a significant risk contagion across large-cap cryptocurrencies. Then, a significant relationship exists between liquidity and efficiency in the cryptocurrency market, since price dynamics can influence the market liquidity. Finally, it sorts out that the COVID-19 pandemic heavily affected the cryptocurrency markets. This chapter underlines current challenges for investors, regulators, and policymakers.

Keywords: Cryptocurrencies; Digital Currencies; Bitcoin; Blockchain; Fintech; Tokenization; BitLicense; Crypto-Asset (search for similar items in EconPapers)
JEL-codes: G1 G11 (search for similar items in EconPapers)
Date: 2021
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