Cryptocurrencies such as Bitcoin have gained much attention over the past few years, mainly due to their surging prices and returns. While Bitcoin, the first cryptocurrency, remains dominant in the market in terms of market capitalization and popularity, there are thousands of other cryptocurrencies today. It is a widely accepted view that most of the cryptocurrencies are a very risky asset. This study examines how cryptocurrencies work, how their prices are determined, and how they are (or should be) regulated.
Firstly, the key mechanism of the cryptocurrencies is described. While each cryptocurrency differs from one another in its design, many of them are based on distributed ledger technology (DLT), which is a decentralized record keeping system. Blockchain, which forms the basis of Bitcoin, is a type of DLT. The characteristics of blockchain technology are discussed and compared to the current electronic payment system. Secondly, this study examines properties of cryptocurrencies, and then discusses how the price of cryptocurrencies will change in the future based on the findings of the existing literature, which indicate that the price of cryptocurrencies is affected by factors such as market liquidity, uncertainty, new regulations, and investor sentiment. Lastly, regulation issues such as taxes, prevention of anti-money laundering and combating the financing of terrorism (AML/CFT), and investor protection are discussed.