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Basic Aspects of Cryptocurrencies

Martin Vejačka
Department of Applied Mathematics and Business Informatics
Technical University of Košice
Košice, Slovakia
[email protected]

Abstract—Cryptocurrency is specific type of virtual currency based on principles of cryptography and electronic communication. In
recent years emerged dozens of cryptocurrencies, while the most popular is the first ever introduced - Bitcoin. Cryptocurrencies
attracted in recent years lots of attention. Character of cryptocurrencies and their volatility is discussed widely by general public,
policymakers and economists. In this paper, basic aspects of cryptocurrencies are briefly introduced. Volatility of two major
cryptocurrencies - Bitcoin and Litecoin is investigated. Further it is compared with volatilities of main stock indices, commodities and
money pair of euro to US dollar in recent years. Other basic aspects of cryptocurrencies including anonymity, awareness and legislation
effects are briefly investigated and discussed. The research results show extremely high volatility of cryptocurrencies in comparison to
basic investment instruments. Also multiple legislation barriers for use of cryptocurrencies are detected. Research findings suggest that
recent negative awareness of cryptocurrencies might lead to change of the cryptocurrencies’ role. Cryptocurrencies might end up as
exchange medium in black economy or as a speculation tool for a limited number of speculators daring to trade highly volatile
cryptocurrencies for standard fiat currencies.

Keywords-cryptocurrency; virtual currency; volatility; Bitcoin; Litecoin;

damaged or the wallet file is inadvertently deleted, then the
I. INTRODUCTION wallet file is lost and the bitcoins it contained are lost forever
Cryptocurrencies are a new concept in the global economy. (in case that the wallet file was not backed up). Although the
They exist only for approximately five years and they already public address of wallet still exists, it can only be accessed by
attracted a lot of attention. Especially, since the year 2013 they the private key, which was deleted. Unless one breaks the very
experience turbulent changes in their exchange rates. The secure encryption built into the system, then it would not be
cryptocurrencies belong to the group of virtual currencies. We possible to recover the lost coins and breaking encryption used
can consider cryptocurrency as a digital medium of exchange, by Bitcoin network by a force is virtually impossible in timely
based on principles of cryptography allowing performance of manner [3].
secure, decentralized and distributed economic transactions [1]. The mining is process of new Bitcoins creation and it is
Theoretical foundations of cryptocurrencies were outlined performed by miners. Miners are second group of Bitcoin users
by Chaum [2] for the first time in 1983 already. The and they are solving artificial mathematical problem by
cryptocurrencies integrate electronic virtual money with dedicating their computational power to the Bitcoin network.
principles of cryptography [2]. The basic principle of The mining is used to confirm waiting transactions by
cryptocurrency is that no individual (or organization) may including them in the block chain. The block chain is created
accelerate or significantly abuse the production of a given every 10 minutes in the case of Bitcoin. So every payment in
currency. Typically only a certain predefined amount of Bitcoins is confirmed in time of 10 minutes. It enforces a
cryptocurrency is collectively produced by the entire chronological order in the block chain, protects the neutrality
cryptocurrency system. The rate of production is set by a value of the network, and allows different computers to agree on the
defined in prior and is publicly known [3]. The state of the system. For the transactions to be confirmed, they
cryptocurrencies allows virtually costless transfers of must be packed in a block that fits very strict cryptographic
cryptocurrency units (referred as coins) between client rules that will be verified by the network. These rules prevent
applications via computer peer-to-peer network [2]. previous blocks from being modified because doing so would
invalidate all following blocks. Mining also represents some
The most famous cryptocurrency and the first to be kind of a competitive lottery that prevents any individual from
introduced was Bitcoin in 2009. It was designed by a person or easily adding new blocks consecutively in the block chain. So
a group of persons hiding under pseudonym Satoshi Nakamoto no individuals can control what is included in the block chain
[4]. Two types of Bitcoin users exist: ordinary users and so or replace parts of the block chain to roll back their own
called Bitcoin miners. Ordinary users of Bitcoin use digital payments. The creation of block is proof of work system of
wallet similar to electronic banking applications. The wallet is mining, so the data are costly and time consuming to create in
software for a management of Bitcoin cash, thus for sending accord with requirements [3]. Bitcoin uses SHA2-256
and receiving payments in bitcoins. Bitcoins exist only as cryptographic algorithm as a proof of work mechanism during
information in files in a computer or a mobile device. Access to transactions confirmation [3]. Some cryptocurrencies (e.g.
these files is restricted to the holder of private key, which is Peercoin) employ also a proof of stake mechanism. The proof
used to secure the money. If file system in the computer is of stake mechanism means that fractions of cryptocurrency

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units are assigned to their holders as a reward for holding the artificially inflating the price of cryptocurrency through false
cryptocurrency, what can be considered an analogy of interest. positive statements, in order to sell the purchased
cryptocurrency at a higher price than it was bought. Once the
Since the introduction of Bitcoin tens of other operators of the scheme sell out the cryptocurrency, the price
cryptocurrencies emerged. The most are based on the similar falls and other holders of given cryptocurrency lose their
specifications as the Bitcoin, which represents first fully money [12].
implemented cryptocurrency protocol. The second most
popular cryptocurrency Litecoin uses scrypt algorithm as a Morris indicated that some cryptocurrencies might be
proof-of-work and has faster transaction confirmations (2.5 manipulated also by pre-mining. In that case a currency is
minutes) [5]. Most cryptocurrencies gradually introduce new mined or generated by its founders before mining code is
units of currency until reaching a preset maximum cap of the released to the general public. This might be a part of a
total amount of currency that will ever be created. The cryptocurrency's original design. Similarly some
maximum cap of cryptocurrency aims to assure the scarcity, cryptocurrencies might have hidden launches available to only
similar to the case of precious metals. It also should prevent a few individuals and might have extremely high rewards for the
hyperinflation [6]. On the contrary, some cryptocurrencies first miners [13].
might experience hyperdeflation as the amount of the currency
Generally only Bitcoin and Litecoin are directly
in circulation will approach its preset finite cap [7].
interchangeable at markets (like BitStamp, Vircurex, BTC-e,
All currently existing cryptocurrencies are pseudonymous, BTC China and others) for fiat currencies. Other
so they provide very high degree of anonymity. Therefor cryptocurrencies can only be traded for other cryptocurrencies.
cryptocurrencies are less prone to be confiscated by law Banking institutions generally do not accept cryptocurrencies
enforcement institutions [7]. These facts make cryptocurrencies and do not offer services for them. Multiple banks also refuse
very attractive for black market. The case of the Silk Road is to offer services to companies dealing with cryptocurrencies
infamous. It was e-marketplace used for drug dealing (and [13].
other black market trading) and it was accepting payments in
cryptocurrencies [9]. Virtual currencies are based on solving mathematical
problems which require enormous computing power.
However since introduction of cryptocurrencies, they Unfortunately, because of these built-in security mechanisms,
continually gain attention (positive or negative) from the media the processing power used comes to nothing, rather than be
and public, especially during the fast price rise of Bitcoin and used for something meaningful. Now researchers from
Litecoin during the year of 2013. Microsoft Research, Cornell Tech and the University of
Maryland proposed how these computing resources used for
II. LITERATURE REVIEW cryptocurrency mining (or rather storing) can be used more
useful. They proposed new virtual currency named Permacoin
The theoretical and empirical research of cryptocurrencies [14].
lacks the bigger extent, because the topic of cryptocurrencies is
very recent and newly arisen. It lacks longer time data series Permacoins would be generated when users would archive
for analysis, because the organized exchange of the data from the huge data fund. The researchers suggest, for
cryptocurrencies and fiat money started only in 2010. example, backing up data from the Library of Congress (200
TB of data). Mining of permacoins would therefore be less
Chaum [2] laid the theoretical foundations of dependent on computing power and the more storage space.
cryptocurrencies, when he drafted use of cryptology for The data would be stored locally. The availability and
allowance of untraceable electronic payments. Above consistency of stored data would be controlled by a network
mentioned pseudonymous Nakamoto [4] proposed the creation and the user would obtain corresponding permacoins. Safety
of Bitcoin at the end of 2008 and further developed it, what led features should also check that the data are not stored in the
into introduction of a Bitcoin network in early 2009. cloud repository and are not vulnerable to attacks on
Researchers, such as Moore and Christin, mainly Permacoin network. It is therefore a public archive data that
investigated security of cryptocurrency accounts. Their results could be useful for mankind. Investments in hardware and
indicated a high risk of breaching security of popular storage would actually serve to secure and distribute data in a
cryptocurrency exchanges. Later crash of Mt.Gox market place decentralized system widely available with multiple data
confirmed their conclusions [10]. backups [14].
The level of cryptocurrencies’ acceptance was investigated Regulators in several countries have warned against use of
by Luther [10]. He concluded that cryptocurrencies like Bitcoin cryptocurrencies. Some countries have taken specific
are unlikely to generate widespread acceptance in the regulatory arrangements to dissuade potential users of
conditions of significant monetary stability and absence of a cryptocurrency. Legal ways of acquiring the amount paid in
government support. cryptocurrencies back, when some problem arises, do not exist,
however administrations try to find solution for consumer’s
Tucker points out a high volatility of cryptocurrencies [12]. protection while using cryptocurrencies [7]. The most
He indicates that holding cryptocurrencies is very risky due to authorities address mainly Bitcoin as prevalent representative
their very high volatility and high potential for price of cryptocurrencies. The willingness to accept it varies in
manipulations. The cryptocurrencies might be manipulated in different countries. For example Chinese central bank forbid to
pump and dump scheme, what is a form of fraud that involves financial institutions in country to offer services connected to

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Bitcoin. Internal Revenue Service (government tax control or manipulate cryptocurrencies protocol because they
administration authority) in USA issued guidance for treating are cryptographically secured [3].
virtual currencies such as Bitcoin as property rather than
currency for federal tax purposes. It may help Bitcoin Cryptocurrency payments can be made without personal
investors, even though it means Bitcoin users In USA will need information linked to the transaction. This offers strong
to report their transactions [14]. In many other countries protection against identity theft and almost full anonymity.
Bitcoin and virtual currency in general have also problems with Cryptocurrency users can also protect their money by
acceptation. Authorities in Norway stated that it does not fulfill encryption and backing up their wallets. In addition, it is
requirements of being a currency. In Finland Bitcoin is not impossible for merchants to hide any charges as can happen
considered legal currency, because it is by definition in conflict with other payment methods. The cryptocurrency transactions
with local legislation. It states that payment instrument must are secure, irreversible. This protects merchants from losses
have the issuer responsible for its actions. On the other hand, caused by fraud or fraudulent chargebacks. This allows
buying cryptocurrencies is in Finland considered a purchase of merchants to have lower fees, enlarge markets and decrease
goods [7]. administrative costs [3].

Besides the authorities also economists criticize Bitcoin and On the other hand total value of cryptocurrencies in
circulation and the number of businesses accepting them are
other cryptocurrencies. Laureate of Nobel Prize for Economy
Paul Krugman in 2013 stated that Bitcoin is very good medium very small compared to classic fiat currencies. Therefore,
of exchange, but it does not store the value at reasonably stable relatively small number of trades or events can significantly
level [16]. Gold preserves value, because if fiat currencies fail, affect the price of cryptocurrencies. This volatility might
gold still can be used as currency as it was used in past. Gold’s decrease as cryptocurrency markets and technologies will
value is limited from above by technology of its mining and its mature [3].
limited supply in mining sites. Federal Reserve System The most of cryptocurrencies and their software are still in
guarantees (in some limits like inflation etc.) the value of US development with many incomplete features. New tools,
dollar. On the contrary, nobody guarantees minimal value of features, and services might still being developed. In addition,
cryptocurrencies as long as they are decentralized and fully many people are still unaware of cryptocurrencies. Both users
independent. They are mainly limited in preset amount of and businesses accept cryptocurrencies because they want to
cryptocurrency units ever be created [16]. utilize its advantages, but their numbers remains small and still
The identification and summary of cryptocurrencies’ needs to grow in order to benefit from network effects [3].
aspects and empirical investigation of cryptocurrency volatility While total supply of cryptocurrency is predetermined and
are not present in current research. Therefore we decided to gradually increases over time with mining, total demand after it
aim our paper in this area. may vary dramatically. However, the supply of cryptocurrency
on an e-market is not equal to its total supply. It only reflects
III. BASIC ASPECTS OF CRYPTOCURRENCIES the amounts of cryptocurrency that market subjects are willing
to sell at given prices at given moment via e-markets.
Aim of our research was to investigate basic aspects of
cryptocurrencies that might influence their prices. Price of Prices in official currencies are directly set by demand and
cryptocurrency reflects the trust of users in given currency and supply on e-markets only for two the most popular
its future development. cryptocurrencies: Bitcoin and Litecoin. Other cryptocurrencies
are directly interchangeable on e-markets only for Bitcoin or
Cryptocurrencies bring to their users freedom of payments. Litecoin respectively. Therefore their exchange rate is strongly
They provide the possibility to send and receive any amount of influenced also by changes of Bitcoin or Litecoin exchange
money quickly anywhere in the world at any time. Users of rates.
cryptocurrencies are not limited spatially or in time when
realizing their payments, so their users are in full control of Other major aspects that have influence on exchange rate of
their money. cryptocurrency are its acceptance and usability in various
applications. Once again Bitcoin is the most widely accepted
Cryptocurrency payments are processed with no fees or cryptocurrency in many cases on the web and also brick-and-
extremely small fees. In the case of Bitcoin, users may include mortar businesses and merchants.
fees with transactions to receive priority processing, which
results in faster confirmation of transactions by the network. Many legal official sites accept payments or donations in
Additionally, merchant processors exist to assist merchants in Bitcoins (or Litecoins). However in addition to that also many
processing transactions, converting bitcoins to fiat currency sites merchandising unofficial or even illegal goods (drugs,
and depositing funds directly into merchants' bank accounts firearms etc.) accept it too. The main reasons are easy transfers
daily. These services are based on Bitcoin, so they can be and their almost complete anonymity of cryptocurrency
offered for much lower fees than with PayPal or credit card transactions. Logically subjects acting on black market want to
networks [3]. remain anonymous.
All information concerning the cryptocurrency money Also availability of cryptocurrency is important issue. The
supply is readable and available in the block chain for anybody easiness of purchasing or exchanging for classical currency
to verify and use in real-time, so cryptocurrencies are into cryptocurrency and vice versa allows better possibilities to
transparent. Furthermore no individual or organization can use cryptocurrencies. Consequently it influences their

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exchange rates. In case of Bitcoin, there are already ATMs for

Bitcoin purchases available in some countries, which use
exchange rate from one of major e-markets allowing
cryptocurrency exchange with small fee covering the ATMs
costs of maintenance and operation. This increases availability
of Bitcoin between wide populations. Though the main source
of cryptocurrency remain mining and direct trading on
electronic markets.
Furthermore legislation changes in many countries
influence positively or negatively the possibility of using
cryptocurrency in legal money transactions. In some countries
legislative arrangements induced by possible illegal
cryptocurrency transactions brought restrictions to the use of Figure 1. Bitcoin historical price chart
cryptocurrencies in particular country. However, the influence
Source: own processing based on [19], [20], [21]
of this legislation on illegal transactions would be lower,
because they already are out of law system of given country
from another reason than new legislation restricting Basic aim of this paper is to investigate volatility of
cryptocurrency usage. cryptocurrencies and their comparison with volatilities of main
currencies, indices and commodities on global markets. Results
Awareness about cryptocurrency affects both positively or might suggest if cryptocurrency are suitable investment for
negatively its exchange rate. Higher awareness of Bitcoin made anyone. Two the most popular cryptocurrencies Bitcoin and
it very popular in last year what partially contributed to Litecoin were selected, because of their direct
enormous increase of its price in 2013. This also had effect on interchangeability to fiat currencies at multiple electronic
many other cryptocurrencies, mainly because they are markets.
interchangeable with Bitcoin.
The figure 1 shows Bitcoin average historical prices on the
All these aspects influence the use of cryptocurrency and its biggest Bitcoin e-markets. All available daily closing prices
final exchange rate to normal currencies. Together they data from multiple electronic markets (Bitstamp, BTC-E, Mt.
generate trust in given cryptocurrency. The higher trust brings Gox) were used to create figure 1. Data showed here start in the
more stable and higher price of cryptocurrency at market. We July 2010 when trading with Bitcoin started on Mt. Gox e-
can summarize these aspects of cryptocurrencies into following market. Data from Mt. Gox were used only in early years
basic aspects: before other markets emerged to avoid the period before crash
of Mt. Gox (in February 2014) when prices on this market were
A. Volatility significantly below prices on other markets. This happened
Volatility represents measure of intensity of price changes because of generally known problems of Mt. Gox with
of given investment. High volatility might cause serious withdrawals of Bitcoins and users were afraid to use this e-
problems with given investment. market any further.
While considering cryptocurrency, the main problem The figure 1 clearly shows that the main big price changes
caused by the volatility is that of a deflationary bias. With more of Bitcoin occured in 2013. Two price peaks were recorded in
and more people wanting access to a limited number of 2013. First peak was during April 2013, when Bitcoin price
cryptocurrency, its value will be pushed upwards and things peaked at above 200 USD per Bitcoin (USD/BTC) and second
therefore become cheaper for those that have cryptocurrency in in December 2013 at around 1200 USD/BTC. The biggest
possession. Deflation encourages cash hoarding rather than difference between prices within one year was in 2013 with
spending and it is incorporated directly into the basic principles lowest price at 13.31 and highest at 1209.94. It represents
of current cryptocurrencies. High increases in cryptocurrency ninetyfold increase of price within period of one year. It
values encourage its users to hold cryptocurrency further and illustrates tremendous fluctuations of Bitcoin prices in
avoid its use for [17]. For example O’Brien at this point relatively short periods.
suggests that cryptocurrency ceases to be a currency and Second chart (see figure 2) shows second Bitcoin rally in
becomes a virtual commodity [18]. 2013. The data illustrated on figure 2 are from October 2013
On the other hand, big decreases of cryptocurrency’s value until May 2014. It is more obvious that highest price was
encourage its holders to sell out their cryptocurrency and buy overdeveloped and it decreased to its half during one month.
more stable traditional currencies or commodities. This leads to Later decrease in February of 2014 is caused by crash of
even greater decreases of cryptocurrency rates as long as their former biggest Bitcoin e market Mt. Gox, which significantly
sell out increases supply of cryptocurrency on the market and undermined the trust in cryptocurrencies in general population.
sellers tend to sell cryptocurrency at still lower and lower price. Since then has the Bitcoin price decreasing trend.
In case of traditional currencies central banks exist to avoid
these effects and assure currency stability, while
cryptocurrencies lack any form of central banking.

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Figure 2. Bitcoin historical price chart – period since October 2013

Source: own processing based on [19], [20], [21] Figure 4. Bitcoin and Litecoin prices comparison since August 2013

Source: own processing based on [19], [20], [21], [22]

From these rate changes of two major cryptocurrencies is

already obvious, that cryptocurrencies have high volatility. In
order to express their volatilities more accurately, we have
gathered available data on Bitcoin and Litecoin prices on
electronic markets (graphically presented on above). Further
percentage prices change between two following trading days
was calculated. As measure of volatility then was used standard
deviation of all percentage price changes available. Finally 30-
day and annualized volatility were calculated by adjustment
with square root rule.
With aim to provide better view of cryptocurrencies’
Figure 3. Litecoin historical price chart on BTC-e e-market volatilities we further compared them with volatility of stocks,
commodities and currencies. Data on major indices (Dow
Source: own processing based on [22] Jones Industrial Average, S&P 500 and NASDAQ) were
gathered at given markets and their volatilities were calculated
The similar case in some areas is the one of the Litecoin. using the same method as in the case of Bitcoin and Litecoin.
The figure 3 shows historic prices of Litecoin at BTC-e
electronic market since august 2013 until May of 2014. Data For further comparison also volatilities of main
on Litecoin prices before this period are not available, because commodities were calculated. Gold, silver and crude oil prices
of non-existent Litecoin market at time prior to this period. It from main commodity markets were gathered and processed
illustrates shorter period than figure 1, but it is obvious that with the same methods as cryptocurrencies and indices.
Litecoin had very volatile period during November and For allowance of comparison with common fiat currencies
December of 2013, increasing its rate from 4 USD/LTC to we considered in our analysis also major currency pair
above 41 USD /LTC during one month. EUR/USD on foreign exchange markets with same method of
On the contrary, in comparison with the Bitcoin’s price volatility calculation.
decrease since February of 2014, Litecoin’s price is rising in All data were gathered from the same period of time
that period. Litecoin’s price rising trend is probably caused by (between July 2010 and May 2014), only for Litecoin had to be
partial switch of cryptocurrency investors and users from used shorter period, because e-markets started to allow change
Bitcoin to Litecoin since Mt. Gox crash. of Litecoin for a standard currency later than in the case of
The figure 4 even better illustrates Bitcoin and Litecoin Bitcoin.
prices’ changes in the most volatile period since August 2013, Following table I shows us comparison of all calculated
with use of adjusted secondary (Litecoin) axis to show both volatilities of cryptocurrencies, indices, commodities and
cryptocurrencies on a joint basis. Litecoin prices have similar currency pair.
development as Bitcoin prices with even higher peaks and
lower bottoms. This suggests that Litecoin might have higher Besides previous volatility expression based on standard
volatility than Bitcoin. deviation of all percentage change, we decided to further
compare volatility expressed by measure of Average True
Litecoin stopped to copy Bitcoin’s course of prices in after Range (ATR).
above mentioned Mt. Gox crash in February of 2014, when
Litecoin continued to rise while Bitcoin lost almost half of its The Average True Range is an indicator that measures
original price. volatility and was developed by J. Welles Wilder [30]. It was
designed considering commodities and daily prices.

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the maximum gap of all three possible gap options. Further

TABLE II. VOLATILITY COMPARISON – STANDARD DEVIATION Average True Range was counted as moving exponential
METHOD average according following formula:
Volatility
Daily Volatility
30-Day Annualized
ATRt 1  n  1  TRt
Comparison Volatility Volatility ATRt 
Bitcoin 7,56% 41,43% 120,09% n
Litecoin 9,52% 52,15% 151,13% where n is period of moving average, TR is true range in
given day (t) [30].
DJIA 0,92% 5,28% 14,86%

S&P500 1,05% 5,69% 16,37%

In our calculation, we used the most common 14–day
period and expressed ATR for the whole period of time
NASDAQ 1,16% 6,31% 18,17% (between July 2010 and May 2014). ATR was initialized (at t =
Gold 0,78% 4,21% 12,19%
0) with a 14-day trailing average of TR. We have expressed
Average True Range percentage as ratio of current ATR to
Silver 1,57% 8,49% 24,38% closing price in given day, to allow comparison of volatility
EUR/USD 0,46% 2,51% 7,27%
between differently priced currencies, indices or commodities.
To provide comparison for whole period of our gathered data
WTI Crude Oil 1,70% 9,25% 26,72% we expressed a mean of all acquired daily ATRs. The table II
a. Own processing based on data from [19],[22],[23],[24][25],[26],[27],[28],[29] shows our results:

Commodities are often subject to gaps and limit moves, which TABLE II. VOLATILITY COMPARISON AVERAGE TRUE RANGE METHOD
occur when a commodity opens up or down its maximum
allowed move for the session. A volatility formula based only Highest ATR Mean ATR
Volatility Comparison
percentage percentage
on the high-low range would fail to capture volatility from gap
or limit moves. Wilder created Average True Range to capture Bitcoin 50,15% 9,41%
this “missing” volatility. ATR does not provide an indication of Litecoin 38,15% 11,47%
price direction only measures volatility [30].
DJIA 6,51% 1,43%
Average True Range is based on concept called True Range
(TR), which is defined as the greatest of the following options: S&P500 4,34% 1,51%

1 current high price less the current low price in NASDAQ 3,83% 1,40%
given period Gold 1,38% 0,50%
2 current high price less the previous period close Silver 3,51% 0,98%
price (absolute value)
EUR/USD 4,16% 0,33%
3 current low price less the previous close price
WTI Crude Oil 2,57% 1,24%
(absolute value)
a. Own processing based on data from [19],[22],[23],[24][25],[26],[27],[28],[29]
Absolute values are used to ensure positive numbers to
measure the distance between two points, but not the direction, Table II contains also single highest ATR percentage
i.e. not increase or decrease of price just size of the price recorded during investigated time period. It documents single
change. If the current period's high is above the prior period's most extreme movements in prices although smoothed by 14-
high and the low is below the prior period's low, then the day moving exponential average. Both cryptocurrencies have
current period's high-low range will be used as the True Range extreme highest ATR percentage. Our main indicator of ATR
(i.e. first option). Options 2 and 3 are used when there is a gap volatility in this method is a mean ATR percentage during
or an inside day. A gap occurs when the previous close is investigated time period. There again both Bitcoin and Litecoin
greater than the current high (signaling a potential gap down or recorded multiple-times higher values of volatility than other
limit move) or the previous close is lower than the current low investigated objects. These results correlate with results of
(signaling a potential gap up or limit move) [30]. volatility comparison based on standard deviation. Relative
stability of gold prices confirms its reputation of safe harbor for
As long as True Range uses absolute price changes, also investors. Stock indices are slightly more volatile than
ATR reflects volatility as absolute level. In other words, ATR commodities. However given two cryptocurrencies have
is not shown as a percentage of the current close. This means dramatically higher volatility confirmed by this method too.
low priced stocks will have lower ATR values than high price
stocks. Because of this, ATR values are not comparable. Even Our results confirm that cryptocurrencies have currently
large price movements for a single security, can make long- extremely high volatility in comparison to main major
term ATR comparisons impractical [30]. currencies, stock indices and commodities. Volatility of
Bitcoin was approximately eightfold higher than other
To overcome this problem, in our volatility comparison instruments investigated. Litecoin had even higher volatility
based on ATR we have decided to express ATR percentage. than Bitcoin. Other cryptocurrencies were not investigated as
Firstly, True Range of all periods was counted with selecting long as they are interchangeable only for Bitcoin or Litecoin

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and they copy price course of two main cryptocurrencies. Also Gox customer care did not identify the payment with original
their significance and market capitalization is way lower. identification and sent given amount again, even if such
amount already has been sent there but it has only changed
However, the high volatility is not for cryptocurrencies identification. This scheme could be repeated multiple times.
users only the bad news. Even short-term speculations might This wrong procedure led to multiple losses of amount in
bring high earnings to cryptocurrency speculators. This fact standard currencies and it could be prevented by early change
along with high growth of cryptocurrencies exchange rates of procedures on this e-market [32].
attracted even more speculators. It led to even bigger price
growths and creation of price bubbles. Although users holding
cryptocurrencies, who purchased (or mined) it sooner in past C. Availability
before volatile year of 2013 might have recorded above 1000 Another important aspect of cryptocurrencies is their
percent earnings. availability for use. Availability is influenced by easiness of
purchasing and their interchangeability for official standard
Having a volatile currency means that businesses can’t plan currencies. This is enabled by private electronic markets
or budget effectively, and the chaos that this could cause would available to general public.
be too much of a risk for most, even if sometimes they came
out ahead. Nobody knows how much stuff a bitcoin will be Number of subjects accepting payments in given
able to buy in a day, a week, or a month – there are no cryptocurrency reflects also its availability and usability.
fundamentals to speak of. Number of merchants accepting some cryptocurrency (Bitcoin
mainly) is increasing, but they are facing the problem of high
High demand after cryptocurrencies made them very volatility of cryptocurrencies, so at most cases they do not keep
volatile with predominant growth of exchange rate. These cryptocurrency for the longer period of time and change for
effects are transferred from Bitcoin and Litecoin into other standard currency. On the other hand, higher availability brings
cryptocurrencies thanks to their interchangeability only via higher and more stable exchange rate of cryptocurrency thanks
medium of Bitcoin or Litecoin. Recorded extreme volatility of to increased number of users of given cryptocurrency slowing
cryptocurrencies suggests them only for risk-takers considering rate changes and decreasing its volatility in time.
them as investment possibility.
Further the speed of transactions and their confirmations
B. Awareness processes makes cryptocurrency more available and practical
for payments in electronic environment.
The awareness of cryptocurrency affects the count of its
users and therefore also the stability of its exchange rate. The
higher awareness of given cryptocurrency means its more D. Anonymity
potential users. Very big role in the field of awareness play the All cryptocurrency payments between anonymous sides are
media. High media coverage of Bitcoin’s price rally definitely hardly traceable. This fact is the main reason of their usage in
drew attention of numerous additional speculators, who then criminal operations. Very hard transactions traceability and no
invested in Bitcoin and participated on its enormous growth of central guaranty of currency are main reasons of criticism and
price. Besides the all forms of media also the word of mouth legislation restrictions of cryptocurrencies.
increases the awareness of cryptocurrencies and contributes to Governments and security authorities are also afraid of
increase of cryptocurrency users numbers. virtually untraceable transactions that might be connected with
On the other hand, negative information on financing criminal activities or terrorist organizations.
cryptocurrencies (electronic wallet thefts, banning by Cryptocurrencies with virtually anonymous transactions are
legislation, criminal usage etc.) might discourage potential potentially very useful for such financial transfers to terrorists
users. from their sponsors. Mainly this lack of transfers’ identification
led to multiple legislation adjustments and arrangements in
The good example of such negative information might be recent years for cryptocurrency usage restrictions.
above mentioned crash of Mt. Gox - former the biggest Bitcoin
market. It ceased its operations in February of 2014, because of On the other hand, also legal users might prefer anonymous
big losses of Bitcoins and also standard currencies. These transactions due to concerns of privacy intrusions by any third
losses were caused by faulty processes of market, which were party not involved in transaction. After recent cases of
known for longer period, but were not addressed by Mt. Gox disclosure of governmental tracking of private communications
management. Price of Bitcoin on this e-market was influenced are privacy concerns even more understandable.
by this fact in multiple weeks prior to its crash. The Mt. Gox’s So anonymity of cryptocurrency affects the usage of
crash significantly influenced also prices of Bitcoin at other e- cryptocurrencies both positively and negatively.
markets due to disruption of trust in Bitcoin [31]. Its prices still
have decreasing trend since then.
E. Legislation influence
Mt. Gox had faulty processes for years and these faults Before year 2009 not a single national legislation contained
were not adequately addressed by this e-market management. the term of cryptocurrency. Since then increasing amount of
Fault was in so called transaction malleability. Identification of money transferred in form of cryptocurrency forced
transaction on Mt. Gox could have been changed during its policymakers in many countries to issue a recommendation or
processing. Then impostor claimed at Mt. Gox that payment create laws regarding the use of cryptocurrency in national
with original identification did not ascribe to his wallet. Mt.

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economy. Broader allowance of cryptocurrency usage Perhaps, a more promising is idea of Permacoin that offers
definitely supports its usage and generates bigger trust in it. a glimpse into the future, where digital currency is tied to the
However the most countries did not allowed use of real world and users should provide their computing power and
cryptocurrency or they did not concede to them the status of storage space to create something useful.
currency. This action restrained their possibility of its usage in
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