2. DERIVATIVE ASSET PRICING Flashcards
“The microeconomics of cryptocurrencies” by Halaburda, Hanna, Guillaume Haeringer, Joshua Gans, and Neil Gandal (2021).
What are the 3 main components of Bitcoin?
1) Users ; 2) Miners ; 3) Blockchain
“The microeconomics of cryptocurrencies” by Halaburda, Hanna, Guillaume Haeringer, Joshua Gans, and Neil Gandal (2021).
What is Proof of Work (PoW) in blockchain?
Proof of work is a form of cryptographic proof in which one party proves to others that a certain amount of computational effort has been expended.
“The microeconomics of cryptocurrencies” by Halaburda, Hanna, Guillaume Haeringer, Joshua Gans, and Neil Gandal (2021).
What are “forks” in blockchain and how do they come about?
Because there are multiple miners working on the same problem (solving the block), there is a possibility that two different miners find and broadcast, at approximately the same time, a correct solution. As a result, we obtain a fork, i.e., two competing branches (versions) of the blockchain.
Solution: Longest chain rule (LCR) – miners should choose the longest branch.
“The microeconomics of cryptocurrencies” by Halaburda, Hanna, Guillaume Haeringer, Joshua Gans, and Neil Gandal (2021).
Name and explain the 3 properties that define a true permissionless network (a network where anyone can become a miner).
Anonymity: If any two miners can change their identities they inherit the selection probability of one another.
Robustness to Sybil Attacks: a miner cannot split its performance into two or more entities and pose as a new
entrant to increase his selection probability.
Robust to Merging: miners cannot increase their selection probability by merging.
“The microeconomics of cryptocurrencies” by Halaburda, Hanna, Guillaume Haeringer, Joshua Gans, and Neil Gandal (2021).
Name 4 design choices in regard to Bitcoin supply.
1) Permission rights to become a miner
2) Miner selection mechanism
3) Miners’ cost structure (the nature of the computation problem miners are solving)
4) Block reward, 𝜃
“The microeconomics of cryptocurrencies” by Halaburda, Hanna, Guillaume Haeringer, Joshua Gans, and Neil Gandal (2021).
What are the 3 purposes currency serves? What are the arguments against Bitcoin as a currency?
- Medium of exchange
- Unit of account
- Store of value
Volatility of Bitcoin price makes it a bad store of value or unit of account (it is rather a speculative asset).
“Blockchain Analysis of the Bitcoin Market” by Makarov, Igor, and Antoinette Schoar (2021).
What is the split of transaction volume by network participant types?
Majority (75%) of real volume is linked to exchanges or exchange-like entities (trading and speculation), only 3% – to illegal activities.
Note: 90% of volume is a by-product of Bitcoin protocol design and preference of participants for anonymity (e.g., sending bitcoins to themselves) , hence only 10 % of total volume is “real” volume.
“Blockchain Analysis of the Bitcoin Market” by Makarov, Igor, and Antoinette Schoar (2021).
How concentrated is mining capacity and Bitcoin wealth?
Mining capacity is concentrated: Top 10% miners control 90% of hashing power, top 0.1% – 50%. Top 0.1% is just 50 miners!
Wealth is concentrated: Most of BTC market capitalization is controlled by a small amount of individual investors.
“Anomalies: The Law of One Price in Financial Markets” by Lamont, Owen A. and Richard H. Thaler (2003).
What does the Law of One Price (LOC) say?
If there are no transaction costs or other constraints (e.g., short selling) identical goods must have identical prices!
“Anomalies: The Law of One Price in Financial Markets” by Lamont, Owen A. and Richard H. Thaler (2003).
What are the two essential ingredients to violation of the Law of One Price (LOC)?
1) Some agents have to believe falsely that there are real differences between two identical goods.
2) There have to be some obstacles preventing rational arbitrageurs from restoring the equality of prices that rationality predicts.
“Anomalies: The Law of One Price in Financial Markets” by Lamont, Owen A. and Richard H. Thaler (2003).
What are dual class shares?
Two classes of shares of the same company with different voting rights. Usually trade at about the same price, except when there is some battle for
corporate control.
“Anomalies: The Law of One Price in Financial Markets” by Lamont, Owen A. and Richard H. Thaler (2003).
Explain how a corporate spin-off works and what impact on the splitting company’s stock price is.
A spinoff is the creation of an independent company through the sale or distribution of new shares of an existing business or division of a parent company.
[…add answer to 2nd question…]
