Gambling Behaviour in the Cryptocurrency Market

Abstract

This article examines whether the investment strategies of cryptocurrency market involve high-risk gambling. Results show that the cryptocurrency risk premiums co-move closely with the return on CBOE Volatility Index (VIX). As such, the strategies of cryptocurrency trading closely resemble that of high-risk gambling. In other words, traders' expectations co-move closely (significantly) with the expected future payoffs from gambling. The co-movement is more pronounced when the gambling offers gains rather than losses and the payoffs are above average. VIX index returns significantly Granger-cause CSAD of returns (with and without Bitcoin) indicates that the cryptocurrency trading constitutes a form of gambling where the motivation for gambling comes from the amount of variation (i.e. riskiness) in the gambling payoffs. These findings warrant policymakers of countries to revisit the existing regulatory framework governing the conduct of electronic finance in the financial services industry.

Herd behaviour in the cryptocurrency market: Fundamental vs. spurious herding

“…Derived from a single-factor capital asset pricing model, the framework introduced by Chang et al (2000) can be meaningfully applied when the asset prices are determined by the information available to investors on the underlying trading assets. In the absence of an underlying asset of a trading currency, investors are either trading for speculative reasons or gambling (Senarathne 2018). Van Wijk (2013) shows that the Bitcoin price is determined mainly by the macroeconomic and financial developments of major economies.…”