Journal of Alternative Assets and Cryptocurrencies Edited by Christian Hafner Printed Edition of the Special Issue Published in Journal of Risk and Financial Management www.mdpi.com/journal/jrfm Alternative Assets and Cryptocurrencies Alternative Assets and Cryptocurrencies Special Issue Editor Christian Hafner MDPI • Basel • Beijing • Wuhan • Barcelona • Belgrade Special Issue Editor Christian Hafner Universite´ catholique de Louvain Belgium Editorial Office MDPI St. Alban-Anlage 66 4052 Basel, Switzerland This is a reprint of articles from the Special Issue published online in the open access journal Journal of Risk and Financial Management (ISSN 1911-8074) from 2017 to 2018 (available at: https:// www.mdpi.com/journal/jrfm/special issues/alternative assets and cryptocurrencies) For citation purposes, cite each article independently as indicated on the article page online and as indicated below: LastName, A.A.; LastName, B.B.; LastName, C.C. Article Title. Journal Name Year, Article Number, Page Range. ISBN 978-3-03897-978-4 (Pbk) ISBN 978-3-03897-979-1 (PDF) c 2019 by the authors. Articles in this book are Open Access and distributed under the Creative Commons Attribution (CC BY) license, which allows users to download, copy and build upon published articles, as long as the author and publisher are properly credited, which ensures maximum dissemination and a wider impact of our publications. The book as a whole is distributed by MDPI under the terms and conditions of the Creative Commons license CC BY-NC-ND. Contents About the Special Issue Editor ...................................... vii Preface to ”Alternative Assets and Cryptocurrencies” ........................ ix Christian Conrad, Anessa Custovic and Eric Ghysels Long- and Short-Term Cryptocurrency Volatility Components: A GARCH-MIDAS Analysis Reprinted from: J. Risk Financial Manag. 2018, 11, 23, doi:10.3390/jrfm11020023 .......... 1 Irene Henriques and Perry Sadorsky Can Bitcoin Replace Gold in an Investment Portfolio? Reprinted from: J. Risk Financial Manag. 2018, 11, 48, doi:10.3390/jrfm11030048 .......... 13 Frode Kjærland, Aras Khazal, Erlend A. Krogstad, Frans B. G. Nordstrøm and Are Oust An Analysis of Bitcoin’s Price Dynamics Reprinted from: J. Risk Financial Manag. 2018, 11, 63, doi:10.3390/jrfm11040063 .......... 32 Lennart Ante, Philipp Sandner and Ingo Fiedler Blockchain-Based ICOs: Pure Hype or the Dawn of a New Era of Startup Financing? Reprinted from: J. Risk Financial Manag. 2018, 11, 80, doi:10.3390/jrfm11040080 .......... 50 Fabian Bocart Inflation Propensity of Collatz Orbits: A New Proof-of-Work for Blockchain Applications Reprinted from: J. Risk Financial Manag. 2018, 11, 83, doi:10.3390/jrfm11040083 .......... 69 Takuya Shintate and Luk´aˇs Pichl Trend Prediction Classification for High Frequency Bitcoin Time Series with Deep Learning Reprinted from: J. Risk Financial Manag. 2019, 12, 17, doi:10.3390/jrfm12010017 .......... 88 Matthias Schnaubelt, Jonas Rende and Christopher Krauss Testing Stylized Facts of Bitcoin Limit Order Books Reprinted from: J. Risk Financial Manag. 2019, 12, 25, doi:10.3390/jrfm12010025 ..........103 Thomas G ¨unterFischer, Christopher Krauss and Alexander Deinert Statistical Arbitrage in Cryptocurrency Markets Reprinted from: J. Risk Financial Manag. 2019, 12, 31, doi:10.3390/jrfm12010031 ..........138 Leopoldo Catania and Mads Sandholdt Bitcoin at High Frequency Reprinted from: J. Risk Financial Manag. 2019, 12, 36, doi:10.3390/jrfm12010036 ..........154 Cathy Yi-Hsuan Chen and Christian M. Hafner Sentiment-Induced Bubbles in the Cryptocurrency Market Reprinted from: J. Risk Financial Manag. 2019, 12, 53, doi:10.3390/jrfm12020053 ..........174 Vera Jotanovic and Rita Laura D’Ecclesia Do Diamond Stocks Shine Brighter than Diamonds? Reprinted from: J. Risk Financial Manag. 2019, 12, 79, doi:10.3390/jrfm12020079 ..........186 v About the Special Issue Editor Christian Hafner is a professor of econometrics at the Louvain Institute of Data Analysis and Modeling of the Universite´ Catholique de Louvain, Belgium. He previously served as an assistant professor at Erasmus University Rotterdam, Netherlands. He holds a Ph.D. in economics from Humboldt University Berlin, Germany, and is a Distinguished Fellow of the International Engineering and Technology Institute. In 2018 he received the Econometric Theory Award in Recognition of Research Contributions to the Science of Econometrics, Multa Scripsit. His main research interests are financial econometrics, time series analysis, and empirical finance. He is currently the associate editor of the journals Digital Finance, Studies in Nonlinear Dynamics and Econometrics, Journal of Business and Economic Statistics, Econometrics, and Journal of Risk and Financial Management. He is a co-author of the book Statistics of Financial Markets and has published widely in peer-reviewed international journals in finance, econometrics and statistics. vii Preface to ”Alternative Assets and Cryptocurrencies” This book collects high profile research papers on the innovative topic of alternative assets and cryptocurrencies. It aims at providing a guideline and inspiration for both researchers and practitioners in financial technology. Alternative assets such as fine art, wine or diamonds have become popular investment vehicles in the aftermath of the global financial crisis. Triggered by low correlation with classical financial markets, diversification benefits arise for portfolio allocation and risk management. Cryptocurrencies share many features of alternative assets, but are hampered by high volatility, sluggish commercial acceptance, and regulatory uncertainties. The papers comprised in this special issue address alternative assets and cryptocurrencies from economic, financial, statistical, and technical points of view. It gives an overview of the current state of the art and helps to understand their properties and prospects using innovative approaches and methodologies. The timeliness of this collection is apparent from the view and download statistics of the journal’s website, where at the time of this writing most of the papers are in the top ten over the last year or more, which highlights the general interest in the topic. A first challenge is the analysis of time series properties such as volatility, including financial applications. Conrad, Custovic and Ghysels study long and short term volatility components and find that Bitcoin volatility is closely linked to indicators of global economic activity. Henriques and Sadorsky use multivariate GARCH-type models to show that there is an economic value for risk averse investors to replace gold by Bitcoin in investment portfolios. Kjaerland, Khazal, Krogstad, Nordstrøm and Oust identify dynamic pricing factors for Bitcoin using autoregressive distributed lags (ADL) and GARCH. They find that the Google search indicator and returns on the S&P 500 stock index are significant pricing factors. A second block of papers deals with high frequency data for cryptocurrencies, meaning minute-stamped or transaction data. A common theme is predictability, which is confirmed in several papers, and which would violate classical concepts of market efficiency. Fischer, Krauss and Deinert use a specific trading strategy to show that there are statistical arbitrage opportunities in the cross-section of cryptocurrencies. In a deep learning framework, Shintate and Pichl propose a so-called random sampling method for trend prediction classification, applied to high frequency Bitcoin prices. Catania and Sandholdt find predictability at high frequencies up to six hours, but not at higher aggregation levels, while realized volatility is characterized by long memory and leverage effects. Schnaubelt, Rende and Krauss study the properties of Bitcoin limit order books. Their findings suggest that, while many features are similar to classical financial markets, the distributions of trade sizes and limit order prices are rather distinct, and liquidity costs are relatively high. Third, a few papers deal with peculiarities of cryptocurrencies such as initial coin offerings, proof-of-work protocols and sentiment indices. Ante, Sandner, Fiedler investigate blockchain-based initial coin offerings (ICOs) and find that they exhibit similarities to classical crowdfunding and venture capital markets, including the determinants of success factors. Bocart proposes a new proof-of-work protocol to establish consensus about transactions to be added to the blockchain, arguing that the availability of alternatives to the classical SHA256 algorithm used by Bitcoin reduces the risk of attacks against particular proof-of-work protocols. Finally, Chen and Hafner use a publicly available crypto-market sentiment index as an explanatory variable for locally explosive behavior of crypto prices and volatility. In a smooth transition autoregressive model, they identify bubble periods ix for Bitcoin and the CRIX, a crypto market index. Last, but not least, we have indeed a paper that deals with a “classical” alternative asset, that is, diamonds. Jotanovic and D’Ecclesia show that, perhaps counterintuitively, investing in diamond mining stocks is not a valid alternative to investing in diamonds commodity directly. Moreover, diamond stock returns are not driven by diamond price dynamics, but rather by local market stock indices. All of the above papers cover many diverse aspects of alternative assets and cryptocurrencies that we hope will contribute to the already rich literature and become useful resources and inspirations