Ideas with Impact
UNB Faculty of Management

Cryptocurrency: the future of high risk investing

Author: Jenna Evans and Luke Saunders

Posted on Feb 27, 2019

Category: Faculty

The development of cryptocurrencies, and in particular blockchain technology, is one of the 'next big things' to capture the imagination of academics and industry. It has caught the attention of Dr. Donglei Du, a professor in quantitative methods at the University of New Brunswick Fredericton, who has been investigating how blockchain can be used to improve investment decisions.  In collaboration with Drs. Yukun Chen and Qiaoming Han, he recently published a study, “A Hashing Power Allocation Game in Cryptocurrencies,” in the Proceedings of the 11th International Symposium (SAGT 2018), Beijing, September 11-14, 2018, Springer-Verlag.
Blockchain is an open-source technology, and refers to a ledger that compiles transactions into what are called “blocks.” Once there are enough transactions to make up a block they are then validated by solving a complex mathematical problem, a process known as ‘mining’. Once the block has been mined (or validated), the user who solved the puzzle is rewarded with a predetermined amount of the associated cryptocurrency. Since there is a real reward for solving the puzzle, and many users devoting computing power to solving these puzzles, there is a great deal of competition in currency mining.

Blockchain is increasingly desirable and proving to be practical to businesses for a variety of reasons but mostly because it is decentralized, publicly accessible, transparent, tamper resistant and anonymous. It also can be shared directly, person to person, without the middleman. There is massive potential for blockchain technology in business due to the unwavering need for secure transactions.

Du became interested in blockchain technology two years ago when a venture capitalist was looking to invest in blockchain research at UNB. At that time, no one was conducting any blockchain research, so he decided to look into the field.

“That was the first time I had heard of blockchain technology. I started to do research on the topic and in the last two years, I have become more and more interested in it.”

Currently, there are over 1,500 cryptocurrencies. Du’s research looks at the different types, ranging in cost and value, and provides a formula to help currency miners decide where to allocate their computing power most effectively.

“Each currency you successfully mine receives a mining reward,” explains Du. “You will be rewarded with a bitcoin, for example, if you are mining bitcoins. However, currency miners have limited resources and budgets. Therefore, one of the most important decisions for a miner to be successful in this competitive mining business is to decide how to allocate their budgets or resources to different currencies to maximize their risk-adjusted profits in a competitive environment due to the winners-take-all nature of the mining reward mechanisms of almost all of the cryptocurrencies.”

You may also acquire cryptocurrency by purchasing it on one of many markets that are operating today. In this case, it is much like investing in stocks. There are many different options with varying prices, and these options will yield very different results. In any case, unless you happen to be incredibly lucky, there will be forgone earnings.

“For example, if you have $100, you have 10 currencies to mine, so you may decide to invest 10% to the 1st currency, and so on. This is your decision and that decision will affect how much profit you can get eventually. This is your investment allocation problem.”

Du concludes that the allocation should be proportional to the expected profits when the miners are risk-neutral who care only for profits. “Our formula tells you how much percentage should be allocated to each cryptocurrency. If you behave like that, you can maximize your profitability.”

Du’s study focuses on high-level currency mining operations and the results published in his article will benefit companies who have the hardware, software, and computers to mine cryptocurrencies.

Since there is so much competition in mining cryptocurrency, many users choose to contribute their computing power to a mining pool. Mining pools account for a large portion of the total blocks mined, for instance, according to, the Chinese based pool “Antpool” accounts for a total of approximately 11% of all blocks mined in the case of bitcoin.

Pool managers in the investment industry, who must decide how to allocate resources in large data mining operations, may also find some practical help in this study.
“I think this is more applicable for the so-called pool managers, in the blockchain communities who are competing with other pools. They are creating mining pools, where a lot of people join forces to mine bitcoin quicker,” he says.
Along with AI and big data, blockchain will shape the future of our business models, especially in the financial industry. Get ready for some disruption, Du says. “Some popular jobs right now, may not be here 10 years from now. I think the financial industry will be hit the hardest. A lot of banking services will be replaced by this technology. If you are planning a career in banking, you better know this technology. Otherwise, you will be out of a job when you graduate. This is a disruptive technology, but one with many potentials."

While this is Du’s first study and publication on blockchain technology, he is in the process of working with other scholars on more blockchain related research. He is also in the process of developing a course on blockchain technology which will enable students in UNB Fredericton’s MBA and Master in Quantitative Investment Management (MQIM) programs to understand the technology and be prepared for using it in their future careers.

Photo: Dr. Donglei Du has developed a formular for using blockchain to make investment decisions.

For more information, contact Liz Lemon-Mitchell.

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