Cryptocurrency: Origin, Growth, And Impact On Worldwide Economy

What are cryptocurrencies?

A digital asset that might be used as a medium for the exchange abiding by the methods of cryptography in order to conduct transactions in a secured fashion might be referred to as a cryptocurrency (Delmolino et al. 2016). The cryptocurrencies might help to keep the creation of the additional units of currency. The various cryptocurrencies are considered to be a part of the currencies that are exchanged virtually, over the digital platforms and as an alternate to the currencies that are generally used.  The following report attempts to investigate the huge increase in the use of the cryptocurrencies. The report attempts to analyze the growth in the cryptocurrency and the effect that the condition might create in the worldwide scenario. The following report aims to discuss the origin of the cryptocurrency concepts and also aims to discuss three cryptocurrencies that have been present in the virtual economy. The report opens to the readers with the discussion of the paper of Satoshi Nakamoto on the cryptocurrency of Bitcoin wherein is discussed the origin of the cryptocurrencies. The report also discusses the ways in which these cryptocurrencies might affect the financial institutions that operate in the hard currency, the ways in which these currencies are put to use by people who have criminal intentions. The report on its ending note deals with the interest of the Chinese government in the matters pertaining to the use of these cryptocurrencies and the implications that it might have on the global economy.

The cryptocurrencies are known to be produced in a collective manner by the completely decentralized system that is dedicated to the cryptocurrencies. The basic technical system that underlies the system of cryptocurrencies was created by an individual or a group of individuals bearing the name Satoshi Nakamoto (Lemieux 2013). The production of the cryptocurrencies experience a gradual decrease till the time when there is a capping over the total amount of the cryptocurrencies that have been circulating in the market. There have been various cryptocurrencies that have been in circulation in the recent times like the Auroracoins, the Bitcoins, the Ethereum and the Litecoins (Narayanan et al. 2016). The main reason for the existence of the cryptocurrencies is the demand for trusted parties in the financial transactions over the e-commerce platforms rather than the financial institutions that deal in the hard currencies. The mediation cost that is involved in the transaction varies with the variance in the cost incurred in the transactions. The electronic payments do involve a certain amount of the fraudulent practices which cannot be avoided. There is a need for a trustworthy medium of transaction that might allow the concerning parties to be engaged in direct transactions without any third party between them.

Origin of cryptocurrencies

The e-payments, in this case, are made using the virtual coins that are defined with the help of a chain of digital signatures. These coins are generally passed from one owner to the other using the digitally signed previous transaction hash and the public key to the transaction. The payee has all rights to verify the signatures but cannot ensure as to whether the same coin has been doubly spent by the earlier owners. The only way to solve the problems might be granting transaction history access to the concerned parties who are involved in the transaction. In order to guarantee the safety of the transactions that are held virtually, there must be included a system that might provide with a proof-of-work that needs to be redone in case of any dishonest handling of the given node of transaction.

The user should be allowed to verify the acceptance of the transactional nodes after their linkage with the concerned network chain. The reliability of the transaction node is valid till the time it is controlled by the honest nodes that have been functioning in the concerned transaction chain. In order to prevent the transactions from being linked to a single IP address, a separate key pair should be used for each transaction (Nakamoto 2018). This might help to prevent the transactions to get linked to the same owner who has been operating from the concerned IP address. 

The PESTEL analysis of the first ever decentralized cryptocurrency, Bitcoin is demonstrated below.

The cryptocurrencies are not controlled by any governmental bodies. The financial institutions of a number of countries have banned the use of the cryptocurrencies. There are countries in the world that are considered to be Pro-bitcoin. The transactions that involve the cryptocurrencies are usually confined between two parties operating in private.

According to a report published by Kim (2018), the government of South Korea has decided to put a ban on the various anonymous accounts at the banks that deal with the trading in the cryptocurrencies. The government aims to put a check on the crimes that are related to money laundering and other such similar activities. These virtual currencies are generally used by the criminals in order to deal with huge sums of money that might be used for facilitating illegal as well as criminal activities. there has been a huge rise in the number of the investors in the field of the cryptocurrencies despite the warnings that were given by the government of the country. The investment in the cryptocurrencies lacks the broader regulatory oversight that the investors must possess in order to gain profit from the investment that they might have made in the concerned field.

Growth of cryptocurrencies

The market capitalization of the Bitcoins has extended beyond the global GDP of almost 78 trillion dollars making it almost 6 billion dollars. There are almost 15359800 Bitcoins in circulation of the total number of 21 million existent Bitcoins (Bitcoin.org 2018).  The cryptocurrencies fail to affect the monetary abilities conduction policies of the government. A huge number of the merchants amounting to almost 88000 of them use the cryptocurrencies in their dealings (Baek and Elbeck 2015).

The anonymity in the operations is one of the driving forces behind the high popularity of the cryptocurrencies. The cryptocurrencies might be used in a wide number of activities, thereby aiding in the savings of the users by helping them to skip the processing methods that are to be followed in the traditional methods for payment.

The public ledger, better known as the block chains, that is maintained by Bitcoin needs to be leveraged (Li and Wang 2017).

The need for the computational power has faced an increase due to the increment in the demand for the cryptocurrency. The miners do search for the cheap varieties of coal that are available in order to generate the needed electricity. This has led to a huge amount of carbon-dioxide emission that might prove harmful for the environment.

The decentralized nature of the cryptocurrency has proved to be a hindrance to the regulatory measures that should have been taken against Bitcoin (Srokosz and Kopy?cia?ski 2015). The countries such as USA, EU and Canada, however, have been on their way to finding measures in order to impose the regulations on the usage of the cryptocurrency.

The cryptocurrencies must follow the five forces management model that has been put forth by Michael Porter (Dobbs 2014). This model states that any business organization must primarily aim to remove the threats that they might face due to the new entrants in the market. The model also deals with the threats that a company faces due to the substitutes that have been operating in the same market (Rothaermel 2015). This model might also aim to keep a look out for the bargaining power of the suppliers and the customers of the concerned business. The analysis of the Bitcoin industry on the basis of the Porter’s Five Forces model is discussed below.

The new entrants to the industry do pose a threat due to the various technological implications that they might pose towards the existing organizations in the market. There are a number of industries that have been dealing with the cryptocurrencies. Thus, it might be safely said that the rivalry of the different companies in the industry is high. 

Impact on financial institutions

The number of the substitutes in the industry of the cryptocurrencies is very high and is seen to be on the rise for the past years.

The financial market had been dominated by the traditional system of hard currency over a long period of time. The entry of the cryptocurrencies in the market is a relatively current matter thus there have been lower chances of facing threats due to the other new entrants (Böhme et al.2015). Thus, the threats that the industry might suffer due to the new entrants is comparatively low.

The suppliers in the case of the cryptocurrencies mainly refer to the providers of the internet connection. The internet service providers do have a huge role to play in the cryptocurrency industry. The hike in their prices that they offer might lead to the lowering of the mining of the currencies leading to the lesser amount of the currencies that have been floating in the market. The supplier bargaining power thus might be said to be very high.

The customers in case of the cryptocurrencies refer generally to those individuals who demonstrate huge interest in the virtual financial market. The clients might have the option to switch between the various types of cryptocurrencies that are available to them via the market (Extance 2015). The bargaining power depicted by the customers might thus be said to be high for the virtual financial market.

In the present times, investments in the equipments needed for the profitable mining of the digital currencies or the cryptocurrencies are considered to be profitable. The miners generally launch the mining set up and then wait for the returns of their investments to set in. The income generated by these digitalized currencies is very low as compared to the investments that need to be done. There are some cryptocurrencies that are comparatively easier to mine than the others.

The mining equipments include the items that are enlisted below.

• A private and free coin base.
• A mining software package(CryptoSource.org 2018).
• The membership of a mining pool and a currency exchange.
• A high-speed internet connection which delivers a speed of not less than 2mbps.
• A cool place is needed for establishing the set up of the required system. The miner needs to have a computer that is tailored for the activity of mining. The miner needs to have an ASIC chip that is necessary for mining and a motherboard that might hold up to three PCI-E slots that are needed for the video cards(CryptoSource.org 2018).

Bitcoins can only be mined on larger scales and involves a number of steps. The miners are required to solve mathematical problems with the help of a special software (Bitcoin.org 2018). The Bitcoins are issued to them for providing the solutions to those problems.

The first cryptocurrency that have been totally implemented in the global financial market is the Bitcoin. This digital currency is open-source and requires no one to either own or control the system. The electronic payments that take the help of the cryptocurrencies are facilitated on the basis of mathematical proofs and other such validations. The Bitcions and other such digital currencies might be exchanged with the other currencies, products, services and other such things. The transactions that involve cryptocurrencies do transpire between two users and are very direct in nature (Fry and Cheah 2016). These transactions are generally fast in their occurrence and do transpire between two users. The most interesting factor about these digital transactions is the fact that they are able to maintain the transparency in the transaction process while maintaining their anonymity of the same.

Impact on criminal activities

The cryptocurrencies that have been rising in the modern day market might lead to the eradication of the needs for the functionality of the various financial institutions that have been helping the residents by providing them with the hard currencies (Vigna and Casey 2015). The number of users all over the world who have been dealing with the cryptocurrencies is expected to increase in the near future which might lead to the decrease in the number of the receipts and payments that were carried out with the help of the conventional transactions (Ahn et al 2016; Sapovadia 2015). Thus, the conventional financial institutions might receive a setback in the operations that they carry out as a part of their duties towards their clientele (Swartz 2014).

In the recent times, there has been observed a rise in the number of criminal activities among those that use cryptocurrencies for the transactions that are conducted through the virtual medium. The criminals do prefer the use of cryptocurrencies in the transactions that they do undertake due to the irreversible nature of the payments that are made (Vovchenko et al. 2017). The cryptocurrencies also demonstrate the use of the payment windows that are private and cannot be accessed by any other person except the user (Bloomberg 2018). Thus, the criminals do prefer the cryptocurrencies over the traditional currencies as the commodity for the transaction. The cryptocurrencies are generally used in cases that involve the contraband transactions, extortion, tax evasion and money laundering (Zohar 2015). The criminals of the modern age seem to be coming up with novel ideas in order to evade the enforcers of the law.

In the modern days, it has become very important for the national banks to be able to develop their own cryptocurrencies. A national bank in the country of China, The People’s Bank of China, has been on its way towards becoming the first nationalized financial institution to develop and run a cryptocurrency that has been developed by the institution itself. There are reports that suggest the usage of the transaction prototypes between the commercial financial institutions that are present in the country and the national digital currency if the concerned country. However, the current reports state that the government of china has imposed a ban on the initial coin offerings or the ICOs (Rapoza 2018). These bans have made a huge negative impact majorly on the local operators.

The Republic of China has put a ban on the use of the cryptocurrencies due to the seven main reasons that have been enlisted below.

• The hype among the residents of the state has faced a huge increase due to the fact that the concept of virtual currencies is relatively a new concept in the market which seems to promise its users with huge returns against the investments that they provide. The initial coin offerings or the ICOs have been outlawed by the Chinese government as a measure to control the various illegal activities that have been taking place through the usage of the cryptocurrencies especially Bitcoins(Wildau 2018).
• The concept of the cryptocurrencies being relatively new, has the potential that might assist the criminals to lure the innocent investors to put in huge amounts of money. There have been many ICOs operating in the market that might be considered to be scams. These are generally used by the criminals to pull out a huge amount of investment from the investors who possess very little knowledge about the concerned issue.
• The craze that has developed among the various investors for the investment of funds in the cryptomarket has proven to pose a huge amount of danger for the investors who still prefer the investment of funds in the retail market. The Republic of China aims to ward of the greater troubles that might be faced by the financial investors in the future.
• The Republic of China has been the central hotspot for the various activities in the cryptocurrency industry. The ICOs based in China has faced a raise of almost $400 million over 65 offerings that involved almost 100,000 investors(Quanlin 2018). This has resulted in the precarious position of the country in case the inflation in the cryptocurrency market faces a downfall.
• The Chinese government has taken attempts to mint its own cryptocurrency which might help the country to excise a greater control over the virtual currency market(Hackett 2018).
• The business ventures that are originated from outside the borders of the country tend to face the failure due to the lack of support from the state of China. The ICOs, thus, do face the threats on the factors related to obstacles in the regulations of the currencies, the access to the capital ventures and other such factors. This leads the Chinese government to view the various ICOs warily.
• The Chinese government has aimed to levy a condition of cooling down of the craze that exists among the residents of the country regarding the various cryptocurrencies that have been operating in the virtual world.

Government regulation

There are four major factors that deal with the fluctuations in the price of the Bitcoins and other such cryptocurrencies. These factors generally include the hype of the media regarding the cryptocurrencies, the uptake by the peers of the concerned investors, the political uncertainty that surrounds the concept and the risks that are involved in the management of the investment that are made by the various stakeholders.

The political factors that have been revolving around the various currencies of the world might also affect the varying prices in the Bitcoins. This is due to the fact that the investors who have been dealing in the cryptocurrencies have been using the same to bring about a movement in the huge value amounts of funds of a particular currency or country. The economic crisis that took place in Greece in the year 2015 led to the increase in the number of buyers of the cryptocurrencies. However, this increase in the number of investors did not seem to affect the price of the Bitcoins in the global economic markets. The price of the Bitcoins seemed to increase by a huge amount of almost 65% during the period of nervousness that had occurred during the decision of Britain to break free of the European Union (Rogoff 2018). The election of Donald Trump as the new president of the United States of America had also led to the increase in the price of the Bitcoins in the global markets.

The business organizations do not generally prefer the usage of the cryptocurrencies as the mode of payment due to the high amount of risks that are involved in the usage of the cryptocurrencies. The business concerns have to keep in mind the various regulatory factors that are implied by the governments of the countries wherein they do function. The regulatory moves of the government bodies that function in the various countries of the world do affect the fluctuations in the prices of the cryptocurrencies in the global market. The Bitcoins are generally used as a mode of payment in the various fields all over the world. According to a report by Chapman (2018), various companies such as the Microsoft and Expedia have been accepting the payments that might be extended through the cryptocurrency methods. Despite all these positive points that have been operating in favor of the usage of the Bitcoin, the cryptocurrency also has a bad reputation for being used by the criminals. The cryptocurrencies have been reported to have been in use by the criminals for the sale of drugs in the dark web (Chapman 2018). The cryptocurrencies have achieved this status due to the untraceable nature of the payment method. 

Porter’s Five Forces analysis of the cryptocurrency industry

Conclusion

The scope and the landscape of the cryptocurrencies have still been evolving in spite of all the challenges and issues that it had been facing. In the recent times, the footing of the cryptocurrencies is on the same level as was that of the internet during the times when it was just introduced to the masses. The concept of the cryptocurrencies is still in the formative stages. The concept would need to go through various changes and modifications in order to get established as an alternative transaction method that might be availed by the commoners who generally use the traditional hard currencies. Bitcoin has been one of the forerunners among the various cryptocurrencies that are available in the market. It has successfully earned the title of being the first decentralized cryptocurrency but might face hurdles in its way of earning the title of being one of the major cryptocurrencies in the future. In spite of all the shortcomings that are observed, the open technology platform that has been set by the concerned cryptocurrency, Bitcoin has set the path for the smooth and seamless future of the digitalization of the global economy. 

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