Introduction to the World of Digital Currencies and Cryptocurrencies
As the world changed to digital era, in that way, the world of economy also changed into digital way. According to John (2018, p. 34), the form of trade has changed over the years form butter trade to trade using currencies. Furthermore, the word has changed drastically and the digital money know has crypto-currencies have entered the market. Most of the people in business world do not understand the insight of this currency, the crypto-currencies. Many governments have even tried to ban the use of crypto-currencies as a form of trade exchange because they argue that this currency is affecting the world economy negatively. Many scholars, financial institutions like banks and the governments’ department of finance have not researched on the topic “crypto-currencies” (Dyhrberg, Foley & Svec, 2018, p. 12). Therefore, many people around the world have little knowledge about the term crypto-currencies. In that note, the report herein has studied and discussed this phenomenon of crypto-currencies. The knowledge from this report can help many people understand the insights of crypto-currencies and can decide to join others in the crypto-currencies business like Bitcoins.
According to Sayed & Abbas (2018, p. 25) crypto currency is a virtual or digital asset that was made to work as a medium of trade instead of money and other electronic currencies offered by banks. The crypto currency verifies and secures business transactions by the use of cryptography. The cryptography also is used to control and monitor the designing of new crypto currency units. In the 1990s many people tried to digital currencies because in this period, the technology was really booming, but they failed. The reasons as to why they failed included insufficient finance to accomplish the works, the cyber fraud and conflict between the employees and their bosses. In 2009, a group of programmers under the umbrella of Satoshi Nakamoto came up with the first digital crypto currency known as the Bitcoins (Ng & Griffin, 2018, p. 1). Bitcoins was the first successful crypto currency to be created and has worked perfectly since its launching and has the cap value of $ 50.57 billion as from August 2018 (Nair & Motwani, 2018, pp 2-3).
Other forms of crypto-currency include; one, Litecoin (LTC)- Litecoin was one of the crypto currencies to follow Bitcoins and has since been known as silver in the world of crypto currencies while Bitcoin is known as gold of digital currencies. Litecoin was launched in 2011 by a former Google engineer and MIT graduate known as Charlie Lee and has a cap value of $ 5.89 billion as from August this year (Casey et al., 2018, p. 4). Litecoin can be similar to Bitecoin is several ways; however, it is faster in confirming payments because of its faster block generation. Another crypto currency to come into the digital market is Ripple which was launched in 2012 and has the market cap of $ 19.07 billion as at July 2018 (Nair & Motwani, 2018, pp 2-3). Ripple is different from other crypto currencies because it does not use the mining process to confirm payments, rather it uses consensus ledger.
Analysis and Comparison of the Top 5 Crypto Currencies by Market Capitalisation
Another crypto currency is Ethereum which was launched in 2015 is a very secure decentralised crypto currency system and is better than other crypto currencies because of its security measures. Ethereum is the second after Bitcoin with the cap value of $ 47.84 billion and $ 474.84 per token value. The top five crypto currencies, is Monero which was launched in 2014 (Nair & Motwani, 2018, pp 2-3). Monero has been linked a lot will criminal activities because it has very high security measures, therefore making it hard for the justice departments to follow the transactions. Monero has a capital value of $ 2.31 billion according to the research done by Moran (2018, p. 7) in August 2018.
Crypto currency is a decentralised virtual or digital currency that is encrypted in which transactions takes place between the peers. However, before any transactions take place, confirmation of the transferred funds must take place in the public ledger through a process called mining (Olson & Tomek, 2017, p. 67). Looking at the why crypto currencies work, they have various advantages which include one, easy access, the general public can access them easily, second, they have easy and quick payments, third, the transaction fees are low, forth, they are very secured and private. Their disadvantages include, they are rejected by many governments, second, people do not have sufficient knowledge about them, it is difficult to reverse payments and lastly they are hard to understand.
Seetharaman et al. (2017, p. 230) argue that crypto currencies cannot fulfil the functions of money at this point because many governments have not approved the digital currencies to be used for business purposes. Caldwell (2018, p. 10) says that the crypto currencies cannot be used in place of money because many businesses have not adopted the currencies. However, Li & Wang (2017, p. 50) discussed that in future, the crypto currencies will take of other forms of currencies because of their numerous advantages, therefore, banks and other financial institutions should watch out. Caldwell (2018, p. 10) stated that the crypto currencies will be adopted in the financial markets in large numbers because they are not centralised, fats and secure. The quick adoption is evident because some counties have started to come up with their own crypto currencies which they can regulate. According to the group’s opinion, the crypto currencies should be used as global because of their secure, faster and can reduce economic wars globally. In the near future crypto currencies will replace the multiple currencies of a faster rate until people will be amazed.
Bitcoin
The Cypriot financial crisis is where the republic of Cyprus faced an economic crisis in 2012 which happened because the Cypriot bank was exposed to local property companies that were overleveraged (Shroff & Venkataraman, 2017, p. 34). At that time the government of Greek had a debt crisis and the government of Cyprus’ bond credit rating was downgraded by the international agencies involved in credit rating. At that time, the economists considered investing into crypto currencies as a safe haven because the value of the Cyprus currencies was shaken and people could not invest in the Cyprus banks again. Caldwell (2018, p. 10) argues that many people who invested in Bitcoins at that time had huge profits. In this case, crypto currency is not safe because it has been involved with criminal activities and most governments are shutting it down. Another reason why crypto currency is not safe to invest in is because there is another form of electronic business that many people in the world have gone to known as forex trade as Scerri & Agarwal (2017, p. 37)reported in his research.
The factors that have led to rapid increase or decrease in crypto currencies value can be classified into internal and external factors. The internal factors include; First, the crypto currency traders- if the crypto currency traders are highly active, the volatility of the crypto currency value is affected. The major players in the crypto currency world can decide to decrease or increase the value of crypto currency by holding or releasing the cypto currency units for sell/buy (Pieters, 2017, p. 56). Second, the influence of other crypto currencies over others- if the value of Bitcoin increases then the other crypto currencies’ values will decrease and vice versa. The external factors include; one, crypto currency acceptance in the business world; if the crypto currencies are accepted in the business world, their value increase and the nationals currencies’ decrease in value and vice versa. Second, the new in the medial can either increase or decrease the value crypto currencies. If the media post positive news about crypto currencies the values may increase and if the news is negative the value decreases. Third, political events also affect the value of crypto currencies positively or negatively. For example the move by the South Korean government to crack down the crypto currency business decreased the price of crypto currencies (Marx, 2018, p. 33).
Litecoin
The crypto currencies have at one time gone down drastically. A good example is a move by South Korea to stop the crypto currency trade in that country, Abdullah & Nor (2018, p. 8) reported that that move made Bitcoin to lose 1/3 of its capital value in twenty four hours. Marx (2018, p. 33) also supported the argument by Abdullah & Nor (2018, p. 8) and said that in financial filed, to lose a third of the capitation is a huge blow to Bitcoins. The future of crypto currencies hung in the balance because most governments are fighting there way inside the business. American government warned over bitcoins because there are no rules that govern the trade. Abdullah & Nor (2018, p. 8) suggested that due to the fights by governments and competition from forex, the crypto currencies may bust in future.
Crypocurrency crisis is where there is drastic decrease in the value of crypto currency due to political reasons or effects form the information from media. A good example is when South Korean politics made the government to burn the crypto currency trade in South Korea. In other hand a currency crisis is where a country’s currency has reduced in value due to huge debt or bankruptcy. A good example is the Asian currency crisis in 1997 which started in Thailand (Light, 2018, p. 220). The crisis was as a result where the Thailand government was not able to maintain the Thai baht because the government lacked the foreign currency to peg the United States Dollar. The Thailand currency crisis affected most of the counties in Asia including Hong Kong, Indonesia, South Korea and China.
The main similarity between the crypto currency crisis and the currency crisis is that all the currencies decrease in value during the crisis. Another similarity is that both crises can be caused by the content form media and the political influence. For example, when Trump visited South Korea, the value of USD increased in forex. The main difference is that the crypto currency crisis does not affect the economy of any country while the currency crisis affects world economy a large. For example the Asian currency crisis affected the economy of a number of countries in Asia.
Reasons why Russia, South Korea, China and India want to ban or restrict the use of Crypto-currencies
A numbers of governments have either wanted to burn or restrict the use of crypto currencies in their specific jurisdiction because of a number of issues that have aroused due to the use of the crypto currencies. The Russian government agreed to step in and regulate the use of crypto currencies in Russia. Due to the following reasons; one, the use of crypto currencies is not a means of payment in the government of Russia. The Russian constitution has not acknowledged the use of crypto currencies as a means of trade and as a measure of value of goods and services in Russia. Berengueres (2018, p. 350) also says the crypto currencies have been restricted in Russia because they are not defined in the Russia’s Central Bank Digital Currency (CBDC). The second reason is that the crypto currency transactions are not secured by any law in Russia and in event where customers encounter fraud, the government cannot protect them.
Ripple
The Indian government of the other hand wants to restrict the use of crypto currency because they believe that most criminals transact there businesses through the Bitcoins and other crypto currencies. The country does not recognise the crypto currencies as a medium of business transactions. The government of South Korea does not even want to restrict the trade; it has banned the public servants from trading or holding crypto currencies. South Korea has banned the trade because most of the traders use anonymous bank accounts to transact illegal businesses thus encouraging criminal activities. On the other hand South Korea banned the crypto currencies traders not to use anonymous accounts while trading. According to Thelwall (2017, p. 1), the Chines government banned the use of crypto currency because they want to become world’s number one economic power. Berengueres (2018, p. 350) argues that China banned use of crypto currencies so they could have enough time to come up with regulations on Bittocins and other crypto currencies.
Many governments and central bank cannot allow the existence of crypto-currencies in the financial market because the use of crypto currencies is a threat to the economy of governments and the central bank businesses. According to Hayes (2017, p. 1308), many governments argue that the use of crypto currencies is a threat their national security. An example is India; the government of India do not recognise the use of crypto currencies because they say that criminals take advantage of anonymity of the crypto currencies transaction to conduct criminal activities. The Russian government instead has come up with its own crypto currency which they can regulate to outdo the other crypto-currencies. ElBahrawy (2017, p. 17) reported that, central banks on other hand are fighting the crypto currencies because the customers are now preparing to transact through crypto currencies rather that the bank.
According to ElBahrawy (2017, p. 17), the use of crypto currency is required to make the economy stable. The argument can be supported by the Cyprus currency crisis. When the government was under currency crisis, the Bitcoins came to aid and now turned to Bitcoin to save their assets. The banks have now come up with strategies as competing measures to ensure that the crypto currencies have not overtaken them. First, the banks and other financial institutions have pressurised their governments to take charge of the crypto currency trade. The move will ensure that both the banks and crypto currencies trade are within one financial law. The move has worked in Russia second, the banks have increased their services to ensures that they attract more customers. The services include loans, free opening of bank accounts and low interest rates.
Ethereum
Advantages and disadvantages of using a widely used Currency such as the USD for International Transactions compared to using a Crypto-currency such as Bitcoin
The first advantage of using the US dollar for trade over the Bitcoin is that the USA dollar is a certified currency of United States of America and it is secured while the Bitcoins is not certified by any government and it is not secure. In case a fraud scenario has occurred, the culprit can be found by tracing how the money was paid. The US dollar transactions take place through banks and other online financial institutions like PayPal which allow for tracing of payment. In Bitcoin it is very hard to trace the payment because of anonymity (Schaupp & Festa, 2018, May, p. 78). Another advantage is that a county or person can get loans in USD while the crypto currencies like Bitcoin do not offer loans. The disadvantage of using USD is that a county can be sanctioned by the US government because the currency is controlled by US government. Another disadvantage is that using dollar as an international currency forces countries to reduce the value of the currency to be below the dollar and hence affecting the economy of the world. Bitcoin on the other hand is not owned by anybody therefore using it cannot affect the value of currencies in the world.
Currency risk is a situation that arises in the change of one currency that relates with another in exchange rates business. MNCs at many times are faced with currency risk which may lead to losses or profits. Crypto-currencies have helped in mitigating this situation in the following ways; first, through use of stop orders, example, if you buy $ 100 Bitcoin, you can put a stop order of $100-$25, so that you cannot lose more than $25. Second, Crypto currency market allows conversion of volatile crypto currencies to an equivalent currency that is flat (Pieters, 2017, p. 56).
Conclusion
The invention of digital currencies known as crypto currency has threatened the financial institutions and also threatened the security of various governments. Even though crypto currencies have many advantages, the governments have retaliated to their threat making the market volatile. Financial institutions have been also fighting crypto currencies making some governments illegalise the trade. The study herein has looked at some factors that affect the crypto currencies and how the financial institutions and governments have reacted about the trade.
Monero
References
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