This is a write-up I wrote for a school project earlier this year. It tries to predict the future of Bitcoins and other crypto-currencies.
Bitcoin and The future of Crypto-currency
INTRODUCTION
Digital transformation is generating a fierce debate among policy-makers, economists and industry leaders about its societal impact. As digitalization disrupts society ever more profoundly, concern is growing about how it is affecting issues such as jobs, wages, inequality, health, resource efficiency and security.
The economics of digitization is the field of economics that studies how digitization affects markets and how digital data can be used to study economics. Digitization is the process by which technology lowers the costs of storing, sharing, and analyzing data. This process has changed how consumers behave, how industrial activity is organized, and how governments operate.
Recent times have shown the evolution of number of cryptocurrencies which are being used largely for transactions as well as investment purposes. The rise of cryptocurrencies is changing the world economic scenario at a rapid pace.
Crypto-currency is a medium of exchange, created and stored electronically in the block chain, using encryption techniques to control the creation of monetary units and to verify the transfer of funds.
In today’s changing economic scenario of digital transactions, looks like cryptocurrencies are here to stay.
TOWARDS DIGITAL ECONOMY
Digital transactions can be broadly defined as online or automated transactions that take place between people and organizations—without the use of paper. Going digital provides great benefits for companies. Digital transactions save time and money, resulting in a better bottom line. Customer experiences are also enhanced.
With the internet becoming easily available, cashless transactions and mobile transactions have become widespread. In recent years, non-bank competitors have emerged and cut into the market share traditionally maintained exclusively by banks. These non-bank competitors are subject to fewer regulatory constraints, and their entry into the market has made the transition to digital transactions a crucial strategy for banks that want to stay competitive.
Beyond that motivation, though, banks can realize new opportunities and benefits through moving to digital transactions. For instance, banks can use digital payments as a path to reach new customers—ones they didn’t have access to in their traditional operations. Banks can also increase their fee and interest income by going digital and can extend their value proposition to existing customers. By streamlining approval and agreement processes, and by providing customers with a modern digital interactive experience, banks can help ensure customer loyalty and keep customers coming back for more.
The digital economy brings with it a number of opportunities, but also new challenges and rules of the game in the global market. Positioning of the country on the global stage largely depends on its ability to adapt to new conditions. Digital economy brings a new set of benefits, which can make it possible to reduce the differences that exist between rich and poor nations. Developing countries have the opportunity to transform its economy and to contribute to the development of the digital economy. Although these economies are characterized by high added value, faced with numerous obstacles, many developing countries cannot adequately respond to the demands of the digital economy. Inadequate access to the latest technology, sophisticated telecommunications infrastructure, low computer literacy as well as numerous cultural and socio-economic factors are just some of the challenges that developing countries have to face.
CRYPTOCURRENCIES
Cryptocurrency is a controversial digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the transfer of assets. Cryptocurrencies are a type of digital currencies, alternative currencies and virtual currencies. Cryptocurrencies use decentralized control as opposed to centralized electronic money and central banking systems. The decentralized control of each cryptocurrency works through a blockchain, which is a public transaction database, functioning as a distributed ledger. Bitcoin, created in 2009, was the first decentralized cryptocurrency. Since then, numerous other cryptocurrencies have been created. These are frequently called altcoins, as a blend of alternative coin.
Decentralized cryptocurrency is produced by the entire cryptocurrency system collectively, at a rate which is defined when the system is created and which is publicly known. In centralized banking and economic systems such as the Federal Reserve System, corporate boards or governments control the supply of currency by printing units of fiat money or demanding additions to digital banking ledgers. In case of decentralized cryptocurrency, companies or governments cannot produce new units, and have not so far provided backing for other firms, banks or corporate entities which hold asset value measured in it. The underlying technical system upon which decentralized cryptocurrencies are based was created by the group or individual known as Satoshi Nakamoto.
As of September 2017, over a thousand cryptocurrency specifications existed; most were similar to and derived from the first fully implemented decentralized cryptocurrency, bitcoin. Within cryptocurrency systems, the safety, integrity and balance of ledgers is maintained by a community of mutually distrustful parties referred to as miners: who are members of the general public using their computers to help validate and timestamp transactions, adding them to the ledger in accordance with a particular timestamping scheme. Miners have a financial incentive to maintain the security of a cryptocurrency ledger.
Most cryptocurrencies are designed to gradually decrease production of currency, placing an ultimate cap on the total amount of currency that will ever be in circulation, as mimicking precious metals. Compared with ordinary currencies held by financial institutions or kept as cash on hand, cryptocurrencies can be more difficult for seizure by law enforcement. This difficulty is derived from leveraging cryptographic technologies.
The success of cryptocurrencies is due to it’s monetary properties.
Monetary properties:
1.) Controlled supply: Most cryptocurrencies limit the supply of the tokens. In Bitcoin, the supply decreases in time and will reach its final number somewhere in around 2140. All cryptocurrencies control the supply of the token by a schedule written in the code. This means the monetary supply of a cryptocurrency in every given moment in the future can roughly be calculated today. There is no surprise.
2.) No debt but bearer: The Fiat-money on your bank account is created by debt, and the numbers, you see on your ledger represent nothing but debts. It‘s a system of IOU. Cryptocurrencies don‘t represent debts. They just represent themselves. They are money as hard as coins of gold.
To understand the revolutionary impact of cryptocurrencies you need to consider both properties. Bitcoin as a permissionless, irreversible and pseudonymous means of payment is an attack on the control of banks and governments over the monetary transactions of their citizens. You can‘t hinder someone to use Bitcoin, you can‘t prohibit someone to accept a payment, you can‘t undo a transaction.
As money with a limited, controlled supply that is not changeable by a government, a bank or any other central institution, cryptocurrencies attack the scope of the monetary policy. They take away the control central banks take on inflation or deflation by manipulating the monetary supply.
CASE STUDY: BITCOINS FOR THE FUTURE OR NOT?
Bitcoin is a crypto-currency and worldwide payment system. It is the first decentralized digital currency, as the system works without a central bank or single administrator. The network is peer-to-peer and transactions take place between users directly, without an intermediary. These transactions are verified by network nodes through the use of cryptography and recorded in a public distributed ledger called a block chain. Bitcoin was invented by an unknown person or group of people under the name Satoshi Nakamoto and released as open-source software in 2009.
Bitcoins are created as a reward for a process known as mining. They can be exchanged for other currencies, products, and services. As of February 2015, over 100,000 merchants and vendors accepted bitcoin as payment. Research produced by the University of Cambridge estimates that in 2017, there were 2.9 to 5.8 million unique users using a crypto-currency wallet, most of them using bitcoin.
Bitcoin has been around since late 2008 but it only started making the news in early 2013. It is a crypto currency and a payment system; its main advantage being that transactions are anonymous and peer-to-peer (i.e. made directly without an intermediary). Bitcoin’s unique architecture is set-up in such a way that their creation (or “mining”) gets progressively more resource-intensive and total production will be limited to 21 million Bitcoins.
It’s certainly an interesting concept with many advantages but also some important disadvantages. For example:
1. Given its pseudonymous nature and that Bitcoin address owners are not explicitly identified, such transactions are effectively anonymous. However, this anonymity has been known to attract transactions from illegal activities, the best-known example being that of the Silk Road website. This has been a problem with regulators and officials, as they recognise it as a medium for illegal transactions.
2. Bitcoin has been recognised as currency in many countries and as of today it’s the most liquid & widely accepted crypto currency in the world. However, there is a long list of alternate crypto currencies that are eager to grab market share and challenge Bitcoin’s dominance. It’s possible that once that ceiling becomes severely limiting, users will turn to other crypto currencies, effectively increasing the global supply.
3. Bitcoin trades continuously on exchanges around the world in a very quick and straightforward manner, and it is conveniently stored electronically in “wallets”. However, having online wallet providers introduces an extra risk factor that cannot be ignored.
In a research survey I conducted among lower investors I found many investors to find Bitcoins and crypto-currencies in general very risky. But, this is not the same with all investors. Many of the world’s largest investors have mixed reactions on the future of Bitcoin. Many of them, have played a role in the promotion of Bitcoins, with even some of the world’s richest people speaking in favour of it.
Many investors find it risky, because of it’s highly fluctuating prices, and it’s volatile nature. Bitcoin price has been very volatile since early 2013 when it was trading between $10 and $15, and soon afterwards it went on a parabolic rise to hit a high of $1163 within the same year. It spent the next 18 months dropping all the way back down to the $200s but then went on the ascent again as global uncertainty persisted.
It made the news once again in late 2016 when there was a China-led buying spree, mainly from people trying to escape the Yuan’s devaluation. Its simplicity, anonymity and transaction ease made it a very popular choice among the Chinese. In early 2017 it almost hit an all-time high, peaking at $1140 and at that point the Chinese central bank made an important announcement. The CB said that it wanted to investigate Bitcoin transactions in market manipulation, money laundering and unauthorised financing. At time of writing BTC is trading at $828, which represents a staggering 2-week drop of over 37%.
For instance, take a look at the fluctuactions in the prices of Bitcoin on April 9th given below. In a single day the rises and falls in the price are very high. Such risks, are the reason why many investors have high uncertainity in the future of Bitcoin.
Many have viewed the rise of bitcoin and other cryptocurrencies as a massive bubble similar to the dotcom and other bubbles in history which saw asset prices increase without any fundamental reason. Goldman Sachs, for instance, warned investors in February that most cryptocurrency prices are headed to zero as they lack intrinsic value. So, to sceptics, the crash now will likely vindicate a belief that markets eventually mark down the prices of assets that have no real value, to zero. Cryptocurrency enthusiasts, on the other hand, view the crash as just another healthy correction that is part of any asset’s rise over the long run. In fact, they point to similar steep crashes in the price of cryptocurrencies in the past that turned out to be short-lived. Thus they see the present crash as a good chance to buy cryptocurrencies cheaply before their prices begin to rise again.
Technically, cryptocurrencies are still trapped in a downtrend which began in mid-December amid increasing fears of a regulatory crackdown by governments. Though unlikely, this downtrend may come to an end if investor sentiments suddenly change in favor of cryptocurrencies once again.
Many believe that the biggest hurdle facing cryptocurrencies is their poor fundamentals. None of the cryptocurrencies, for instance, has yet proved its fundamental value as a currency that will be readily accepted by a huge population as a medium of exchange. This is in contrast to national currencies such as the U.S. dollar which are widely accepted by people as money. So cryptocurrencies, in essence, continue to be viewed as a gamble by most. Governments across the world have also not been too keen on allowing cryptocurrencies to be used as alternative money as they view private currencies as a threat to their sovereignty. The Reserve Bank of India, for instance, imposed a ban last week preventing banks from dealing with cryptocurrencies. The present crash has only managed to bring these risks to the fore.
How do Economists review The Future of Bitcoin?
Forbes
“Bitcoin will likely go down in history as a great technological invention that popularized blockchain yet failed due to its design limitations. Just like the industrial revolution was fueled by the combustion engine, Nakamoto’s most valuable contribution is the blockchain polymorphic engine that will further accelerate innovation in the post-information age and immensely affect our lives.”
Chris Robert, currently an Adjunct Lecturer in Public Policy at Harvard
“Compared with corporate securities, futures, or even derivatives, Bitcoin is even less inhibited by any underlying sense of value. The bubble can just grow and grow, so long as demand increases faster than supply — and so long as the network doesn’t crash, a new cryptographic exploit doesn’t unravel everything, the fundamental lack of anonymity doesn’t bother anyone, those who lose private keys and thus potentially small fortunes don’t complain too loudly, improvements (or hacks) to “mining” don’t lead to sudden shocks to supply, etc. Profiting from a bubble of any sort can be a risky business, but our global economy is not at all lacking in people willing to give it a go. Thus, as a potentially exciting new vehicle for financial speculation, Bitcoin may be with us for some time”
Bill Gates, Founder Microsoft Corporation
"Right now cryptocurrencies are used for buying Fentanyl and other drugs so it is a rare technology that has caused deaths in a fairly direct way. I think the speculative wave around ICOs and cryptocurrencies is super risky for those who go long.”
Does cryptocurrency have an impact on trade?
Crypto-currencies are now predicted to disrupt the way people do business, and those buying and selling across borders stand to benefit.
| Advantages of Crypto-currency for Trade | Disadvantages of Crypto-currency for Trade |
| • A lack of exchange rate. Everyone is using dealing in the same currency with the same value, without the constant hassle of monetary exchange. | • The future of crypto-currencies remains uncertain. |
| • Fast money movement. Crypto-currency transactions are near instantaneous. | • Bitoin isn’t legal in all countries, and therefore can’t be used everywhere. |
| • Lower taxes and fees. | |
| • Detailed records |
While many are debating the future of Bit-coin as a tech bubble versus a viable long-term currency, it’s likely at least some of the technology created by Bit-coin is here to stay. From quick transfers to the thorough records created by block-chains, businesses and institutions are looking at how they can use crypto-currency and related technologies to make doing business easier and cheaper. Regardless of how the future pans out for crypto-currencies, it’s clear that savvy business owners should be exploring crypto-currency and block-chain technologies to see how they could benefit and make a move to capitalize on the technology.
Does Crypto-currency have an impact on Employment?
With billions of dollars expected to be saved every year by moving transactions to block-chains or distributed ledger systems, what's often lost in the conversation is that much of this money will likely stem from a reduction in salaries currently paid to real, working people. Addressing the matter was Blythe Masters, CEO of one of the industry's best-funded startups, New York-based Digital Asset Holdings.
While industry numbers are only now beginning to be researched, Masters positioned block-chain in the same category as robotics, machine learning and artificial intelligence - all industries that she believes need to consider the impact of their innovations on public policy surrounding job creation.
According to Masters' own estimation, blockchain's impact will go far beyond the 5-10% of employees that she says "any well-disciplined organization will naturally try to squeeze out" in the process of improving processes.Instead, she estimates that 30-60% of jobs could be rendered redundant by the simple fact that people are able to share data securely with a common record.
Growth has created a surge in demand for employment in crypto-currencies: A report saw a 100% increase in advertised jobs in the past six months. This surge in recruitment was not just in Tech roles, but in all functions across the board; with such an influx of capital, crypto-currency businesses are boldly investing into expanding their headcount. Factors that attract candidates include higher median salaries, more flexible contracts, and better benefits. Growth in the crypto market also ties into the expanding FinTech sector, report from earlier this year.While bitcoin value fluctuations may be testing investor confidence, the hiring market for blockchain-based technology remains overtly bullish
Survey
Do people think crypto-currencies have a future?
During the course of the survey, I found many people to be optimistic about the future of Bitcoin. Although, many people had opposed views to the former. These people believe prices of Bitcoin will keep going down as it has been for the past few months and will eventually crash.
Some of the candidates surveyed answered that they were uncertain about the future of bitcoin, while many others suggested Bitcoin may survive but it will never rise to former levels. Very few of the respondents surveyed responded that the future of Bit-coin will be limited to certain countries alone, as many countries find cryptocurrencies a threat to their own national currencies. Such countries will limit trading of Bitcoins through governmental policies.
LEARNERS’S OUTCOME
This project analyses the future of Cryptocurrencies .It provided me with deep knowledge in the field of cryptocurrencies.
After doing this project, I would conclude that cryptocurrencies are highly controversial and very versatile. Investing in Bitcoin is very risky both for the investors as well as governments. Today, cryptocurrencies have come under the radar for the wrong reasons. Cryptocurrencies are said to be funding illegal activities like terrorism and drug smuggling, due to the anonymity of it’s users and administration. Though most popular cryptocurrencies, like bitcoin, are anonymous and only use a key to identify a user, it is possible to include personal information, like the ID number, and make the cryptocurrency non-anonymous. The use of cryptocurrency also allows for instantaneous transactions and borderless transfer-of-ownership (“money with wings”), which reduces transaction time and cost, since financial intermediaries are not needed.
There have been many individuals who want to invest in Bitcoin but who are put off by the complexity involved, and also by the security risk. You need to get a digital wallet, preferably a physical piece of hardware. Then you need to get very good anti-virus protection and make sure you have backups. Do all that and you could still potentially be vulnerable to hacking. Cases where cryptos are hacked or stolen are multiplying and this is surely putting people off. Bitcoin futures will provide a platform where getting long Bitcoin becomes extremely simple, and for this reason I believe that the initial reaction to the introduction of this future will probably be bullish. It’s my opinion that Bitcoin will continue to rise going into year end.However, there will have to be a point where there will be a major correction. Bitcoin price will no longer be subjective and driven purely from capital flow, but it will also have to somehow represent intrinsic value. This is something that Bitcoin longs need to be very careful of, and plan their contingency strategy accordingly.
BIBLIOGRAPHY
1. https://www.forexanalytix.com
2. http://www.digitaltransactions.net
3. https://blockgeeks.com
4. https://www.forbes.com
5. http://www.thehindu.com
6. http://www.tradeready.ca
7. https://www.coindesk.com
👏👏
ReplyDelete