ECON430-Topic #1: Crypto-currency, Money and Banking

Scientific American recently reported on the phenomenon of blockchain and crypto-currency in general, explaining the invention, as well as many of the recent innovations. Bitcoin is the most popular of the new phenomenon of crypto-currencies. One of the main reasons there appears to be so much buzz about the virtual currency is that there is a definitive limited amount of the currency, and enthusiasts believe that it could replace the centralized control of central banks over monetary policy. What might be more important about Bitcoin is the innovation of blockchain, which to put it bluntly means that the same electronic thing cannot be in two places at once. Think of this more like an eBook, which must be checked out by an individual, versus a streaming audio file which can be accessed by millions. Banks are eager to jump on the bandwagon and use blockchain to help them reduce their own costs of transferring money across and within entities.

The appeal of Bitcoin as a currency stems from it’s perceived similarity to gold. Like gold, Bitcoin has a limited supply, and once the supply is exhausted, the prices of goods would be expected to fall over time if the economy continues to grow. Unlike fiat currencies which have increased in quantity over time and led to rising prices. However, there are currently 1453 crypto-currencies trading on the open market, implying that there are an infinite number of ‘finite’ currencies. In fact, some cryptos do not have a natural limit in supply, although there would be a nominal limit at any moment in time allowing it to remain scarce. So, it could be that the finite-ness of crypto-currency is not a novelty after all. In fact, we are all free to use blockchain technology to create our own (one or more) crypto-currencies. Does this undermine the ability to declare Bitcoin the end of government control of currency (if this link doesn’t work, please read this one)? Does this eliminate the credit created by banks, or do people demand credit in a way that Bitcoin cannot foreseeably provide? What is the role of debt in our society, and can Bitcoin adequately fill those needs? Is Bitcoin a safe store of value? It is intended to be safer than typical bank money, but there have been many publicized thefts in recent years.

The current market capitalization of Bitcoin is around $200b USD, up from around $5b USD in late 2015. The price (as of this writing, is between $11,000 and $12,000) up from less than $10,000 a few days ago, but down from nearly $20,000 in December 2017. On January 17th, the entire crypto market was down, with Bitcoin losing over 21% of its value in the 24-hour stretch leading to the price nearly hitting $9,500. Compare this volatility to other globally accepted currencies and see if Bitcoin (or any other crypto-currency) measures up as a reasonable store of value. Imagine if the euro went from 1 per dollar, fell to 2 per dollar, then rose back to 1 per dollar in a 24-hour period. While Bitcoin is the most popular crypto-currency, it may not yet measure up as money if it does not serve the reasonable functions of money. Compare Bitcoin to other forms of money to help you determine if it can serve as money.

One 0ther possibility is that these crypto-currencies will never develop into full-fledged money that competes with central bank and bank developed money. Microsoft is trying to make it easier for banks to use blockchain. What role do you think these types of crypto-currencies will play in the future if Bitcoin (or some other) does not actually develop into a currency? What role will crypto-currencies play? Are they a fad, or are they here to stay? Furthermore, if many believe that Bitcoin will have no value in the future because the technology is outdated, why would you accept it or invest in it today?

Inflation in the U.S. is low, with current inflation rates at only 1.5%, although they are expected to rise to about 2.2% over the next five years. The US unemployment rate is currently at 4.1%, generally believed to be well below a rate that is sustainable without causing inflation. We expect the Fed to raise the target federal funds rate twice in 2018, and possibly three times if signs of rising inflation emerge. With all this in mind, crypto-currencies exist in a world where cycles still exist. If the Fed and other central banks were truly undermined by the invention of blockchain, would we still have financial crises? Would there be debt created by fiat? Did the world live without crises before the expansion of fiat currency and fractional reserve banking?

There are a lot of questions I posed above, so pick one and go with it.

28 thoughts on “ECON430-Topic #1: Crypto-currency, Money and Banking”

  1. Nobel-winning economist Robert Shiller thinks Bitcoin is a fad, like bimetallism was in the 19th century. (1) Crypto-currencies like Bitcoin and its sisters are just a fad; thus, the crypto-currency market will collapse soon. The “greater fool” theory implies that people are buying crypto-currencies because they expect to sell them to other people with higher prices. (2) Investors seem to have viral optimism and enthusiasm when betting on the future value of crypto-currencies. (2) For example, the most popular reason why people are buying Bitcoin is that it is rising in price. (2) However, the prices of crypto-currencies are volatile, making it harder to predict their future values. (see chart 3) In addition, crypto-currencies can be hacked or stolen. For instance, hackers have recently hacked the Bitcoin platform and stole $70 million worth of Bitcoin. (4) With many uncertainties, people will soon stop buying crypto-currencies to avoid the risks. Some believe that we are in a crypto-currency bubble and the prices will crash soon. (5) “Markets are not perfectly efficient. But they are usually efficient enough to punish those who mistake a bet on one version of the future for a sure thing”. (6) When the market crashes, people will lose their excitements and enthusiasm for crypto-currencies. Eventually, the craze for crypto-currencies will fade away.
    Sources:
    1. https://www.cnbc.com/2017/10/16/nobel-winning-economist-shiller-calls-bitcoin-a-fad.html
    2. https://www.economist.com/blogs/buttonwood/2017/11/greater-fool-theory-0
    3. https://coinmarketcap.com/
    4. http://money.cnn.com/2017/12/07/technology/nicehash-bitcoin-theft-hacking/index.html
    5. https://www.forbes.com/sites/bernardmarr/2017/12/01/should-you-invest-in-bitcoins-here-are-the-top-reasons-for-and-against/3/#7e897e9d3a8c
    6. https://www.economist.com/news/finance-and-economics/21729995-crypto-coin-mania-illustrates-crazy-and-not-so-crazy-sides-bubbles-manias

  2. Bitcoin, or any cryptocurrency for that matter, could not be a safe store of value. For any currency to hold its value there must be a strong sense of confidence in the currency.
    The argument for an increased confidence in cryptocurrencies is that they either have a fixed amount or a monetary rule which is separate from human discretion. This should implicitly increase confidence for the currency, however, this is already undermined by the unregulated and current speculative environment surrounding blockchain. In a paper published in the Journal of Monetary Economics, there has been research done which indicates that a single actor made suspicious trades in the Bitcoin market to manipulate the cryptocurrency to rise from $150 to $1000 in 2 months. This highlights the vulnerability of an unregulated cryptocurrency market.
    Cryptocurrencies are going through a fad now, which hinders the ability for any one of them to be a stable store of value. This mania can be demonstrated through the creation and surge of Dogecoin, a meme based cryptocurrency initially created as a joke which now has a market cap of 2 billion. The founder Jackson Palmer even stating, “I think it says a lot about the state of the cryptocurrency space in general that a currency with a dog on it which hasn’t released a software update in over 2 years has a $1B+ market cap”. Blockchain technology is now a speculative asset rather than a proper store of value.

    https://www.sciencedirect.com/science/article/pii/S0304393217301666
    https://www.ft.com/content/b2012d2a-0023-3927-afdf-6f8eaef9cac0
    http://www.businessinsider.com/dogecoin-cryptocurrency-has-market-cap-above-2-billion-2018-1

  3. The terms “crypto-currency” and “Bitcoin” provide narrow coverage of the potential that the crypto space truly contains. As stated in the Microsoft article, Bitcoin applications are barely scratching the surface when it comes to the potential of these new technologies, more specifically the cryptographic security and reliability of the blockchain (Engadget). The article sheds light on the innovation that Ethereum provides, mentioning its use to secure and verify the exchange of any data across industries through the use of “smart contracts” (Engadge). Rather than shying away from “smart contracts” because you have yet to see them on a popular meme on reddit, take the time to consider this. Ethereum’s contracts allow developers to reduce the system into guidelines that specifically fit their industries, which is entirely beneficial (Inc). This technology serves as a trust platform as well as a secure, speedy, and cost- effective alternative in comparison to a transaction regulated by a third party. The development of these contracts is also becoming user friendly (Inc). Upon conclusion, there is more to the crypto space than “Bitcoin” and currency itself. Though Bitcoin is trying to pave its way as currency, “your money, held in a digital form” (Forbes), projects such as Ethereum are aimed at changing the world in a positive manor and can’t be considered fads. Here are words taken directly from their mission statement, “and together build a more globally accessible, more free and more trustworthy internet” (Ethereum). If projects like these don’t achieve currency status, then hopefully they can partner with the existing economy to provide for a better future.
    https://www.engadget.com/2015/11/11/microsoft-bitcoin-currency-banks/
    https://www.inc.com/drew-hendricks/what-are-smart-contracts-how-they-could-help-optimize-your-business-processes.html
    https://www.forbes.com/sites/quora/2017/09/14/how-is-ethereum-different-from-bitcoin/#507accdd502b
    https://www.ethereum.org/foundation

  4. Most cryptocurrencies such as Bitcoin may have the guise of being a currency considering that it can be accepted by “100,000 different merchants worldwide” (CNBC) yet that seems to be a far too minimal range of cryptocurrency’s acceptance as a real currency. Cryptocurrency seems to lack the two main criteria of money: store of value and unit of account. Economist Jeffrey Dorfman believes that one of the main criteria that cryptocurrency (more specifically Bitcoin) lacks is a characteristic of “store of value” (CNBC). Rather than focusing on the security aspect of store value, Dorfman criticizes the speed of Bitcoin transactions explaining that the slowness of the transactions may make the block-chaining secure (Forbes) but believes that cryptocurrency’s extremely slow transactions is the main reason having a store of value. Though I agree partially with this, I believe that the relatively new block-chaining method is the main area of concern when it comes to store of value considering that with recent cryptocurrency price rises, hackers and fraudsters have begun using new methods such a Neptune exploitation kits to redirect and steal cryptocurrencies (Security Intelligence). The other currency criteria not met by cryptocurrency is that is its unit of account which it seems to lack. Cryptocurrency does not measure the value of goods and services: dollars do (U.S dollar in the United States, pounds in the U.K, etc…). The value of cryptocurrency itself is measured by dollars thus making it more of an asset than a currency. There are over 1453 types of cryptocurrencies and like in previous history with U.S states having their own designated currency, the lack of having a universally equal worth makes cryptocurrencies extremely difficult to use as measurement of value (Coinmarketcap). That’s why right now there is only one kind of money, dollars, that are seen as a universal value indicator because most people understand the worth and value of goods/services by the amount of dollars.

    https://www.forbes.com/sites/jeffreydorfman/2017/05/17/bitcoin-is-an-asset-not-a-currency/#3f71820d2e5b
    https://www.cnbc.com/2017/12/07/heres-how-you-can-and-cant-spend-bitcoin.html
    https://securityintelligence.com/blockchain-exploits-and-mining-attacks-on-the-rise-as-cryptocurrency-prices-skyrocket/
    https://coinmarketcap.com/all/views/all/

  5. The rise of digital currency has promoted the idea of creating a currency not regulated by a Federal Reserve. The mindset of progressing towards a world that only consists of digital currencies that are either not backed by a trustworthy system or controlled by a government both seem very consequential (1). Since crypto-currencies are tracked via a blockchain, some argue that we could develop a currency that is “nationless” and dictated by the market (2). If a computer-backed system controlled the money supply instead of a Central Bank, it would not be able to account human behavior into a predictable equation to stabilize the economy (2). Due to bounded rationality and skepticism of cryptocurrency, price trends of these digital currencies are uncertain (3). Without some sort of regulation of Bitcoin, some, like Goldman Sachs, have claimed it could lead to a possible bubble bigger than the dot-com era (4). If the U.S. government was able to control the cryptocurrency market, then they would have complete and total control of the economy (1). This would solve the problem of prices drastically changing, but would create the situation of the government having access to every transaction that takes place. Banks would become meaningless since the availability of accounting your currency is already in your control. The effect of this type of control is unknown due to lack of accurate models or historical examples. The theory of cryptocurrency completely dominating the market of exchange with or without regulation seems impractical.

    Sources
    1.) Scientific American (Scientific American Bitcoin.pdf) on Canvas
    2.) Financial Times (FT_Bitcoin.pdf) on Canvas
    3.) https://coinmarketcap.com/all/views/all/
    4.) https://www.coindesk.com/goldman-sachs-warns-investors-of-bitcoin-bubble-in-new-report/

    1. I find intrigue in the idea of a “nationless” currency that is controlled by the market. I see your point on the security issues regarding a currency that can’t be controlled by a reliable and well known government, but nonetheless I think the idea has potential.

  6. With the increasing levels of research and development, as seen with entities such as First Bitcoin Capital and Microsoft, cryptocurrencies are here to stay. Yet, the major assumption is that once people realize the validity and superiority of these cryptocurrencies, they will rationally drop their dollars and euros to take advantage of this new opportunity. On the other hand, according to Gresham’s law, the bad money will chase out the good money and thus these futuristic forms of cryptocurrencies are more likely to be held privately outside of the market as commodities as people try to rid themselves of their previous currency. These cryptocurrencies would then be more accurately described as crypto-commodities. Furthermore, the whole notion that these currencies are will have no value in the future is simply ungrounded pessimism. Even though some of the most renown financial leaders such as Warren Buffet and Jamie Dimon have berated the phenomenon, top investors speculate the worth of cryptocurrencies to only increase in the future. If they really were doomed, there is no reason that anyone would be willing to purchase these cryptocurrencies at any price if it was speculated to be worthless in the future. In other words, it would be worthless today as well. Yet, with even more agreements being made and groundworks being laid for the future of cryptocurrencies, the time to invest them is now, but due to the principles of Gresham’s law, the time to accept them as currency is later.

    Sources:
    http://bitcoincapitalcorp.com/about/
    https://www.engadget.com/2015/11/11/microsoft-bitcoin-currency-banks/
    https://www.cnbc.com/2018/01/23/nasdaq-looking-into-bitcoin-futures-different-to-rivals-ceo.html
    http://markets.businessinsider.com/commodities/news/goldman-sachs-says-bitcoin-is-a-commodity-2017-11-1009967470
    Champ, B., and S. Freeman (2001):Modeling Monetary Economics, 2nd Edition. Cambridge University Press, Cambridge, MA.

  7. Bitcoin, or any other cryptocurrency, will not have the ability to replace the dollar any time soon. Bitcoin enthusiasts claim that its cryptocurrency cannot experience inflation due to its alleged scarcity and limited supply, which would give it some inherent value (1). However, with 1,486 cryptocurrencies actively being traded on the market, creation of these digital assets is seemingly unlimited and unregulated, with no real ability to differentiate between their values. (1, 2). The only tangible counterpart a cryptocurrency can offer is its value in dollars, and with no physical asset tied to the digital commodity, its price is prone to rapid fluctuation and manipulation solely based on the actions of buyers and sellers (1). In comparison, there are currently only 180 paper currencies circulating in the world, each of which have government regulation in order to control the supply and inflation of said currencies (3). Unlike these government-back fiat currencies, Bitcoin and others have no intrinsic value: their value is determined by opinions on the use of the cryptocurrency as a unit of account, and by pure speculation (4). Lastly, Bitcoin is not a practical store of value. Since 1982, USD price levels have increased by about 148%, with the largest rapid decline in value of -3.48% during the Great Recession (5). Bitcoin’s value is subject to daily change: it can gain or lose more than a quarter of its value in under 24 hours, and has seen its value halved from $20,000 to $10,000 in less than a month (2). This proves that USD and other fiat currencies are a truly reliable store of value in comparison to the always-changing Bitcoin, and will not be replaced by any unregulated cryptocurrency in the foreseeable future.

    (1) https://www.thestreet.com/story/14444820/1/cryptocurrencies-will-never-replace-the-dollar-fed-s-kashkari-explains-why.html
    (2) https://coinmarketcap.com/all/views/all/
    (3) https://www.travelex.com/currency/current-world-currencies
    (4) https://www.forbes.com/sites/jayadkisson/2018/01/21/bitcoin-hurt-by-lack-of-viable-pricing-model-and-the-ghostbusters-stairs-syndrome/#420ae83726ad
    (5) https://www.forbes.com/sites/jayadkisson/2018/01/21/bitcoin-hurt-by-lack-of-viable-pricing-model-and-the-ghostbusters-stairs-syndrome/#420ae83726ad

  8. Ever since the introduction of Blockchain and Bitcoin by Satoshi Nakamoto there has been a spark in the economy, a spark that is bound to create a more efficient future. The world is indecisive about Bitcoin’s economic stability and security, especially central bankers, who are simply afraid for what the future holds (1). The Blockchain software has the power to create things greater than just a peer-to-peer internet payment currency, thus high-tech individuals will not stop until they discover this potential. In the meantime, Bitcoin will continue to be accepted, and possibly forbidden, by large companies and institutions (2). Once the Blockchain format has helped to create a new invention that surprises our world with efficiency and reliability, such as the possibility of self-driving, self-owning car using Blockchain-backed smart contracts eliminating the need for a driver, Blockchain will gain a respectable foundation in our economic system (3). As stated by Harvard Business Review, “Blockchain is a foundational technology: It has the potential to create new foundations for our economic and social systems. But while the impact will be enormous, it will take decades for Blockchain to seep into our economic and social infrastructure.” This quote summarizes the idea that technology-driven citizens will not dismiss this new technology, but they will simply reshape it in order to eventually integrate it into pre-existing systems.

    (1) Financial Times Bitcoin (FT_Bitcoin.pdf) on Canvas
    (2) https://www.fool.com/investing/2017/07/06/5-brand-name-businesses-that-currently-accept-bitc.aspx
    (3) Scientific American Bitcoin (Scientific American Bitcoin.pdf) on Canvas
    (4) https://hbr.org/2017/01/the-truth-about-blockchain

    1. This is an interesting post. You say that since the introduction of cryptocurriencies like Bitcoin, there has been a spark in the economy. However, a lot of the papers that I’ve read allude to the point that this spark is due to speculation. It makes me wonder if this spark is real and is a bubble rather. A lot of investors in Bitcoin are buying the currency just to flip it for profit. At a certain point, the market will hit a cap, and once people realize that the Bitcoin isn’t worth as much as they thought, the market will tank big time and the bubble will pop.

  9. At its current state, Bitcoin cannot serve as money, as it doesn’t seem to fit any of the definitions for being money. It doesn’t act as a very good medium of exchange, one reason being that it doesn’t have high liquidity. The constant price fluctuations cause transactions to take significant more time than fiat money. Also, bitcoin is still not accepted by a majority of companies, with some countries even banning it outright. One would need to convert their bitcoin into another form of money to purchase from these places. This causes bitcoin to act as a poor standard of deferred payments too; debts cannot be paid off at very many places with bitcoin. As a store of value, bitcoin falls short; it is volatile to changes in its worth, and it’s susceptible to hacking. According to Stripe, an online transactions company, bitcoin was “better-suited to being an asset…” Right now, bitcoin is much closer to being considered a speculative stock rather than money. In fact, that’s the reason many people who don’t believe in the future of bitcoin still invest in it. They buy bitcoin with the idea to profit off it later, like a stock. This is where bitcoin fails at being a unit of account. Things aren’t measured in bitcoin, but how much said bitcoin can fetch in fiat money. Bill gates net worth isn’t measured in his Microsoft stocks, but how much those stocks are worth in US dollars. It will be exciting to see how bitcoin and similar cryptocurrencies address these problems in the future.

    Sources:
    https://www.investopedia.com/articles/investing/112914/liquidity-bitcoins.asp
    http://www.bbc.com/news/business-42798935
    https://steemit.com/cryptocurrency/@bitcoinchaser/the-myth-of-cryptocurrency-liquidity
    https://www.bloomberg.com/news/articles/2018-01-18/hackers-have-walked-off-with-about-14-of-big-digital-currencies

  10. The idea that Bitcoin has no “real” value is a sincere one. However, this does not mean there is no intrinsic value in the commodity. Fiat money came around and people had the same thought, “It’s just a colored piece of paper that anyone can print given the right technology”. so why should I trust it to hold value indefinitely? Our society has been shifting to these “valueless” forms of currencies for a while now. Gold to fiat to digital, and possibly something more extreme like a currency based on virtual accolades. The idea that Bitcoin will hold some form of value indefinitely is impractical, but people exchange and invest in Bitcoin today because they speculate it will hold, or increase in value within the near future.
    So far Block chaining seems to be a substantially large collateral of Bitcoin. An upcoming form of security for business operations to track transactions more efficiently. However, in its infancy there are still “sharks in the water” that can find ways to manipulate the process. It requires conspiring individuals who essentially attempt to spend the bitcoin as many times as possible before the network relay can register that the coin has been transferred. This can be a major deterrent for people who are considering investing in cryptocurrency as cyber hacks have already chipped away at the legitimacy and security of cryptocurrencies like Bitcoin and Ether. Also, the fact that the majority of people interested in Bitcoin are looking at it as an investment (the primary focus being to hold the coin and not spend it) rather than a common medium of exchange somewhat disqualifies the cryptocurrency as “money”.
    Cryptocurrencies will act as a novelty exchange. Meaning that people will not use digital currencies on a day to day basis to buy things like groceries and gas, but will attempt to hold bitcoin for specialized purchases such as: illicit drugs, transactions between two private individuals, and other exchanges that might be considered special or unusual purchases.
    https://www.cnbc.com/2015/11/11/banks-could-use-bitcoin-technology-by-next-year-study.html https://www.bloomberg.com/news/articles/2018-01-18/hackers-have-walked-off-with-about-14-of-big-digital-currencies
    https://canvas.jmu.edu/courses/1527360/files?preview=83352449

  11. The three standard functions of money that an asset must fulfill are that it must be a medium of exchange, unit of account, and store of value. As noted above, cryptocurrencies are not spectacular at fulfilling the latter two functions. They are also not very successful media of exchange, the function that is the most important of the three (1). But at some point they could be. 99bitcoins.com lists around 100 entities that accept bitcoin as a form of payment, including Subway, Microsoft, and Expedia (2); Japan has also recently passed legislation allowing cryptocurrencies to be legally used as payments and is granting licenses to some cryptocurrency exchanges (3). Bitcoin is definitely more of a financial asset than a currency, but there is a historical precedent for such assets to be used as media of exchange, even assets as speculative and ludicrous as Bitcoin. Tulips in western Europe during the 1620-1630, for example, began as luxurious rarities but became speculative assets for which tradesmen would convene in taverns to buy bulbs just to resell at a higher price. Tulips eventually became an accepted as a form of money; in 1633 it is documented that properties were sold for just a few bulbs (4). After the bubble popped, tulips lost their function of money, as will probably happen with bitcoin. There are other cryptocurrency assets that have an underlying value, are therefore not as speculative as bitcoin and could endure. Initial coin offerings (ICOs, as opposed to initial price offerings), a phenomenon that has appeared in the past year, is a new fundraising method for startups in which they sell their own crypto-coin to investors (5). The coin has different functions depending on the specific ICO, but the SEC has already classified some coins as securities (6). ICO coins are therefore more similar to equity assets than to bitcoin, especially if the coin is issued by a firm like Facebook (7). There is also a precedent for equity to be used as a form of payment, compensating labor with stock options, for example.
    1. Handa, Jagdish. Monetary Economics. 2009
    2. https://99bitcoins.com/who-accepts-bitcoins-payment-companies-stores-take-bitcoins/
    3. https://www.economist.com/news/finance-and-economics/21735055-china-has-taken-harsh-line-south-korea-contemplates-banning-bitcoin
    4. http://www.bbc.com/culture/story/20160419-tulip-mania-the-flowers-that-cost-more-than-houses
    5. https://www.economist.com/news/leaders/21731161-there-ico-bubble-it-holds-out-promise-something-important-meaning
    6. https://www.economist.com/news/finance-and-economics/21731157-they-raise-difficult-legal-questions-regulators-begin-tackle-craze
    7. https://www.economist.com/news/finance-and-economics/21734462-which-could-be-next-digital-coin-rule-them-all-bitcoin-no-longer

  12. In a report on bitcoin, the U.K.’s central bank described the blockchain as a “genuine technological innovation”. They believe that blockchain, could allow the financial transaction systems to work without a third party intermediary and showed that digital records can be held securely on one digital ledger. The technology used in for the Bitcoin could be very useful in the future, but the current expectations of the value of bitcoin are very likely over estimated. Crypto-currencies will probably not replace the fiat currencies or the current monetary system because they are not backed by any government or assets, and their value only comes from speculative demand. While blockchain technology could be adopted in the future it would take a long time because of how complex the current financial system is. Today there is a consortium of banks that is developing a framework to apply blockchain technology to markets, but they say that it will take around 5 years to apply blockchain to derivative transactions and over 10 years to use blockchain to settle share trading. Another issue with Bitcoin that could limit its effectiveness is the amount of electricity that bitcoin “miners” use. Bitcoin currently uses as much electricity as Google, Facebook, and eBay and is projected to use as much as some countries in the future. This high cost could limit its potential to be used as a currency. Bitcoin value is also very unstable. Bitcoins’ historical volatility is about 6%, which is very high when compared to currencies like the US Dollar. Given this volatility, people may be unwilling to except Bitcoin as a currency. While some large companies are now excepting Bitcoin, it will take time for wide spread adoption.

    Sources:
    1) Scientific American (Canvas PDF)
    2) Financial Times (Canvas PDF)
    3) https://www.cnbc.com/2015/11/11/banks-could-use-bitcoin-technology-by-next-year-study.htm
    4) https://www.bloomberg.com/news/articles/2017-12-15/what-the-world-s-central-banks-are-saying-about-cryptocurrencies

  13. The article says Bitcoins have a limited supply, however, if it is a form of crypto-currency, then anyone with the right knowledge and/or computer skills can technically make a crypto-currency. Therefore, if Bitcoin is just a form of made up money, how can it be limited? According to an article written by Mark Williams, Bitcoin’s supply is controlled by a fixed formula. When new tokens are minted there is a cap around 2,140 Bitcoins that can be supplied. Once the supply roughly reaches that number the currency will stop growing. Nevertheless, competitors of Bitcoin are trying to alter the growing supply to have no cap on the amount of the Bitcoins in the world. They are doing this to try and generate low inflation. The competitors’ goals are being accomplished because FRED’s economic database shows how inflation rates in the United States are around 1.5%, which is on the lower end. The question is, what is going to happen to Bitcoin and crypto-currencies if the Fed raises interest rates? Investopedia states that when interest rates rise, inflation decreases because consumers save more due to a higher return in interest. With less disposable income, the economy slows and inflation decreases, or in the current situation it will stay around its already low rate. In an article form “Coindesk,” author Charles Bovaird talks about how Bitcoin first became appealing because investors saw it as another safe haven asset, like an alternative to bonds. With extremely low rates, no one was rushing to put their money into bonds, and so they tried out Bitcoins. However, if interest rates rise, digital currency will suffer because investors will move away from Bitcoin and put their money into interest bearing assets.

  14. Bitcoin and other crypto currencies cannot replace the current monetary system we have today in their present form. There is too much uncertainty surrounding bitcoin to be used as a safe store of value. If you put a dollar in your pocket today, you can expect to take that dollar out in a week or month and get the same amount of goods for it. That is not true for crypto currencies. In December 2017, bitcoin reached a high of almost $20,000 (coindesk). If you put a bitcoin in your digital wallet then, expecting to spend it a week or a month, you would be very disappointed. The value of that bitcoin has dropped to around $11,000 (coindesk). Unless crypto currencies become more stable, it would be impossible to use in day-to-day transactions because prices would need to change just as rapidly as the price of the crypto currency. The menu costs for businesses to implement these constant price changes would be paramount. Additionally, the environmental costs of bitcoin could make it unsustainable. It is argued that “running the bitcoin network uses up as much yearly electricity as a medium-sized country (wired.co.uk).” Although these numbers are being debated, it is apparent that running the network and mining for bitcoins consumes a large amount of energy. In a time where global warming is a series threat, it is not probable to think that a volatile, environmentally harmful currency would be able to be implemented into society. Therefore, crypto currencies are only a fad and will not have any long term value.

    https://www.coindesk.com/price/

    http://www.wired.co.uk/article/how-much-energy-does-bitcoin-mining-really-use

  15. Optimists believe that cryptocurrency has the ability to hold value safely. They also believe that cryptocurrency has more security than paper money. After my research, I have sided with the pessimists who believe that cryptocurrency is too volatile to be a safe store of value (one of the core functions of money). The appeal of cryptocurrencies is that they are decentralized, so no central body controls the supply of crypto. Additionally, crypto, in theory, has a finite supply at all times so inflation can be controlled. Crypto is essentially using a stock of the world cryptocurrency as a form of debt. However, unlike normal stocks traded on the market, the crypto supply is not controlled by a company who issues stock. If you consider crypto as transferring a stock as a form of debt, its value is naturally volatile as the crypto market could rise or fall at any time. Crypto prices peaked in the fall and have dropped to half their value since then. More rigid prices increase and decreases have been observed recently as bitcoin has been a hot-ticket item in the market. If the volatility of bitcoin is not enough to turn you off to the idea of it being a legitimate currency, the crypto market is also unregulated and not secured by the government. Although crypto is being used as a form of currency now, there is no governing body to control the market and make sure peoples investments are safe. As many people are using the crypto market to make investments opposed to using it as currency, I anticipate a high risk for the market to be taken over my intelligent traders who will use it to make quick and large profits. Hence, the future of the crypto market seems very volatile and unsustainable while it is still unregulated.

    https://www.cnbc.com/2017/12/26/bitcoin-price-in-2018-could-hit-60000-but-another-crash-is-coming.html
    https://www.forbes.com/sites/haroldstark/2017/04/21/from-here-to-where-bitcoin-and-the-future-of-cryptocurrency/#389a43184367
    https://www.economist.com/blogs/buttonwood/2017/11/greater-fool-theory-0

  16. Proponents of cryptocurrencies like Bitcoin have made various claims that cryptocurrencies will effectively decentralize money around the world (1). However, if this outcome were possible it would not be ideal. Transactions would be completely impractical if everyone owned a number of different currencies and these exchange rates were constantly fluctuating. It would be akin to going back to the story often told of the barter system where everyone has an unclear idea of the relative prices of goods. Although the market would determine the price of each currency, this inefficiency would only lower real transactions. The current system in which money easily flows between private banks has been made possible by the government ensuring that there is an even exchange of 1 because it is all USD. The crowning characteristic of Bitcoin as a decentralized peer to peer system does not mean that the power of each holder is somehow checked (2). “The system was also set up to distribute authority among many miners, but by banding together in gigantic pools, a small number of groups have become powerful enough to control the Bitcoin system (2).” If large shareholders with unclear incentives and no regulatory pressure have massive control over the price of Bitcoin, there is room for immense volatility and destruction of the economy if Bitcoin and other cryptocurrencies toppled the USD. Further, Bitcoin lacks real assets to back up its value. Although that has not stopped the public from placing value into Bitcoin it makes issuing credit and developing trust a much taller task (3). How does a peer to peer system offer credit if one cannot be sure that there is at least a promise of repayment from an institution in the form of some sort of asset? A currency that holds value only from its use is bound to fail and cause shocks that are much more damaging than a one currency centralized system that is closely monitored.

    1.) https://canvas.jmu.edu/courses/1527360/files?preview=83352902
    2.) file:///Users/brianconnor/Downloads/Scientific%20American%20Bitcoin.pdf
    3.) https://coinmarketcap.com/all/views/all/

  17. Modern day technology has given rise to significant developments, and cryptocurrencies like Bitcoin certainly headline some of these innovations. However, it is interesting to see what the future will hold for these 1453 currencies.

    A popular consensus among most my peers is that cryptocurrencies do have some sort of value but not at the current market price. According to The Economist, “The air has been swiftly leaking out of the virtual currency bubble.” This is about virtual currencies like Bitcoin and Ripple that dipped below $10,000 and two-thirds of its value from the peak it hit at the beginning of this month, respectively. There is no secret that these currencies are extremely volatile in nature, and the reasoning behind this high volatility could be the fact that people are not buying bitcoin to use it as a currency. People are buying cryptocurrencies to flip them; investors want to buy low and sell high. Money is meant to be used as a medium-of-exchange. And cryptocurrencies are not being used the way they were intended; their real value is significantly less than their market value.

    Also, as pointed out in this reading, countries are deviating from cryptocurrencies and began to shut down exchanges of cryptocurrencies. In places where exchanges are accepted, private entities are banning it. For example, Capital One has chosen to ban customer usage of credit cards to buy bitcoin or other cryptocurrencies because of their “limited mainstream acceptance and the elevated risks of fraud, loss and volatility.” Less institutions and governments are recognizing currencies like Bitcoin, so it makes one skeptical of its future. In the long run, nothing will change. Fiat money will stay here in the US, and the cryptocurrency bubble will pop.

    Sources
    https://www.wsj.com/articles/should-you-buy-bitcoin-with-your-credit-card-1516897097
    https://www.wsj.com/articles/bitcoin-the-rise-of-the-regulators-1515065459
    https://canvas.jmu.edu/courses/1527352/files/folder/372%20Articles?preview=83358649

  18. The idea the world lived without financial crisis before the creation of fiat money is an absurd one. You only have to look at the financial crisis in France during the 1780’s to observe this. Back then they were still using the money backed by gold and silver but were still in economic turmoil (1). This was not because they had fiat money but a result of a poorly run government. They King could not pass a law in a region unless that region’s parliament approved it. Corruption was rampant, the cost of having a large military was vast, and the debt from being involved in multiple conflicts grew. This shows that although gold and silver backed the France money it could not save them (1). Granted part of the problem was over production of the paper money making it not as valuable as it should have been (1). Another example is why the US and many other countries left the gold standard around the Great Depression. Around then people were worrying their paper money would become less valuable, so bank runs started so people could turn their money into Gold or something else that holds value (2). The large populations clambering to get their money out lead to countries fearing they would run out of gold causing them to abandon money backed by gold for fiat money. Many economists believe this was a driving force of getting the US and others out of depression (2). In conclusion, the world was not free of crises before fiat money, and in fact in at least one instance it saved economies. Being backed by gold does not prevent crises because people and how they view the economy still plays a massive role in how the economy performs. This all tells me that the invention of blockchain will not save us from financial crises because no type of currency has yet to prove it can prevent any sort of crisis from occuring.
    1. https://schoolworkhelper.net/france’s-financial-crisis-1783–1788/
    2. https://www.npr.org/sections/money/2011/04/27/135604828/why-we-left-the-gold-standard

  19. The volatility of crypto currencies such as Bitcoin makes it difficult for investors to rely on it in a long-term situation. While specific currencies such as Ethereum may not be the future, block chain technology has potential to revolutionize the banking system. As prices for Bitcoin have shot up in the last several months, revenues from blockchain firms have amounted to around $240 million (1). Implementing blockchain technology into the banking system could help improve efficiency and generate great output in the long term. Areas of banking such as trade finance and syndicated loans still employ archaic systems of faxing and paper records, whereas blockchain technology could greatly improve the process (1). While many banks have begun their research on blockchain implementation, many others see issues in systematic consistency. The integration of blockchain technology into banking is heavily dependent on the cooperation of banks internationally (2). Most recently China has been pushing for banks to adopt blockchain to help with their loan markets. The China Bank Regulatory Commision (CRBC) has been quoted indicating that “blockchain technology will enhance the efficiency of sharing critical data such as balance sheets and foster a more liquid secondary loan market” (3). It is apparent that crypto-currencies have indicated features reminiscent of economic bubbles we have seen in the past and I would not recommend investing any more time and money in it than we already have. Blockchain however, is the one takeaway we can greatly benefit from and we should be moving towards a future banking system with blockchain at the forefront.

    (1) https://www.ft.com/content/615b3bd8-97a9-11e7-a652-cde3f882dd
    (2) https://www.accenture.com/t20161019T015506Z__w__/us-en/_acnmedia/PDF-35/Accenture-Blockchain-How-Banks-Building-Real-Time-Global-Payment-Network.pdf#zoom=50
    (3) https://www.coindesk.com/chinas-banking-regulator-pushes-blockchain-adoption-credit-market/

  20. If bitcoin and other cryptocurrencies do not develop into currencies that compete with central bank currencies, then cryptocurrencies will likely become worthless. There is no doubt that blockchain technology is a useful invention that has the potential to impact a wide variety of industries. Cryptocurrencies may end up just being a misallocation of a great new invention. There is no theoretical reason that bitcoin should have value if other companies are profiting off bitcoins underlying technology. The profits of cryptocurrencies will most likely be realized by the firms applying blockchain technologies to improve the productivity and innovate. An overlooked reason on why cryptocurrencies will most likely never rival government sponsor currencies deal with the political pressure governments would put on cryptocurrencies to protect their monopolies over printing money. There has already been an increase in government interference in the cryptocurrency markets especially in China and South Korea. The United States has a lot to lose from cryptocurrencies because of the special treatment the dollar has received sense the Bretton Woods Conference. The large debt the United States would becomes a lot more significant if the central bank is not controlling the printing press. A political campaign to stop bitcoin could easily gain support if the politician used rhetoric linking bitcoin to silicon valley elites trying to control the money supply to take advantage of hard working Americans.

    https://www.ft.com/content/adfe7858-f4f9-11e7-88f7-5465a6ce1a00
    https://www.engadget.com/2015/11/11/microsoft-bitcoin-currency-banks/
    http://time.com/money/5105008/bitcoin-plummets-as-more-governments-crack-down-on-cryptocurrencies/
    https://www.marketwatch.com/story/why-bitcoin-is-worth-exactly-0-and-blockchain-might-be-very-valuable-2018-01-09
    https://www.thebalance.com/bretton-woods-system-and-1944-agreement-3306133

  21. Highly speculative in nature, Bitcoin and the overarching cryptocurrency market has experienced a recent rush of investors seeking to capitalize on the recent increases in price. This can be shown by the dramatic change in the total market cap for all cryptocurrencies, reaching as high as $830 billion before falling to around $500 billion within the scope of a month. Some may be quick to classify this a bubble, but it’s hard to tell if that is indicative of the wider crypto market.
    Along with its highly speculative nature, Bitcoin, with a variety of underlying issues including a lack of security and increasing transaction costs, may not ever experience the price stability necessary to allow it to function as a real currency. Bitcoin was never universally accepted as a method of payment for real goods and services. Recently, digital based companies such as Microsoft and Steam have stopped accepting Bitcoin as payment, citing its price volatility [1]. Conversely, Bitcoin has been used increasingly in the sale of larger assets, mainly real estate. Just today, a commercial warehouse was sold in Japan for 547 Bitcoins (roughly $6 million) [2]. In theory, this is the type of consumer behavior which would indicate a strong alternative to conventional currency. In my opinion, such a large purchase made in BTC is likely to indicate a more troubling reality. The sale of a large asset to acquire bitcoin is a cheaper alternative to simply purchasing the Bitcoin, which requires an intense verification process and imposed trading limits at the higher level. In this sense, the sale of the original warehouse is simply a loophole taken to reduce the cost of participating in the speculative game of buying and selling Bitcoin. As long as Bitcoin and other crypto are purchased with the sole intent of making a profit, they will never function as a real currency.

    1. https://www.bleepingcomputer.com/news/cryptocurrency/microsoft-halts-bitcoin-transactions-because-its-an-unstable-currency/
    2. http://cryptobible.io/first-building-japan-sold-bitcoin/

  22. Our society is one that runs on the concept of debt, trust, credit, owing things to one another, and doing things for one another. Such foundations go as far back as specialization and productivity; for example, my teenage brother may specialize in cutting the lawn for $20 which allows my neighbor to be more productive with his time, all the while creating relational bonds and a world where a well-established 40-year-old man can somehow depend on my younger brother. Such morality and dependency lies within the concept of debt and its role in our society and the world.
    So how would Bitcoin adequately fill those needs? Borrowing money exists on the basis of trust. Once you mix debt into a brand new, borderless, nationless, peer-to-peer lending system that skips the intermediary, you place the trust between two parties (1) and “put a question mark on the fractional banking model we know today” (2). As debt has the power to bring people more closely connected, it also has the power to bring stark division as a result of a system that is built to fail at times. As Graeber puts it, “The remarkable thing about the statement ‘one has to pay one’s debts’ is that even according to standard economic theory, it isn’t true.. If all loans, no matter how idiotic, were still retrievable… the results would be disastrous” (3). Bitcoin would surely shake up the banking system as we know it, and maybe for the better, but a system which fundamentally relies on trust, debt and lending and trust have to become part of the discussion. We cannot ignore the financial and relational intricacies that tie our economy together or destroy pre-existing trust and the significant need for trust altogether.

    1. https://hbr.org/2017/03/how-blockchain-is-changing-finance
    https://www.bitbond.com/
    https://btcpop.co/home.php
    https://coinsutra.com/bitcoin-loan-networks/
    2. https://fee.org/articles/imf-head-predicts-the-end-of-banking-and-the-triumph-of-cryptocurrency/
    3. “Debt: The First 5,000 Years” Graeber, David

  23. Specific qualities of cryptocurrency and other similar technologies have become more attractive lately, such as the security and decentralization they provide. Strategies used by businesses such as data mining and the prevalence of hackers and identity theft in today’s society have increased interest in privacy and security, which cryptocurrency offers. The main issue with cryptocurrency currently is its volatility, as value is subjective and public understanding of cryptocurrencies is relatively new and its popularity is largely due to the recent popularity of Bitcoin. There is still reason to invest in Bitcoin and other cryptocurrencies, due to the current fad surrounding cryptocurrencies. Once public obsession with Bitcoin is over, it will lose all its value. Investing in general has its risk, but with a resource as volatile as Bitcoin, the value could plummet as fast as it has risen in the last few years. This fad can be compared to the obsession with tulip bulbs in Holland in the 1600s, known as Tulipomania. The values of tulips kept increasing and increasing. Eventually people were selling their houses to buy tulip bulbs. When the market crashed, people were left now worthless tulip bulbs that they had spent their life’s savings on. Crypto-currencies are interesting because they are not tangible forms of currency. If the crypto-currency market crashes, people will be left with actually nothing. This brings up the question of what money is worth. Our current form of currency is just paper and could very well be worthless if the world collectively stops valuing it. Currency has to be stable to be successful and cryptocurrencies have not been so. If a cryptocurrency like Bitcoin manages to become a full-fledged currency public interest in it will have to be constant. Otherwise, in Professor Neveu’s words, “You don’t want to be caught holding the Bitcoin.”
    Sources:
    https://www.usconsumerfinance.com/bitcoin-information
    https://www.beckershospitalreview.com/cybersecurity/what-to-know-about-7-major-types-of-cryptocurrencies.html
    http://www.thebubblebubble.com/tulip-mania/

  24. Despite operating with blockchain technology which should make the use of crypto-currencies safer, the costs seem to outweigh the benefits. The currencies, although finite and not controlled by a central bank or governing body, can be created by anyone. And currently appear to be a fad which is evident in their volatility. Using bitcoin as an example, in January 2017 one bitcoin was about $800, in June 2017 it was $3000, in July it lost $1000 of value then increased dramatically and then decreased dramatically again (1). Clearly, the bitcoin is quite volatile. That alone makes it unsafe especially as an investment (even if it fits the definition for store of value) or replacement currency. Despite its almost “fad” status, institutions and businesses are trying to make it easier for people to use bitcoin as a real medium of exchange (2). Given this “fad” status and despite businesses trying to transition into using it, it doesn’t compare to currency tied to and issued by the US government which is backed by faith in the stability of the government and the trust that should the banks fail, the US government will provide solutions. However, should the crypto-currency fail, no one knows who to turn to to make sure they don’t lose everything. In noting this, the crypto-currency cannot be fully protected against financial crises. Just look how volatile it is now! With the real value of the currency constantly changing, it would be a frustrating currency to use unless someone found a way to make it less volatile. And, by not being backed by the government, that would suggest that crypto-currencies are more prone to financial crises than a currency backed by a stable government.

    (1) https://www.theguardian.com/money/2017/oct/01/will-bitcoin-ever-be-safe-investment-gamble
    (2)https://www.cnbc.com/2015/11/11/banks-could-use-bitcoin-technology-by-next-year-study.html

  25. The recent rise in the popularity of crypto currency has brought conversation regarding Bitcoins ability to become a global currency. While many articles allude to the process of mining bitcoin as a positive of the currency because it forgoes the creation of debt, as well as the efficiency of it as a ledger it is still suspect to several issues. One of the current issues bitcoin faces is security. Bitcoin has been subject to a few hacks resulting in the theft of it. Analyst believe that bitcoin has the potential to one day become a world currency, but most believe it will not be anytime soon. Much of the value of bitcoin is believed to be based on speculation and this is often exemplified by the rate of investment in countries with weak currencies. A significant portion of bitcoin investment comes from countries which have weak monetary systems and bitcoin offers a safer alternative than their own currency. Countries like the US or UK who have strong monetary systems and have seen hesitation from investors as bitcoin is a riskier alternative to the nations currency. Bitcoin has the potential to become a replacement for debt but will likely take a complete overhaul of the current monetary system in many prominent economic leading countries.

  26. The recent growth of Bitcoin and other cryptocurrencies transactions raise a question to the future value of cryptocurrency investments. Some are hoping that Bitcoin will be the world future currency. Even though Bitcoin is a commodity asset to trade, Bitcoin can never truly be real money. Investors love Bitcoin because it makes easier speculate on their asset value and shield transactions from others because of the anonymity and untraceability. However, that will not be an effective way to manage and endorse credibility. More than that, Bitcoin does not contain the main characteristics of money: the store of value. Over the past three months, Bitcoin price had experienced a dramatic change to its peak $19,000, up from $13 when it was first known. But now it is around $11,000 and its daily average change is between 3-5% (1). Fed chairman Janet Yellen also answered lately in the Fed conference that “Bitcoin at this time plays a very small role in the payment system. It is not a stable source of—store of value, and it doesn’t constitute legal tender” (2). Investors put their money into Bitcoin and hope to get some future earnings, as an asset with future profit. Despite the convenience that Bitcoin has, people cannot oppose that they have faith in the currency that they do not know it will raise or drop by the time they wake up tomorrow. Nevertheless, Bitcoin does have a limit amount of transactions, sometimes it might take a couple days or more to complete a simple trade.

    (1)https://www.coinbase.com/dashboard
    (2)https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20171213.pdf

Leave a Reply

Your email address will not be published. Required fields are marked *