The Role of Cryptocurrencies in Modern Economic Markets

Thesis

Lukas Bestajovsky

Submitted in Partial fulfillment

Of the Requirements for the degree of

Bachelor of Arts

Business Administration

university

2017

Originality Statement

This thesis is my original piece of work, and it has not been presented to any institution in the past. There should be no part that may be reproduced without permission from the original author or institution.

Dedication

This thesis is dedicated to my family members for their overwhelming support and patience during the long days I spend in the write-up.

iii

Acknowledgements

I would like to appreciate my family for the support they have offered me to advance my education in this institution. I will also not forget my lecturers and my classmates for their time in the process of helping me complete my studies, and to this I will always be indebted to them.

Lastly, I will not forget my mentor for the support provided towards completing this thesis.

Table of Contents

Originality Statement ...... ii

Dedication ...... iii

Acknowledgements ...... iv

List of Figures ...... xxi

Table 4.2: Security Mechanisms…………………………………………………………………37

...... xxii

Abstract ...... xxiii

CHAPTER ONE ...... 24

1.0 Introduction ...... 24

1.1 Overview of Cryptocurrencies ...... 25

1.1.1 History ...... 25

1.1.2 Bitcoin ...... 27

The invention behind Bitcoins has however brought about different controversies as no one knows the person who invented it. However, the name Nakamoto Satoshi is associated with the individual who was behind its release in the year 2008. This information came about because the currency requires individuals to put down their birth date, and as far as the coin is concerned

Nakamoto’s name came up when his year of birth was registered during this period...... 30

1.1.3 Ethereum ...... 30

1.1.4 Monero ...... 35

Due to the untraceable nature of monero, all coins are similar and have similar values when seen and transacted by different parties. This fungibility level allows merchants to use them in all their transactions, without any possibility of refuting them due to their past histories. This characteristic has made monero to be adopted by a majority of people since its initial launch.

Different marketplaces like Oasis and AlphaBay, have strongly embraced this technology because of its popularity, and overall demand...... 36

The market for monero is similar to that of other cryptocurrencies, and people who desire to own it can easily purchase it from various exchanges which include Kraken, Poloniex or Bitfinex.

However, Poloniex is listed as the first exchanger that held this currency, while listing eight others by mid 2014. Bitifinex was next in the year 2016, and this exchanged Bitcoins, with listings of XMR/BTC and XMR/USD which fully allowed withdrawals and deposits of monero.

...... 37

Kraken started providing trading options at the beginning of 2017 while pairing currencies in the form of XBT/XMR, USD/XMR, and XBT/XMR. During this time monero was highly praised, and this was indicated on their blog, where they confirmed high trading levels. Similar to many other cryptocurrencies, monero provides parties with the opportunity to get blocks mined, while the individuals can easily join pools, and mine monero without problems by themselves...... 37

People who own PCs can easily take part in such operations because they never require any applications that are specific to the mining process to continue. It, however, makes use of proof- of-work kind of algorithm which is easily accessible through different processors. The block time for the particular currency stands at two minutes, with a clear provision of a permanent reward. Currently, the rewards stand at 7.46 XMR, and this indicates production of 224 XMR every hour, with a total of 5,376 XMR every single day, with a hash rate of 81.84 million

(Piotrowska 201)...... 37

The price margin of monero has been changing significantly and it in the past one month it went up by a higher margin of 70%. Since its launch, it has experienced fluctuations of $0.25 and $60, and this is a clear indication that it will continue to increase in price in the coming days. Most investors and observers interpret such volatility as less credible, but they often provide the needed fluctuations while in the trading arena. Traders are always allowed to purchase monero by using cryptocurrencies and fiat currencies, and this is made possible to motivate them to sell and buy this vital commodity with the main desire of making a profit. Those buying this currency can also use it for hedging purposes when dealing with other cryptocurrencies that are already in operation in the market...... 38

Since this particular currency has been accepted by the majority, it has gained visibility due to its ability to give users the needed privacy setting, and it is considered to be less speculative when compared to other competitors. In the future, however, its price will be determined due to its demand and supply, and its uncertain nature will give investors an opportunity to use experts in the speculation process to ensure higher returns in the future...... 38

1.1.5 Petro ...... 38

CHAPTER TWO ...... 41

2.0 Fiat Money vs. Commodity Money ...... 41

Fiat money has its legal status and value, and this is commonly derived from the relationships of the demand and supply channels, coupled with the regulations from the government. In addition,

vii its acceptance among the traders and others users form a larger part of its value in the economy.

Unlike the original fiat money, cryptocurrencies are trustless, and they make use of peer-to-peer forms of transaction, which are decentralized in nature. It is commonly operated by protocols, with minimal regulations from other financial institutions and the government at large. Fiat money often becomes valueless immediately the government backing it decides to step aside, whereas cryptocurrencies continually maintain their value without having to contend with backings from the government...... 41

In the case of Bitcoin, for example, its value often increases based on the coins’ performance and not any entities support. They take pride in their innovations and technological operations that are employed in their development while ensuring tight security measures to avoid instances of theft and fraud. With these stringent measures, the coins continually gain acceptance and trust from the majority making them popular among the masses. Most people consider bitcoins as being commodities and not a pure currency because of their inherent features, patterns of trading, and their ever-changing prices...... 41

2.1 Relevancy of Cryptocurrencies ...... 42

As mentioned earlier, cryptocurrencies are digital creations that are encrypted for security reasons and were introduced to avoid double currency usage. There are several cryptocurrencies that are being used currently, and all of them derive their protocols from either proof-of-stake or proof-of-work. Their maintenance is made possible by ‘miners’ who participate in the processing and validation processes by using their computers...... 42

Notably, there are several currencies in this segment, but those that have been widely researched like Bitcoin, Ripple, Litecoin, and Ethereum have made significant progress towards ensuring transactions between individuals. Bitcoin, for example, was introduced in the year 2009, based on the proof-of-work protocol, and was the first cryptocurrency to be recognized by most sites on the World Wide Web. Ripple was later coined in the year 2012 and was only meant to suffice payments in the international arena. With its growth of 4.000%, it managed to have more than

$30 million transactions by the end of the second quarter in the year 2017 (Jedlinský 185)...... 42

Litecoin, on the other hand, was coined in the year 2013 and is known to be the second type of currency that makes use of proof-of-work protocol, with a block processing power of 2.5 minutes. It is currently valued at $41 million and has helped increase and uphold the idea of encrypted data when making transactions between two different parties. Further, Ethereum was released in the year 2015, and it has a peculiar concept of providing applications that are decentralized in the blockchain...... 43

It is vital to note that the king of them all is Bitcoin, while other creations after it are imitations.

They have been created to provide an alternative method of transaction where increased security and safety is ensured. The cryptocurrencies are relevant in the world today and only exist on the

Internet, hence giving banks and other governing bodies a hard task when they want to control them. Altering the value of these cryptocurrencies is not easy, for example, Bitcoin has a maximum roof that is positioned at 21 million, a margin that cannot be altered. With their internet positioning, they are easily transferable when considering normal or traditional payment systems, because they move in real time around the globe...... 43

ix safest because getting bugs in the set is not easy, as this task is only accomplished by the community of miners. In addition, miners that can make extractions that exceed 51% can control the world blockchain, and easily create another one. Hacking under these conditions is not easy as the hacker will only make transaction reversals or provide a blockage to other operations. ... 43

Further, the idea of anonymity also increases their security levels as they are commonly assigned pseudo-anonymous status, with major coins coming up with new functionalities to strengthen their security levels. They are vital tools as they can easily be traded openly using the internet, and most of the platforms that are currently used include markets.com, eToro among many others. Until recently, the purchases that were done when buying Bitcoins was not easy and only experienced players could speculate their market. However, this scenario has changed, and most of them are now traded legally without any hitches. Cryptocurrencies provide a real and fast opportunity to make money, and it is a phenomenon that can easily be grasped for players that are not experienced. To achieve such a goal without problems, individuals are required to use tools that are right...... 44

The notion of the media that the formation of the cryptocurrencies was done single-handedly should be considered as a lie because such innovations never take place in a vacuum. Most discoveries become realities while building on previous research works by other individuals. The precursors to this invention include Back Adam who invented the Hashcash in the year 1997,

Finney Hal’s Proof of Work, Szabo Nick’s bit-gold, and Dai Wei’s b-money. All these personalities contributed heavily to the later white-paper work that presented the Bitcoin concept as a complete discovery in the year 2009...... 44 The primary inventors identity is unknown and goes by the alias Satoshi Sakmoto, and this is because of its current popularity. It is also vital for the inventors to keep their names secret for their safety. This is because of their characteristic of requiring authorization before they are transferred to another party. The mining of 32,489 blocks of bitcoins in the year 2009 alone, for example, indicates that those involved must have accumulated more than $900 million when considering the coins worth currently. With this kind of money and the limited exposure that was there during its initial stages, the inventors can easily be targets by criminals (Lim 361)...... 45

Most supporters have the belief that investments in the cryptocurrency market present the future.

Those who support such sentiments are of the view that their unmatched speeds coupled with its security features are what most contenders in the economy desire. Despite its limited backing by banks and the government at large, it can easily be exchanged by other traditional currencies.

The coin is not only growing in value but popularity, and this is because it can act as an alternative mode of payment or other commodities in the money market like gold...... 45

Cryptocurrencies are easily accepted as payment means for services or goods sold. Individuals who run brick and mortar stores can indicate that they accept these currencies, and such transactions can be handled by the use of wallets while incorporating codes and other apps.

However, businesses that operate online can easily add such payment options with other traditional forms without problems...... 45

2.2 Money Supply in the Economy ...... 46

xi for investors to use them for their investment opportunities. Altcoins are different from Bitcoins by the applications of various algorithms, and their mining procedures. Most researched papers provide information on the technicality of these coins, while others discuss their trends and future values, but all are based on their importance to the economy of the world. The confidence people have towards these currencies is an important concept, as it indicates those currencies that have majorly been accepted by the public domain (Umarovich et al. 3)...... 46

Money supply in the economy is a vital instrument that ensures all activities are undertaken within their specified periods without delays. With this form of provision, institutions can run their operations globally without having to lack any investment opportunity due to the nature of their operations. Operations that need secure and anonymous transactions can rely on the use of cryptocurrencies like Bitcoins as they offer users with the confidence that their information is kept safe without any sharing through their relevant networks. However, the amount of money in the economy can affect a region total price level, inflation, and overall business cycle in the long- run...... 46

Even though the economy of cryptocurrencies is not tied to one particular nation, spenders, miners, and merchants usually form a large community which can lead to a country that is decentralized. Issues of panic in the banking sector, coupled with the currency crisis that usually lead to financial problems in a nation can easily affect the world of cryptocurrencies majorly, and this is because they are never regulated, coupled with their decentralized nature...... 47

The advancement nature of technology can, however, solve the major problems and limitations the currencies face current like double spending and attacking of their networks. However, for the currencies to be part of the larger financial market, they need to have low levels of volatility, with flexible and reasonable supply. There is no coin that can challenge the leadership of

Bitcoins in this industry, and this is because of their reputation, and overall network support which comes from the investors and miners alike. Bitcoins have been found to have some flaws, and without much engineering and support, most of these problems might affect their future operations if current problems are not solved. With the current problems, individuals will start looking at the altcoins with the desire to find out the coins that are vital for investment purposes, and through such speculations, they might end up sourcing other new forms of currencies without hitches (Zhang et al. 70)...... 47

Currently, there are more than 800 altcoins, and most of them have not had the chance of full development due to the hindrances that are in the market domain. It is not easy to fully define the roles the currencies play, because of the limited literature about them, coupled with the various factors that are needed to make clear considerations on the main players in the market. There is, however, need for more research on the roles played by these coins, and how they will be shaping the world in the coming future. With full disclosure, the coins will need government attention and some regulation for them to stand the test of time, and offer services to their users without the thought of losses on their part...... 47

2.3 Cryptocurrency and Money Functions ...... 48

2.4 Bitcoin Classic ...... 50

xiii tackle the challenging issues of speed and size, hence the introduction of the bitcoin classic. In the year 2016 alone, bitcoin classic was able to process different blockchain with a capacity of two to one megabytes...... 51

2.5 Bitcoin fork ...... 51

The cryptocurrency industry is currently experiencing a shakeup after bitcoins moved up by a higher margin of 150% in only two days. However, the original BTC (Bitcoin) has dropped by a small margin of 15% in the same period. The increasing nature of the BCH (Bitcoin Cash) can be attributed to its security features, while its network and power of processing are high...... 51

Such improvements came into place amidst the cancellation of the ‘hard fork’ portion of Bitcoin.

The newly proposed fork was canceled because it was in the process of creating a different kind of Bitcoin, which was tentatively known as Bitcoin 2X. This Resulted after the upgrading plans that were made in the Bitcoin Classic modality, which also is currently attracting more investors who had majorly accepted to make use of the 2X fork. The implementations of the SegWit2x would have generally brought about another version of the original Bitcoin, due to the newly created public ledger branch...... 51

CHAPTER THREE ...... 52

It is vital to note that these payment systems can take the form of electronic transfers or physical, and both have their own protocols and procedures. The idea of standardization has however enabled most of these systems to have increased growth capabilities to scales that are considered to be international. Some of the products that are currently employed globally include automated teller machines and credit cards. There are also other specific payment systems that are used to clear financial obligations for equity markets, future markets, current markets, among others. These products allow the transfer of funds domestically and internationally in real-time through the SWIFT network...... 53

3.1 Electronic Payments ...... 53

These are the different systems of payment from one account to the other through the use electronic systems, while foregoing the use of employees in the bank. It can also refer to e- commerce, which constitutes a method of selling and buying of services and goods through the internet portal, or through other electronic transfer methods...... 53

An effective system of payment usually reduces the costs associated with the foregoing transactions and commonly indispensable in the overall functioning of capital markets, money, and the interbank options. A system that is weak can easily affect the economy of a nation, and this can result due to inefficient use of the total resources in a nation, losses, and the inequitable sharing of risks between different agents. The overall efficiency of a particular system is vital as it can easily lead to increased economic gain. The options should, therefore, be real-time and operate on gross terms. The idea of real-time means that waiting time is limited when transactions are being undertaken...... 53

Through ‘gross settlement’ terms, individuals are able to have their transactions settled without using other third-party transactions as netting options. Immediately such processes are made payments usually become irrevocable and final. The use of TARGET2 has also become common in the past, and it involves the covering of the EU (European Union) members who use the euro system. This system has been used in the past for settling the operations in the central bank, various euro payments, and interbank transfers. They, however, have transfers that are real-time, with debt clearing capabilities which are irreversible and immediate...... 54

The issues of globalization have led to an increased volume of transactions across the globe.

Individuals and banks alike are currently transacting on larger margins globally while using the different payment systems that are relevant and applicable to their situations. Most of these groups of people are either living or working abroad, while others are simply making use of the various sites that allow them to purchase their commodities from the comfort of their homes. The industry has in the past registered high volumes of trade, in terms of the total number of transactions and amounts transacted (Srivastava et al. 561)...... 54

The different ways these payments are offset can either be expensive, error-prone or cumbersome. Most of these systems were set a long time ago, hence the need for their changes to meet the needs and requirements of all their clients in the long-run. Users of such systems both on the payment and receiving ends can have difficult times in understanding all of them in the process of setting them for use, hence the need for systems that are secure and easy to use. Most financial institutions also face problems and often struggle to make changes in the systems to meet the demands of their clients. However, for those who use cross-border options, they often have the opportunity of earning more profits while using systems that are safe and secure, hence rewarding...... 55

3.2 Automated Clearing House ...... 55

This is an electronic form of a network which aids in financial transactions in the US. This system often deals with large processes of debit and credit forms of transactions which come in batches (Federal Reserve Board 4). Their credit transfers include vendor payments, payroll, and deposits, while their debit transfers are in line with mortgage loans, premiums from insurance organizations, coupled with other forms of bills. They also include applications that are new to check conversions and point-of-purchase programs. This system is used by both the commercial and government sectors, while business forms make use of their online sources to enable customers to pay their bills as opposed to using debit and credit cards (Federal Reserve Board 4).

...... 55

In essence, they are computer settlement and clearing facilities which were established to ensure the processing of electronic transactions. Their rules are however put down and regulated by the

Federal Reserve and NACHA. In the year 2015, the system was able to process more than 24 billion transactions which had a face value of more than $41.6 trillion. It is vital to note that other networks outside their operations commonly undertake their credit card payments (Federal

Reserve Board 5)...... 55

The ACH operators include the Federal Reserve Banks using the FedACH main system. In the year 2005 alone they were able to process 70% of the commercial banking transactions, while the 30% was taken up by the Electronic Payment Network, which is the US sector’s ACH main operator. The banks and the EPN rely on one another when the parties involved are not their customer (Federal Reserve Board 6)...... 56

The different transactions by the operators are commonly settled by the banks, while the

Automated Clearing Houses are needed to provide disclosures to the government and the banks.

The Banks make use of deposits to ensure settlement of their transactions, and this is because bank credit is only used in the main bank it was initially created. Reserve Deposits are controlled by the central banks, and these are digital forms only (Federal Reserve 6)...... 56

3.3 Wire transfer ...... 56

3.4 3rd Party Processors ...... 57

xvii

Immediately the processor has all the required information, and that the card details are verified, the data is sent to the payment merchant who then does the final compilations and acceptance to aid the needed transaction. When verification is not accepted by the card entities, the same procedure applies, and the merchant is also informed to decline any payment that has been requested...... 58

3.5 Paypal ...... 58

PayPal is a third party kind of operator which aids individuals and organizations to receive payments from different merchants who are in line with their operations and regulations. They do not allow users to have their merchant accounts but use the terms provided by the processor who commonly have few setup requirements...... 58

CHAPTER FOUR ...... 59

4.0 Results ...... 59

Figure 4.1: Cryptocurrencies in Circulation ...... 60 ...... 60

(MacDonald et al. 295) ...... 60

Table 4.1: Cryptocurrencies Inflation Rate ...... 61

xix

...... 61

CHAPTER FIVE ...... 65

5.0 Conclusions ...... 65 List of Figures

Figure 4.1: Cryptocurrencies in Circulation ...... 60

xxi

List of Tables

Table 4.1: Cryptocurrencies Inflation Rate ...... 61

Table 4.2: Security Mechanisms…………………………………………………………………37 Abstract

Since its inception in the year 2009, Bitcoin has seen numerous growth capabilities, and this has led to the creation of other cryptocurrencies in the market. While some thrive, others fade before they start their operations. However, the crypto market is currently treated as the only technological advancement in the world due to their unique developments and operations.

Further, several papers have been published for purposes of algorithm improvements, while other discuss the numerous flaws in their development and design. Minimal studies have been done to understand role of the cryptocurrency in the economic world, hence the need for this paper. It provides succinct information on three major currencies which include Bitcoins, Ethereum,

Monero and Petro, their relevance, coupled with the different traditional payment systems that enable paper and electronic transactions to flourish. It answers the question on the developers, their motivation, and their acceptability in the market as a whole. Understanding the role of cryptocurrencies will help other researchers to base their arguments while giving learners an opportunity to understand how they are formed before they are launched. The data was derived from data-driven analysis to find out the role of cryptocurrencies in the modern economic world.

The future of such growth in the current market is discussed for purposes of understanding their economic value, and relevance to the economy.

xxiii

CHAPTER ONE

1.0 Introduction

A cryptocurrency is a coinage system that is virtual and commonly operates similarly to the paper currency in the process of providing payment options for services and goods without any controlling authority (Fry 344). It purely makes use of transmitted digital data, with the use of cryptographic techniques for purposes of ensuring unique transactions that are legitimate. The cryptocurrency industry has evolved at rates that are unprecedented over a short period. The release of the pioneer cryptocurrency in the year 2009 led to the development of more than 550 other cryptocurrencies majority of which never saw any success in their initial stages. Literature and research on the industry are currently scarce, while a majority of it only considered Bitcoins as opposed to the diverse cryptocurrency numbers which are under operation today. Despite its high growth rates, it is being outpaced by different regulations by the government, new coins, developments in the industry and technological progress. Even though the fluidity nature of the market presents a challenge for researchers and policy-makers, there is a need to evaluate the phenomenon with precision.

The thesis presents literature on the role of cryptocurrencies, with a clear focus on the economic markets. The data presented is comprehensive, and informs individuals of the different cryptocurrencies in the market, their relevance, and other vital information that pertains to their operations in the economic market. The first part discusses the introduction, where the whole idea of the cryptocurrencies is unveiled. The second section presents traditional payment systems and is followed by literature on issues that pertain to investments, drawbacks, bank involvement, and other uses of blockchain technologies. In addition, other tackled areas include players in the

industry, and how they categorize the cryptocurrency transactions, current EU laws, and the increased amounts of fees that are incurred by traditional processing agencies. The third segment will outline the conclusions and recommendations following the discussions.

Other vital options that are considered in the paper include a clear view of the industry, a historical background of these currencies, and different issues that affect their growth across the globe, and the perception of people on their use in the retail segment. The industry is still in its growth stage, and with the current developments, many factors impact its growth rates on a daily basis (Li & Chong 50). There are also few researched topics on this particular phenomenon, hence the need for this particular research. While different academic work was consulted, the majority of the information was derived from white papers.

1.1 Overview of Cryptocurrencies

1.1.1 History

The idea of electronic currency goes back to the 80s, while Bitcoin was launched in the year

2009 by an unidentified developer by the name Nakamoto Satoshi (Glukhov et al. 448). This was the first decentralized currency that became successful after being launched, and with current increased growth capabilities. Bitcoins moved a step further in the digital market by being free of any hierarchical structures, while being decentralized. Businesses and common people alike transact using this option electronically using the peer-to-peer network.

Increased attention on the Bitcoin was in the year 2011, and this is the time when different altcoins started appearing in the market (MacDonald et al. 280). Litecoin was later introduced at the end of 2011, and it had increased success immediately after being launched, with a high market capitalization which surpassed that of Bitcoin. The currency was however overtaken by

Ripple in the year 2014, whereas Litecoin started its modification processes of Bitcoin’s protocol, leading to increased speed in transactions, with the main tenet that it would increase the speed at which people transacted with one another in their day-to-day operations. Ripple, on the other hand, has the second highest market capitalization and was launched in the year 2013, with new and unique introductions to those of Bitcoin (Nica et al. 5).

The other notable introduction in this industry was the Peercoin, which makes use of revolutionary development process to ensure its coinage is sustainable. Peercoin uses the PoW technology of Litecoin and Bitcoin, coupled with its mechanism of proof-of-stake for purposes of employing a hybrid system of security. Recently, new developments have led to the introduction of NuBits, and this operates under the dual currency system. Currently, there are more than 550 coins in the market, which have different volumes of trade and user base.

Different nations, such as Russia, Iran and even the Marshall Islands have also expressed their interest in introducing or investing in cryptocurrencies (The Economist, “Venezuela's Crypto-

Currency: Salvation or Scam?”). similarly, central banks of different nations like Singapore and

Sweden have been contemplating on issuing their versions of cryptocurrencies, but are yet take this step (The Economist, “A Primer on Blockchain-Based Versions of Central-Bank Money”).

This trend poses a serious threat to the American dollar since it gives the countries an illusion that they have considerable control of their currencies. With their high levels of volatility, the

cryptocurrency market has seen increased changes in the past, with a high market cap of 10 billion, with Bitcoin taking the lead (Scott 78).

However, with this popular trend of cryptocurrencies, a critical question emerges (who will be the user of these currencies?). For example, individuals could either easily access and use central-bank digital currencies (CBDCs) or be restricted from using them. On the other hand, these currencies could exist like cash where they are transferred in a peer-to-peer system or a banking system or be transacted anonymously. Either way, the CBDCs could be beneficial

(create financial stability) or disadvantageous (disrupt the banking industry) (The Economist, “A

Primer on Blockchain-Based Versions of Central-Bank Money”). This therefore indicates that cryptocurrencies are at the moment speculative.

1.1.2 Bitcoin

This is a peer-to-peer digital form of currency, which was proposed in the year 2008 by

Nakamoto Satoshi. The idea behind its introduction was due to the increased reliance by commercial online operations on third-party financial institutions to process transactions. While the system is workable when dealing with different transactions, it still has issues on the part of a trust (Bala et al. 25). In addition, the existence of another trusted party not only increases the time spent dealing with other people while transacting but overall costs.

Initially, the intermediaries were getting increased pressure to get more information concerning the different parties for controlling their costs, and this led to Nakamoto’s invention. The investor wanted to come up with a new coin that never recognized other authorities and third parties, but only cryptographic proof. With this kind of a system, the developer knew that there

was going to be enough proof, low costs and anonymity among the users. All the cryptocurrency formations including the Bitcoin have digital signatures, where owners transfer the coin to others by simply signing on the past transactions, and the public key of the new owner and ensuring such additions are included at the end of the coin for purposes of programming this information to the coin.

The computer code lines are put into programs that are referred to as ‘wallet’ using hard drives or those that are online. Similar to cash, bitcoins can also be destroyed, lost or stolen, hence the need to always keep such drivers safe. Issues of stolen or lost wallets are common, and from research, one man from the UK disposed his hard drive which had his wallet of more than 7000

BTC, while the commonly known exchange in this industry Mt. Gox had more than $350 million stolen in the year 2014 (Jedlinský 185). Such scenarios brought about the issues of security when dealing with cryptocurrencies, and this has made more researchers start studying the phenomenon with the main aim of coming up with new strategies of how the system can be kept secure.

Bitcoins are received and sent by using the transaction logins in the blockchain. They commonly do not have any intrinsic value, but it is a function of demand and supply. Unlike the paper currency that is used across the globe, bitcoin is not backed or created by any authoritative body but works to help solve the common double-spending issue through its protocol. The idea of using third parties is eliminated by bitcoins, and users never require any trusted third party operator to make verifications (Vora 816). This not only saves time but allows users to contend

with minimal costs when dealing with other vendors. Issues of double spending are common with paper money users, and this applies when assets are duplicated, leading to increased costs.

The problems of double-spending never exist with physical currency users because the involved transactions often follow after the exchange of property from one individual to the other.

However, copying a digital file is not hard, but the security properties of the cryptocurrencies are inherent in their ledger systems or blockchains. The systems are strong and often keep records safely, and these include those that pertain to transactions with the main aim of avoiding copying, hence the idea of double-spending.

Bitcoin transactions are only termed as being complete when a certain computation power is made use for purposes of fulfilling the proof-of-work requirement. This point makes the transaction complete, hence full ownership is transferred to another owner without the problems associated with double-spending. This is because the network is already informed of the wallet the coin resides. The introduction of the bitcoin was made in January 2009, but during this period it traded below the dollar margin until 2011. It, however, improved in the year 2013 where it hit a high margin level of $1151 (Vigna et al. 15). The coin currently trades at $7000, and this figure is still moving higher, hence the increased investment in the segment.

Verification of the creator of this coin has not been made public, but only speculations are being heard from different quarters about Nakamoto Satoshi. The vast importance of this coin is that it provides users with low fees structures when compared to other traditional payment systems that are used and authorized by banks and other financial institutions. Its decentralization makes it unique when compared to other government currencies that are under operation. Currently, the

market capitalization for BTC stands at more than $7 billion, and this is a clear indication of future increments and benefits to the traders.

Physical forms of this currency are not available, but balances that are maintained in the cloud where massive forms of power are used to verify the various transactions that are undertaken.

Individual forms of these coins are never seen as being a valuable commodity because they are not presented by institutions. Despite all their not being considered as being legal tenders, they rank highly and have led to increased number of such currencies which have been termed as

‘Altcoins.’

Nakamoto’s name came up when his year of birth was registered during this period.

1.1.3 Ethereum

Similar to Bitcoin, Ethereum is also a blockchain network that is disturbed by its users. The two are different in many ways, but the most outstanding distinction is their capability and purpose.

Bitcoin on its part only offers a peer-to-peer system of cash transfer which allows for payments using the blockchain technology. While Bitcoin is only concerned with the tracking of ownership of their currencies, Ethereum focuses on the process of ensuring the program of decentralization is run efficiently.

It is a platform that is blockchain based on the main purpose of distributing computing features using different modalities. With its decentralized virtual machine, it can easily execute different scripts through the use of an international based network. It also has a token which is referred to as ‘ether,’ which can easily be transferred in between different accounts, for purposes of compensating for the computations done. Through the use of a tool referred to as ‘Gas,’ the use of a pricing mechanism is easily deployed to do away with spam in the networks.

The cryptocurrency was first proposed by Buterin Vitalik in the year 2013, but its development was live in the year 2015. The whole process of its funding involved online ‘crowd-sale’, and its initial production involved 11.9 million coins. Immediately after the fall of the DAO initiative in the year 2016, Ethereum was placed under two different blockchains, and while the new version was coined “Ethereum,” the initial one maintained “Ethereum Classic.”

Personal data is today stored in other third-party computers and only retrieved when required.

Such an operation comes with increased benefits as it allows data to be accessed easily and conveniently, through the use of specialized individuals in these fields. These people are usually responsible for storing and securing the data while doing away with the costs that are associated with uptime and hosting. With the convenience, there are also other vulnerabilities because hackers usually visit sites without the immediate knowledge of their owners. This implies that they can also invade the Ethereum networks, despite the stringent measures that have been put in place (Lim 361).

The internet has thus brought about different opportunities to the people by allowing them to perform different payment transactions from their places of work or at home. It has however been used to extend the blockchain technology to achieve this major goal. Ethereum is thus the newest form of technology that has joined this movement, and it is envisioned to take over the internet by storm in the coming years. While Bitcoin has the desire to disrupt other third parties in the payment system like PayPal, and many other online systems, Ethereum has an objective of making use of blockchain to do away with the third parties that are responsible for transferring mortgages, keeping track of different financial instruments and storing of data.

In the short-run, Ethereum desires to be a global computer that decentralizes the client-server model that is in existence. Ethereum renders clouds and serves useless by using nodes which are maintained by volunteers who are situated around the globe. Their vision is however to enable the functionality of allowing people to enjoy different services using this infrastructure across the globe.

While browsing through an app store, individuals commonly find colorful options that represent different services that are offered by various organizations across the globe. Such organizations or services rely on third-party service providers to ensure safe storage of their credit card data or purchasing history. In addition, the choice of such apps is also governed by other third parties;

Google and Apple for example censor and maintain the different apps that one can download at a particular period. With the current arrangements, Ethereum will be able to provide accurate control of such data points by returning them to their rightful owners, while ensuring owner rights are respected and upheld.

They will, however, introduce the idea of safety and ownership where individuals will not allow other third parties to control their data. This will make the owners to only make changes to their

Apps without allowing other third parties in their operations. In theory, the technique will provide the needed control that individuals need when dealing with past information that is usually accessible easily using the internet. The nodes in the system allow for changes every time people save or add notes to their networks (Umarovich 3).

However, it is vital to note that the current idea has not been fully embraced by the majority, due to their skepticism nature towards such digital platforms. The apps are useful, but their only problem lies in the specific applications of blockchain that will be scalable, useful and secure. It is also not clear if the particular Apps will be convenient similar to those currently being used across the globe. The Ethereum blockchain allows users to earn Ether instead of mining the bitcoins, and this is a form of crypto that continually fuels the network as required. Ether is also used by different developers of applications to ensure smooth payments for services on their networks.

It is vital to note that the system makes use of code that is dubbed “smart contract,” and this facilitates the exchanges of shares, money, valuable items or content. When being used in the blockchain, the smart contract is seen as a program that is self-operating, which has the power to perform different executable functions when different conditions are attained. Since the contract operates from the blockchain, they usually run without any issues of fraud, third party interference, downtime or censorship.

Blockchains usually have the capability of process codes, but some are limited towards this endeavor. However, Ethereum is somehow different, because it does not provide sets of limited operations, but allows individual developers to create the operations they desire. This, therefore, means that these individuals have the freedom of creating several applications which are beyond common provisions which have been witnessed in the past. Before its creation, the applications from blockchain were only made to perform limited functions, and this made Bitcoin, for example, to work under the peer-to-peer form of technology alone.

Later crypto developers were faced with insurmountable problems as they were not sure whether to increase the set of functions mostly provided by Bitcoin or come up with a new application with a different platform. After the functioning predicament was realized the creator came up with a new approach to dealing with the new creations. The main innovation of Ethereum, EVM

(Ethereum Virtual Machine) is software that ensures full operations of their network. It provides the easiness required when running programs albeit the increased amount of time that is needed and memory. The software allows for easier developments of the blockchain applications using a similar platform (Zhang et al. 60).

Ethereum is a vital component and can be used by developers who want their applications to be decentralized. These applications are important and have useful functions to their users. Bitcoin uses this similar technology and makes use of a peer-to-peer system which ensures different transactions and payments through their platform. All applications make use of codes that are

operated in the blockchain network and do not have any control either by an individual or organization.

1.1.4 Monero

Monero is a cryptocurrency that is privacy-oriented and was launched in the year 2014. The developers of this technology did not set aside anything to ensure increased continuity of the project, and this has made them to continually rely on donations from the community. The funds have been used to further the provisions of the new technology, which leverages the use of ring signatures and addresses to ensure the safety of the identities of the recipients and senders. The new technology of ring signatures is sufficient as it allows for a mix of different account keys which are collected from the blockchain of monero. This means that external observers cannot easily put a link on the signature to a particular user without being noticed while operating from the network.

The new ring signature concept was coined by different academicians from Weizmann Institute and MIT, and its introduction has led to the whole process of legitimizing monero, in a period when the overall usage of the cryptocurrency is new in the market. It is vital to note that there are different mixing services for most cryptos, and users went ahead to perform the mixing procedures when they desired to hide some information or data from the general public domain.

However, monero does mix coins which have been used in different transactions, and this conceals the normal concern that they are being mixed to hide the information of both recipients and senders (Kurihara & Akio 57).

The users of monero can easily keep all their transactions secret, but can also share such data selectively with the people they desire. With the view key, holders can easily look at the historical transactions without problems. Initially, the ring signatures provided obscure details to conceal the hidden information about the parties involved without hiding the relative amounts concerned.

However, with RingCT, which was a new update, the system was able to conceal the total amount transacted and the information of the recipients and senders. In addition to the leverages made on the ring signatures, monero also ensures increased privacy levels through the use of stealth addresses, which are not generated sequentially. This feature allows recipients to have publications of one address, with the different transactions made, to other addresses that are unique.

With this kind of privacy setting, monero provides fungibility, and this involves the substitutions done to any currency in the network. This provision makes the coins equal, and since every bitcoin has recorded information in the blockchain, other exchanges or merchants can easily shun those that are associated with certain issues like fraud or theft.

Different marketplaces like Oasis and AlphaBay, have strongly embraced this technology because of its popularity, and overall demand.

The market for monero is similar to that of other cryptocurrencies, and people who desire to own it can easily purchase it from various exchanges which include Kraken, Poloniex or Bitfinex.

every hour, with a total of 5,376 XMR every single day, with a hash rate of 81.84 million

(Piotrowska 201).

1.1.5 Petro

Petro is another cryptocurrency by Venezuela. This currency refers to an oil-backed crypto-asset, which the Venezuelan government intends to use to bring stability and economic independence

within the nation (The Economist, “Venezuela's Crypto-Currency: Salvation or Scam?”). Petro aims at saving Venezuela from the high rates of inflation that the nation has been experiencing, which have led to high costs of goods and services, as well as a low output. Oil production in the country has also declined due to insufficient investment by PDVSA and decreasing foreign exchange reserves. Nonetheless, for the Petro coin to work, there should be no political interference (The Economist, “Venezuela's Crypto-Currency: Salvation or Scam?”).

The idea of the Petro began in February 2018, but the Venezuelan state made it open to the public a month later. The government already has 100 million pre-mined copies of this cryptocurrency, with individuals in the regime claiming the pre-sale of the Petro amounted to $5 billion (The Economist, “Venezuela's Crypto-Currency: Salvation or Scam?”). According to the government’s plans, Venezuelans can purchase the Petro from authorized exchange points and use them to pay taxes. Consequently, this can make the Petro a dominant currency like the bolivar (The Economist, “Venezuela's Crypto-Currency: Salvation or Scam?”). Unlike

Ethereum, Petro does not validate nor store all transactions in numerous cryptocurrencies. Petro has a smaller platform than Ethereum and this makes it more centralized. Subsequently, it becomes easy for the Venezuelan regime to dominate and undermine this cryptocurrency (The

Economist, “Venezuela's Crypto-Currency: Salvation or Scam?”).

However, according to commentators, Petro appears to be a scam. There is a lot of skepticism since Venezuela has the most unstable currency in the world. The Venezuelan government is not only under sanctions from the US and EU, but also exploits private companies, violates the nation’s constitution and has devalued the country’s currency (The Economist, “Venezuela's

Crypto-Currency: Salvation or Scam?”). For this reason, Petro appears as an idea that only the most gullible investors may be willing to invest in. According to proponents of this

cryptocurrency, Venezuela can use it to circumvent sanctions from the US and raise the much- needed funds for its economy. Nevertheless, the US Treasury claims that any investor willing to trade with Petro may be in violation of the nation’s sanctions against Venezuela (The Economist,

“Venezuela's Crypto-Currency: Salvation or Scam?”). Therefore, Petro may only create a short- term solution for Venezuela’s economic problems. In other words, this currency may not be that effective in evading the sanctions.

CHAPTER TWO

2.0 Fiat Money vs. Commodity Money

Bitcoin is known to be a decentralized form of currency, whereas their users form a community regardless where they are situated around the globe. The particular community can be seen as being unified, whereas the currency is used as the main medium of exchange between the users, and traders in that nation (Bala et al. 169). This is a similar idea that can easily be applied to other forms of cryptocurrencies such as litecoin and reddcoin, among many others.

Fiat money has its legal status and value, and this is commonly derived from the relationships of the demand and supply channels, coupled with the regulations from the government. In addition, its acceptance among the traders and others users form a larger part of its value in the economy.

theft and fraud. With these stringent measures, the coins continually gain acceptance and trust from the majority making them popular among the masses. Most people consider bitcoins as being commodities and not a pure currency because of their inherent features, patterns of trading, and their ever-changing prices.

2.1 Relevancy of Cryptocurrencies

$30 million transactions by the end of the second quarter in the year 2017 (Jedlinský 185).

It is vital to note that the king of them all is Bitcoin, while other creations after it are imitations.

They have been created to provide an alternative method of transaction where increased security and safety is ensured. The cryptocurrencies are relevant in the world today and only exist on the

The industry is not stable, and this happens as its market is expanding at an alarming rate. With the variable pricing modalities, traders can earn big returns in a short period, while their security factors often play a major role because of their linkage to the internet. They are however the safest because getting bugs in the set is not easy, as this task is only accomplished by the community of miners. In addition, miners that can make extractions that exceed 51% can control

the world blockchain, and easily create another one. Hacking under these conditions is not easy as the hacker will only make transaction reversals or provide a blockage to other operations.

The primary inventors identity is unknown and goes by the alias Satoshi Sakmoto, and this is because of its current popularity. It is also vital for the inventors to keep their names secret for their safety. This is because of their characteristic of requiring authorization before they are transferred to another party. The mining of 32,489 blocks of bitcoins in the year 2009 alone, for example, indicates that those involved must have accumulated more than $900 million when considering the coins worth currently. With this kind of money and the limited exposure that was there during its initial stages, the inventors can easily be targets by criminals (Lim 361).

Most supporters have the belief that investments in the cryptocurrency market present the future.

The coin is not only growing in value but popularity, and this is because it can act as an alternative mode of payment or other commodities in the money market like gold.

However, businesses that operate online can easily add such payment options with other traditional forms without problems.

2.2 Money Supply in the Economy

The thesis studies a select number of cryptocurrencies through the use of data-driven analysis to provide a clear understanding of their role in the modern economic market. The current analysis will also showcase their failure and success since inception while providing relevant information for investors to use them for their investment opportunities. Altcoins are different from Bitcoins by the applications of various algorithms, and their mining procedures. Most researched papers provide information on the technicality of these coins, while others discuss their trends and future values, but all are based on their importance to the economy of the world. The confidence people have towards these currencies is an important concept, as it indicates those currencies that have majorly been accepted by the public domain (Umarovich et al. 3).

however, need for more research on the roles played by these coins, and how they will be shaping the world in the coming future. With full disclosure, the coins will need government attention and some regulation for them to stand the test of time, and offer services to their users without the thought of losses on their part.

2.3 Cryptocurrency and Money Functions

Defining cryptocurrencies as either fiat or commodity money is hard, but it was coined initially to operate as a medium of exchange. For purposes of differentiating cryptocurrencies from fiat money, bitcoins are always regarded as being digital forms of money. Currencies are always an integral portion of any economy in the modern times, and this is due to its several functions that help people to exchange their products and services with either liquid money or digital money.

With the popularity of cryptocurrencies in the world today, most merchants are accepting these forms of payment to offset their invoices without problems. Most businesses outside the online portal also use these forms of currencies because of their convenience and security. However, the little acceptance levels that have been set by other parties in the past made their success hard.

The recent increasing value of these currencies has however sparked worldwide speculations, and most traders, organizations, and individuals are using such forms of payment in their operations without problems. With the stringent security measures put in place for such currencies, merchants can counter instances of theft and fraud hence increasing their value and worth in the economy as a whole.

The year 2017 alone has seen an increased number of bitcoin users, and large companies are moving into their usage while encouraging their customers to keep track of their transactions.

Organizations like Expedia and Dell are now using bitcoins in their operations, and the currencies are used as mediums of exchange for products and services. Most digital currencies have not had the opportunity of flourishing, but they are on the way working towards becoming the next bitcoin in the future.

The currencies have also played the role of becoming a unit of account. This is a particular measure which anticipates understanding and leveling the value of the economy. When products are assigned values, investors and traders are allowed to make comparisons, while interpreting profits and costs. Economies commonly benefit from units of accounts that have some form of stability, and this has become the main issues that underpin the use of cryptocurrencies in the economy today.

However, the volatility nature of these coins often makes it hard for their acceptance, a condition that is always under scrutiny before any purchases are made. Issues of trust for any legal tender are vital, as it assists users to have the needed confidence that their investments are safe, while their expenditures are not exaggerated.

Cryptocurrencies are digital forms that have the capacity to hold wealth within themselves, and this is a vital function that is usually accepted when considering paper money. Even though this form is regulated, it also has to have the power of wealth for it to be considered as being valuable to the users. Cryptocurrencies also possess this vital characteristic, and people who trade in

Bitcoins today vision their investments as being huge when compared to those that were applauded in the past histories, more so in the oil industry. Investments that were done in this particular field were regarded as being superior, and this was before the introduction of bitcoins in the economic market.

2.4 Bitcoin Classic

Bitcoin makes use of peer-to-peer systems, and this was made possible due to the problems of double spending that had been seen in the use of traditional forms of payment. The introduction of Bitcoin saw a new advanced technology which required a computational force to decode and attack the blockchain, hence its high-security level. Such a provision limited the coin from going through other third-party dealers hence used between two different miners who form a community.

There are some issues like the size that were later discussed to improve the original version. The used software has been changed for purposes of increasing the transactions the system can undertake at a particular time. Such a process was only going to be possible through the use of algorithms, and every time a new block is completed it often gives way to another block that is waiting in the blockchain. The size issues resulted in the development of new software form to tackle the challenging issues of speed and size, hence the introduction of the bitcoin classic. In the year 2016 alone, bitcoin classic was able to process different blockchain with a capacity of two to one megabytes.

2.5 Bitcoin fork

Such improvements came into place amidst the cancellation of the ‘hard fork’ portion of Bitcoin.

CHAPTER THREE

3.0 Traditional Payment Systems

Individuals and organizations commonly use systems of payment alike to settle different financial needs. This is commonly done by ensuring the transfer of value and uses instruments, rules, people, institutions, technologies, standards and procedures for such transactions to succeed. The commonly used traditional form is the one that ensures monetary exchanges through linkages with banks. This kind of system maintains networks, which are also secured in the process of linking them with the users who are referred to as their account holders (Kim et al.

84).

The use of substitutes instead of cash makes such payment capabilities reliable systems in the industry. Individuals can easily make use of drafts, and other documentary credits when performing their transactions. With the advent of the World Wide Web and PCs around the globe, there has been a surge in the increasing number of electronic systems that are used for purposes of transactions among different people and organizations. Currently, people use electronic funds transfers systems, internet banking, e-commerce, direct debits/credits, credit cards, and debit cards. Other technologies make use of credit mechanisms which is a unique aspect used by individuals in transacting their businesses. All these provisions constitute a larger portion of systems that avoid the use of cash in both international and domestic transactions while making use of financial institutions and banks.

These products allow the transfer of funds domestically and internationally in real-time through the SWIFT network.

3.1 Electronic Payments

it can easily lead to increased economic gain. The options should, therefore, be real-time and operate on gross terms. The idea of real-time means that waiting time is limited when transactions are being undertaken.

The issues of globalization have led to an increased volume of transactions across the globe.

3.2 Automated Clearing House

In essence, they are computer settlement and clearing facilities which were established to ensure the processing of electronic transactions. Their rules are however put down and regulated by the

Reserve Board 5).

The different transactions by the operators are commonly settled by the banks, while the

Automated Clearing Houses are needed to provide disclosures to the government and the banks.

3.3 Wire transfer

These are methods of electronic transfer which are initiated by one entity or individual to another. They can be made using one account in the bank or by using cash transfers. There are different wire operators and systems usually provide different options while considering the

costs, transactions, and value. Systems like the FedWire in the US are commonly real time in their operations. They usually provide transactions that are quick, and irrevocable, and this is because of their real-time characteristic. Many other systems like the CHIPS usually have net settlement options, which are offered on a regular basis. Other settlement systems have high costs of operating, with payments that are relatively small in volume. Faster processes allow individuals to use less time in dealing with their operations, and this is a characteristic that is often regarded by most operators (Srivastava et al. 562).

3.4 3rd Party Processors

A processor can be any organization, which is usually recognized as a third party and is appointed by a particular merchant to ensure all the transactions are handled as required. Such operations become possible through different channels which include debit and credit cards for banks that are regarded as being merchant acquiring. They are commonly divided into back-end and front-end, while the latter have immediate connections to the card entities, the former usually accept settlement options from the front-end settlers, using the federal bank.

With operations that take few seconds, the processors are mandated to check on the transaction details, and these are often forwarded to the card issuers for purposes of verification. They also undertake different anti-fraud regulations when different transactions are being undertaken.

There are other parameters that are considered, and they include the country that issued the cards and transaction history, and while these parameters are employed, they usually determine whether a particular transaction should be accepted in the long-run.

3.5 Paypal

This is an American organization that operates across the globe while giving users the opportunity to transact online instead of using the traditional forms of payments like money orders, and checks. The organization operates as a processor for different online sites and commercial users who pay a small amount of fee to receive their services. It was established in the year 1998 and had its initial IPO in the year 2002, and by 2015 it became an independent organization away from its initial owner eBay.

CHAPTER FOUR

4.0 Results

The results section presents interpretations to the research questions, and this only makes use of the three stated coins, that is Bitcoins, Ethereum, and Monero. Both of them have significant market capitalization and were realized before 2015 (Kurihara et al. 57). The main method for reviewing such coins to ascertain their role in the economic market is always the white papers, and since most of them lacked this vital characteristic, their information was therefore collected from their main websites.

The operations and history of the cryptocurrencies have been discussed extensively in the previous sections. However, all of them have a similar calculation methodology which indicates the total number of coins that will be developed in the future. Increased number of these coins in the market will ensure their growth capabilities, and this will alter the economic condition of a nation. The total number of blocks that will be processed in the coming years is indicated in table

4.1, and from the table, it is clear that the rates of inflation are decreasing with time, with an ending margin of 0.40% in the year 2034. The processed numbers can easily be calculated by dividing 60 by the processing time for every block, with assumptions made that indicate 365 days a year with a constant of 24 hours per day.

The formula will, therefore, be: (60/time of processing each block)*365*24. The 60 used in this example denotes the total number of blocks miners can develop in every hour under normal circumstances. This figure is then multiplied by the units developed every hour to find the daily

productions and to get the annual totals 365 days have been used. Figure 4.1 shows the circulation of these currencies from the year 2009 to 2033, and it is clear that there is going to be a rapid growth rate in the future, while the table indicates their growth rate. These rates are vital in ascertaining their role in the economy and with an increased number of blocks coupled with low inflation rates, the economy will grow, leading to better business opportunities for different traders in the industry.

Figure 4.1: Cryptocurrencies in Circulation

(MacDonald et al. 295)

Table 4.1: Cryptocurrencies Inflation Rate

(Kurihara & Fukushima 57)

The trends in the industry present a consensus that is hybrid, and this is as a result of the previously introduced coins into the market (Li & Chong 60). The important role of any coin currently lies in its acceptance by the users, and their overall network capability and size.

Bitcoins have had higher trading volumes in the past, and this trend is likely to be envisioned in the coming years. They will be able to surpass other coins in value, hence making them ‘the most looked after’ in the industry. With the increasing investment opportunities in this industry, investors will only invest in those coins they anticipate better profits, and this will likely divide their value prepositions, and strength in the market. The developers on their part need to come up with better management capabilities that will not only ensure safety but success in the process of trading the coins in the market.

The coins are therefore not secure when considering other traditional systems and this is because of the regulations and standardization measures that have been incorporated in their operations.

Most traditional systems follow after laid down rules and regulations, and commonly processed by regulated processors or merchants who have the capability of understanding those systems that should be used and those that are not safe.

Most people are currently responding to the digital currency industry positively, while the cryptocurrency success only gains credibility through its acceptance in the market (MacDonald et al. 279). Its intrinsic value lies in the total number of users, and with minimal trust, such coins and their position of acting as alternative methods of payment will be unsustainable in the coming years. This particular road is not easy, and always complicated, and requires increased amounts of knowledge and education which will help unveil the skeptical nature of most investors who trade in the coins. This is particularly true to the recent data that indicated their volatility in the market, a factor that lessens their usage among users.

However, through the different stories that are provided by individuals about their market values and standing, the cryptocurrency market is slowly gaining strength in the global arena and could lead to increased benefits to both traders and users alike in the future. Despite their wide media coverage, cryptocurrencies are not known by most people in the society, but surveys indicate that

Bitcoin has generally gathered much acceptance because of the virtues surrounding its operations. Research conducted in the US indicated that a small margin of 4.0% traded with the coins, while the majority of the respondents confirmed that they feared its downfall due to its

decentralization capabilities. It is, however, important to understand that the usefulness of such coins should not be overlooked, and individuals need to research of their existence and operations for purposes of coming up with informed decisions before making concluding judgments (Nica 56).

It is also vital to note that PoS or PoW systems that work alone are never feasible. While a PoW system is known to have low feasibility in the long-run, due to its capability of developing economies of scale within the miners, coupled with its deflationary nature, the PoS is feasible, but often contend with different logistical problems. Such issues emerge because of the problems underpinning their coin distribution among the community members. There is, however, a need for a hybrid system, and this can not only be flexible when considering their deflationary and inflationary tendencies, but also their energy efficiency in the long-run. Currently, the industry consensus on the hybrid provisions is underway, but other methods have also been used and succeeded in the past.

Table 4.2 indicates these mechanisms against the market capitalization of the cryptocurrencies in the market today. It is clear that those coins that make use of a PoW mechanism have higher level market capitalization, and this indicates that they are highly valued in the market with higher returns for traders. However, with such provisions, the developers should also ensure that their security levels are high to avoid instances of theft, and fraud which commonly occur when coins are being transferred from one party to the other. The only way to ensure this safety is by way of coming up with unique algorithms while using several pseudonymous addresses.

Table 4.2: Security Mechanisms

(Kurihara & Fukushima 57)

CHAPTER FIVE

5.0 Conclusions

The cryptocurrency industry is growing at a relatively high rate, and the coins in this industry have shown that they are resilient despite the numerous theft cases, and government actions that have been undertaken in the past (Vora 816). Further, there are several coins that have emerged, and this is a clear indication of the industry’s growth capabilities. The value of digital money in circulation is increasing each day, and such aspects affect the inflation rates of a region and their economic standpoint in the long-run. The industry on its part has shown the world of its expertise and creativity in developing different solutions that are workable in the process of developing these coins. Bitcoin might never dominate the market for ever, but with increased expertise and increased technological advancements, the industry fully owes its existence to this knowledge.

While there are several cryptocurrencies that have come into existence, and most of them have tried to ensure that their privacy is at higher levels, very few have been successful in their operations. The protocol of cryptocurrencies desired to have a level of privacy that was high, by keeping the identities of the users private. This function was achieved by making sure that the identities of the users had pseudonymous addresses, and were generated randomly through the use of letters and numbers. The crypto markets always have their transactions recorded, and this makes them be available publicly. Hence any individual can get hold of them and use them when they want. Even with their pseudonymous nature, Bitcoins are often attached to several transactions, and this can make them recognizable. The purchase trends of such currencies are never hidden, and this makes them vulnerable when people desire to follow their footpaths.

While most people contend that cryptocurrency transactions are secretive, most organizations which are mandated to enforce the law often use analytics from blockchains to track all their past transaction histories.

Annotated Bibliography

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through the National Science Center, which had a mandate of promoting different

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capabilities of the various coins developed and how they shape the economy as a whole.

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conclude that all economic, financial systems are always influenced by virtual processes,

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conceptual plan of how developers can maintain their trust among the people they want to

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used to ensure increased economic gains among the people and the nations at large.

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forms of payment in the near future.

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2029, a fact that needs to be documented earlier. He also confirms that the banking sector

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authors use different models to explain the importance of such coins in the economy, and

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Accounting 5.2 (2016): 201.

The journal contends that cryptocurrencies should be seen as payment gateways

that are safe, with increased security features. From their research, they observe that

individuals and organizations should continually make use of such coins as this will

allow them to understand how they operate and their economic benefits as a whole. It

concludes that the economy will be shaped by such payment processes because they form

part of the larger equation which deals with the economic issues and growth patterns of

any nation.

Scott, Brett. How can cryptocurrency and blockchain technology play a role in building social

and solidarity finance?. No. 2016-1. UNRISD Working Paper, 2016.

Scott in his paper confirms that the blockchain technology and cryptocurrencies

as a whole are vital tools that will lead to financial freedom while building social

interactions in the financial sector. He concludes that with the widespread information

about these coins, developers should come up with ways of ensuring increased security

measures while building the needed trust.

Srivastava, Shirish C., Shalini Chandra, and Yin-Leng Theng. "Evaluating the role of trust in

consumer adoption of mobile payment systems: An empirical analysis." Communications

of the Association for Information Systems 27 (2010): 561-588.

The journal focuses on the role of vital aspects of trust in the use of different

payment systems in the world today. The authors confirm that such systems can only be

utilized if the developers put stringent measures that will make the users feel safe when

using such forms of payment.

Umarovich, Albekov Adam, et al. "Block Chain and Financial Controlling in the System of

Technological Provision of Large Corporations' Economic Security." European Research

Studies 20.3B (2017): 3.

The paper is presented from research that was conducted on the issues of controls

in the financial sector. They consider other traditional payment systems at length and

allude that with the increasing technological capabilities in the world, there is need for

increased security for all payment processes and systems.

Vigna, Paul, and Michael J. Casey. The age of cryptocurrency: how bitcoin and the blockchain

are challenging the global economic order. Macmillan, 2016.

The article presented challenges the introduction of bitcoins, but considers their

safety measures as being the main characteristic that is keeping them alive, and

operational. Through research, the authors confirm that the order in the economy has

been disrupted, hence the need for regulations which will ensure smooth operations in the

world economy.

Vora, Gautam. "Cryptocurrencies: Are Disruptive Financial Innovations Here?." Modern

Economy 6.07 (2015): 816.

Cryptocurrencies are seen as a disruptive form of payment, albeit their complex

innovation system. The author in this paper alludes that nations will grow to higher

heights economically if they continually seek new ways of ensuring social order in the

financial sector.

Zhang, Bryan, et al. "Moving mainstream: benchmarking the European alternative finance

market." Journal of Financial Perspectives 3.3 (2015): 60-76.

Zhang in his work considers the European markets, and provides information of how they are

operating while using different payment systems that are available to them. The journal

points into different aspects of finance and accounting, and concludes that with the

increased usage of the digital systems of payment, nations, organizations, and individuals

will become globalized hence their importance in the economy.

Works Cited

Bala, Sebastian, Tomasz Kopyściański, and Witold Srokosz. "Cryptocurrencies as electronic

means of payment without the issuer. Computer science, economic, and legal aspects."

(2016).

Federal Reserve Board. Report to the Congress on the Use of the Automated Clearinghouse

System for Remittance Transfers to Foreign Countries. Board of Governors of the

Federal Reserve System, 2011.

www.federalreserve.gov/boarddocs/rptcongress/ACH_report_201107.pdf. Accessed

24 Apr. 2018.