Essay Example. Exploring Cryptocurrencies

Published: 2024-01-14
Essay Example. Exploring Cryptocurrencies
Essay type:  Compare and contrast
Categories:  Internet Information technologies Money
Pages: 7
Wordcount: 1787 words
15 min read

A cryptocurrency is a digital currency used as a medium of exchange. Cryptocurrencies are immutable (information on blockchains cannot be edited), decentralized i.e., they are not under anyone's control, and trustless (information on blockchains can be accessed easily and therefore, there is transparency). Decentralized control of cryptocurrencies works through blockchains. Information is stored in blocks in the blockchains; they provide a permanent record of information.

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Cryptocurrency is a digital currency used as a medium of exchange that cannot be counterfeited (Mason, n.d). Cryptography is used for data encryption to ensure information security. It uses the blockchain technology to store information. Blockchain technology stores information in blocks, and the information does not have a central authority, i.e., it is decentralized. All the cryptocurrency users have control of available information, but not one or a few users, which creates transparency. Blockchain has a record of all transactions, and information stored cannot be edited or reversed unless all the users have agreed.

Forms of cryptocurrency are; bitcoin (most commonly used), Litecoin, Ripple, Ethereum, Dogecoin, and Coinye. The traditional modes of payment in transactions include credit cards and debit cards, cheques, and the use of cash. According to Omohundro (2014), cryptocurrency is important in transactions over the traditional payment modes because the payment cannot be charged back i.e., it's irreversible (information stored on blockchains is permanent/ cannot be reversed). It also has a lower transaction cost because there is no government or intermediary involvement; there is only a flat fee, which is very minimal. The transaction fee is less than 1%, unlike in credit cards, where it ranges from 1.5% to 3%. Lastly, there is user discretion in this type of transaction; personal details of users are kept anonymous, and both domestic and international transactions are treated the same. Anonymity in transactions has encouraged illegal activities such as drug peddling, weapons procurement, and money laundering.
Cryptocurrencies are not considered legal tender like other forms of currency; they have not been entirely accepted and adopted by citizens. There is no government control, and its supply is not regulated by the government(decentralized). According to Martucci (2017), for a currency to be well functioning, it has to act as a unit of account, store of value, and exchange medium. Bitcoins, however, do not perform these functions because its unstable price i.e., price fluctuations hence change in value over time. The market price of bitcoins is determined by the forces of demand and supply. It fails to act as a medium of exchange because of the slow transaction speeds involved. Transactions may be slow because of network congestion, and because of their low transaction cost, miners opt to go for transactions that have a higher cost because they will get better returns.

A shift towards a cashless society has contributed to the adoption of cryptocurrency as a means of exchange. Cashless transactions eliminate the risk of counterfeit money, theft and reduce the costs involved in withdrawing from the bank, transportation of money, and time wastage during counting (Central Bank of Ireland, n.d). The use of cryptocurrencies has led to the growth of the blockchain field, where more apps are being developed so as to facilitate the acquisition of digital assets through purchases.

One of the reasons for the slow adoption of cryptocurrency is the lack of awareness in the masses and the media's role. The media has created an illusion about cryptocurrencies; negative media coverage hinders cryptocurrency adoption. The Chinese authorities in 2017 banned ICOs (Initial Coins Offering), and this led to a reduction of the price of bitcoins from $5000 to $3000. Another reason is security problems in cryptocurrencies as a result of hacking. In 2014 Mt Gox, a cryptocurrency trading platform, lost approximately 850000 bitcoins through theft. The high risks associated with cryptocurrency hinder its adoption.

Recent Development and Special Cases

Most people and organizations have adopted the use of cryptocurrencies in 2020 (bitcoins). Among them is the banking industry, which got attracted to it because it is the best performing asset. JPMorgan retail bank is processing crypto transactions, and it plans to create its coin (JPM Coin) that will be tied to the US Dollar. This will facilitate cross-border transactions. Venmo and PayPal are offering direct sales of cryptocurrencies. There is a high level of transparency when using cryptocurrencies because of decentralization, and people have more control over their wealth because there is no government involvement.

Recently, most people have adopted the use of cryptocurrency, especially in 2020 after the coronavirus pandemic. Different economies have printed more money to be used during the COVID-19 19 pandemic. The value of currency has been decreasing lately (The US dollar), and this makes many people to adopt the use of cryptocurrency because it has inflationary protection.

The increasing credibility of bitcoins has also increased its use by people. Credibility is a result of transparency because all users can access information on all transactions on blockchains. Most organizations and institutions are adopting the use of cryptocurrencies in service delivery. In Hong Kong, some of the companies include; Ping An Securities, CWT International, SMIT holdings, and Chong Sing Holdings FinTech. Most Hong Kong citizens have adopted the use of cryptocurrency to keep their assets from government control (anti-government protest). The government will be able to freeze people's assets if they are involved in illegal activities. The use of cryptocurrency keeps assets away from government control.

The recent developments in cryptocurrency markets are; co-movements, forecasting, and spillover effects. Cryptocurrencies are treated as things, and this means that their prices move together. The spillover effect quantifies how the price of one cryptocurrency is affected when another cryptocurrency is hit by a one-unit shock (bi-directional and unidirectional spillovers). As they become established, its sensitivity to impacts reduces. Forecasting involves the prediction of cryptocurrency prices (Coley, 2020). It involves acquiring the current data on cryptocurrencies, preparing data for testing and training, predicting cryptocurrency prices using LSTM (Long Short Term Memory) neural network, and visualizing predicted results.

Countries that have adopted the use of cryptocurrencies have put in place measures to regulate its use. There has been a consultation by the Hong Kong government, and its aim is to counter financing regulation of terrorists and strengthening anti-money laundering in the country. Money laundering is most common in areas of drug trafficking, weapon procurement, international terrorism, and embezzlement. The regime intends to make it mandatory for cryptocurrency platforms to have a license if it will be approved. The introduction of licenses in cryptocurrencies ensures that there is oversight of rival digital currencies.

Libra: Currency Issued by Facebook

Another form of cryptocurrency is Libra, which is issued by Facebook. It was developed so as to help people in developing countries who had little or no access to financial services or banks. This would promote financial inclusion. The currency will be backed by sovereign currencies like the yen, the dollar, and the Euro (Massad, 2020). Management of Libra currency is entrusted to the Libra Association cryptographically, and demand will be the basis for the creation of the currency. Libra intends to develop infrastructure that will support many cryptocurrencies. However, central banks are opposing the Libra project because of its implementation, which requires the use of a blockchain and cryptocurrency. Other reasons for opposition are the creation of fake Libra websites on Facebook and privacy concerns because of lack of user discretion. The G7 also opposes Libra because it fails to address regulatory, legal, and oversight requirements. Improper regulation of the Libra project will compromise consumer protection, privacy, financial stability, cybersecurity, and taxation (Roberts, 2020). Libra's successful implementation requires a blockchain consensus, software, digital wallet (Novi), and move (smart contract).

The original proposal of Libra did not address many issues, and it therefore had a lot of criticism. With the current proposal, a lot of changes have been made to address grey areas. Initially, a single stable coin was backed by many currencies, which interfered with the central bank's monetary policies. In the current proposal, there are many stable coins, and each of them is backed by a single sovereign currency. This shows that Libra does not undermine sovereign currencies. To reduce financing of illegal activities and money laundering, the current proposal has also improved compliance through the introduction of screening procedures. The other change is on the protection of the reserves of foreign currency by Libra to address soundness and safety concerns. Libra issues stable coins in exchange for these reserves. As much as changes have been made, people are still skeptical about the privacy of Libra because there are high chances of data misuse, which has been created by Libra.

Digital Currencies Issued by Governments

There are many forms of digital currencies to be issued. They include; e-cash, cryptocurrencies, central bank digital currencies, and virtual currencies. There is a record of all the transactions that have occurred by the use of digital currency in the blockchain. Many governments are launching their cryptocurrencies to do away with bitcoin, which is decentralized and regains control. Some of the countries that have issued their cryptocurrencies include Tunisia, Senegal, Singapore, Ecuador, and China. China is looking towards replacing paper money with cryptocurrency. There are successes and constraints of adopting cryptocurrencies. Draghi (ECB president) stated that Eurozone member states should not introduce their own digital currencies. The Euro remains to be the currency of the eurozone. When countries launch their cryptocurrencies, the Ethereum and bitcoin will be significantly affected. People will be forced to move out of bitcoins into national digital currencies. Bitcoin holders will not receive a move to a centralized cryptocurrency well. This is because national currencies have a centralized nature, and this means that central banks will control its value, unlike in bitcoins, which is decentralized, and its value is determined through demand and supply i.e., high demand means high prices and low demand has low prices. Some countries like Japan have recognized bitcoin as legal tender. It is less likely for nations that do not have their digital currencies to accept bitcoins as the only cryptocurrency at the expense of the national digital currency.

There is progress as China hopes to start using its digital currency- Digital Currency Electronic Payment. China intends to use this currency to promote the use of Yuan as Washington threatens to use laws to regulate the use of the dollar in China's financial institutions. This currency is centralized in nature (controlled by the People's Bank of China- PBOC) and does not use the blockchain technology. There is assured stability in the value of this currency, but there is no user discretion as in the case of bitcoins. The need to monitor transactions and eliminate anonymity so as to reduce money laundering activities drives central banks to consider digital currencies.

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