The Importance of Research
The importance of this article is to study the feasibility of new technology that could revolutionize the way we handle money in the United States of America. Financial services, commercial applications, retail, and exchanging currencies with other countries all are potential areas in which cryptocurrency could have an impact. This article aims to rationally and objectively evaluate potential flaws and strengths with the proposed digital currencies. This post will look at what value cryptocurrency can bring to the United States economy as well as what cost will with implementing such a technology.
The information and data compiled for this research are limited to the United States economy and monetary system. Estimates will be based on unbiased reasoning and judgment and carefully explained. Assumptions will be stated for the reader and carefully analyzed based on current scholarly academic journals. Existing data will be taken from available data and the source of the information noted. Limitations of this research will be based on academic literature available on this topic due to the recent creation of such a currency. Few economic models have been developed for cryptocurrencies and this paper will discuss currently available models.
Since cryptocurrency is a relatively new technology there is limited scholarly research regarding the topic. Financial institutions and academic research institutes are starting to perform financial models on the feasibility of cryptocurrency. The largest digital currency in terms of market cap is Bitcoin. Bitcoin is the cryptocurrency that is most widely studied. Much of the research that will be discussed in this literature review will focus mainly on Bitcoin, but some research discusses other coins that use blockchain technology.
Several articles see potential in using cryptocurrency in the global economy as well as The United States’ economy. The articles discuss the potential vulnerabilities and possible applications of using digital currency. The literature review will include three areas: benefits of cryptocurrency, applications of cryptocurrency in business sectors, and oppositions of cryptocurrency and underlying technology.
Benefits of Cryptocurrency
Blockchain technology is the protocol that allows Bitcoin to operate as a decentralized entity and provide accurate ledger recordings within its ecosystem. This online ledger keeps a record of all transactions dating back to the creation of the coin. This blockchain technology allows individuals or companies to make transactions without using a “middle-man” application to make sure each party gets debited and credited (Underwood, 2016). This is a digital means of making payments with the absence of using a third party (Chiu & Kooeppl, 2017, p. 3). When the ledger is updated it is copied across the network running the bitcoin protocol and allows it’s to be updated with minimal risk to hacking or tampering. The risk of hacking is minimal since Bitcoins’ proof of work protocol is solved by miners who collaborate work to solve a mathematical puzzle that wins each block in the blockchain. The competition in mining keeps the chain secure and is too challenging for anyone miner to solve at one time. By using this technique no one person can ever gain access to the ledger to rewrite transactions (Extance, 2015).
Researchers point out many benefits in which cryptocurrency could provide value to society. The following section will review articles in which applications of cryptocurrency in businesses was discussed.
Applications of Cryptocurrency in Business Sectors
Blockchain technology can change how organizations provide value and efficiency in their transactions. (Michelman, 2017). This ledger that is built into the blockchain technology could change the way commercial applications operate to evaluate transactions for fraud. Financial applications could replace current technology with blockchain technology utilizing its security, immutability, and ability to cut out the middle man. (Underwood, 2016). Businesses currently waste resources on auditing transactions and their ledgers which could be done by using blockchain. This could reduce the company’s overall verification costs and improve revenue models. (Michelman, 2017).
Ethereum allows users to make contracts. Ethereum is also decentralized but allows unlike Bitcoin which acts strictly as a currency, and these contracts are used to crowdfund companies or set up a voting system (Extance, 2015).
Businesses currently waste resources on auditing transactions and their ledgers which could be done by using blockchain. This could reduce the company’s overall verification costs and improve revenue models (Michelman, 2017). Central banking institutions may have to change the way they operate if this technology becomes mainstreamed and the cryptocurrency monetary system becomes widely accepted (Sauer, 2016). Taxation could also be performed differently within the government with blockchain technology allowing for money to be taxed in real-time. Blockchain technology could revolutionize taxes since the ledger of the blockchain is updated in real-time and everyone has access to it including government organizations like the IRS (Schwanke, 2017).
While many of the scholarly literature on digital currency discusses the potential, the technology could bring, some discuss oppositions to the technology and risks involved. The following section will discuss research that concludes in opposition to technology. Other researchers believe that the current technology is not at the level it needs to be for widespread adoption.
Oppositions of Cryptocurrency & Underlying Technology
The security of the blockchain system is under debate. The mining aspect in which the blockchain ledger is updated is discussed as a possible risk to cryptocurrency. Miners are using computing power to verify each block or transaction being updated on the ledger and can pool their computation power. The system is at risk when one group of miners have over 50% of the total mining power which briefly happened in 2014 (Extance, 2015). This has happened in the past to coins that were taken down by successful 51% attacks which dominated the mining power and took down smaller cryptocurrencies called Terracoina and Coiedcoin which the damage was so detrimental they ceased operations (Extance, 2015).
Security risks are at the whim of the user in most cases. In which the user could lose his digital currency due to hardware, misplacing a password, or vulnerability of storing it in an online database. People have two numeric keys which one public one that they give to others as an address to send money to, and a private one that they use to approve transactions (Extance, 2015).
Many investigators see no real value in cryptocurrency in the form of “money”. Since bitcoin is a non-regulated currency and not controlled by any institution it is seen as a risky asset (Sauer, 2016). Bitcoin’s chances of survival are slim due to the system not being built on the trust of the system like banking (Dowd & Hutchinson, 2015).
Data shows that many digital currency holders do not own the currency for uses in the marketplace but rather as an investment. To some authors, the digital currency does not currently play a substantial role in society and it is unlikely that they will achieve widespread usage in the foreseeable future (Ali, Barrdear, Clews, & Southgate, 2014). If Bitcoin cannot show value in the form of payment systems rather than an investment then it will likely cease to continue with no rewards from mining (Dowd & Hutchinson, 2015). There needs to be a policy set in place to control the digital currency supply and there is not enough empirical evidence on how the money market equilibrium will act with digital currency (Sauer, 2016).
While researchers discuss the potential vulnerabilities to Bitcoin and another cryptocurrency it seems that blockchain technology will be here to stay. Some coins may cease to exist in the future but the blockchain is proving to have real application potential in the economy.
Summary of the Literature
The literature shows that there are practical applications in which cryptocurrency could be used within the economy. Many authors performed took qualitative approaches to the topic and formed conclusions on the benefits that cryptocurrency could bring to business sectors as well as society. While other researchers see value in cryptocurrency technology, they point out that there are flaws with the technology and potential risks that need to be addressed before it could achieve widespread usage. The other flaws seem to be that the current adoption of the currencies is being treated as an investment rather than the intended purpose of a currency to be used in payment systems.
What do you find to the be a most impactful benefit to this new technology? Leave your comments below!
Ali, R., Barrdear, J., Clews, R., & Southgate, J. (2014). The economics of digital currencies. Bank of England. Quarterly Bulletin, 54(3), 276-286.
Chiu, J., & Koeppl, T. (2017). The economics of cryptocurrencies. Retrieved from https://www.chapman.edu/research/institutes-and-centers/economic-science-institute/_files/ifree-papers-and-photos/koeppel-april2017.pdf.
Dowd, K., & Hutchinson, M. (2015). Bitcoin will bite the dust. Cato Journal,35(2), 357-382.
Extance, A. (2015). Bitcoin and beyond. Nature, 526(7571), 21-23.
Michelman, P. (2017). Seeing Beyond the Blockchain Hype. MIT Sloan Management Review, 58(4), 17-19.
Sauer, B. (2016). Virtual currencies, the money market, and monetary policy. International Advances in Economic Research, 22(2), 117-130.
Schwanke, A. (2017). Bridging the digital gap: How tax fits into cryptocurrencies and blockchain development. International Tax Review, International Tax Review, Mar 23, 2017.