MONEY AND BANKING ASSIGNMENT subject IS CRYPTOCURRENCY THE FUTURE OF MONEY

Today, Bitcoin dominates 61.57% regarding the cryptocurrency market and it is subsequently followed by Ethereum, Carnado and Tether.. 2.2.2 Proof of work and proof of stake Proof of work

FOREIGN TRADE UNIVERSITY

-*** -MONEY AND BANKING ASSIGNMENT

Subject:

IS CRYPTOCURRENCY THE FUTURE OF MONEY?

Lê Mai Khánh Sơn Huỳnh Thanh Thảo Trần Thanh Tùng Phạm Gia Thịnh

Ho Chi Minh, March 3, 2021

In last decades, digital currencies have been widely traded throughout the world With the continuous development of cryptocurrencies, especially the slump of Bitcoin price in last months Many in the cryptocurrency community have spent years predicting that digital currencies will someday take the place of fiat currencies All things we mention in this report based on our knowledge, theories and information searched on the Internet This report gives an overall introduction of cryptocurrencies After that, we analyze pros and cons of digital currencies, which may give an overview whether they can become leading currencies in the future or not Summing up with our research with a conclusion that cryptocurrencies is the future money provided that it can be controlled by central bank While cryptocurrencies have yet to fully take over in the real world in a way that enthusiasts have predicted, there are nonetheless some signs that various currencies are making it in the traditional business space, even if only to a limited extent We will explain further below.

Table of content

1 Introduction 1

2 Cryptocurrency explain 2

2.1 Characteristics of cryptocurrencies 2

2.1.1 Decentralized 2

2.1.2 Irreversible & Immutable (cannot be undone) 2

2.1.3 Volatility 2

2.2 How does it work? 3

2.2.1 What is blockchain? 3

2.2.2 Proof of work and proof of stake 3

2.2.3 The role of Consensus in crypto 3

3 Evaluating the money roles of cryptocurrency 4

4 Benefits of cryptocurrencies 6

4.1 Open Participation 6

4.2 Enormous Profit 6

4.3 Time and Cost Efficient Transaction Processing 7

5 Limitations of cryptocurrency 8

5.1 Cryptocurrency Security 8

5.2 Price Fluctuation 8

5.3 Lack of regulations 8

6 Conclusion 9

References 10

List of figures

Figure 1: Market shares of cryptocurrencies 1

Figure 2: Bitcoin Price Fluctuation 02/2020-02/2021 8

1 Introduction

Cryptocurrency is just a repayment that is electronic that doesn't rely on banking institutions to confirm deals In place of being cash that is real is carried around and exchanged within the real world, cryptocurrency repayments occur solely as digital entries to an on-line database that describe particular transactions

The first digital currency date back to the early 1990’s, and was called DigiCash, offering anonymity through cryptography protocols However, it was in 2008 that the cryptocurrency that was first presented to the globe, when Satoshi Nakamoto introduced Bitcoin, in a nine-page paper entitled as “Bitcoin: A Peer-To-Peer

Electronic Cash System”

Into the most years which can be present cryptocurrencies and its particular market capitalization were increasing to levels never seen before, which has attracted more individuals to invest on Bitcoin, Ethereum, Ripple, Litecoin and so on Today, Bitcoin dominates 61.57% regarding the cryptocurrency market and it is subsequently followed by Ethereum, Carnado and Tether

Figure 1: Market shares of cryptocurrencies (market prices, May 2018, in %)

2 Cryptocurrency explain

2.1 Characteristics of cryptocurrencies

2.1.1 Decentralized

When we describe cryptocurrencies as being decentralized, we mean that they are not controlled Every currency in the world, apart from cryptocurrencies, is governed by some kind of authority Every transaction goes through a bank, where people are charged enormous fees, and it normally takes a long time for the money to reach the recipient Cryptocurrencies, on the other hand, are not controlled by anyone It’s a decentralised network and it’s built on the cooperation and communication of all the

people taking part in it Because of that, even if some part of the network goes offline, transactions will still be coming through

2.1.2 Irreversible & Immutable (cannot be undone)

Cryptocurrency transactions are irreversible and immutable The irreversible and immutable features of cryptocurrency means once it really is recorded in the blockchain that it's impossible proper however the owner regarding the respective personal key to move their electronic assets and that deals cannot be changed As it calls for one to change many nodes in the blockchain while it just isn't impractical

to alter the deal, protected cryptography makes it very difficult for modification So that you can avoid deals which can be fraudulent that cannot be reversed, all deals are transparently recorded regarding the blockchain and ready to accept people

2.1.3 Volatility

Another important characteristic of cryptocurrencies is its volatility From the time

2009, following the appearance regarding the cryptocurrency that is the very first Bitcoin, the cost possessed a large amount of ups and downs The price of cryptocurrencies goes down and up every single day, according to what people say, read and think by being subject to countless speculation From 2009 on, when Bitcoin started operating, the price has raised more than 5.000.000.000%

2.2 How does it work?

2.2.1 What is blockchain?

A blockchain is an open, distributed ledger that records transactions In practice, it’s a little like a checkbook that’s distributed across countless computers around the world Transactions are recorded in “blocks” that are then linked together on a “chain” of previous cryptocurrency transactions It is like a diary notebook which is written down all things happen day by day Each of pages is similar to a block, and the whole book, a number of pages, creates a blockchain With blockchain, everyone who uses a cryptocurrency has their own copy of this book to create a transaction record Every copy of the blockchain is updated continuously if a new transaction happens so that all records are identical precisely To prevent fraud, each transaction is checked using one of two main validation techniques: proof of work or proof of stake.

2.2.2 Proof of work and proof of stake

Proof of work is a method of verifying transactions on a blockchain in which an algorithm provides a mathematical problem that computers try to solve as quickly

as possible Each computer participates, called miner, gives the solutions for a mathematical puzzle that helps verify a group of transactions— as a block—then adds them to the blockchain ledger The computer that completes it well is rewarded with a small amount of crypto

Proof of stake is used for reducing the amount of electrical power necessary to have a quick check transactions, some cryptocurrencies use a proof of stake verification method Using proof of stake, an amount of cryptocurrency they are willing to “stake will set the limitation on the number of transactions which each person can verify.

When a validator is chosen to verify some new transactions, they will be rewarded with cryptocurrency, it may be the amount of aggregate transaction fees from the block of transactions

2.2.3 The role of Consensus in crypto

Both proof of stake and proof of work are all based on consensus mechanisms to verify transactions This means while we use individual users to verify transactions,

3 Evaluating the money roles of cryptocurrency

The question “what is money?” has had an amount of research dedicated to solving it While it has been hard to define exactly in definitive terms what constitutes as money and what doesn’t, it is clear that money is a crucial part of civilization and the human

condition

Currently, bitcoin does serve as a medium of exchange, however in quite limited capacity It is possible to exchange bitcoin for goods and services in a selected number of retail stores which operate around the world, and bitcoin can also be exchanged for peer-to-peer services by any individual who has a cryptocurrency wallet and is interested in exchanging goods or services for bitcoin

However, it should be noted that while the virtual currency can function as a medium of exchange, it does not reflect that the currency would be especially efficient in functioning as a medium of exchange Transactions fees can be another obstacle to the use of cryptocurrencies such as bitcoin as a medium of exchange, as

in cases of congested networks and spikes in the number of individuals making transactions, the transaction fees can spike to unusually high values

One of the crucial aspects that is essential for any currency or commodity to serve as a store

of value, is its ability to retain a stable and somewhat predictable value As discussed earlier, one of the significant obstacles is that the currency has shown to be extremely volatile in the past few years While holders of the currency may have welcomed this radical shift in value when the price of bitcoin was rapidly rising, the flip side of this rise was the expected and inevitable fall The value of cryptocurrency, especially the high volatility can partially be attributed to certain conditional factors, such as investor speculation, new market conditions Perhaps as the cryptocurrency market begins to mature, and the regulatory framework is established and known, the volatility may start to stabilize One issue is that to this date, despite cryptocurrency initially being invented to be used as a payment method, the virtual currency as observed has primarily been widely viewed as a financial investment opportunity, and therefore the value of it has also corresponded to this perspective, the virtual currency

market reacts in sync with people’s collective perceptions of it

A further global incorporation of cryptocurrency as a payment mechanism, may

eventually, alter the public’s perspective of cryptocurrency as an investment

opportunity into a form of currency The issue of volatility is of course, also a factor

that makes cryptocurrency unable to effectively at this point in time to fulfill the unit of account function of money It is hard to measure any asset in relation to the value of a cryptocurrency such as bitcoin, as the value continues to fluctuate However, in theory, given that the conditions were suitable, cryptocurrency in essence could fulfill the function of both a store of value and unit of account

4 Benefits of cryptocurrencies

In recent years, cryptocurrencies, especially Bitcoin-the most trading cryptocurrency, are becoming more popular and valuable in today's payment systems The technical infrastructure of bitcoin creates unparalleled opportunities that cannot be observed in other monetary systems Following is a brief description

of the major opportunities of this special kind of currency

4.1 Open Participation

Open Participation refers to the availability of the data on the cryptocurrency blockchain to everyone, causing the system to be completely transparent Cryptocurrencies in general, Bitcoin included, allows anyone with an internet connection to get access to these systems This open participation is enabled since Bitcoin is built entirely on verification, eliminating the need of trust In comparison with modern financial institutes and other intermediaries, cryptocurrencies demand trust, not in people but in technology There are certain requirements to open a bank account in almost everywhere in the world, such as being able to present a valid ID document or a passport Cryptocurrencies give groups, that for various reasons are excluded from the traditional financial infrastructure, access to a technical payment system

4.2 Enormous Profit

Bitcoin has surged to never-before-seen highs over recent weeks, breaking through

to levels that seemed unimaginable just a few months ago Investment on Bitcoin is now more attractive to many investors because they can get extremely high return

on investment from Bitcoin This Graph demonstrates the movement of Bitcoin price one year till now

Figure 2: Bitcoin Price Fluctuation 02/2020-02/2021 Due to the high profit, more people want to have Bitcoin on their hands, which lead

to a trend of Minting Bitcoin Because of the random nature of hashing, achieving

an acceptable block is never a guarantee Thus, bitcoin mining is a competitive venture, where miners are awarded new bitcoins for each block successfully hashed and accepted in the blockchain

4.3 Time and Cost Efficient Transaction Processing

The complexity of cross-system interaction is one of the biggest limitations of traditional payment methods Making cross-border transactions and bank-to-bank transfers consumes several banking days and eventual transaction fees Bitcoin offers a technical infrastructure

to transfer money anywhere in the world at any time Because both parties are connected to the same network, borders are eliminated No matter where on the globe one is located, transactions can be validated and confirmed within an hour, as long as payer and payee have access to a Bitcoin software Therefore, cryptocurrencies are faster, cheaper and easier when doing transactions.

5 Limitations of cryptocurrency

5.1 Cryptocurrency Security

Bitcoin exchanges are digital and therefore vulnerable to hackers, operational flaws, and malware By hacking a cryptocurrency exchange, hackers can gain access to millions of accounts and wallets where the cryptocurrencies are stored For example, the famous Mt.Gox hacking incident in 2014, which caused the Japanese exchange to close down after millions of dollars in bitcoin were taken These incidents can impact any exchange but pose the biggest threat on the smaller exchanges Since cryptocurrency is not considered as a currency by the US regulatory, these

cryptocurrency “banks” are not FDIC insured Therefore, if hackers steal your

cryptocurrency, the exchanges will not be responsible for that

5.2 Price Fluctuation

Since the beginning, cryptocurrency has had a very volatile nature For example, although Bitcoin is the most liquid cryptocurrency, it is still susceptible to wild price

swings over short periods In the incident of Mt Gox’s collapse, Bitcoin’s value fell

by more than 50% However, after the FBI’s announcement that it would treat Bitcoin and other virtual currencies as “legitimate financial services,” Bitcoin’s value rose by the same amount In 2017, Bitcoin’s value doubled several times, only to be

halved in early 2018, deleting billions in market value overnight While cryptocurrency’s volatility offers short-term gains for traders, it makes the currency unsuitable for more conservative investors with longer time horizons Besides, since

cryptocurrency’s value fluctuates from week to week, it’s difficult for consumers to

use it as a stable means of exchange

5.3 Lack of regulations

Because cryptocurrency has no central issuer, there are no formal entities to protect

the owner of cryptocurrency in case of frauds and scams Besides, since it’s the nature

of cryptocurrency to protect the owner’s privacy, it can be used to purchase illegal

purposes such as purchasing illicit drugs, weapons; be used as a mean of payment in the black market, money laundering,…