Abstract
This paper looks to explore a new digital cash system, cryptocurrency, and the effects it may leave on the economy. Cryptocurrency doesn’t need third-party intermediary overseeing transactions, and because of this, there are some benefits and drawbacks. Through research, this paper explores the depths of cryptocurrency, when it was invented, how it works, and how it is affecting our society.
The Impacts of Cryptocurrency on our Society and Economy
Throughout the past decade or so, there has been an increase in the popularity of cryptocurrency. Cryptocurrency is a digital currency stored in electronic wallets, which is transferred and recorded using blockchain technology. A blockchain consists of a chain of several blocks, each block being a piece of data stored in a database known as the chain. Cryptocurrency may seem like a technology of the future, but it has, and will, revolutionize the way we store money, pay for goods and services, and do business. Additionally, there are other ways that cryptocurrency can make our economy and society a better place by making transactions more private and efficient and improving the e-commerce system. The idea of an implementing a digital currency into our society is exciting, our society has never before had the opportunity to make international cashless transactions not just the economy will benefit from this but also the social constructs of our society by letting still developing countries have the same benefits and economic advantages as other more technologically advanced countries.
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While the nature of cryptocurrency is still somewhat ambiguous, it has caught the attention of many as the market and applications for cryptocurrency continue to grow. Perhaps one of the greatest indicators of cryptocurrency’s success is exemplified through an article written by Yessi Bello Perez, which entails the story of a man who in 2010 bought a few pizzas for the price of ten thousand bitcoins. Perez explains that in 2018, those bitcoins were worth 82 million dollars, roughly $4 million per slice (Perez, 2019). In 2010, it was interesting to see that you could buy something with lines of code on a screen but to see that only five years later, those ten thousand bitcoins would now be worth millions displays the intensity of the growth of cryptocurrency throughout the past few years. While some are still hesitant to accept digital currency as a universal currency system, its increase in popularity leaves many economists and small investors wondering how the implementation of cryptocurrency in our society will impact the global economy.
One of the biggest mysteries regarding cryptocurrency is the identity of the creator of one of the first cryptocurrencies, bitcoin. This is because the computer programmer uses a pseudonym: Satoshi Nakamoto. No one knows who Satoshi Nakamoto is, but “Satoshi” means “clear thinking, quick-witted; wise”. “Naka” can mean “medium, inside, or relationship”. “Moto” can mean “origin”, or “foundation”. So, it is very likely that Satoshi Nakamoto is an organization of individuals. But since the creation of bitcoin, no one has been able to figure out the true identity of Nakamoto. In 2008, Nakamoto published a white paper on cryptocurrency, that explained the details of how he would use blockchain technology to create a digital currency system, he called it a “peer-to-peer electronic cash system”. Shortly after the publication of Nakamoto’s white paper, Nakamoto released bitcoins software to the public and partnered with several programmers and software developers online to improve bitcoins software. The collaboration to improve the software continued for a few years until 2011 when, suddenly, Nakamoto vanished. Prior to disappearing, Nakamoto contacted a fellow programmer that was working on the software, telling him through an email, saying that he had moved on to other things. It was estimated by an argentine researcher by the name of Sergio Demian Lerner, that prior to disappearing, Nakamoto was in possession of about one million bitcoins, and today that number of bitcoins would be worth over 5 billion dollars. Even to this day, Satoshi Nakamoto's identity remains a mystery. Over the past few years, several individuals and groups have claimed to be Nakamoto, but none have had programming skills advanced enough to be viewed as Nakamoto by the public. The only known information about the mysterious inventor are the claims to be located in Japan, and supposedly born on April 5th, 1975.
Initially, blockchain technology was created by Nakamoto as a way to store bitcoin. But eventually, blockchain and bitcoin separated when people found a use for blockchain outside of bitcoin and cryptocurrency. Even today, there are still those who cannot distinguish between blockchain and bitcoin. But it wasn’t until 2014 that people started to explore how blockchain technology could be altered to perform many different kinds of operations. Using blockchain technology is extremely efficient and may even reduce the cost of transactions.
After the initial creation of bitcoin, other cryptocurrencies began, most notably Ethereum. Vitalik Buterin, an initial contributor to the development of bitcoin, soon became infuriated with bitcoin’s programming limitations and sought to create a more flexible blockchain. Buterin built the second public blockchain and called it Ethereum. Ethereum is different from bitcoin because Ethereum can record other transactions such as loans or contracts, transactions that bitcoin cannot record. Ethereum began in 2015 and is used to develop smart contracts, which can be automatically processed based on a set of conditions established in the blockchain. Ethereum caught the attention of multiple corporations such as Microsoft, BBVA, and USB. These corporations were attracted to the functionality of these smart contracts and by the potential to save money and time.
Nakamoto never intended to create a currency. Instead, he wanted to build a decentralized digital cash system. Nakamoto was hoping to build a digital cash system without a central entity, in which he succeeded. He did this by utilizing blockchain technology to create a digital peer-to-peer transaction system. A blockchain is a decentralized ledger of all transactions across a peer-to-peer network. A decentralized ledger, in its simplest form, is a database that consists of and is updated by nodes or participants in a large network. Because blockchain is stored on a distributed ledger, it can safely and effectively record the transactions of two separate groups. Blockchain technology was given that name because it consists of a large number of blocks of data linked together on a chain.
A singular block within a blockchain is a collection of data. The collection of data is stored in a block on a blockchain by connecting to other blocks in chronological order form a chain of blocks linked together, containing large amounts of information. As it is distributed, Blockchain technology is usually managed by a peer-to-peer network. Peer-to-peer networks are the core of most cryptocurrencies. The idea of a peer-to-peer network is to exchange digital assets like cryptocurrency through a distributed network. With a peer-to-peer network, there is no need for a centralized authority to oversee and mediate transactions. Instead, peer-to-peer platforms allow buyers, sellers, and other participants to execute trades directly to each other without the need for intermediaries. It is these peer-to-peer networks that manage blockchains by working to solve complex mathematical equations discover new blocks within a blockchain.
Once the data is recorded, the information in each block cannot be updated or changed without altering the following blocks, which requires a consensus within the network. This consensus is how blockchain technology can prevent unauthorized online activity and is therefore not as vulnerable to hacking. Cryptocurrencies like bitcoin are a decentralized cash system that uses blockchain technology to record all transactions on a peer-to-peer system.
Twelve years ago, the thought of cryptocurrency was nothing more than an academic concept, largely unknown to the world. Some attempted to create a cashless currency system in the ’90s but to no avail. Well, this idea came to life in 2009, with the creation of bitcoin, the first successful digital currency. And now, a large number of people use cryptocurrency and those that don’t, have probably heard of it. Lubomir Tassev shows the drastic increase in the popularity of cryptocurrency in her article she says that according to a study done in by Statista, “The number of blockchain wallet users worldwide has jumped from less than 6.7 million in 2016 to over 34.6 million in 2019.” (Tassev, 2019). A possible reason why the market for cryptocurrency gained popularity and grew so drastically over the past few years could be due to many individuals taking advantage of cryptocurrency as a lucrative investment opportunity. While many are still skeptical of cryptocurrency and lack an interest in investing time and money due to the uncertainty and mysterious nature of the market, some have invested by buying popular cryptocurrencies like Bitcoin, Litecoin, and Ethereum. Others have attempted to profit off of cryptocurrencies by mining bitcoins themselves, this has worked for some, but for others, this was unsuccessful, because, at a certain point, it costs more money to run the equipment that mines the cryptocurrency than the money gained by the mined digital currency. Even still, countless individuals have made a small fortune from mining bitcoins.
Cryptocurrency has also gained popularity among many businesses and personal finances. Governments, businesses, and other large corporations are working to learn more about the cryptocurrency market and how they can utilize blockchain technology to their advantage. Many companies and businesses have begun researching blockchain technology to assess the practicality of incorporating this technology into their business operations. Since our society is becoming more and more digitally driven, financial service providers are becoming more interested in learning about cryptocurrency and potentially using it as a way to provide secure services in a more efficient and cost-effective manner.
Many analysts compare cryptocurrency to gold to see which is a safer and more beneficial investment opportunity, but economists are more concerned with how a financial system based on cryptocurrency compares and contrasts to a gold-standard financial system. Some of the most notable differences between cryptocurrencies and gold is their contrasting supply and demand, which gives them very varying degrees of purchasing power stability. The rate at which the stock value of gold grows each year responds to and stabilizes the purchasing power of gold. Commodity demands also respond to the changes in the price and prevent drastic variations in the value of gold. The rate at which the value bitcoin and other cryptocurrencies change, on the other hand, is entirely programmed. With cryptocurrency, there is a complete lack of commodity demands to stabilize its value, and it doesn't have to react to its purchasing power.
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Cryptocurrency is analogous to the gold standard in at least two ways. First, both cryptocurrency and gold are stateless, so either can provide an international base currency that is not the subsidiary to any national central bank. Second, both cryptocurrency and gold provide a base currency that exists in a consistently limited quantity, because there are so many Bitcoins, Litecoins, Ethereum, etc. And therefore, a central bank can't create more of each base currency in any quantity out of thin air. Gold payments can be peer-to-peer without a third party involvement only when exchanged in a physical state, like a coin or a bar of gold. Electronic gold payments require a reputable, trusted intercessor to oversee the transaction. Whereas, cryptocurrency payments take place on a distributed ledger and use a peer-to-peer network without the need for a financial intermediary. In reality, it is not uncommon for cryptocurrency transactions to use the services of commercial storage and exchange providers.
Like most new technologies, cryptocurrency has benefits and drawbacks. Cryptocurrency’s ability to let users make transactions amongst themselves without supervision and verification from a third party has left many worried about the doors this may open if cryptocurrency ended up in the wrong hands, most notably by Bill Gates, the co-founder of Microsoft, who was skeptical of cryptocurrency and its ability to make crime easier. Bill Gates was concerned that blockchain technology was killing people by revolutionizing financial crime, terrorism, and drug dealing, by saying in early 2018, “The main feature of cryptocurrencies is their anonymity. I don’t think this is a good thing. The Government’s ability to find money laundering and tax evasion and terrorist funding is a good thing. Right now, cryptocurrencies are used for buying fentanyl and other drugs, so it is a rare technology that has caused deaths in a fairly direct way” (Gates, 2018). Gates’ main concern with cryptocurrency is that the lack of a third party intermediary might allow a way to short the government’s intervention in illegal activity. Cryptocurrency provides secure and private peer-to-peer transactions, and these privative transactions can be used both lawfully and for illicit purposes. Naturally, there are some concerns raised that cryptocurrencies creates new opportunities for offenders to conduct illegal activity like exchanging illegal substances, laundering money, and terrorist funding.
An example of this is silk road, the deep web marketplace which used TOR, an open-source software used to enable online communications, and the bitcoin payment system to create a peer-to-peer sale for illegal substances and falsified identification documents. However, this is not an issue that warrants writing off cryptocurrency altogether. That would be like saying we should stop using cash because people do illegal things with cash. Also, cryptocurrency is not completely anonymous, since cryptocurrency transactions are conducted on a public ledger system, this could provide law enforcement agencies with the means to gain insight into those with a previous criminal record. Also, the creator of the silk road, Ross Ulbricht, was arrested. According to Wade Davies, the government conducted a detailed investigation that involved the cooperation of those who were previously involved in the silk road. Eventually, they successfully caught him in a library trying to log in as the administrator of the silk road. (Davies, 2017) So, even though it’s easier to stay anonymous with cryptocurrency technology, it’s still possible for the government to track down illegal activity.
Another drawback to cryptocurrency is the instability of the market. Right now, the market for most cryptocurrencies is unstable, meaning that the values are constantly fluctuating, sometimes by wide margins. Because of this, some people have made a lot of money when the price of cryptocurrency drastically increased. But this also means that others might lose just as much money in the same amount of time if the price cryptocurrency crashes. With that being said, it is not likely that that market will continue like this for much longer, as cryptocurrency’s popularity continues to increase and more and more people buy it, the market will likely stabilize. There have been theories that the initial volatility of the values of some of the common cryptocurrencies is merely just stress testing and that over time, the fluctuations will level out, and the now unstable cryptocurrencies will soon have stable values.
Despite these drawbacks, there are many benefits to cryptocurrency. For instance, cryptocurrency transactions generally process much faster than bank-facilitated transactions. Plus, all transactions are final the second they are processed in the blockchain, which helps vendors by preventing charge-back fees from dishonest customers. Another important benefit is that cryptocurrencies usually have a lower transaction cost compared to electronic payment systems like PayPal and other systems that transfer money through banks. Electronic payment systems that transfer through banks tend to have additional, expensive fees that aren’t necessary with cryptocurrency. This means that transferring money from person to person costs less and that merchants don’t have to account for added fees, which would result in lower prices. This can also be a cost-effective option for immigrants who left their homes to find work and wish to send payments to their families. And since the only way cryptocurrency can be accessed is through a private key, a cryptographic password which consists of a set of numbers unique to each user, no central government, corporation, or bank can freeze your assets. Entrusting an amount of savings in cryptocurrency is a safe way to be financially insured. Even if the government happens to default on its loans or there is an inconvenient complication with the bank, money saved in cryptocurrency will be unaffected by this, and there will still be available money, ready to use.
Cryptocurrency also provides privacy for all financial transactions, much like paper money does. And while some people are okay with having third party intermediaries like government agencies, financial institutions, and private corporations record what they're spending and receiving, there are plenty of legitimate reasons to desire private transactions. Whatever the reason may be, cryptocurrency can provide it. It's important to note that cryptocurrency provides privacy, not anonymity. Cryptocurrencies are still, by nature, public open-source systems, meaning that detailed information of each transaction is available via the cryptocurrencies public ledger, blockchain.
Another benefit to cryptocurrency is its ability to help the impoverished as well as developing countries and those living in rural areas. As of now, most banks and financial institutions don’t provide for the penurious, especially those living in rural areas or third world countries. In 2017, the World Bank found that “Among adults in the richest 60 percent of households within economies, 74 percent have an account. But among those in the poorest 40 percent, only 61 percent do, leaving a global gap of 13 percentage points. The difference is similar in developing economies, and neither gap has changed meaningfully since 2014.” Further, the government is financially crippling many people by devaluating currencies and freezing capital markets. Cryptocurrency offers an alternative to our existing resources that can provide anyone with access to the internet with exquisite financial services. Joe McCarthy explains in his article how the once cryptocurrency skeptic Bill Gates eventually warmed up to the idea of it by saying that “Poor people do have assets — their intellect, their labor, their savings. The problem is they don’t have the financial tools to capitalize on these resources.” Meaning that by giving poor people and third world countries the right financial resources it would balance out the socioeconomic playing field and goes on to say that “They’re trapped in an inefficient cash economy that robs them of opportunities to insure themselves against risk to invest in their prolixity and to ultimately lift them out of poverty” McCarthy explains that throughout the past few decades, Gates has been working through the Bill and Melinda Foundation to terminate poverty around the globe. Gates has poured $40 billion into the foundation, working for various causes such as malaria and the improvement of drinking water quality in rural areas. He goes on to say that even though Gates once dismissed cryptocurrency and deemed it a bad investment, he now regards the role that cryptocurrency can play as a digital foundation that can be affordable and scaled around the world. (McCarthy, 2018) The opportunity to use cryptocurrency as a financial service is especially important for individuals living in rural areas, as they often don’t have a viable alternative.
As we've seen, cryptocurrency is impacting governments, merchants, businesses, and corporations. Recently, the introduction of cryptocurrency into society has led to many changes in different industries. Many online institutions have begun to accept cryptocurrency as a viable payment option. Cryptocurrency has opened to opportunity for smaller businesses to make a name for themselves on the market. The impact of cryptocurrency on today’s commercial world is immense, but beyond that, cryptocurrency has the power to change lives by impacting everyday citizens. Most notably, the life of a certain Ohio teen by the name of Eddy Zillan later known as the Wolf of Crypto Street. Zoe Bernard writes about his journey to wealth in an article she wrote in 2018. Bernard explains that Zillan began trading cryptocurrency when he was fifteen, three years before he was of age to open an account on the trading platform, Coinbase. Refusing to acknowledge age requirement, Zillan opened accounts on Coinbase and another trading platform called Kraken and purchased $100 of Ethereum on both sites. Bernard goes on to say that when Zillan checked his accounts a few hours after investing his first $100, he was surprised to find that he made $10. Over the next few weeks, Zillan continued to invest more and more money into Ethereum, and over the next few years, he had invested $12,000, the entirety of his savings. Throughout the next few months, his returns began to skyrocket, and he educated himself on everything there is to know about cryptocurrencies, he spent his days chatting on online cryptocurrency forums talking to other investors, soon he began investing in alternate cryptocurrencies called altcoins. And eventually, within three years, his time and money paid off as his initial $12,000 became $350,000. Zillan acknowledges that his good fortune is mostly due to the timing of his investment and the cryptocurrency market. As of 2018, Zillan, age 18, has over one million dollars. He now owns a company called Cryptocurrency Financial, which offers cryptocurrency investing advice to businesses and small investors. Zillan thinks that his company fills a gap in the cryptocurrency market because while many people know of cryptocurrency, there is a lack of resources when it comes to investing in cryptocurrency. Zillan posted a picture to social media of him standing next to a painting of him depicted as the Jordan Belfort from the wolf of wall street, the caption read “The Wolf of Crypto Street” he claims that while the photo and caption are flashy, but Zillan used it to market the possibilities that cryptocurrency can bring. (Bernard, 2018) It’s incredible how cryptocurrency can change one’s life. Zillan’s story shows the impact that cryptocurrency can have on the lives around us, how a few hundred dollars became one million in only three years, and now Zillan continues to help other people find their way to wealth and preach the cryptocurrency gospel.
It's not difficult to visualize a future where cryptocurrencies thrive as an effective and popular platform for businesses and everyday citizens to interact, a future world where transactions with one another can take place using financial services free from administration control, like an ideal economic system. Although, it is also just as easy to visualize a future world in which cryptocurrencies run wild, causing economic chaos by robbing customers and businesses of their banking and blockchain funds. But since governments see the threat that cryptocurrency poses to government administration in both futures, neither of the two futures will likely come to pass. Because of cryptocurrency's extraordinary financial mechanisms, they are facing government restrictions in the near future. Most likely, the result will be a world where several various cryptocurrencies are available to whoever wishes to opt for a less restrictive financial system, and cryptocurrencies will merely act as an alternative to the current fiat currencies. Cryptocurrencies may see less price volatility, although recent price movements have shown big shifts may not be completely gone for good. cryptocurrencies see less price fluctuation, although recent price movements indicate that volatility in the market is not entirely gone for good. Most of the well-known cryptocurrencies will maintain their traction, both in value and consumption, while smaller cryptocurrencies will find their purpose in smaller, more particular industries. Cryptocurrency, even years after its release and years a development, still has room for improvement and exciting advancements. It is truly a wonderful technology, bringing together all the latest innovations in modern financial, internet, and software services. The risks will most likely continue to decrease, as governments establish guidelines for the institution and well-known private organizations proceed to discover ways to stabilize the product whilst preserving its one-of-a-kind appeal. Cryptocurrency is here to stay. The only uncertainty that remains is the pace of fast it will develop.
References
- Yessi Bello Perez. (2019, May 23). Bitcoin pizza day: How a hungry florida man made cryptocurrency history. Retrieved from https://thenextweb.com/hardfork/2019/05/22/bitcoin-pizza-day-how-a-hungry-florida-man-made-cryptocurrency-history/
- Cochrane, M. (2018, April 2). The History of Bitcoin. Retrieved from https://www.fool.com/investing/2018/04/02/the-history-of-bitcoin.aspx
- Tassev, L. (2019, May 1). The number of cryptocurrency wallet users keeps rising. Retrieved from https://news.bitcoin.com/the-number-of-cryptocurrency-wallet-users-keeps-rising/
- Allan, D. (2018, March 1). Bill Gates says cryptocurrencies cause deaths in a ‘fairly direct way’. Retrieved from https://www.techradar.com/news/bill-gates-warns-about-cryptocurrencies-saying-they-cause-deaths-in-a-fairly-direct-way
- Davies, W. V. (2017). Bitcoin Criminals. Tennessee Bar Journal, 53(7), 24–29. Retrieved from http://search.ebscohost.com.cod.idm.oclc.org/login.aspx?direct=true&db=a9h&AN=124030442&site=ehost-live&scope=site
- World Bank. (2017). 2017 Findex full report. Retrieved from https://globalfindex.worldbank.org/sites/globalfindex/files/2018-04/2017%20Findex%20full%20report_0.pdf
- Bernard, Z. (2018, February 6). Meet 'The Wolf of Crypto Street,' an Ohio teenager who used his entire savings to become a cryptocurrency millionaire. Retrieved from https://www.businessinsider.com/eddy-zillan-ohio-savings-cryptocurrency-millionaire-2018-2
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