Boom or Bust: is Bitcoin too Good to be Invested?
How it works
In the technology era, e-commerce has become a common business model. As a result, cryptocurrency which are digital currencies had been created and it has been developing effectively. cryptocurrency represents a new monetary system, an easy way to send and receive money which is also affordable for any computer user. Many businesses now accept cryptocurrency as a payment option and there are many kinds of digital currencies such as Bitcoin, Litecoin, PotCoin, Vertcoin, Zcash, etc. However, Bitcoin was the first cryptocurrency with the most outstanding, popular as well as the highest market capitalization.
It was created in 2009 by Satoshi Nakamoto. According to the yahoo finance (2018), bitcoin was worth $0 in the trading market during its very first year of existence and in the fourth quarter of 2017, its price was increased rapidly to over $19,000 per share which was the highest value of bitcoin. Even though its value has decreased by half in the past few months, it is still higher than other cryptocurrencies. Since bitcoin had an unbelievable market capitalization, it seems to attract many investors and many people believe that buying a bitcoin could be a profitable investment. However, many financial experts argued that because bitcoin has many potential risks which are unregulated, legal issue, high volatility and vulnerable to theft, so investing in bitcoin should not be a good idea. The main purpose of this paper is to discuss different perspective of many scholars and non-scholars about cryptocurrencies and bitcoin in particular by examining and analyzing the latest researches and studies.
In a research article conducted by Negurita (2014), the author described one of the factors that digital currency is so attractive which is unregulated, so that no other financial authority can influence its value of transactions made by the system and an absence of regulation can hurt investors and trigger the next financial crisis. Additionally, it could lead to another issue which is the rise of delinquency. Because all transactions are mainly done through internet, and anyone could illegally enter into the system and generate a lot of bitcoins, government fears that Bitcoin phenomenon will increase crime activities such as bribery, money laundering, illicit trafficking in drugs and weapons. Therefore, using bitcoin will stimulate crimes. Additionally, this study illustrated possible risks associated with the acquisition, holding and trading of digital currencies. Some risks include cyber-attacks against users’ account.
Regarding to the legal issue of using bitcoin, another research study conducted by Turpin (2014) stated that because bitcoin is a new technology, there are very few laws currently that specifically apply to it and legislatures around the globe are not known for their quick action. Thus, “Bitcoin operates in a legal grey area” (Turpin, 2014). Unlike to the previous study by Negurita (2014), this study not only described the legal issues of using bitcoin, but it also introduced the history of bitcoin and how illegal activity specifically conducted in bitcoin. While Negurita (2014) and Turpin (2014) both recognized that bitcoin enables criminal activities, Turpin (2014) also suggested that the U.S. government should take a more aggressive approach to Bitcoin and the simplest and most likely route by which regulation will be introduced to the Bitcoin network is through the regulation of the exchanges, trading floors, and other financial entities developing around Bitcoin.
Whereas the previous studies all indicated the about the bitcoin legality that relates to criminal activities. A study by Tu and Meredith (2015) expanded the idea that bitcoin is vulnerable to theft. They believed that in modern day, the information technology has grown effectively, so bitcoins could be lost or stolen easily. The nature of bitcoin transaction is final and irreversible. and the wholly online storage system appears to be particularly attractive to cyber thieves and the bitcoin system has some imperfections and weak points that can be exploited by sophisticated hackers looking to steal bitcoin for their own use. As early as 2011, Bitcoin users had reported hundreds of thousands of dollars’ worth of the virtual currency as stolen (Tu and Meredith, 2015). Moreover, they propounded another disadvantage of bitcoin is that is no user protection. victims are not protected from loss if its exchange fails or is hacked because bitcoins are not controlled by the government or any financial institutions.
While Negurita (2014) and Turpin (2014) talked about the legal issues of bitcoin, the study was done by Ross & Ram. (2017) mentioned another disadvantage associated with using bitcoin which is the high volatility and it was conducted by using surveys and interviews many financial experts. The main finding was that investing in bitcoin is very high risk because bitcoin is extremely volatile and unpredictable. Also, many experts believed that there are significant regulatory hurdles for investors that want to buy bitcoin. because bitcoin is strings of computer code and it is not securities, so it is not regulated by any financial institutions, such as the Securities and Exchange Commission or the Financial Conduct Authority, and could not be held by traditional mutual funds or most exchange traded funds. Since the price is not regulated and many people entered into the market that they were attracted by the high prices, the price consequently tends to rise higher. This might lead to the formation of a bubble that will eventually burst and cause widespread losses so that you could be a millionaire in a day and busted within a week.
On the other hand, the research by Harwick (2016) was a counter argument. he supposed that cryptocurrency in general and bitcoin in particular could replace the current international monetary system. He stated “the rise of cryptocurrency in the past decade is more than simply a technological feat; it is a real-world incarnation of a monetary system with numerous features that have existed to date only as thought experiments.” To support his argument, he used Ludwig von Mises’s regression theorem to explain the emergence of money. By doing that he believed cryptocurrency obviously qualifies as money, so it should be considered and used as a new monetary system. Additionally, the study also presented the gadgets by using bitcoin such as portability, durability, divisibility and security.
Similarly, the article “The Issues and Benefits of Investing in Bitcoin” wrote by Takanawa (2017) is another counter argument. The author believed that even though there is still distrust of the exchange market, the value of bitcoin is rising quite dramatically and it continues to show incredible price. Therefore, many companies have started to learn how to use bitcoin, and have begun to create and use tech associated with digital currency. This includes the ability to pay for groceries, gasoline, dinner, or even a cup of coffee. By doing that, they could increase their revenue. Moreover, Takanawa (2017) claimed that most of the countries where have begun to ban the cryptocurrencies, particularly bitcoin, are lack of understanding and backward that they could not utilize such a revolutionary technology. Both Harwick (2016) and Takanawa (2017) attempted to provide arguments to alter the views of people about the cryptocurrencies and suggested that because bitcoin is groundbreaking technology and human intellect, it should be widely used as traditional money.
Taken together, the results indicate that the use of bitcoin has many disadvantages such as unregulated, legal issue, high volatility and vulnerable to theft (Negurita, 2014; Ross and Ram, 2017; Tu and Meredith, 2015; Turpin, 2014). However, there are some believers think bitcoin should be treated as traditional money (Harwick, 2016; Takanawa, 2017). It could assume from these literature reviews that the debate over cryptocurrencies is sure to continue between the sceptics and the believer. Therefore, more studies should be done to explore the further impacts of bitcoin to the global economy. Also the future researches should focus on both negative and positive effects of using bitcoin because it is necessary to consider whether all businesses accept it or not to improve their profit.