Financial System and Cryptocurrency
Since the Financial Crisis of 2008, many Americans have held lingering doubts about the stability and creditworthiness of the current financial system. As a response to the economic crisis the first cryptocurrency, Bitcoin, emerged which intended to be a cash-like payment system unaffected by economic downturns. Unlike the traditional monetary institutions who’s negligence caused the financial crisis, cryptocurrencies such as Bitcoin differ from the established infrastructure within the context of peer-to-peer networks and decentralized organization using an open source software. The focus of this review paper is to review the economics of digital cryptocurrencies and discuss their impact of the financial system following the recent financial crisis, as well as explore future applications of digital currency. Going further, we will examine the supply and demand of digital money, the role of the blockchain, applications in FinTech, intermediation, innovation of payment systems, and cryptocurrencies as investment alternatives.
Despite the growing number of cryptocurrencies, for simplicity, our paper will focus primarily on Bitcoin as it is the most used cryptocurrency. Thesis Statement: Our research aims to examine the impact of digital cryptocurrencies on the financial system following the 2008 financial crisis by analyzing the current uses of cryptocurrencies compared with their potential application in other economic arenas. Body: As the world’s financial infrastructure was crumbling in late 2008, the domain bitcoin.org was registered, and a person or persons using the pseudonym Satoshi Nakamoto published a white paper on Bitcoin, which outlined how the cryptocurrency would work. The foundation of Bitcoin is the use of a peer-to-peer network (P2P) and its open source software the blockchain which stores all transactions made on the network. Today, most cryptocurrencies, including Bitcoin operate independently and consist of the issuance and circulation for exchange. We begin our review with one of the most significant aspects of cryptocurrency, blockchain. The relationship cryptocurrencies share with the current monetary system relies heavily on the technology which they are built. To understand this relationship, we look at the fundamental technology underlying these digital currencies, blockchain. Often referred to as the ledger, the blockchain records all past transactions and bitcoins produced (Dwyer, 2015). Simply put, blockchain is defined as a decentralized, shared ledger which utilizes chronological encryption and chained blocks to store data across a P2P network (Dumitrescu, 2017).
Broadly speaking, the decentralized nature of blockchain guarantees secure and private transactions with cryptography and the distributed computing paradigm stores encrypted data forming a “blockchain” of self-executed scripts (Yuan & Wang, F2018). Additionally, cryptocurrency blockchain protocols intertwine seamlessly within the financial technology sector, where the innovation of digital currencies is highly disruptive. The “distributed-ledger” technology could be implemented within several areas of FinTech such as capital marketing and corporate banking, insurance, supply chain monitoring to name a few. In the context of the blockchain, the FinTech sector seeks to cultivate “the security and reliability of the underlying infrastructure and implementing smart-contract functionality” (Eyal, 2017). Blockchain represents an ever-growing system which has attracted interest from tech firms, financial institutions, governments, and capital markets as many consider it to be one of the biggest innovations in cloud computing (Yuan & Wang, F2018). In addition to the intrinsic applications of the blockchain, the regulatory constraints of intermediation limit the effectiveness of financial institutions in a way they do not for the protocols of cryptocurrencies.
However, even after the financial crisis of 2008, digital commerce relies almost exclusively on financial institution acting as trusted third parties to process payments. (Corbet, Meegan, Larkin, Lucey, & Yarovaya, 2018). Cryptocurrencies and related technologies can reduce transaction costs and could lower the costs associated with attaining and sharing information, however, some researchers believe it could amplify contagion and destabilize financial markets. For conventional models of business, this would undermine the role of the banking system and put pressure on central banks to maintain financial stability (Harwick, 2016). In theory, having a decentralized financial system utilizing digital cryptocurrencies would decrease the layers of intermediation, creating a simpler alternative. In such a system, more power is given to individuals as the middleman is removed from the equation. However, it is important to note these implications are highly speculative given that little research exists for such claims. A few years ago, cryptocurrencies were not considered to be something that can be invested, even some people have never heard of it. With development of society, bitcoin, a kind of cryptocurrencies, it had been appreciably noticed.
Bitcoin suddenly rose from $1,000 to $10,000, and reached a high of $19,000 in December, 2017. (Pasztor, J 2018) It is a big decision when people decide to invest bitcoins. It Only for pure speculators who understand the risks. Bitcoin has no revenue, earnings or underlying asset value. Its price rise is driven by demand alone, and that shows signs of a frenzy. (Huang, 2018) Compare bitcoin to stock market, stock price based on an expectation of earning or revenue. Therefore, bitcoin is not stable market. Bitcoin not only has the application needs of money, application scenarios, but also the core of securitization. securitization kernel refers to an asset form that can be speculated by people. Bitcoin not only have a value core, but also like a bubble in the market. There are usage requirements, application scenarios, value attributes and switching function for bitcoin. Therefore, bitcoin is a currency, a broad currency, and it can be invested.