Crypto Currency And Economy

Introduction

A general equilibrium monetary model is developed to study the optimal design of a cryptocurrency system based on a blockchain. The model is then calibrated to Bitcoin transaction data to perform a quantitative assessment of the scheme. We formalize the critical elements of a cryptocurrency: the blockchain to keep a history of transactions, the distributed updating of information and consensus through competition for such updating. We show that, unlike cash, a cryptocurrency system does not support an immediate, final settlement. In addition, the current Bitcoin scheme generates a welfare loss of 1.4% of consumption. Such loss can be lowered substantially to 0.08% by adopting the optimal policy which reduces mining and relies on money growth rather than transaction fees to finance mining rewards. The efficiency can potentially be improved further by adopting an alternative consensus protocols such as the proof-of-stake.

A key economic feature of a cryptocurrency system is that mining is a public good, while double spending to defraud the cryptocurrency depends on individual incentives to reverse a particular transaction. As a result, a cryptocurrency works best when the volume of transactions is large relative to the individual transaction size (e.g., as in a retail payment system).

As you may know, blockchain technology aims to transform the current financial system and exclude the mediators, and these facts can’t be unnoticed by governments.

In the beginning, cryptocurrency seemed to be a doubtful scheme, and now many financial giants show that blockchain can be successfully used in the bank system.

Classification

Bitcoins is a digital asset designed by its inventor, Satoshi Nakamoto, to work as a currency. It is commonly referred to with terms like: digital currency, digital cash, virtual currency, electronic currency, digital gold, or cryptocurrency.

The question whether bitcoin is a currency or not is disputed. Bitcoins have three useful qualities in a currency, according to The Economist in January 2015: they are “hard to earn, limited in supply and easy to verify”. Economists define money as a store of value, a medium of exchange and a unit of account, and agree that bitcoin has some way to go to meet all these criteria. It does best as a medium of exchange: As of March 2014, the bitcoin market suffered from volatility, limiting the ability of bitcoin to act as a stable store of value, and retailers accepting bitcoin use other currencies as their principal unit of account.

And now there is a big question — what is Bitcoin? Is it the money or goods?

When Satoshi Nakamoto was presenting Bitcoin, his concept was to present it as the virtual currency, but in reality, we see that people don’t measure money and goods in crypto — fiat money is on a roll. And Bitcoin is measured in BTC as well.

The difference between cryptocurrencies and regular currencies:

• investing in cryptocurrencies has minimal risk compared to other currencies;
• electronic currency does not have a definite owner, and ordinary money refers to the political and economic situation of the country;
• the main element of cryptocurrency is demand;
• the functions of ordinary money are assigned to digital coins, while the individual characteristics are characteristic only of cryptocurrency.

These features include:

• Pay ability;
• storages — top bitcoins wallets;
• growth of the monetary unit;
• commodity exchange;
• decentralize exchange.

Buying and selling

Bitcoins can be bought and sold both on- and offline. Participants in online exchanges offer bitcoin buy and sell bids. Using an online exchange to obtain bitcoins entails some risk, and, according to a study published in April 2013, 45% of exchanges fail and take client bitcoins with them. Exchanges have since implemented measures to provide proof of reserves in an effort to convey transparency to users. Offline, bitcoins may be purchased directly from an individual or at a bitcoins ATM. Bitcoin machines are not however traditional ATMs. Bitcoin kiosks are machines connected to the Internet, allowing the insertion of cash in exchange for bitcoins. Bitcoin kiosks do not connect to a bank and may also charge transaction fees as high as 7% and exchange rates US$50 over rates from elsewhere.

Price and volatility

According to Mark T. Williams, as of 2014, bitcoin has volatility seven times greater than gold, eight times greater than the S&P 500, and 18 times greater than the U.S. dollars.

Many financial experts discuss the reasons why crypto can’t act like dollars, for example.

The first reason is the complete decentralization — the absence of the institution that regulates and protects the cost of money.

The next reason is volatility — the high fluctuations of crypto prices prevent them from being used for payments. Although, for example, Microsoft accepts BTC to pay for Xbox content and in the Windows store, even with the volatility. Also, it is known that bitcoin is often used for cross-border payments between counterparties from different countries. For example, in international trade or to pay remote employees.

Cryptocurrencies affect the economic, political, cultural, and social life of humankind. Digital money is not becoming a substitute for real currency, but it can become an impetus for the formation of a new currency system. Currently, in the absence of regulations and guarantees to protect bitcoin buyers, there is a risk of unscrupulous persons appearing on the market.

Previously, governments wanted to prohibit or restrict the use of cryptocurrencies, but now many countries are positively disposed towards the new technology. Electronic money can be transferred anywhere in the world at virtually no cost and can be traded with the help of crypto signals.

Thus, the risk for cryptocurrencies is that the state does not conduct an independent interest rate policy. The world economy will change, and currencies will go into electronic savings. The number of investors is growing every day, and as a result, electronic assets will be valued much more than they are now.

In general, the cryptocurrency market is actively growing, new companies and infrastructure projects appear. And the fact that the legal institutions and software development services are trying to assess the impact of bitcoin and other digital currencies on the development of the economy is a positive signal. This proves once again that cryptocurrencies are a multifaceted concept, and the relationship arising from their use can be interpreted in different ways, and no regulator has yet come to a consensus on this issue.