Cryptocurrencies have gained increasing attention in the recent years. Especially Bitcoin is on his way from being a very little known phenomenon towards becoming a seriously recognized player in the economy. Its origin lies in the subprime mortgage crisis of 2007 after which crypto anarchists attempted to take the matter of money distribution in their own hands. In 2013, most people still didn’t know what the term Bitcoin is associated with. In a survey, conducted by a German newspaper, 51% of the interviewed persons couldn’t identify Bitcoin. The other half has heard about Bitcoin but could not give further explanation except of identifying it as a virtual cyber currency. There exists a great need for enlightenment about cryptocurrencies such as Bitcoin.
Cryptocurrencies are often associated with the Wild West, as there are still lots of open questions concerning its nature juristically, economically and tax status. The price of a Bitcoin has been growing with recurrences of high fluctuations in the last years and has shown similarities to the concepts of a speculative Bubble. Is this statement justified?
The media either praises Bitcoin as a great innovation, or demonizes it. This makes it very difficult to obtain an objective position about Bitcoin. This work analyses the characteristics of Bitcoin and evaluates their relevance for a sustainable existence. Are cryptocurrencies just a temporary phenomenon or should we expect them to prevail in the future?
The intention of this work is to provide an economical analysis of cryptocurrencies by investigating its biggest representative, Bitcoin. The main research questions are therefore:
• How does Bitcoin work?
• What are the benefits and risks of Bitcoin?
• How is the price of Bitcoin determined?
• Can Bitcoin currently be identified as money?
• What does the future hold for Bitcoins development?
Table of Contents
1 Introduction
1.1 Course of investigation
1.2 Information on linguistic usage
2 The evolution of money
2.1 Functions of money
2.1.1 Medium of exchange
2.1.2 Measure of value
2.1.3 Store of value
2.2 Characteristics of money
2.3 Creation of money
2.3.1 The European Central Bank
2.3.2 Money creation by commercial banks
3 The concept of cryptocurrencies
4 The infamous Bitcoin
4.1 History
4.2 How Bitcoin works
4.2.1 Double spending
4.2.2 Creation of Bitcoins
4.2.2.1 Difficulty
4.2.2.2 Mining
4.2.2.2.1 Solo Mining
4.2.2.2.2 Pool Mining
4.2.2.2.3 Time and costs
4.2.2.2.4 Revenue by mining
4.2.2.3 Alteration of the Bitcoin protocol
4.3 Characteristics of Bitcoin
4.3.1 Transaction security
4.3.2 Transaction fees
4.3.3 Storage security
4.3.4 Counterfeit protection
4.3.5 Anonymity
4.3.6 Irreversible payments
4.3.7 Volume of bitcoins
4.4 Forms of trading with Bitcoin
4.4.1 Wired transfer
4.4.2 Near Field Communication (NFC)
4.4.3 QR-Code
4.4.4 Coins
4.4.5 Debit cards
4.5 How to acquire bitcoins
4.5.1 Bitcoin exchanges
4.5.2 Mining
4.5.3 ATM machine
4.5.4 Donations
4.5.5 Businesses accepting bitcoins
5 SWOT analysis
5.1 Strengths
5.2 Weaknesses
5.2.1 Volatility
5.2.2 Supply shortage
5.2.3 Energy Consumption
5.3 Opportunities
5.3.1 Independent online payments
5.3.2 Micropayments
5.3.3 Developing countries
5.4 Threats
5.4.1 Crime
5.4.1.1 Silk Road
5.4.1.2 Money laundering
5.4.1.3 Botnet
5.4.2 Risks
5.4.2.1 Risk of loss
5.4.2.2 Risk of prohibition
5.4.2.3 51% Attack
5.4.2.4 Niche currency
6 Classification of bitcoin
6.1 Taxation
6.2 Comparative Analysis
7 Theory of speculative bubbles
7.1 Dutch tulip mania
7.2 Digital gold fever
8 Scenario Analysis
9 Discussion
9.1 Matter of trust
9.2 The great scheme
9.3 The evil Bitcoin
9.4 The question of questions
9.5 Deflation versus Inflation
10 Conclusion
11 Appendix: Excursus on hash function
12 Bibliography
Research Objectives & Topics
The primary research objective of this thesis is to conduct an economic analysis of cryptocurrencies, specifically focusing on Bitcoin. The central research question seeks to evaluate how Bitcoin functions, identifying its benefits and risks, determining how its price is established, assessing whether it can be currently identified as money, and predicting future developments for the Bitcoin system.
- Theoretical evolution of money and fundamental economic functions
- Comprehensive analysis of the Bitcoin protocol, creation, and transaction mechanics
- Evaluation of Bitcoin through a SWOT analysis (strengths, weaknesses, opportunities, threats)
- Classification of Bitcoin in the context of current economic theories and taxation
- Discussion of Bitcoin in relation to speculative bubbles and future scenarios
Excerpt from the Book
4.2.1 Double spending
Solving the problem of double spending is one of main focuses of Satoshi Nakamotos publication in 2008. In order to understand the solution one must first understand the actual problem. The root of the problem is the matter of transaction order. Imagine person A giving out checks with the same value to two other persons B and C. However, person A only has enough money in its bank account to cover one of these checks. Under these circumstances only one person (B or C) will be able to cash the check at the Bank and the other person will be refused. In this example time determined if person B or C were able to cash the check. The Bitcoin network is globally connected and a transaction will never proceed as directly as shown in Figure 5. It will transfer indirectly over a lot of nodes to the final destination. The point of time a transaction was originally caused is not perfectly identifiable and could even be manipulated.
If person A would buy products in exchange for Bitcoins from person B and C, the problem of double spending could potentially occur. “Network delays might cause transactions to arrive in different orders in different places”, causing persons B and C to think they received their payment first and ship their products. As a result, if person A only had sufficient funds for one product he would receive both products for paying only once.
To eliminate the problem of double spending Satoshi Nakamoto introduced the following solution. When transferring money from one user to another all the ledgers in the Bitcoin network are registering that transaction. In the Bitcoin network, transactions are gathered in Bitcoin blocks. “A block is a record of some or all of the most recent Bitcoin transactions that have not yet been recorded in any prior blocks”. The blocks are linked together in a form of a block chain, which records all executed transaction that ever took place in the network. All current transactions in the Bitcoin network can be viewed on blockchain.info.
Summary of Chapters
1 Introduction: This chapter introduces the rise of Bitcoin, its emergence from the 2007 financial crisis, and establishes the core research questions regarding its nature and future sustainability.
2 The evolution of money: This section details the fundamental functions and characteristics of money, tracing its development from barter systems to modern electronic and fiat currencies to establish a basis for evaluating Bitcoin.
3 The concept of cryptocurrencies: This chapter defines cryptocurrencies as a digital medium of exchange and an administrative system, while distinguishing between open source and closed source software models.
4 The infamous Bitcoin: This comprehensive chapter explores the history of Bitcoin, its decentralized workings, mining processes, protocol alterations, and various practical characteristics like security, anonymity, and acquisition methods.
5 SWOT analysis: This analytical section performs a SWOT evaluation of Bitcoin, covering its technological strengths, volatile weaknesses, opportunities in payments and developing countries, and threats involving crime and regulatory risks.
6 Classification of bitcoin: This chapter examines the classification of Bitcoin, arguing against its simplistic identification as fiat money and discussing its treatment under taxation regimes.
7 Theory of speculative bubbles: This section provides a theoretical framework for speculative bubbles, illustrating their emotional nature through historical examples like the Dutch tulip mania and the specific case of Bitcoin's price development.
8 Scenario Analysis: This chapter presents various hypothetical future outcomes for Bitcoin, ranging from extinction to potential dominance as a payment system, ranked by their relative probability.
9 Discussion: This section engages in a critical discussion regarding trust, the "Ponzi scheme" allegations against Bitcoin, its relation to illicit activities, and whether it qualifies as money under economic regression theories.
10 Conclusion: The final chapter summarizes the findings, reiterating that while Bitcoin is not yet money in the traditional sense, it holds significant potential as a transactional system, provided it overcomes its volatility and regulatory challenges.
Keywords
Bitcoin, Cryptocurrencies, Money, Blockchain, Mining, Double spending, Volatility, SWOT Analysis, Speculative Bubbles, Taxation, Peer-to-Peer, Transactions, Decentralization, Electronic Money, Satoshi Nakamoto
Frequently Asked Questions
What is the core subject of this thesis?
The work provides an objective economic analysis of cryptocurrencies, with a primary focus on Bitcoin as its most significant representative.
What are the central topics covered?
The thesis covers the evolution of money, the technical functioning of the Bitcoin protocol, a SWOT analysis of the currency, its classification regarding taxation, and a discussion of its susceptibility to speculative bubbles.
What is the primary research goal?
The goal is to understand how Bitcoin works, what its benefits and risks are, how its price is determined, whether it qualifies as a form of money, and what its future development might look like.
Which methodology is employed?
The author uses a qualitative research approach, including a review of existing literature, technological evaluation of the Bitcoin protocol, a SWOT analysis, and the application of economic theories such as Mises' regression theorem and Gresham's Law to analyze Bitcoin's nature.
What does the main body explore?
It details the technical history and mechanics (mining, blocks, wallets), identifies strengths and weaknesses (volatility, energy consumption), evaluates opportunities (online payments, developing countries), and analyzes threats (crime, prohibition, 51% attacks).
Which keywords characterize the work?
The most relevant keywords include Bitcoin, Blockchain, Mining, Double spending, Volatility, Speculative Bubbles, and Decentralization.
How does the author categorize Bitcoin in terms of money?
The author argues that while Bitcoin is used as a medium of exchange, it currently lacks the necessary widespread acceptability and store-of-value stability to be fully identified as money in the classical sense.
What is the "New Technology" phenomenon mentioned?
It is a phenomenon where the efficiency gains from new, more powerful mining hardware are negated by increased adoption and competition, leading to a rise in total network difficulty, mining time, and ultimately higher total electricity consumption.
How does the author view the risk of Bitcoin being used for illegal activities?
The author acknowledges the use of Bitcoin in illegal markets (like Silk Road) and for money laundering but notes that the scale of such activities is vastly smaller compared to the estimated volume of money laundering performed with fiat currencies.
- Citar trabajo
- Snorri Christian Glaeser (Autor), 2014, Economic Analysis of Cryptographic Currencies on the Basis of Bitcoin, Múnich, GRIN Verlag, https://www.grin.com/document/283747
