Bitcoin‘s potential of becoming a world currency


Term Paper, 2019

21 Pages, Grade: 1,7


Excerpt

Table of contents

1. Relevance and course of the investigation
1.1. Relevance
1.2. Course of the investigation

2. Definitions
2.1. Currency
2.2. Cryptocurrency & Bitcoin

3. Is Bitcoin a currency?

4. Advantages and disadvantages of cryptocurrencies

5. The idea of the world currency - a historical thought

6. Potential of Bitcoin being a world currency

7. Conclusion
7.1. Summary
7.2. Conclusion and results
7.3. Outlook

References

1. Relevance and course of the investigation

1.1. Relevance

The US dollar currently is the world’s largest reserve currency. But alongside the US dollar, other currencies (such as the Euro) are increasingly becoming a firmly established world currency. The recent financial crisis revealed the instability of the world’s monetary system despite the extreme complexity of the global financial system. Often, the reasons for such financial crises are not less complex than the systems themselves. The prevailing position of the US dollar is a historical development. The 20th century shows that there have already been various approaches to a world monetary order, which have so far often led to discussions about a single world currency. The 20th century started with the prevalence of the gold standard, which lasted until the First World War. The gold value was also of central importance in the Bretton Woods system after the Second World War. The value of the dollar was firmly linked to the value of gold and other currencies had to stabilize relatively to the dollar. During the 1960s, US deficits quickly led to the fact that the gold-dollar ratio could no longer be guaranteed. This resulted in a kind of dollar standard. Through the unification of Europe, the Euro has been installed as an emerging currency, which "asserts itself" more and more against the US dollar. Due to their economic significance, countries such as China or India have also played a significant role in today's financial world. (Belke, Bernoth, & Fichtner, 2011)

In addition to the complexity of the financial world, the digitization and the increasing speed of economic developments and processes pose challenges for everyone - especially for the financial sector. (Dr. Tisson, 2018) Beginning in 2008 the development of the Bitcoin system opened up a market for digital currencies, so-called cryptocurrencies, which made the financial world even more complex and complicated. (o.A., Die Geschichte der Kryptowährungen, o.J.) The number of existing cryptocurrencies has risen steadily and is well over 1000 today. (Kops, 2018)

The emergence of cryptocurrencies raises several questions. Are cryptocurrencies currencies at all? How can digital currencies be integrated into the financial system? Or how will cryptocurrencies change the financial system? What potentials and threats lay within the use of cryptocurrencies? One potential could eventually be the use of Bitcoin as the single world currency. Bitcoin is often used as a pioneer and prime example of crypto currencies - even if the crypto currencies differ from each other also and especially through their technical design.

1.2. Course of the investigation

In this thesis, the crypto-currency Bitcoin should be examined for its suitability as world currency or part of it. In order to determine the potential of Bitcoin, the terms currency and cryptocurrency must be explained and defined first. Included in the definition of cryptocurrencies is the meaning of the Bitcoin system and the functionality will be roughly explained. In this thesis the detailed technical aspects of the design of the Bitcoin system are greatly simplified and partially neglected. After that follows a summary of advantages and disadvantages of cryptocurrencies in general that can be found in the literature. This is primarily to gain insight into how the current perception of Bitcoin is in the public and to identify arguments that are likely to have a high impact on others' opinions.

After the consideration of the cryptocurrency Bitcoin follows a historical discussion with the concept of the world currency. It will be investigated which approaches of a world currency already existed in the recent past and which are currently available. This will lead to the identification of the driving forces and challenges that have an impact on the fiscal world order.

Thereon, the findings about the Bitcoin system will be laed against the discussion about a world currency and potentials will be derived.

After a conclusive summary and a critical conclusion, further research opportunities in the investigated fields are finally opened.

2. Definitions

2.1. Currency

A currency is a legal tender or the financial system of a state regulated by legal regulations. (Schubert & Klein, 2018) It is not absolutely necessary that the means of payment belongs to a state. Alternatively, it could may also belong to a particular area or trade. (o.A., Währung, o.J.) Currency trading is also called foreign exchange trade, which simply means that money in one currency is exchanged for money of another currency at a predefined exchange rate. It is irrelevant who carries out this exchange - whether a central bank, a branch bank, speculators, companies or private persons. During the trading of currencies, the exchange rates are indicated by so-called currency pairs (e.g., USD / GBP). (o.A., Devisenmarkt: Forex, FX, o..J.) A currency generally fulfills three functions: the unit of account function, the investment function and the means of exchange. In addition to these functions, Daube & Dobernig (Digitale Währungssysteme - Funktionsweise und Einsatzmöglichkeiten, 2019) define other characteristics of a currency: the consistency (also in terms of purchasing power), the wide application or acceptance in the market, the uniqueness as a disqualifier for the trade of copies of digital money, the shortage by limitation, consistency of monetary units, security in terms of originality and easy identification of authenticity, and divisibility for smaller transactions than requirements.

2.2. Cryptocurrency & Bitcoin

Among the currencies described in 1.1 there are also digital or virtual currencies called crypto currencies. In recent years, more and more cashless digital currencies have raised. Digital currencies are created online and can be acquired through real money. (Becker, o.J.) Another alternative to gain virtual currency is mining. Mining, in a nutshell, offers computing capacity and power to create a digital currency, such as bitcoins. (o.A., Bitcoin: Vorteile und Risiken der digitalen Währung, o.J.) With the virtual money, the owner can then purchase online goods or services of the currency provider. If other providers accept the currency, the currency provider needs an additional license to issue the currency. (Becker, o.J.) Nowadays there are over 1000 different cryptocurrencies in the market. (Kops, 2018)

A very prominent example of cryptocurrencies is the online currency Bitcoin. Bitcoin is an online currency existing since 2009, which is operated and issued by no bank but an international community itself. The monetary system allows a maximum of 21 million bitcoins to be in circulation. (Braun, o..J.)

Rosenberger (2018) writes that Bitcoin was invented in 2008 by Satoshi Nagamoto. Satoshi Nagamoto is just a pseudonym. The invention is based on the fact that Satoshi Nagamoto was extremely annoyed by the financial crises. With Bitcoin, he wanted to create a financial system, that works through decentralization, independent from banks and state governments.

But how does the Bitcoin system work? The key driver for trading Bitcoin is mainly the avoidance of a trustworthy third party in a trade. This makes Bitcoin a decentralized digital currency. This should work through cryptographic proof by verifying payments. Trading works through a pure peer-to-peer linkage. Each transaction generates a data block, which joins into a so-called block chain. These data blocks are created at each transaction and are visible to all participants. In this electronic payment system, transactions are not reversible and therefore provide some protection for sellers. This allows you to track the ownership of bitcoins. The individual accounts are protected by private keys. Only with the respective key you can make transactions with your account. To decrypt a transaction, there is a public key. Due to the cryptographic process with digital signatures, the forgery of a Bitcoin is currently not possible. (Nakamoto, o.J.)

Bitcoins can be both bought and sold, as well as created through mining. This requires a very high computational effort. This computing power has to be provided by the processor and the graphics card. (Wiedemann, 2014) This computing power tries to solve an algorithm and thus Bitcoin will be mined. The more Bitcoin was mined and the more computers are being involved, the more difficult this algorithm becomes. The power consumption and thus also the price for the mining increase in parallel. (Eckert & Zschäpitz, 2017)

The mining process works through a special check value calculation that looks for a value below a certain limit. If the result is smaller than the limit, a new block is found and the blockchain is added and the miner is rewarded with Bitcoin. (Nakamoto, o.J.)

3. Is Bitcoin a currency?

According to Daube & Dobernig (Digitale Währungssyssteme: Kryptowährungen in der Unternehmensfinanzierung, 2019), Bitcoin can be understood as a currency, since both the exchange function and the computing function and (depending on the exchange rate, the interest rate and the inflation rates) the value retention function are basically given. The fact that currencies must be issued by a central bank is not an essential requirement.

Quitzau (2018) disagrees. He believes that the three monetary functions are insufficiently fulfilled. Surely you can calculate and compare prices and monetary values in Bitcoin. However, since many people do not have any bitcoins yet, the use of Bitcoin as a processing unit turns out to be a foreign currency. Thus, there is the problem of widely fluctuating exchange rates and Bitcoin is useless as a processing unit. A stable exchange rate would at least minimize the problem and getting the paycheck in Bitcoin would even eliminate the problem. Due to the small number of businesses that accept Bitcoin as a means of payment, Bitcoin's means of exchange is also less fulfilled for Quitzau. Again, he sees the origin in the strong fluctuations of the exchange rate, since there is always one side of the market that has no interest in a transaction in Bitcoin. The third function of currencies, the value preservation, is also subject to exchange rate reasoning. The function cannot be answered with yes or no, which, according to Quitzau, is reason enough to regard this function as inferior.

Daube & Dobernig (Digitale Währungssysteme - Funktionsweise und Einsatzmöglichkeiten, 2019) compare Bitcoin with a classic currency based on four criteria: acceptance, protection against inflation, security and stability. A precise determination of the number of participants in the Bitcoin system is difficult because no registration for participation is required. Even the number of companies and providers worldwide that accept Bitcoin cannot be clearly determined. However, there are some large companies (on some websites) that accept Bitcoin as a means of payment. According to the IT portal Giga.de (Baykara, 2018), giants such as Microsoft, Lieferando, Wikipedia or Greenpeace are among those who accept the Bitcoin system. Others have tested the system and have removed it from their payment options or have (still) refused this method of payment, such as the online retailer Amazon or the game provider Steam. The reason is that Bitcoin is still too unstable. Due to the decentralized creation of money and due to the fact that Bitcoins can be lost due to defective hard disks, malware or general loss of data, the amount of Bitcoin available can be classified as inflation-proof. System changes would be incumbent on the community. While Bitcoin's encryption technology provides high levels of protection, hacking and data loss cannot be ruled out.

An important aspect is that owners can always have their bitcoins at their full disposal. The outsourcing of large amounts therefore requires comprehensive safeguards. Bitcoin, like other Fiat currencies, is carried by its users without its own value. Central authority and status as legal tender are missing. The value of a Bitcoin is relatively simply determined by supply and demand. The exchange rate shows high volatility against other currencies. In summary, inflation protection and security are given to a very high degree, but due to the low stability there is also a lack of acceptance on the market. Competing digital currencies exist and continue to be expected. (Daube & Dobernig, Digitale Währungssysteme - Funktionsweise und Einsatzmöglichkeiten, 2019)

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Excerpt out of 21 pages

Details

Title
Bitcoin‘s potential of becoming a world currency
College
Northern Business School
Course
International Financial Relations
Grade
1,7
Author
Year
2019
Pages
21
Catalog Number
V508583
ISBN (eBook)
9783346070050
ISBN (Book)
9783346070067
Language
English
Tags
Bitcoin, world currency, world, currency, finance, finanzen, weltwährung, geld, potential, international, financial, relations, crypto, cryptocurrency, cryptocurrencies, Krypto, Kryptowährung, finanzwirtschaft, money, financial system, digital, digitale, währungssystem, währungssysteme, digital currencies, digital currency, mining, block chain, block, chain, satoshi, nagamoto, monetary, functions, monetary functions, geldfunktion, geldfunktionen, virtual, virtual currency, virtual currencies
Quote paper
Finn Schwarz (Author), 2019, Bitcoin‘s potential of becoming a world currency, Munich, GRIN Verlag, https://www.grin.com/document/508583

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