The Cryptocurrency Bitcoin And Causal Effects Of Market Volatility

Academic Paper, 2018

16 Pages, Grade: 9/10


Table of content


Bitcoin and illegal trading

Fluctuations and causal effect of it

Bitcoin Fluctuations in the year of 2013

Market Fluctuations in the period 2015.01-2017.01




The recent emergence of new technologies in a financial sector and virtual communities lead to new types of transactions and started questioning the relevance of financial centers around the world. The main reason for the emergence of virtual currencies (cryptocurrencies) is not necessary incapability or shortcomings of traditional currencies, but rather the development of the internet and its networks. Unfortunately, cryptocurrencies raise more controversies on questions such as legal framework, financial risks or effect on the economy – this is a challenge for the financial sector and existence of financial centers.

In the beginning, it is necessary to define Virtual Currencies. This type of currency can be defined as International Monetary Fund (IMF) in a research “Monetary and Capital Markets, Legal, and Strategy and Policy Review Departments” (2016) describes “digital representations of value, issued by private developers and denominated in their own unit of account”. This definition clarifies the usage of virtual currencies as it has functionality to be transacted electronically, stored, accessed if two parties of a transaction confirms an exchange.

Virtual currencies emerged because of a creation of a blockchain or so called distributed ledger system. This system is exceptional because of decentralization principles. The most important detail in a system is the unique ledger of transactions. As IMF in a research “Monetary and Capital Markets, Legal, and Strategy and Policy Review Departments” (2016) stated “The network’s distributed ledgers—and hence individual transactions—are validated by using technologies derived from computing and cryptography”. The bitcoin technology allows to have a consensus between members of a network and decentralize transactions within a network.

Talking about cryptocurrencies it is essential to discuss volatility of a currency itself. For example, bitcoin had 4 peaks and plummeted 5 times in the period of 2016-2017 Year. This characteristic leads to a conclusion that money cannot stand for a form of capital accumulation, because the risk of rapid fluctuations of the exchange rate is too high.

So, we raised a research question - the reasons for cryptocurrencies' fluctuations and challenges for illegal trading. Since, the cryptocurrencies emphasized these two questions (volatility and illegal trading) it remained the most important for a long time. In this research we provide analysis of fluctuations and illegal trading as a challenge for the existence of cryptocurrencies.

Bitcoin and illegal trading

Most countries do not view cryptocurrencies as legal tender, but bitcoin is steadily becoming a mainstream asset. What used to be a market for mostly speculators and traders is now also being adopted and integrated into small businesses and large companies. Although there are a couple more things that should not be forgotten about bitcoin, for example according to an article written by Adam Bergman (2017) “What You Need to Know About Cryptocurrencies and Taxes”, retrieved from Forbes journal ​,bitcoin, like most cryptocurrencies, is taxed in a specific way, is a highly liquid asset, difficult to trace and treated as property and not currency. Naturally raising the question, does bitcoin facilitate some form of illegal trading?

To start with, the bitcoin transactions flow wallet-to-wallet, without any physical items being exchanged, and where “wallet” identities are disguised. In this sense, bitcoin is like USD or gold in facilitating illegal trade. The simple convenience of completing business

transactions within the comfort of your own home is what attracts bitcoin users most, not to mention the upside of no fees, just plain give and receive interactions with no strings attached. On the other hand, a criminal’s best friend is the anonymity, so it is clear why BTC is a favorite amongst them. It is certainly known that these courtesies are just tools, so one could use them for either good or evil. This uncertain legal framework brings bitcoin out in a bad light, providing more bad press, and also keeping potential investors and companies away.

As with all money it is best if you’re able to spend it. It has been gradual but more commodities are becoming available for bitcoin users each day. Mentioning only a couple of most high-profile acceptors of bitcoin, according to an article written by Darryn Pollock (2017). “Five Big Businesses Leading Bitcoin Charge”, ​ retrieved fromCoin Telegraph magazine, companies like “Microsoft” obviously make the list. Furthermore, the DISH network, a ​satellite television provider has given the green light for bitcoin users, as you can now purchase a variety of digital satellite services via this specific cryptocurrency. These companies set the stepping stones for others, regarding the usage of bitcoin as a means of payment.

On the other hand, black markets were the first to widely accept and use bitcoin transactions as a preferred means of exchange. This is where the pros of anonymity come into play, as items purchased were not mainly comprised of books, plates or any other items purchasable at a market across the street from where you live. Perhaps the illegal market that gained most notoriety was called “Silk road”, the users dealt in illegal drugs of every variety, hitmen, stolen bank accounts, firearms and ammo, counterfeit bills, digital goods, forgeries etc. Putting things into perspective, just how big was the black market? The following numbers are excerpted from the criminal complaint against the website owner Ross Ulbricht in New York also in accordance with the data collected and article written by Lorenzo Franceschi-Bicchierai (2013). “The Silk Road Online Drug Marketplace by the Numbers”, ​ retrieved from theMashable magazine, at its peak, the website had close to 1 million registered accounts, over 1.2 billion dollars in revenue, approximately 1.25 million completed transactions at an average of 976 dollars per deal. Looking at the numbers it obviously did not take long for the website to gain notoriety amongst illegal goods vendors, as it fulfilled most needs for such trade. To add to the secrecy, to access the online shop it was necessary to own an IP disguising routing service called “Tor”, as to make the website and its users hardly trackable. As with all good things, it did not last very long, a little over two years to be more specific. Although, one thing is certain, the smartest sellers did not leave with empty pockets.

Though the inevitable happened, “Silk road” finally crashed due to the carelessness of the creator of the website, resulting in an asset forfeiture. The news had a field day with it, most obviously highlighting the negative sides of cryptocurrencies, in turn also affecting the value, as it dropped immensely.

Bitcoin Fluctuations in the year of 2013

It is very difficult to determine the reasons behind crypto currencies volatility, in this case Bitcoins. Bitcoin is said to be very volatile because of events regarding it, sensitive to the press, statements of the government. Nonetheless, even the events or statements of influential people might disturb the price, in some cases, for not so long, not an exception, the year of 2013.

As mentioned previously, Bitcoin was not rarely linked with illegal activities. In October, 2013, online black market “Silk road”, was shut down by the Federal Bureau of Investigation, who reportedly ​seized 144,000 bitcoins, which were estimated roughly to $28.5

million dollars. It would be expected that after such events of shutting down the market where people were so used to or primarily made transactions with Bitcoins, the price would experience a huge crash. In spite of that, when the market was shut down, the price of Bitcoin was at around $145, when the news was made public, the price fell not that sharply - to $109.

Abbildung in dieser Leseprobe nicht enthalten

Graph 1. Bitcoin price fluctuations in 2013.09.08-2013.10.12

The shutting down of one of the biggest markets where Bitcoin was traded explains a temporary decrease in its price. However, Bitcoin did not experience a long-time stagnation and the price rose back to almost the same levels, according to an article written by Alex Hern (2013) “Bitcoin price plummets after Silk Road closure”, retrieved from The Guardian.

On December 5, 2013, the People's Bank of China (China’s Central Bank) announced that people should not be engaging in trading Bitcoin, it should be banned and it is illegal to buy goods with currencies that are virtual. However, Bitcoin was not banned, and people were told they are still free to trade at their own risk. Nonetheless, the Bitcoin experienced a remarkable drop in price. Over the course of a few days, the currency’s price suffered a huge drop from $1147,25 to $694,47. According to Susan Athey (2016) “Bitcoin Pricing, Adoption, and Usage:


Excerpt out of 16 pages


The Cryptocurrency Bitcoin And Causal Effects Of Market Volatility
International School of Management, Campus Munich
Financial Geography
Catalog Number
ISBN (eBook)
ISBN (Book)
cryptocurrencies, bitcoin, investment, finance, markets, volatility, fluctuations, trading
Quote paper
Gabriele Pauliuk (Author), 2018, The Cryptocurrency Bitcoin And Causal Effects Of Market Volatility, Munich, GRIN Verlag,


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