Question

International Financial Management Case 2:

Bitcoin as an international digital currency Bitcoin and other cryptocurrencies based on blockchain technology have been around for over a decade now. The former President of the European Central Bank, Mario Draghi, was asked about Bitcoins. He told Debating Europe he would not call Bitcoin a currency for a couple of reasons. One of them was that “a Euro today is a Euro tomorrow. Its value is stable. The value of Bitcoin oscillates wildly”. Isn’t this a big problem for cryptocurrencies like Bitcoin? How can we use them as currency if their value is not stable?

Mr. Josh, who is an owner of a digit currency on the other hand argues for a Bitcoin as follows: Our current system is not so rosy. Just look at what happened in 2008: we placed our money in banks and they failed us. What’s to prevent that from happening again? Do you have a say in the European Central Bank’s (ECB) or the US Federal Reserve’s monetary policy? We are already living with a highly volatile system, which could be pushed to the brink should another financial crisis occur. Cryptocurrency offers a possible alternative to our failing financial system. Is it not wiser to start placing trust in algorithms rather than fallible individuals?

Questions:

1. What are Bitcoins? How do they operate as an international currency?

2. There are two opposing views about Bitcoins. Explain the arguments for and against Bitcoins as a currency?

3. Would do you invest in Bitcoins? Why or Why not? Give detail reasons.

Answer 1

1. Bitcoin is a digital currency, also known as crypto currency, allows to people to send or receive money across the internet, even the parties ( sender or receiver) unknown to each other. In another words, money can be exchanged without disclosing the real identity.

Bitcoin is legal in US, Japan,UK ,Canada and most developed countries.

Each Bitcoin is basically a computer file which is stored in a digital wallet app on a smartphone or computer. People can send Bitcoins to your digital wallet and you can send it to other people. Every single Transaction is recorded in public list called the Blockchain.

2. Bitcoin can't be a Currency, it has a intrinsic value, unlike fiat currency , Bitcoins can not be created out of thin air. In another words mining Bitcoin has a tangible cost and this cost is not only used to create new units, it also ensures Bitcoin' s functionality and reliability as a decentralised ledger and International payment system.

So Bitcoin is in practice but can not be considered as money. It could be currency if it is widely used. It is a very niche product and can also become expensive to use in certain situations.

3. As per my opinion, Investment in Bitcoin is not a good suggestion due to following reasons:

I. Extreme volatility- This is extreme volatile Currency so involved very high risk. Since there is not any regulator so no control on price.

II. Neither commodity nor currency- It comes neither commodity nor Currency category. So very risky for businesses, industry and people to trade or invest. It is just as a formula.

III. Don't invest if you don't understand- It is highly advisable that don't invest in it if you don't understand it properly. Or invest a very small amount.

Iv. An Unregulated- There is not any legal entity or watchdog who could monitor the transaction. So very difficult in case of grievance redressal.

v. Possibility of fraud- Though the system ' Blockchain' on which bitcoin operates is very safe but we can not deny the possibility of fraudulence.