Bitcoin prices are highly volatile compared to other currencies… and in fact most types of other...

Bitcoin prices are highly volatile compared to other currencies… and in fact most types of other securities as well.

• Briefly outline reasons why Bitcoin may be considered unusually risky. Feel free to add any quotes or data to support your thinking.

• Summarize how regulators (US or international) are considering getting involved.

Solutions

Expert Solution

A) Bitcoin may be considered unusually risky becasuse:

1. Faulty price discovery - Bitcoin prices are discovered through exchanges that are unregulated with very lax KYC compliance process. Wash trades, front-running and trading with insufficient funds is said to be common in many of these exchanges.

2. Price volatility - The main reason for this volatility is that there is no underlying to which the value of the bitcoin can be pegged. Its price is based just on the demand and supply in numerous unregulated exchanges around the world.

3. Lack of regulation - The speed of money transfer and the lower cost of transaction in bitcoins are mainly because there is no supervising authority. But with no overseeing authority, instances of price manipulation is common.

B) Regulators (US or international) are considering getting involved

1. US government request to trawl through the personal data of millions of users of the cryptocurrency exchange Coinbase signals the start of an effort to pull digital currencies like bitcoin into the mainstream.

2. China recently made it illegal for companies to raise new funds by issuing virtual tokens.

jeff jeffy answered 3 months ago

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