Question

 

 

Read about Crypto currencies and answer the given question.

 

 

“Recently, cryptocurrencies and bitcoin have become the main topics in the financial industry. A cryptocurrency is a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency, and arguably its most endearing allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation. Cryptocurrencies have their benefits and drawbacks. It is not easy to predict the future of cryptocurrencies, since there is a lot to be done especially in the field of formal regulations. However, the banks and other financial institutions should see and consider cryptocurrencies as an alternative for the financial transactions in the future”.

 

Questions

 

1. Explain early development, challenges and risks, opportunities, advantages and disadvantages, and the future of Crypto Currencies.

 

 

2. What is Bitcoin and how does cryptocurrencies (bitcoin) work? Do you think this is an alternative for Currency in circulation?

 

 

3. What are the biggest determinants of cryptocurrency prices?

 

4. How does the aggregate demand and supply of cryptocurrency affect the Economy?

Answer 1

1)Early Development:

Nearly ten years after the introduction of bitcoin, the first and most prominent cryptocurrency, digital currencies continue to defy the doomsday. Despite being around for less than a decade, cryptos already show potential to replace traditional fiat currencies and transform the financial services landscape.

While the concept of online currency predates bitcoin, 2009 marked a defining moment for peer-to-peer electronic cash system when an individual (or group) under the pseudonym Satoshi Nakamoto publicly released the bitcoin software. Bitcoin was created to protect against inflation, provide security, and put the control of money in the hands of the people.

As bitcoin grew in popularity and gained more acceptance, users began to notice some of its shortcomings. As a result, alternative cryptocurrencies (often referred to as altcoins) were launched to fix its perceived flaws in areas such as privacy, transaction speed, DNS resolution, proof-of-stake, among others.

2) Challenges And risks

• Spoofing payment information and phishing:

  We’ll start with common problems such as plain old theft. Let’s say you’re transferring money to a friend. You copy his wallet address accurately, but malware replaces the address in the clipboard with another one. Not every user is vigilant and double checks an address after copying it. Especially if the address is a long jumble of characters.

  Or take phishing, for another example. As with ordinary e-money, users can be tricked into going to a phishing website where they upload their cryptowallets and enter a password.

• Hacking a payment gateway :On top of that, even using a genuine payment gateway with the correct address can result in a loss of money.Turned out, hackers had used social-engineering methods to convince the hosting provider that they were the real domain owners. After gaining access, they started intercepting cash flows.
• User address error :The preceding cases were typical electronic-money issues, but as we’ve already said, cryptocurrencies add their own wrinkles. For example, there is a risk that’s very specific to cryptocurrencies — loss of money due to an error in the address to which the money transfer is made.
• Loss of a wallet file :There’s one more problem that is typical of cryptocurrencies: loss or theft of a wallet. Most users store their cryptocurrency wallet files on their computers. Therefore, they can be stolen using malware or lost if the hard disk crashes.
• Insecure ICOs:The problem is that the cryptocurrency market still isn’t regulated by any means, there are no risk assessment mechanisms, and there is no guarantee — like at all — of return on investments, except the word of honor of people who came up with the project.
• Spoofing a user address:Sometimes, a money-grabbing scheme is even simpler. Collection of funds in an ICO usually opens at a specified time and closes when the required amount has been collected. The collection address is posted on the project website when it opens.

3) opportunities:

1. Ease of Access and Liquidity

As long as you have a secure cryptocurrency storage, you can be assured that any transaction you make is fast, safe, secure, and low-cost. Compared to transactions using fiat currencies, cryptocurrency transactions are simpler and faster, even when you are making cross-border payments.

2.Transparency

Many cryptocurrencies today are dependent on the blockchain, which is an online ledger that serves as a complete record of all relevant transactions. Transactions are visible for everyone to see and monitor, making them safe and transparent. This makes transactions extremely transparent since you can easily monitor the movement of your money and see if it goes where you intend it to be

4) Advantages and disadvantages

1. No inflation – the maximum number of coins is strictly limited by 21 million Bitcoins. As there are neither political forces nor corporations able to change this order, there is no possibility for development of inflation in the system.

2. Peer-to-peer cryptocurrency network – in such networks there is no master server, which is responsible for all operations. Exchange of information (in this case — money) is between 2-3 or more software clients. All installed by users program-wallets are part of a bitcoin network. Each client stores a record of all committed transactions and the number of bitcoins in each wallet. Transactions are made by hundreds of distributed servers. Neither banks or taxes, nor governments can control the exchange of money between.

3. Unlimited possibilities of transaction – each of the wallet holders can pay to anyone, anywhere and any amount. The transaction can not be controlled or prevented, so you can make transfers anywhere in the world wherever another user with a Bitcoin wallet is located.

5)Future

There are different and confronting opinions regarding the future of cryptocurrencies in general and bitcoins in particular. Whils, those with libertarian views of life are optimistic and embrace the cryptocurrency system, other authors, economists, and scholars from this field are not enthusiastic about the use of cryptocurency in the system of payments and financial transactions. The optimistic view of cryptocurrencies use is backed by the fact that they make it easier to transfer funds between two parties in a transaction; these transactions are facilitated through the use of public and private keys for security purposes. These fund transfers are done with minimal processing fees, allowing users to avoid the steep fees charged by most banks. In addition, many countries have started to accept bitcoin as a valid currency.

Q2)Briefly, a bitcoin can be thought of as a chain of transactions from one owner to the next, where owners are identified by a public key from here on out, an address that serves as a pseudonym; that is, users can use any number of addresses and their activity using one set of addresses is not inherently tied to their activity using another set, or to their real-world identity. In each transaction, the previous owner signs using the secret signing key corresponding to his address a hash of the transaction in which he received the bitcoins and the address of the next owner.

Bitcoin offers an efficient means of transferring money over the internet and is controlled by a decentralized network with a transparent set of rules, thus presenting an alternative to central bank-controlled fiat money. ... Bitcoin and other digital currencies have been touted as alternatives to fiat money.

Q3: Supply and Demand are the biggest determinents of cryptocurrency

Q4:This is a basic economic principle. If a cryptocurrency has a high token supply with little demand from traders and users, then the cryptocurrency’s value will drop. Conversely, if the supply of a particular cryptocurrency is limited and the demand is high, then the value of the coin will increase.