MAF702 Financial Markets Assignment Sample

• Subject Code : MAF702
• University : Deakin University My Assignment Services is not sponsored or endorsed by this college or university.
• Subject Name : Financial Accounting

Functioning of Cryptographic Currencies

Contents

Introduction.

Research objectives.

Literature review..

Analysis of literature.

Evolution of cryptocurrency over years.

Functioning of cryptocurrency.

Irregularities in the functioning of cryptocurrencies.

Bitcoins and Dogecoins.

Trends in Bitcoins and Dogecoins and changes in their performance over the years.

Conclusion and Recommendation.

References.

Abstract

The report summarizes about cryptocurrencies. These are the virtual currencies that are dealt on an online platform and has no physical presence. The transactions are done on a peer to peer basis and have no institution involved within them. For the purpose the report studies five papers that outline various legal issues and other problems involved in the cryptocurrencies. The objective of the paper is to understand the functioning of cryptocurrency and also provide a study on the trends of Bitcoins and Dogecoins. The trends show an upwards movement and were highest in July 2019. In this manner the report recommends that a proper channel or institution should be established and value should be defined for the cryptocurrencies.

Introduction

Cryptocurrency or the virtual currencies that are secured by cryptography are known as cryptographic currencies. It functions as a digital asset that can be used as an exchange. The individuals have digital tokens as proof for their ownership and these are recorded or stored in the digital ledger (Hileman Rauchs, 2017). A computerized database is used by using cryptography for securing the transactions and record the entries, for controlling more creation of token that is digital and for verifying the ownership whenever the transfer takes place. Various cryptocurrencies use a control that is decentralized and not in line with central banking systems. If a currency is held in a centralized exchange before its creation then it is considered as centralized while in decentralized version cryptocurrency works through a ledger of distributed technology.

A database for the financial transaction of the public is created through the blockchain. Cryptographic currencies function mostly like the credit or debit cards of the banks. The only difference is that instead of any centralized agency regulating the currency ledgers and algorithm issues the currency. Since, there are no regulators for the currency, the currency remains unregulated. The report aims at studying the functioning of cryptocurrencies and the irregularities that prevail in dealing with cryptocurrencies. Also, the report will study the trends of the cryptocurrencies like Bitcoin and Dogecoin accordingly over the past few years.

Research Objectives

• To understand the history of cryptocurrencies and how they have evolved over the years.

• To understand the functioning of cryptocurrencies.

• To understand the irregularities that prevail in the functioning of cryptocurrencies.

• To understand about Bitcoins and Dogecoin.

• To understand the trends of Bitcoins and Dogecoins and the changes in their performance over the years.

Key terminology: Cryptocurrency, Digital assets, ledger database, Bitcoins, Dogecoins

Literature Review

According to Inna Gryshova and Tatiana Shwstakovska in the year 2018, the main idea about this subject is the development of Fintech business to legalize the cryptocurrency in Ukraine. The integration of Ukraine in the community of Europe and the globalization of cryptocurrencies has been complicated due to a lack of legal support. Fact 1: The currencies are created through mining where the users are located at different places and through the installation of software and by solving algorithms or mathematical problems, cryptocurrencies are created. Fact 2: The process of creation of cryptocurrency and distribution is not controlled by any single center of emission.

Cryptocurrencies are similar to electronic money, but the lack of control, anonymity, and limited release distinguishes it from the payment systems. Fact 3: The process of legalization of these currencies vary from county to county. In the US these are recognized as payments for e-commerce while in Germany they are classified as private money by which multilateral transactions of clearing can be carried out. Fact 4: The existence of cryptocurrency in Ukraine is ignored by the officials that might cause social and economic troubles. Fact 5: Ukraine has prepared a bill in this regard and has become the first Soviet Union that has developed a bill on the circulation regulation of cryptography and legal relations.

Also, the country is considering criminals as civil liberties and this is evident from a developed state land cadaster as per the technology of blockade. In conclusion, the study has shown that cryptographic currency cannot be equated as per the product as the turnover is dependent on demand and supply. But for the functioning, certain innovations are required, especially in case of software and legal regulation for protecting the economies from cyber thefts as anonymity is one thing that is looked by cybercriminals and cryptocurrencies provide that.

According to another author A.M. Bondarneko, in 2018, the main idea is to show how cryptocurrencies have evolved and became a new way of earning. Fact 1: Cryptocurrencies are the new trend in the world of business and have provided an opportunity for producing, selling, and earning. The first cryptocurrency was created in the year 2009 and was based on the technology of blockchain that is an open and distributed ledger for recording the transaction that takes place between two parties. These blocks are secured as they are written with the method of cryptography. Fact 2: Bitcoins are the most popular cryptocurrency and are limited to 21 million and these are produced through mining a process of the transaction record. In the year 2018 almost 81% of the whole amount was already produced.

Fact 3. The blockchain system is regulated itself and this leads to the problem of mining. Yet the system is decentralized and the requirement of entrusting the money with some broker and exchange institution is removed. Fact 4: The price of Bitcoin in May 2018 reached $9082 which was at $0.0001 in the year 2009 and the market capitalization for cryptocurrencies stands at $418.6 billion. Bitcoins has a 37% share in the overall value of cryptocurrency. This shows that cryptocurrency is growing and Bitcoins are the fastest growing cryptocurrency.

Fact 5: The power of mining is slow and it requires huge power of computing and the electricity cost. But for certain cryptocurrencies like Litecoin mining is 4 times faster than the bitcoin and the speed of mining depends on the hash rate for the hardware and coin. In conclusion, cryptocurrencies have shown huge growth and provided people and ample opportunity for growing their money. Also with certain improvements there are possibilities that cryptocurrency will grow further and people who are willing to take risks can earn a lot from it.

A third writer Blake J. Cowley in the year 2018 states that Bitcoin and cryptocurrency are different than any other financial instruments prevailing in the market, thus presents various legal and regulatory issues as current laws do not cover the way it functions. Fact 1: The US government is not sure of how to deal with the legal realm of cryptocurrencies and regulate it efficiently. Till the year 2018, there is no single bill that has been passed by the Congress in the US regarding cryptocurrency and has left it the regulatory measure on each state, certain states of US like New York, California and North Carolina have created their own set of frameworks for regulating cryptocurrency.

Fact 2: There are two legal and regulatory issues that the US government has not been able to address. The first is the classification of the cryptocurrency and which regulatory body should keep a check on cryptocurrency. Fact 3: Due to infancy various people are taking advantage of the lack of regulation and harming the consumers through various scams, like hacking of wallets and robbing millions of dollars. Fact 4: In a case of SEC vs Shaver's in the year 2014, it was described that cryptocurrency comes under the definition of security that was outlined in the Securities Act of 1993. This was the first case that took a stand about the classification of cryptocurrency. Fact 5: The scams that took place in cryptocurrency includes 17% of theft, 30% of fraud, 22% of hack, 13% of Phishing, and 17% of the exit scam. This all happened because there was no legitimacy for proving the operations that means that anyone can create an exchange for Bitcoin.

Hackers constantly hack the wallet by trying to get through the encryption key. Also, at present, no agency of government ensures the safety and with that, the transaction that happens is hard to trace as they are split around thousands of computers and if a cryptocurrency is hacked from the wallet then it is impossible to get it and there are no remedies legally that will help in tracking down the hacker. In conclusion, the growth of the cryptocurrency will lead to various problems that will be faced by the country. However by understanding and implementing reforms that are easy and have low cost, the government will be able to prepare themselves to handle issues that may arise.

A fourth source for Cryptocurrency: A challenge to the legal system by Saman Jafari, states that various legal issues have cropped up with the growth of cryptocurrency in the market. Various methods are being used to conceal the transaction of money. Fact 1: Virtual currencies have the potential to evade the tax as they are anonymous. These currencies do not rely on any financial institution as they mostly peer to peer exchange-based transactions. This will defeat the government measure of tax evasion.

Fact 2: Cryptocurrency is considered as a heaven for the tax evaders and also for money launderers. A variety of approaches are used to hide the money by which transfer is performed. Multiple wallets can be used and only money is received and no currency is transferred out since the wallet creation. Fact 3: Another approach that can be used is a division of transactions, through fork and merge patterns.

Under these various transactions are divided into smaller parts and sent to different destinations and on later stages they are collected in one place. Fact 4: At present there is a lack of regulations with regards to legal challenges posed by virtual currencies and through illegal activities development of innovative technology is being deterred. Fact 5: Certain countries like Canada and the UK considers cryptocurrency as a method of payment. While in Switzerland there is enough flexibility with regards to cryptocurrencies. Thus, people are moving to Switzerland for the purpose. In conclusion, Cryptocurrency brings certain benefits to the business but with that they pose a threat to the government regulations and the problems include risk of cybersecurity, tax evasion, and support for terrorism in financial terms.

Finally the authors, Sabrina Howell, Marina Niessner & David Yermack in the year 2-19 states that in cryptocurrencies, Initial coin offerings are emerging as a new mechanism for the finance of entrepreneurs. Fact 1: ICO's have collectively raised around $12.9 billion. Fact 2: ICO provides early liquidity to the investor as the tokens for ICO's are transferable easily. Also, the liquidity of the token increases drastically if the token has been listed on the exchange on cryptocurrencies. Fact 3: The cost of raising a token on the platform is that the transaction cost is lower than the other platforms.

For the transactions related to ICO, transaction and regulatory cost has been zero. Fact 4: On the two dimensions of the progress of operations, tokens that are designed with the utility features enables access for future products and also the services. Thus, helping the issuer in avoiding failures and generating higher levels of employment. Fact 5: ICO provides another platform to the investor for raising capital in a form of crowdfunding, where the rights are not distributed. In conclusion, ICO provides an opportunity for the promotion of loyalty and the adoption of customers for raising capital by new investors in class.

Analysis of Literature

There are various ideas that I found relevant to the topic that are as follows:

• For legalizing the cryptocurrency certain innovations are required as the present system cannot detect the details of transactions appropriately.

• Cryptocurrencies can pave a way for earnings. Many have earned a lot through the purchase and sales of these currencies.

• The currencies do not lie under any specific classification that makes it difficult to understand and also hard to regulate in the country.

• The various legal issues that arise involve tax evasion that can be done through multiple wallet creations, dividing the amount, etc. This will make it hard to understand how much money has been transacted.

• The initial coin offering is the new platform that has risen and provides funds to the entrepreneur. In recent times a large amount has been raised through this platform.

These ideas are similar to the topic that have been taken. The functionality of the cryptocurrency is required to be discussed and with that the various legal aspects are to be read. These reading provide a fair idea on the benefits of cryptocurrency and also shows the various legal problems that will cope up in the process.

Evolution of Cryptocurrency Over Years

The very first cryptocurrency evolved in the year 2009 and was marked as a moment that is defined in the peer to peer electronic system of cash. It was released by pseudonym Satoshi Nakamoto publicly. It was created for protection against inflation and giving the control of money in the hands of people. After the bitcoin there are several hundred cryptocurrencies that have entered the market. These include Litecoin, Dogecoin which was a joke currency, and also Ethereum. The idea behind the creation of cryptocurrency was to create an anonymous channel for the transfer of currency from one person to another (Clements, 2018). For registering this Blockchain, a digital ledger was created.

Blockchain registers every transaction that takes place concerning cryptocurrency. The main benefit of using blockchain is that once the data has been stored ledgers cannot be tampered. In the year 2017 value of cryptocurrencies saw a massive spike and in the year 2013 Tesla model S was brought in for 91.4 bitcoins. Also, at present Starbucks allows its customer to use cryptocurrency for payment of foods and drinks. Japan is aiming to have around 260000 stores around the country for accepting the bitcoins or cryptocurrencies. Also, the volatility of the cryptocurrency market stands at $4.8 billion a day. This shows that over the year’s cryptocurrency has grown and money is taking a new form (ElBahrawy et al 2017).

Over the years the growth of virtual coins has increased on global terms.

Functioning of Cryptocurrency

There are various terminology that is involved in the functioning of cryptocurrency. In the dealings of cryptocurrencies, transactions are sent between peers through a software called cryptocurrency wallets. The person who is starting or creating the transaction uses this wallet for transferring the balances from one account to another. There is a password that is attached to the account and the person who is operating that account knows that password. Then the transactions are made. When these transactions are made there is a ledger in which the transactions are recorded.

These ledgers are created by the blockchain. Blockchain acts as a bank which is decentralized and records transactions and balances for both the parties. Once the transaction is initiated and completed, a copy of the blockchain is sent to all the users involved. These transactions are recorded through mining. Users have access to the ledger if they want to access it (Mkrtchian, 2019). They can download and then run a copy of the software known as the "full node" wallet. Amounts of transactions remain public but who sent the transaction remains encrypted. Each transaction is encrypted and creates a unique set of keys. Whosoever owns the keys owns the sum associated with those keys. In this manner an overall transaction of a bitcoin takes place.

Irregularities in The Functioning of Cryptocurrencies

According to the growth and explosion of the digital currency in the country various legal implications are also rising with regards to new technologies and currencies. Government, financial institutions are trying to understand the meaning of virtual currency and technology, to control the irregularities or discrepancies that may arise in their dealing. These are the currency that is not physically present and cannot be owned (Schaupp & Festa, 2018). Various irregularities are created by the cryptocurrencies.

The very first one is the evasion of tax. By using cryptocurrencies people can easily evade the tax. The users are anonymous in the transaction of cryptocurrency. And by various ways like dividing the funds, the amount of money involved cannot be traced. Also, there is no central point for the transactions. They are divided across various computers, due to which it becomes hard for the authorities to trace the amount. By this people can easily evade tax and makes it difficult for the legal authorities or the government to regularize the market.

The other major irregularity concerning cryptocurrency involved the classification of cryptocurrency. US has defined the cryptocurrency as a property while in Canada it can be used as a currency. This creates an issue while dealing with the countries.

The virtual currencies are decentralized. This means that no one has any authority or control regarding the transactions. This poses a threat to the investors. Since the currencies are not backed up by a central authority, nor have they any physical presence this leaves investors into certain legal complications. The value of the cryptocurrency is entirely dependent on the other owner or investors and since there is no backing by the authorities it leaves investors in the lurch when any complication concerning transaction or ownership arises.

Also, there are certain restrictions for the registering of business and licensing. As, it has been determined earlier ICO's and other currencies are being used for raising the capital and business thereof are using them as a form of payments. But, as the jurisdiction is still evolving and there is no clarity for the operations of the business market of cryptocurrencies, at times businesses are not approved or they do not get the license (Spithoven, 2019). They have to submit a special consideration for the registration.

 In this manner, there are various irregularities concerning cryptocurrencies and it is required that an appropriate law is created or institution is made that looks over all the transactions. This will help in creating a proper channel of dealing for cryptocurrencies and reduce the risk for investors and the government too.

Bitcoins and Dogecoins

Bitcoins are the digital currency that was created in the year 2009. It is a decentralized currency and offers a lower range of transactional costs. Bitcoins have no physical presence. The balances are recorded in the cloud ledger (Shanmugam et al., 2017). These are not considered as legal tender and are high on popularity concerning other virtual currencies. In the year 2017 the value of Bitcoin skyrocketed and reached to $20000 per coin. It is the first cryptocurrency that used peer to peer technology.

Dogecoin is also a cryptocurrency that shows the likeliness for the Japanese breed dog Shiba Inu. This currency has developed its's online community and has reached a capitalization of US$60 million in the year 2014. The currency was first released in the year 2013. Dogecoin has a faster production of initial coins. There were around 100 billion coins that circulated in mid-2015 and after that every year 5.265 billion coins were added. In the year 2015 100 billionth coin was mined. This coin is also referred to as an altcoin.

Trends in Bitcoins and Dogecoins and Changes in Their Performance Over the Years

Bitcoins

The market of bitcoin is valued at USD 293.66 billion in the year 2019. The market is supposed to reach USD 477.05 million by the end of the year 2025. According to the report of Mordo Intelligence, the CAGR growth of bitcoins will be around 8.3% between the years 2020 to 2025. Since there is no risk of inflation with bitcoins, they are trending at the top for various years (Giungato rt al., 2017).

A data report by Data by ICO in the year 2019 states that about 15558 businesses have started accepting Bitcoins around the globe with Slovenia being the one accepting the highest bitcoins. Also according to a report by Coin ATM radar, the main producers of bitcoins are Genesis coins holding 31.5% of the market share and General bytes holding 31.4% of the market share. Also the global ATMs for the bitcoins are rising.

Over the year the size of the bitcoin blockchain has increased. It has reached around 242.39 gigabytes from its creation. The overall side growth of the bitcoin can be seen from the picture of the chart below:

Size of bitcoin blockchain

This shows that the trend is increasing and the size of the market for bitcoins is increasing.

Over the year prices of bitcoins has also increased. There are certain ups and downs but the overall trends of the prices in increasing. The graph below shows that prices touched the peak in July 2019 nearing to USD 12000 and also the volume was highest in the same month. Now the prices are between $8000 to $1000 (Statista, 2020).

Trends and prices of Dogecoins

Dogecoin was born as a meme on the internet and today it has reached a market capitalization of $300 million. For 3 years the coins were not traded much and there were no movements of price as such. The ROI on the coin is around 300% since the day of its creation. In the year 2018 DOgecoin showed bearish movements and lost the attention of the public. The coin is most popular in Venezuela. According to the report of Walletinvestor, Dogecoin shoes a positive rise in the price for the year 2020 and it is expected that by the year 2025 the prices of coins can significantly increase to $.0184.

The trends of Dogecoins were as follows:

This shows that the price and volume were highest in July 2019. This shows the same trend as of Bitcoin.

Conclusion and Recommendation

Cryptocurrencies are the digital currencies that are not regulated in the market. No institution scrutinizes their services. These currencies are transacted through virtual platforms and a technology of blockchain. Bitcoins and several other virtual currency functions under it. Various articles and journals have been written, that point out certain problems concerning the cryptocurrencies. This involves legal issues like tax evasions that can be done by opting for various methods. Transactions are anonymous, funds can be divided into parts. The other problem is that the investor has no place to go if any fraud happens.

There is no proper channel that can monitor the activities and since the transactions are done through various computers, it is hard to capture the source. Yet these currencies are popularizing in the market and have grown significantly in the world. Cryptocurrencies are secured through blocks and an encrypted key that is known by the users. Still the scams around these are growing. Bitcoin and Dogecoin trends show that they both have grown over the years. In the year 2018 dogecoin has some fallback but in Jul 2019 both the coins were popular.

It is recommended that a proper legal channel should be created and the value of a bitcoin around the world should be synchronized. This will help the investors to have a proper value around the world for their bitcoins and also to the government for keeping a check accordingly.

References

Bondarenko, A. M. (2018). Cryptocurrency: a new way of earning. Retrieved from: http://elib.bsu.by/handle/123456789/216819

Clements, R. (2018). Assessing the evolution of cryptocurrency: demand factors, latent value, and regulatory developments. Mich. Bus. & Entrepreneurial L. Rev., 8, 73.

Crowley, B. (2018). The Legal and Regulatory Issues Surrounding Cryptocurrency. Retrieved from: https://repository.tcu.edu/bitstream/handle/116099117/22440/Crowley__Blake-Honors_Project.pdf?sequence=1&isAllowed=y

ElBahrawy, A., Alessandretti, L., Kandler, A., Pastor-Satorras, R., & Baronchelli, A. (2017). Evolutionary dynamics of the cryptocurrency market. Royal Society open science, 4(11), 170623.

Giungato, P., Rana, R., Tarabella, A., & Tricase, C. (2017). Current trends in the sustainability of bitcoins and related blockchain technology. Sustainability, 9(12), 2214.

Gryshova, I. Y., & Shestakovska, T. L. (2018). FinTech business and prospects of its development in the context of legalizing the cryptocurrency in Ukraine. Наукові записки Інституту законодавства Верховної Ради України, (5), 77-78.

Hileman, G., & Rauchs, M. (2017). Global cryptocurrency benchmarking study. Cambridge Centre for Alternative Finance, 33. Retrieved from: https://www.crowdfundinsider.com/wp-content/uploads/2017/04/Global-Cryptocurrency-Benchmarking-Study.pdf

Howell, S. T., Niessner, M., & Yermack, D. (2018). Initial coin offerings: Financing growth with cryptocurrency token sales (No. w24774). National Bureau of Economic Research. Retrieved from: https://www.nber.org/papers/w24774.pdf

Jafari, S., Vo-Huu, T., Jabiyev, B., & Mera, A. (2018). Cryptocurrency: A challenge to legal system. Reza, Cryptocurrency: A Challenge to Legal System (May 2, 2018). 

Mkrtchian, S. M. (2019). Criminal and Legal Protection of Relationships in the Area of Blockchains Functioning and Cryptocurrency Turnover: New Challenges. In Ubiquitous Computing and the Internet of Things: Prerequisites for the Development of ICT (pp. 355-361).

Schaupp, L. C., & Festa, M. (2018, May). Cryptocurrency adoption and the road to regulation. In Proceedings of the 19th Annual International Conference on Digital Government Research: Governance in the Data Age (pp. 1-9).

Shanmugam, B., Azam, S., Yeo, K. C., Jose, J., & Kannoorpatti, K. (2017, January). A critical review of Bitcoins usage by cybercriminals. In 2017 International Conference on Computer Communication and Informatics (ICCCI) (pp. 1-7). IEEE.

Spithoven, A. (2019). Theory and Reality of Cryptocurrency Governance. Journal of Economic Issues, 53(2), 385-393.

Statista. 2020. Bitcoins: Trend, price, and volume. Retrieved from: www.statista.com

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