Blockchain Technology and Its Investment Potentiality

BLOCKCHAIN TECHNOLOGY AND ITS INVESTMENT
POTENTIALITY
Executive Summary
Cryptocurrency is an application of blockchain technology that functions as an alternative currency.
The blockchain technology do operate outside government control and allows parties to have an
online interaction. The interaction can involve verifying transactions with no impact from third
parties. Lack of government supervision means reduced number of stakeholders hence low cost and
time involve in trading cryptocurrency. The lack of government control though brings about issues of
trust among the investors. In this report the objective is to analyse the investment potentiality of
bitcoin and compare it with other traded stocks such as MAC. The data was collected on weekly
prices of bitcoin and MAC from yahoo finance and thereafter analysed using excel. From the findings
of the analysis, it can be noted that the prices and returns of cryptocurrency is highly volatile
compared to MAC. Bitcoin has a higher expected weekly return rate though the high standard
deviation means investors are exposed to very high risks of losing their money in case of deviations.
On the other hand, the prices of MAC have been relatively stable from 2013 to date. The prices are
continuously increasing in a steady trend. Drawing a histogram, of returns from MAC gives a
normally distributed return. MAC is therefore a safer investment option that can be recommended for
risk averse decision makers. An investment in bitcoin can be treated as a form of speculation and
hence is only recommended for risk takers.
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Introduction
Blockchain is a form of distributed ledger technology that allows for the interaction of
several different parties through the use of the internet. It avails a secure and trustworthy
platform to view transaction records with no control by third parties. Once in the blockchain
platform an individual is able to verify where a transition has come from and gone to
(Griswold, 2014). This makes the technology to possess the potentiality of opening up new
economic ventures in fields like regtech, financial services, government registries as well as
supply chains.
The blockchain technology can be applied to better the operations of businesses and
government services; In business, the technology’s removal of third party makes it useful in
cutting down the number of stakeholders that are involved in a transaction, this reduces the
time and cost of carrying out business activities (Gilpin, 2014). The blockchain technology
also enables transparency in information sharing which increases stakeholders’ confidence
and thus cut down costs and risks of business. In government agencies, blockchain can be
applied as a common reference point that brings together different levels of government to
host government registries and provide open data. Such application enhances reliable
integration of government services , improved the mobility and consistency of business
across states as well as gives regulators a better platform to effectively carry out their
mandate (Commonwealth Scientific and Industrial Research Organisation, 2017).
One of the applications of blockchain technology in finance is the cryptocurrency.
Bitcoin is the name given to the most popular cryptocurrency. This is the cryptocurrency for
which the blockchain technology was invented. Cryptocurrency by definition is a medium of
exchange just like the US dollar though it is digital and applies the encryption technique to
control the creation of monetary units and to verify fund transactions (Likens, 2017).
Background of the study
Virtual currency also known as cryptocurrency are digital means of exchange that
were invented and is being used by private individuals or groups. Since majority of the digital
currencies are not national government regulated, they are considered as alternative
currencies, that is medium of financial exchange that do exist outside the bounds of state
monetary policy. Bitcoin is the prominent virtual currency and was the first to be accepted
widely (Rose, 2015). Hundreds of cryptocurrencies do exist and others continue to emerge
in the market every month.
These digital currencies have advantages as well as drawbacks which have made their
legal application to remain a controversial issue in several nations. Their application outside
government domain means the currencies are rarely regulated and can easily be used to
finance terror and other illegal crimes (Jeffries, 2013). Being a new technology, it is
relevant for investors to have an extensive market research before investing in them. In this
report, the aim is to evaluate the development and progress of bitcoin so as to gauge the
investment return potentiality of the blockchain technology.
Objectives of the report
The study objectives include;
To evaluate the recent bitcoin prices so as to gauge its investment potentiality.
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To shed light into the applications and drawbacks of investing in bitcoins
To investigate the relationship between returns of bitcoin with those of Macquarie group
limited
Methodology
So as to achieve the mentioned objectives Yahoo finance was used to collect the
weekly closing prices of BIT and MAC. The obtained data was recorded in Microsoft excel
and analysis carried out.
Scope and structure of the report
The report covers introduction to the blockchain technology which entails
familiarizing with the new technology and its applications. In addition, the report will contain
the response to the data collected and analysed regarding the investment potentiality of the
virtual currencies. Afterwards, a conclusion will be drawn that summarizes the findings and
gives the necessary individuals and investment advice regarding whether to invest on
blockchain or not.
Part A
1. Bitcoin trend description
The line graph presented below provides a summary of the BIT weekly prices
from 2013 to 2019. From the graph, it’s evident that the weekly bitcoin prices have
been in a fluctuating trend from 2013 to date. In the late 2013 towards late 2015, the
prices of the cryptocurrency did remain way below $ 500. As we approached 2016
moving towards early 2017. the price of the cryptocurrency did experience an upward
surge which saw the currency value dramatically increase to pass $ 2000 by 2018.
The price remained relatively high in 2018 with some months experiencing an
increase in price to over $ 2500. From late 2018 towards early 2019 there was a
drastic drop in the bitcoin weekly price with some weeks seeing price fall to below $
500. So far in the year 2019, there has been a steady increase in the price of bitcoin
with prices being over $ 1500 by the month of June. From the graph trendline this
increase on prices is still being experienced to date.
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2. BIT weekly return
The weekly return for the bitcoin gives the weekly return that is achieved by holding
the cryptocurrency for over a week. The table provides a summary of the return
distribution.
Bins
Frequenc
y
-
30.00% 1
-
20.00% 8
0.00% 137
20.00% 159
40.00% 22
60.00% 4
80.00% 3
100.00
% 1
More 0
Min
-
39.756%
Max 85.717%
The maximum weekly return is 85.71% while the minimum value is a loss of 39.76%.
Looking at the distribution of the returns, it is observed that most of the weekly return
fluctuates from -20% to 60%. The information is presented in a histogram as shown
below. The histogram presentation gives the mode return to be the range 0 to 20%
with no single weekly return exceeding 100%. The graph does not represent a
normally distributed data.
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