Crytocurrency Versus Regular Currency Study

Running Head: CRYTOCURRENCY VERSUS REGULAR CURRENCY; A
COMPARATIVE ANALYSIS
Crytocurrency Versus Regular Currency; A Comparative Analysis
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CRYTOCURRENCY VERSUS REGULAR CURRENCY; A COMPARATIVE
ANALYSIS
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Table of Contents
Introduction................................................................................................................................2
Conceptual framework for regular currency and cryptocurrency..............................................3
Drawbacks of cryptocurrency..................................................................................................14
Acceptability of crypto currency over regular currency..........................................................17
Conclusion................................................................................................................................18
References................................................................................................................................20
Word Glossary.........................................................................................................................23

CRYTOCURRENCY VERSUS REGULAR CURRENCY; A COMPARATIVE
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Introduction
In any economy currency plays an important role. Apart from acting as a medium of
exchange currencies help to measure values, acts as a store of value and a unit for
standardizing values of material goods and services. Regular currency includes paper notes,
coins and money issued by central bank of a nation1. Currency is actually capture in form of
circulating bank notes and coins within an economy. Government regulates the designing and
operation of these currencies, which are subject to law within the boundary of a nation.
Money can be broadly categorized into Fiat money and Commodity money. In the
monetary system, Fiat money is the currency that does not have any intrinsic value. However,
it is established as money without any use value only because government values it and
buyers and sellers agree on its value for transaction2. Commodity money on the other hand is
defined as one that is created from a good mostly precious metals like gold, silver and has a
use other than an exchange medium. Such a good is called commodity and so it known as
commodity money3.
In the twenty first century, the rapid spread of internet has made business and
industries increasingly digitalized. With a growing E-commerce market, a new digital
currency has introduced and gained attention of investors in the economy. In transaction
between two parties in the e-commerce market, banks play the role of an intermediary.
However, in such transaction the possible transaction reversal might be troublesome to the
sellers. To resolve this issue, the system of e-currency or e-payment has been designed4. The
1 Abner, Ben. "Ethereum: A look into the world of Ethereum and how to trade and invest this cryptocurrency!."
(2016).
2 Bernanke, Ben, Kate Antonovics, and Robert Frank. Principles of macroeconomics. McGraw-Hill Higher
Education, 2015.
3 Heijdra, Ben J. Foundations of modern macroeconomics. Oxford university press, 2017.
4 Al Shehhi, Aamna, Mayada Oudah, and Zeyar Aung. "Investigating factors behind choosing a
cryptocurrency."Industrial Engineering and Engineering Management (IEEM), 2014 IEEE International
Conference on. IEEE, 2014.

CRYTOCURRENCY VERSUS REGULAR CURRENCY; A COMPARATIVE
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new system is considered as much cheaper than traditional system of banking. This system is
known as Bitcoin and digital form of currencies thus invented is called cryptocurrencies.
The rise of cryptocurrency and spread of digital currency makes this an attractive
area of research. The essay aims to find to what extent cryptocurrencies can act as a regular
currency. An intensive research has been conducted between these two form of currencies
using economic concepts related to money market. Additionally, the associated benefits and
risks of cryptocurrency to draw a clear conclusion.
Conceptual framework for regular currency and cryptocurrency
Before making a comparative analysis it is important to understand the basic
functioning of these two currencies and its implication in the money market.
Money market equilibrium for regular currency
Equilibrium in the money market is determined from the interaction of forces of
money supply and money demand. The money demand explains the relationship between
quantity of money that people willing to hold at a certain point of time and factors
influencing this desired quantity. There are different purposes for holding money. Based on
these purposes the money demand is classified in three categories- transaction demand,
precautionary demand and speculative demand. Transaction demand is demand for money for
making payment of any anticipated payment of goods and services. Precautionary demand for
money is when people hold money for unanticipated emergency expenditure. In line with
fluctuating prices of bonds the demand for bonds and hence, money demand also fluctuates5.
In times of rising bond price people increases their demand in expectation that it will increase
further. This creates speculative demand for money. The two major determinants of money
5 Johnson, Harry G. Macroeconomics and monetary theory. Routledge, 2017.

CRYTOCURRENCY VERSUS REGULAR CURRENCY; A COMPARATIVE
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demand are income and interest rate. Income has a positive influence on money demand.
With rise in income people willing to hold more money and vice versa. When bank raises
interest rate then people find it more profitable to keep money in banks rather than keeping it
at home6. Following the inverse relation between money demand and interest rate the money
demand curve is downward sloping.
Money supply is the quantity of money available in an economy at a certain point of
time. For regular or institutional currency, the money supply is determined by the central
banks and hence, the money supply is given as a vertical straight line.
The money supply and money demand together helps to determine interest rate. This
is known as the ‘Theory of Liquidity Preference’. The central bank thus by changing money
supply can control the interest rate.
Figure 1: Money market equilibrium7
Cryptocurrency market
Crypto currency is an alternative medium of exchange and treated as subset of virtual
currencies and alternative currencies. They are also termed as digital currency. The path-
6 Johnson, Harry G. Macroeconomics and monetary theory. Routledge, 2017.
7 Heijdra, Ben J. Foundations of modern macroeconomics. Oxford university press, 2017

CRYTOCURRENCY VERSUS REGULAR CURRENCY; A COMPARATIVE
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breaking feature of these currencies is the implantation of cryptography. Cryptography is a
practice or technique that provides a security in communication in the presence of third party.
Cryptography was developed in order to meet the need of secured communication while the
Second World War8.With the combined effect of mathematical and computer science theory,
there has been evolution in this system that allowed it to be used as mode of secured
communication and transaction of information and money online. The application of
cryptography makes the conversion of information into a code, which cannot be hacked or
cracked. This also helps in tracking purchase and transactions. The cryptocurrency market
uses cryptography in order to secure transaction between parties. Since the issuance of these
kinds of currencies lies outside the discretion and operation of central authority, it enjoys
immunity from the interference and manipulation of the government9. The inbuilt anonymity
of this digital currency makes the nefarious transactions like evading taxes and laundering
money well-suited. Reflection of public imagination was materialized and well-captured in
Bitcoin currency.
A group operating with pseudonym Satoshi Nakamoto in 2009 first introduced e-
currency. Within only 6 years that is by 2015, 14.6 million currencies were circulated having
gross market value of $.3.6 billion. The successful existence and operation of bit coins
boosted the appearance of various competitive crypto currencies like Namecoin, Litecoin
PPcoin and so on. Starting from introduction of Bit coin in 2009, there has been numerous
others currencies in the existence made of applying cryptography. In 2011 Litecoin and
8 Danilina, M. V., A. G. Podlinnova, and A. S. Silaev. "«E-gold»: the Advantages and
Disadvantages." Глобальный научный потенциал 1 (2015): 101.
9 Androulaki, Elli, et al. "Evaluating user privacy in Bitcoin."International Conference on Financial
Cryptography and Data Security. Springer, Berlin, Heidelberg, 2013.