Bitcoin and Cryptocurrency Economics

This assignment examines the complex economics surrounding Bitcoin and cryptocurrencies. It explores topics like mining processes, regulatory challenges, the factors influencing cryptocurrency value, and potential future developments in this rapidly evolving field.

Running head: STRATEGIC MANAGEMENT
Strategic management
Name of the University
Name of the student
Authors note

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Table of Contents
Introduction:....................................................................................................................................2
Strategic background:......................................................................................................................2
Strategic environment:.....................................................................................................................2
Competitive environment:...............................................................................................................5
Strategic analysis:............................................................................................................................6
Comparison of capabilities and resources required to mine crypto currency by small home users
and large commercial factories:.......................................................................................................6
Cost and viability of mining bitcoin:...............................................................................................7
Criminal usage of crypto currencies:...............................................................................................8
Threat of Crypto currencies to hard currency banks:......................................................................8
Chinese government interest in crypto currency and implication of worldwide interest:...............9
Conclusions:....................................................................................................................................9
References:....................................................................................................................................10

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Introduction:
The case study demonstrates the growing use of crypto currencies along with its reason
for evolution. There are three types of crypto currencies that comprise of Bitcoin, darkcoin and
Ethereum. In this current study, resources and capabilities of small home users are compared
with than of large commercial factories. Cost and viability of Bitcoin along with threat of crypto
currencies are depicted. Later part of report deals with discussion of Chinese government efforts
in crypto currencies and their implication in world wide.
Strategic background:
Financial institutions serves as the trusted third parties for processing electronic
payments. However, this trust-based model suffers from some inherent weakness for some
transactions. There were payment and cost uncertainties that limited the transaction size and
reducing the small transactions possibilities (Zhang and Song 2014). In such scenario, it was
required to avoid payment and cost uncertainties by using a communication channel that does not
require any trusted party. This called for the development of electronic payment system that was
based on cryptographic proof that facilitates transaction between two parties directly instead of
creating trust. This has led to the evaluation of crypto currency and one of the most famous
example of an emerging technology network for improving banking is Bitcoin. Crypto currencies
can be defined as a financial animal that leads to secured money storage, decentralized and
transferring of money that is enables by internet facility (zerohedge.com 2017). This results in
instance of money between two parties without any cost.
Strategic environment:
Strategic environment of crypto currencies using PESTLE analysis of the case:

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Political factors- There is not any government body controlling crypto currencies and
they are usually allocated between private entities. Ability of federal government to conduct
monetary policy becomes limited by crypto currencies. The competitive behavior of Crypto
currencies market would be enhanced through regulatory bodies. Regulatory effort can be
hindered due to decentralized nature of coin hinders.
Environmental factors- Market of Crypto currencies requires computational power with
increase in demand. An alternative sources of energy is required for reducing the emission of
carbon. The larger monetary environment is considerably different from crypto currency and
compared to conventional currencies, there are several advantages of crypto currencies that has
resulted grown in usage and utility. Sustainability of network of Bitcoin is affected by the
environment factor that influence legacy of wealth and monetary system. It is required by
Bitcoin miners to have efficient equipment for reducing environmental impact. Electricity cost of
Bitcoin mining is estimated at $ 70712000 per year. Miners are required to ascertain an
alternative source of energy that would minimize costs.
Social factors- The social-cultural factor is one of the driving forces of crypto currencies
market that involves reach, anonymity and savings. There is low level of awareness and usage of
such currencies among people. However, there can be adoption of using such currencies among
customers if such payment technology is adopted by more merchant. Operations of Crypto
currencies is supported by the political environment of respective countries (Vitáris et al. 2017).
Nonetheless, the effectiveness of business in the industry is threatened as the regulations is not
intensive their war on cybercrime.

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Technological factors- Firms adopting the payment system of crypto currencies would
have concern about internet security. The future of crypto currencies market is impacted by
technological development and internet innovations encourage adoption of such payment system.
Bitcoin is considered to be in the first few stage of enthusiast of innovation. Cyber security is one
of the issue that is affecting crypto currencies market.
Technological life cycle
(Source: Luther 2016)
Legal factors- The unexplored and evolving nature of crypto currencies results in
increased concern about undertaking of illegal activities and the usage of such currencies would
result in security issue. It is regarded as one of the major concern of government and investors.
Future of usage of crypto currencies is dependent upon regulatory and legal configuration that
helps in defining the use of such system in each countries (Peters et al. 2015).
Economic factors- One of the positive indicator of crypto currencies market is the
recovery of global and US economy. Increased level of economic activities is likely to positively
affect the market.

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Competitive environment:
The competitive environment of crypto currencies is analyzed using porters five forces of
the given case:
Supplier’s bargaining power- The bargaining power of suppliers in crypto currency
market is determined by the degree to which the suppliers has control over capability or
technology that make switching expensive or difficult. Supplier power is determined if large
number of suppliers are required to produce product. Bargaining power of suppliers in crypto
currency market is lower and the market is positively affected by lower switching cost (Carroll
and Bellotti 2015).
Buyers bargaining power- The bargaining power of Bitcoin is low as the highest quality
technology is provided at lower cost.
Threat of new entrants- The value of Bitcoin is positively impacted by e commerce
potential and it can be seen that there is high entry barriers. Entry barriers of Bitcoin is high that
is likely to positively affect the crypto currencies (Elendner et al. 2016). This is so because new
competitors faces difficulties ion entering the market.
Threat of Substitutes services or Products- As compared to current payment system
that requires multiple verification system leading to incurring cost in such procedures and this
end up making transactions costly. Bitcoin intends to minimize this cost and in this regard, it can
be see that there is lower threats of substitutes (Bitcoin.org 2017).
Rivalry among existing among competitors- Exit barriers of Bitcoin is low and Bitcoin
is positively impacted by low exit barriers. The profit of firms in the currency market would
increase if there exist low exit barriers.

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Strategic analysis:
Comparison of capabilities and resources required to mine crypto currency by small
home users and large commercial factories:
Large commercial factories are required to make additional investments in the area of
mining of crypto currency resulting from decreasing lifespan of mining hardware. Significant
resources are taken up by supply chain, thermal and power design, logistical and administrative
overhead in the mining process. Additional resources are required for mining crypto currencies
enable users to purchase mining capacity of hardware in data centers. Bitcoin mining in large
commercial factories is done using cloud and it does not requires them to manage software,
hardware, electricity and bandwith along with some offline issues (abc.net.au 2017). Mining
devices are required to keep in cool for which cooling energy is required by organization and
commercial factories. Cooling electricity overhead can be reduced substantially due to
implementation of different technologies. Influence on development of protocol is lower for
small miners as compared to large miners.
Small miners are mainly concerned about price drop in crypto currency and large
factories are concerned about fierce competition among the same crypto currency miners.
Centralization of hashing power another capability that is required by commercial power in the
geographical area. Small home users rare required to have a registered legal personality and they
are required to possess greater ability to influence the development of protocol. Large
commercial factories has a diversified range of activities and the resources required are
comparatively higher as against small home users that have a single section of mining value.
Large miners are required to have their own value chain by running their own pool, hardware
and mining facilities. They are required to have proper dealing with hydroelectric power electric

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stations that would enable them to access to cheap electricity (Biggs 2017). However, small
home users are required to implement efficient software for mining of crypto currency.
Cost and viability of mining bitcoin:
Cost of mining of Bitcoin should take into consideration several parameters such as
hardware cost, electricity cost and several other variables impacting the project. In the last few
months, there has been fall in value of Bitcoin. An extreme low is registered by the Bitcoun
exchange with the value falling from $ 1100 in year 2013 compared to $ 200 in the current
period. The longevity of Bitcoin is dependent upon the direct support from community many
from mining apart from it adoption on global scale. The mining growth in Bitcoin industry has
detrimental effect resulting from certain cost that is required to sustain concerning this mining
activity. Infrastructure of miners for continuing operations forms the basis of crypto currency.
Mining cost is not cast in stone that has led to putting down of tools by miners. The process of
mining has become less costly resulting from implementation of software and hardware. Cost of
mining has reduced significantly due to usage of solar generators and electricity from winds.
It is clearly indicated that life of crypto currencies does not have long life and it is
regarded that mining is not expensive. In the event of price going down, until there is an
improvement in price, holding onto Bitcoin is the option of miners. In mining, rewards forms the
basis of investment to people rendering services in solving mathematical issues. Therefore, for
aligning data and updating it along with healthy keeping of public ledger. Moreover, a rational
investor is highlighted by law of economics that an investor would be involving in production
activities when returns generated is more than efforts in short and long-term (Guadamuz and
Marsden 2015).

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Criminal usage of crypto currencies:
The main concern about crypto currencies is related with security as virtual money can be
used for funding illegal activities and can fuel thieves and hackers. Bitcoin transaction has the
possibility of drawing criminal activities. It is likely to have considerable inducement to
criminals from the anonymous transactions of crypto currencies. There are several elements
involved in the thefts of crypto currencies such as terrorist organization and hackers.
Cybercrimes would be fueled by the virtual currencies as it conceals identities by evading
enforcement of law. Some of the programs in newer system like Ethereum makes it executable
forever and money are transferred in arbitrarily complex ways. In this situation, hackers are able
to exploit the complicated ways of handling money.
Threat of Crypto currencies to hard currency banks:
Crypto currencies are one of the virtual currencies that are driven by technology and in
many events, they are not connected to central issuing authorities. The real threat to the hard
currency banks resulting from crypto currencies is their capability to collect taxes that will be
incurred on transactions along with their ability of law enforcement to fight crime that has been
transacted in such currency. Established money bank has been posed with a threat from crypto
currencies as it results considerable policy issues along with vulnerability to cyber-attacks,
counterfeiting and privacy. In order to improve the existing payment system, innovations of
central banks could throttle. Given the market growth, it is urgently required by banks to have
regulated clarity. There are many abuses of virtual money that involves sale of illegal goods and
criminal money laundering (Gamble 2017). Regulation of digital currencies are not regulated by
banks and unregulated digital currencies has led to evolving of crimes and speculations.

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Chinese government interest in crypto currency and implication of worldwide interest:
In china, crypto currencies have gained publicity resulting from stringent actions taken by
government concerning Yuan. Crypto mining in China is facilitated by abundance availability of
hardware and cheap energy. Currency turbulence further amplify the adoption of crypto
currency. Crypto currencies has been viewed as one of the stable assets and people are willing to
make investment in this sort of currency. Most of mining facilities are hosted by China that make
use of highest power consumption for mining of crypto currency. Facilities of mining in China
are concentrated in remote areas where land and electricity are available at cheaper cost (Rose
2015).
The adoption of Crypto currencies by China and japan has generated success worldwide
and the popularity and value of virtual currencies have improved. Limits of currency piled by
consumers in highly speculative market is minimized by the adoption of crypto currencies.
Conclusions:
From the above analysis, it can be concluded that one of the most widely used currencies
are crypto currencies and they have some shortcomings. Central banks are faced with the
challenge of monitoring the payment system and one of the major concern is losing the money
control system with the usage of this virtual currency. Mining costs of crypt currency is variable,
however, the implementation of software and hardware has contributed to reducing the cost
considerably. Performance of crypto currencies in most of countries as well as in gabling market
are adversely impacted by various factors impacting cost of mining.

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References:
ABC News. (2017). China's new crypto-currency kings not fazed by regulation. [online]
Available
http://www.abc.net.au/news/2017-04-17/chinas-new-cryptocurrency-kings-not-fazed-by-
regulation/8447094 [Accessed 13 Oct. 2017].
Biggs, J. (2017). A Rare Look Inside A Massive Bitcoin Mine. [online] TechCrunch. Available
at: https://techcrunch.com/2015/02/06/a-rare-look-inside-a-massive-bitcoin-mine/ [Accessed 13
Oct. 2017].
Bitcoin.org. (2017). Retrieved 13 October 2017, from https://bitcoin.org/bitcoin.pdf
Carroll, J.M. and Bellotti, V., 2015, February. Creating value together: The emerging design
space of peer-to-peer currency and exchange. In Proceedings of the 18th ACM Conference on
Computer Supported Cooperative Work & Social Computing (pp. 1500-1510). ACM.
Elendner, H., Trimborn, S., Ong, B. and Lee, T.M., 2016. The cross-section of crypto-currencies
as financial assets: An overview (No. 2016-038). SFB 649 Discussion Paper.
Gamble, C., 2017. The Legality and Regulatory Challenges of Decentralised Crypto-Currency: A
Western Perspective. Int'l Trade & Bus. L. Rev., 20, p.346.
Guadamuz, A. and Marsden, C., 2015. Blockchains and Bitcoin: Regulatory responses to
cryptocurrencies.
Luther, W.J., 2016. Cryptocurrencies, network effects, and switching costs. Contemporary
Economic Policy, 34(3), pp.553-571.

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Motherboard. (2015). Inside the Chinese Bitcoin Mine That's Grossing $1.5M a Month. [online]
Available at: https://motherboard.vice.com/en_us/article/qkvxk3/chinas-biggest-secret-bitcoin-
mine [Accessed 13 Oct. 2017].
Peters, G.W., Panayi, E. and Chapelle, A., 2015. Trends in crypto-currencies and blockchain
technologies: A monetary theory and regulation perspective.
Rose, C., 2015. The Evolution Of Digital Currencies: Bitcoin, A Cryptocurrency Causing A
Monetary Revolution. The International Business & Economics Research Journal
(Online), 14(4), p.617.
Vitáris, B., Coleman, L., Coleman, L., Madore, P., Smart, E., Madore, P., Madore, P., Madore,
P., Wilmoth, J., Wilmoth, J., Smart, E., Wilmoth, J., Smart, E., Fargo, S., Wilmoth, J. and
Wilmoth, J. (2017). Darkcoin News. [online] CryptoCoinsNews. Available at:
https://www.cryptocoinsnews.com/darkcoin-news/ [Accessed 13 Oct. 2017].
Zerohedge.com. (2017). Central Banks Are Driving Many To Cryptocurrencies. [online]
Available at: http://www.zerohedge.com/news/2017-06-17/central-banks-are-driving-many-
cryptocurrencies [Accessed 13 Oct. 2017].
Zhang, Y. and Song, G., 2014. Economics of Competing Crypto Currencies: Monetary Policy,
Miner Reward and Historical Evolution.