Cryptocurrency Market Analysis

This assignment delves into the dynamic cryptocurrency market by applying Porter's Five Forces framework for a comprehensive analysis. It examines the competitive landscape, threat of new entrants, bargaining power of buyers and suppliers, and the impact of substitutes within the cryptocurrency ecosystem. Furthermore, it explores strategic management considerations for businesses operating in this rapidly evolving industry.

Running head: STRATEGIC MANAGEMENT: CRYPTOCURRENCIES
STRATEGIC MANAGEMENT: CRYPTOCURRENCIES
Name of the Student
Name of the University
Author Note

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EXECUTIVE SUMMARY
Cryptography refers to the study and practice of techniques used to ensure a secure
communication with the adversaries or third parties present during the transaction. In other
words, it refers to the construction and analysis of codes of conduct that the public in general
or any third party from intercepting any private messages. In modern days, cryptography has
certain aspects of information security like data confidentiality, authentication, data integrity
and non-repudiation. This report deals with the comparative study of three such
cryptocurrencies –Bitcoin, Ethereum and Litecoin.

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Table of Contents
Introduction....................................................................................................................3
Discussion......................................................................................................................3
Background discussion based on a paper by Satoshi Nakamoto...............................4
Capabilities and resources required by small-scale and large-scale cryptocurrency
users to mine the currencies.......................................................................................5
Costs and viability of bitcoin mining.........................................................................8
Criminal uses and threats posed by cryptocurrencies for financial institutions.........8
Interest of Chinese government in cryptocurrencies and global implications...........8
PESTEL analysis and Porter’s Five Forces analysis..................................................8
Conclusion....................................................................................................................10
References....................................................................................................................11

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Introduction
Cryptocurrency refers to any digital asset that is designed to work as exchange
medium using cryptographic methods to secure transactions (Dictionary.cambridge.org
2017). Cryptocurrencies also help in controlling the creation of additional currency units.
These are considered to be a part of digital currencies, virtual currencies and alternative
currencies. In this report is investigated the increasing use of cryptocurrency. This report
analyses the growing industry of cryptocurrencies and the effect of it on the global scenario.
The report will discuss the origin of the concept of these currencies and three such
cryptocurrencies. In the following report, a paper on Bitcoin by Satoshi Nakamoto is
discussed which discusses the origin of cryptocurrencies. This report goes on to draw
comparisons on the capabilities and resources needed by personal and commercial users to
mine such cryptocurrencies and sheds light on the viability and costs of bitcoin. This report
further discusses the threat that these cryptocurrencies pose to the financial organizations that
deal with hard currency, the ways in which these currencies are put to use by people with a
criminal mindset. The report ends with the interest taken by the government of China in
cryptocurrencies and implications of the same all around the globe.
Discussion
The cryptocurrency system is decentralized and is produced collectively by the total
cryptocurrency system. A group or an individual named Satoshi Nakamoto created the
underlying basic technical system of cryptocurrencies (Lemieux 2013). In case of
cryptocurrencies, production is gradually decreased until there is a capping on the total
amount of currencies circulating in the cloud. There are a number of such cryptocurrencies in
use these days like Bitcoins, Ethereum, Litecoins, Auroracoins and many other such
currencies.

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Background discussion based on a paper by Satoshi Nakamoto
Cryptocurrency came into the being with the need of trusted third parties in the e-
commercial financial transactions other than the existing financial institutions that deal in
hard currency. The cost of transactions increase with the mediation cost involved in the
transactions. There would be a certain amount of fraudulent practices that are unavoidable in
case of electronic payments. The uncertainties of electronic payments can be avoided by
making payments using physical currency. In case of electronic payments there must be
present a trusted third party. Thus, a transaction medium is needed that allows willing parties
the scope of engaging in a direct transaction between themselves without the need of any
third party (Bitcoin.org 2017).
These electronic payments are made using electronic coins that can be defined a
digital signature chain. The coins are passed from owner to owner by digitally signing the
previous transaction hash and the public key of the next owner. The payee has the freedom to
verify the signatures but not the fact that the coin has not been doubly spent by the previous
owner. This problem can be solved only if the parties involved are made aware of all the
transaction history. The solution provided to the problem discussed is a timestamp server.
The server works by widely publishing the hash of a certain block of things. A system of
proof-of-work is needed to implement the distributed timestamp server. This also helps in
solving the problem of deciding the representation of majority in decision-making. In case of
hacking, a hacker needs to redo the proofs-of-work for all the blocks in order to actual nodes.
There should be a properly run network that would track the progress of the node. In case of
discrepancies the longer node is followed. There should be incentives for the nodes to remain
honest towards the transaction. Any hacker who is greedy for more coins should find playing
by the rules more profitable than adopting unfair means. The spent transactions of a certain

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bock should be removed after regular intervals to ensure saving of enough disk space to
continue transactions.
There are ways to provide for verification of payments made by a user. The user
cannot check the transaction by himself but can find out whether the following nodes have
accepted the transaction after linking the transaction to some place in the network chain. The
verification of the transaction is deemed reliable as long as the network is controlled by the
honest nodes in the chain. It becomes vulnerable if the network is controlled by a hacker.
There are at least two outputs for every transaction. One output is dedicated towards payment
while the other is used to produce returns towards the sender if there is any. Privacy of
transactions can be maintained by keeping some of the publics keys of the transactions
anonymous. A separate key pair should be used to prevent transactions to be linked to a
common owner. Linking the other transactions could be traced back to belonging to one IP
address if the owner of the key is revealed.
Capabilities and resources required by small-scale and large-scale cryptocurrency users
to mine the currencies
In modern times, people find investing in equipment of digital currency mining
profitable. They may set up the equipment and then spend months to mine the currencies
while waiting for their investment return to set in. There are certain coins that are found to be
profitable in terms of cost-benefit of the beginners. The mining of cryptocurrencies may be
worth in case of it being a hobby but not for the sake of being a secondary income.
Cryptocurrencies may generate a small income of almost a couple of dollars daily. Some of
the cryptocurrencies such as Feathercoins, Dogecoins and Litecoins are easier to mine. A
significant amount of profit can be earned from cryptocurrency mining only if a huge amount
is invested into the business. Mining cryptocurrencies generally aim to provide for

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bookkeeping of coins. It aims to reward the miners for their accounting services. It tries to
keep the miner’s costs down.
There are a few things required for the mining of cryptocurrencies apart from high
levels of curiosity on the part of the miner.
 Coin base – A coin base is a database that is free and private (Marian 2013). It
is a container that is protected by a password. It stores a miner’s earnings and
keeps a ledger of the transactions held from all over the network.
 Mining software package – A miner needs to have access to a free software
package for mining (Cryptosource.org 2017). This mining software must be
built of stratum and cgminer.
 Mining pool membership – The miner must have a membership of an online
pool for mining. This is a miner’s community in which miner’s combine and
link their computers to gain an increment in the profitability and stability of
income.
 Currency exchange membership – The miner must be a member of an online
forum of currency exchange. This would enable them to exchange their
conventional cash for virtual coins and vice versa.
 Internet connectivity – The miner needs to be connected to a high speed
internet connection that is reliable. An ideal internet connection for mining
cryptocurrencies should function at a speed of 2 megabits per second or
higher.
 Hardware setup – A miner needs to possess a cool location for setting up the
hardware and a cooling system for cooling the computer as and when required.

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A custom-made computer or desktop is required for mining. It is
recommended to abstain from using the current working computer of the
miner because the miner may not be able to use the system for any other
purposes while the mining is under process. The miner would also need a
mining ASIC chip. This chip would provide the accounting services and the
mining works. The miner needs a motherboard with three PCI-E slots for
video cards (Cryptosource.org 2017).
Bitcoins, on the other hand, can be mined by the large scale users only. The mining
process involves a series of steps. These steps finally help encouraging the miners to compete
with each other to come up with hashes that help meet the needed criteria. The miners of
Bitcoin use a specific kind of software to solve mathematical problems. They are issued
Bitcoins in exchange for the solved problems. This helps in providing a smarter way of
issuing the currency thereby creating incentives for a larger number of people to mine the
currencies.
Cryptocurrency Introduction date Values Market trends
Bitcoin 3rd January, 2009 1 bitcoin = around
4214.41 USD
Prices have gone higher since
October, 2015
(Worldcoinindex.com 2017).
Litecoin 7th October, 2011 1 litecoin = around 51
USD
Prices have gone higher since
May, 2017 but have been
fluctuating in the past 30 days
(Worldcoinindex.com 2017).
Ethereum 30th July, 2015 1 ethreum = around 292.3
USD
Prices have gone higher since
April, 2017 but have been

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fluctuating in the past 90 days
(Worldcoinindex.com 2017).
Costs and viability of bitcoin mining
Bitcoins have been the first decentralized cryptocurrency that has been fully
implemented. It is owned or controlled by no one and is open-source (Bitcoin.org 2017). The
e-payments through these cryptocurrencies are facilitated based on validation and
mathematical proof. Bitcoins can be exchanged for other services, products and currencies
and vice-versa. These transactions are direct and take place between two users. Though fast,
these transactions are irreversible in nature. These are transparent transactions yet anonymous
Interest of Chinese government in cryptocurrencies and global implications
In the present day scenario, it has become necessary for national banks to develop
their own cryptocurrencies. The People's Bank of China, a national bank of China is on its
way to become the first nationalized bank to develop as well as run a digital currency of its
own. There are reports that suggest the use of some prototypes of the transactions between
the national digital currency and some commercial banks of the country. In the present day
scenario, though, China is reported to have banned the initial coin offerings or ICOs
(Forbes.com 2017). This ban has hurt the local operators mostly.
Criminal uses and threats posed by cryptocurrencies for financial institutions
Cryptocurrencies may lead to eradication of the need for the financial organizations
dealing with hard currencies (Bollen 2013). An increase in the number of users of
cryptocurrencies is expected in near future. Thus it can be predicted that there will be a
substantial amount of decline in the number of payments made and received through
conventional methods. During recent times, there has been a rise in the number of criminal

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activities involving cryptocurrencies. Criminals prefer the cryptocurrencies due to the
provision of irreversible and private payment windows (Bitcoin.org 2017).
PESTEL analysis and Porter’s Five Forces model
The following table provides a PESTEL analysis of Bitcoin, the first decentralized
cryptocurrency.
Political analysis No government body is in control of this currency. Financial
institutions of many countries of the world are barred from accepting
these cryptocurrencies (Heid 2013). There are some countries like
Canada, United States and EU that are considered Pro-bitcoin.
Transactions involving bitcoins are generally allowed between two
private parties.
Economic analysis Market capitalization of bitcoins extends beyond 0.008% of the global
GDP of 78 trillion dollars which amounts to almost 6 billion dollars.
There exist 21 million bitcoins in the present days with almost
15359800 of the total number in circulation. The ability of the federal
government of conducting monetary policies remain unaffected by the
cryptocurrencies (Brenig, Accorsi, and Müller 2015). Bitcoin is
widely used in the global market by more than 88000 merchants.
Socio-cultural
analysis
The driving force behind the popularity of the cryptocurrencies is the
anonymity of operations (Clarke and Tooker 2017). These
cryptocurrencies have wide range of reaches and helps in savings by
skipping the cost of processing that can be incurred in the traditional
payment methods. The increase in the number of merchants adopting
this technology of payment results in the increase of the number of

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customers availing the same.
Technological
analysis
Block chains or the public ledger of Bitcoins need to be leveraged
Environmental
analysis
An increase in the requirement of computational power is experienced
with the growth of demand of the cryptocurrencies. Miners try and
find alternative sources of electricity such as the cheap variety of coal
in old places of production (Zohar 2015). Bitcoin is associated with
1.5 tonnes of carbon-dioxide emission.
Legal analysis Any kind of regulatory measures against Bitcoins are hindered due to
the decentralized nature of the cryptocurrency (Chuen 2015). This
legal scenario is on its way to change. Many countries like USA, EU
and Canada are working on measures to impost regulations on the
cryptocurrency usage.
In order to sustain itself in the market, a cryptocurrency must follow the five forces
model of management by Porter. According to this model, the threats to the business due to
new entrants must be removed. The threats due to the substitutes present in the market must
also be removed. A business firm must be aware of the rivalry intensity among the other
firms functioning in similar businesses. The firm should also keep an eye on the power of
bargaining of the customers and the suppliers (E. Dobbs 2014; Rothaermel 2015).
Conclusion
Despite the issues and challenges faced, the landscape and scope of cryptocurrencies
are still on its way of evolution. In the present day, cryptocurrencies are almost in the same
footing as the concept of internet was back in the year 1990. The concept is in its formative
stages and would need to go through a number of changes to be established as an alternate

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transaction method for the common man. Bitcoins may have earned the title of the first ever
decentralized cryptocurrency but it might not be able to earn for itself the title of one of the
major future cryptocurrencies. Despite its shortcomings, the open technology platform of
bitcoins has been the forerunner of a smoother and more seamless digital economy globally.

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References
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Brenig, C., Accorsi, R. and Müller, G., 2015, May. Economic Analysis of Cryptocurrency
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Chuen, D.L.K. ed., 2015. Handbook of digital currency: Bitcoin, innovation, financial
instruments, and big data. Academic Press.
Clarke, C. and Tooker, L., 2017. Social finance meets financial innovation: contemporary
experiments in payments, money and debt. Theory, Culture & Society.
Cryptosource.org 2017. Part 1: Hardware Requirements. [online] CryptoSource. Available
at: http://cryptosource.org/mining/hardware-requirements/ [Accessed 5 Oct. 2017].
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http://cryptosource.org/mining/software-requirements/ [Accessed 5 Oct. 2017].
Dictionary.cambridge.org 2017. cryptocurrency Meaning in the Cambridge English
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