Cryptocurrency: Risks, Opportunities & Regulation

This assignment delves into the multifaceted realm of cryptocurrency. It examines the potential benefits and risks associated with cryptocurrencies, such as Bitcoin and Ethereum, exploring their decentralized nature, mining processes, and use cases. The document also analyzes the regulatory challenges surrounding cryptocurrencies and discusses various perspectives on their future impact on traditional financial systems.

Running head: STRATEGIC MANAGEMENT
Growing use of Crypto-currency
Name of the Student:
Name of the University:
Author note:

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Introduction
Crypto currency is a new phenomenon of currency that has become a big thing in the
digital world. It is a digital asset that is designed to be used as a currency or medium of
exchange. It uses cryptography for securing the transactions and for controlling the generation of
extra units of currency. In a broad sense, crypto currencies are considered to be the subset of
digital currencies or virtual currencies (Narayanan et al. 2016). However, it is a lesser known
fact that, these digital currencies were invented as a by product of some other invention. The first
crypto currency was Bitcoin, and invented by Satoshi Nakamoto. This currency is still the most
used digital currency. Nakamoto never intended to invent this coin. In his paper, ‘Bitcoin: A
Peer-to-Peer Electronic Cash System”, Nakamoto says that, he wanted to
build a digital cash system with no central entity being present. He observed
that, the for many decades, the trusted third party based transaction
systems failed, hence, he felt a need for decentralized digital cash system
(Nakamoto 2008). This resulted in the invention of Bitcoin in 2009, which
uses the peer-to-peer network for preventing double spending. It has no
central server or authority. Regarding the security issue, Nakamoto says
that, if there is no third party, the chances of fraudulent activities get
reduced automatically. This currency could be accepted by all parties over
the internet across the world. After Bitcoin was introduced, numerous crypto
currencies emerged. Some of the major crypto currencies other than Bitcoin
(BTC) are, Litecoin (LTC), Ethereum (ETH), Zcash (ZEC), Ripple (XRP), Monero
(XMR), Dash (DASH) etc. Litecoin was introduced in 2011, second to Bitcoin.

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It is based on open source global payment network. It offers a faster
confirmation of transaction than Bitcoin. Ethereum is launched in 2015. This
uses Smart Contracts and Distributed Applications (Granger 2016). These two
are most common crypto currencies other than Bitcoin. As the world is
becoming more digital with a rapid technological advancement, the era of
crypto currency has just begun.
Mining of crypto currencies
Mining of the crypto currencies can generate rewards for the miners. It is a process of
legitimizing and authenticating the crypto currency transactions. In the digital world, people can
make some profit by investing some money in the equipment and spend time in mining the
digital coins. Most of these coins are script based. Hence, knowledge of scripting is a foremost
criterion for mining the coins (Eyal and Sirer 2014). The other basic resources are electricity,
computers, internet connections and some cash, needed to mine crypto currencies. Mining
requires many specialized servers, which are not suitable for normal computing and lots of
cooling is required too. When more than 1000 people work in a space, things become difficult.
Hardware as well as software, both is required for mining. For a small home based miner, mining
a few coins using the home system can be possible. But for mining 100 coins per day for a long
time, large commercial users can only afford the equipment and bear the cost of electricity.
Bitcoin has to spend $80,000 as a monthly electricity bill. This amount of money is not feasible
for a small home based miner (Murray 2016).
The mining process requires effort, time and money. One should understand the amount
of effort needed and then proceed with the mining. Recording every transaction in the ledger,

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making a block, and adding it to the blockchain by authentication is a time taking process. A
proper hardware needs to be selected. These are special computers, known as mining rig. Next, a
proper wallet should be chosen to add the coins. After that, downloading the software and
joining the mining pool are required. Technical knowledge is very essential in this work. From
writing a script to making a blockchain, requires effort, training and knowledge. Thus, it can be
said that, larger companies have more of the resources and capabilities than the small home
based miner (Kirkpatrick 2017).
Figure 1: Mining process of Crypto currencies

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(Source: Granger 2016)
Costs and viability of mining Bitcoin
The terms associated with mining Bitcoin are Hash Rate, Bitcoins per Block, Bitcoin
difficulty, Electricity Rate, Power Consumption, Pool fees, Time Frame, Profitability decline per
year, and Conversion rate. Hash Rate is the rate of problem solving and refers to the performance
of the miner. This is measured in MH/s (Mega hash per second), GH/s, TH/s and PH/s (Lacoma
2016).
A hash rate must be high to mine more number of bitcoins.
Constant amount of Bitcoins are generated each time a mathematical problem is solved. Number
of Bitcoins in a block starts with at 50 and halts at 210,000 blocks that takes around four years.
The current number of awarded Bitcoins is 12.5 per block (Gil 2017).
Electricity consumption is a major thing in Bitcoin production. This incurs a heavy cost and
profitability depends on this cost.
For mining, the miner needs to join a pool. It is a group of miners joining together to mine more
efficiently. Joining the pool deducts a fee for maintaining the operations. Once the coins are
mined, the profit is divided among the members depending on their contributions.
Time frame also influences revenue. The more time will be spent on mining, more coins would
be generated and revenue would increase. Viability and profitability also depend on the
conversion rate. There is uncertainty about the conversion rate in the future and since, it is still in
the developing stage, the value is not stable too (Marian 2015).

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If the example of a Bitcoin mining at a hash rate of 14 TH/s is taken, with 2% mining pool fees,
1375W electricity consumption, $0.12 per KW and 12.5 Bitcoins reward per block, 0.11 Bitcoins
a month would be generated. The estimated costs are as follows:
Figure 2: Estimated cost for Bitcoin mining
(Source: Beigel 2017)
Hence, the cost of mining Bitcoin includes the software, hardware, internet and a massive
amount of electricity cost. If more coins could be mined, more profit it would bring in. Since, the
world is moving towards digitization, people are becoming aware about the digital cash. The
world has already moved into cashless transactions with credit and cards and similarly, the
optimistic people say that the crypto currencies would also be popular in the future (Barber et al.
2012).
Threat to the hard currency
Hard currencies are those, which have a stable exchange rate for a long period of time.
US Dollar, German Mark, Euro, GBP, and Japanese Yen are the most noted hard currencies of

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the world. For a crypto currency to be a real threat to any hard currency, say, US Dollar, it would
require a potential reserve currency. This indicates that the central banks in all over the world
must hold a wide reserve of crypto currencies to pay off the international debt obligations. This
also indicates that, some important commodities, such as, crude oil must be priced in a particular
crypto currency and not in USD. People are not yet aware or certain about the future of the
crypto currencies and hence, the credibility and the faith on this new system are still not present.
Hence, the crypto currencies have a long way to go before they could pose a real threat to a hard
currency, like, USD. However, the scopes for threats arise while using the crypto currencies are
the cases of tax collection on transactions by the governments, and ability to implement the law
to fight the criminal activities in crypto currency transactions (Mannarino 2017). It is also said
that, the crypto currencies have the power to transform the financial markets where there would
be no centralized authority and no third party. Banks could work together with the crypto
currencies to reduce the risks and to foster and design the appropriate innovations in the future.
However, the banks are apprehensive about the impacts of crypto currencies as it promises to
bring decentralized banking services system and create micro markets, removing the
intermediaries (Undheim 2014)
At the same time, the underlying technologies of the crypto currencies are too big for the
banks. If the boom for the digital currencies continue, it would be difficult for the banks to
handle the pressure. Although, the hard currencies are expected not to be affected by these new
currencies, hence, the threat would not be big.

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Criminal usages
There have been some criminal activities by using the crypto currencies. One of the most
infamous examples of fraudulent activities is the case of Silk Road website. It illegally sold
drugs and used Bitcoins for transactions. The founder, Ross W. Ulbricht, was arrested in 2013
and the online block market was closed down. He was convicted for money laundering and drug
trafficking (Birtles 2017). All the currencies in the world have faced illegal activities, which led
to the formulation and enforcement of laws to prevent the money laundering. But, the case is
different with crypto currencies. Poorly developed regulations, difficulty in tracking the
transactions, anonymity, huge international network and inability of the owner to reverse a fund
transfer and restore the value of the money if it is lost or stolen are the major opportunities for
the cyber criminals (Brown 2016). According to a report by Bloomberg, in the last 1 year, crypto
currency phishing scams have led to a loss of around $225 million. It has been found that,
investors are tricked to send money to some internet addresses that pretend to be a charity or
funding site for the digital coins related to the technology of Ethereum blockchain. Over 30,000
people became victim of the Ethereum related criminal activities and each lost around $7,500.
This type of crime has become a major concern in the digital financial world (Chen and
Nakamura 2017).

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Figure 3: Criminal activities with Ethereum
(Source: Chen and Nakamura 2017)
Along with hacking, scamming and phishing, tapping the project loopholes is another
type of crime with the crypto currencies. A bug in the Smart Contract Project, DAO or
Decentralized Autonomous Organization, which is built on top of the Ethereum, was exploited to
steal $55million of Ether. In case of Bitcoin, the scams happen specifically on individual holders
and not on the ICO related campaigns (Engle 2015).
Interest of the Chinese government and its implications
10% of the total Bitcoins is traded in China. After the invention of Bitcoin, it was mostly
traded in China. Currently, the Chinese government is expanding its interest as well as
investment in the Ethereum blockchain, than on Bitcoin (Fink 2017). Experts point out many
reasons for China’s interest on a digital currency. Firstly, millions of citizens do not have access
to standard banking due to infrastructural issues in the country (Huang 2017). Secondly, the
international payments are charged high, and a digital currency could remove some of the extra
fees. Thirdly, since the crypto currencies maintain a public ledger for each transactions; hence,

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the block chain transactions can be easily traced and that allows easier finding and removing
corruption. Lastly, it would help in faster economic analysis with real time data. This would be
helpful in the developmental plans and activities faster.
As the central bank of China is developing its own crypto currency, it is the first nation to
do so. Lower operational costs, more efficiency and better control on the illegal flow money are
the potential reasons for this step by the PBoC. The major implication of this would be a
significant drop in the usage of cash. The money supply in the nation would be controlled, and
the economy is expected to be more stable. With digital money, the tendency of people holding
cash would be reduced and deflation would be controlled. Since, China is showing interest in
digital currency, it is expected that some other countries would like to do the same. Thus,
digitization of money can occur faster. The demand for the crypto currencies would increase in
the international market, and more mining would happen (Birtles 2017).
Conclusion
In the end, it can be said that, crypto currencies are bringing new era in the digital cash
market. With the advancement of technology, this new trend of digital cash is becoming more
popular. Although, it has a very costlier process to mine, still companies are seeing the potential
in it. The decentralized cash system, peer-to-peer networking and absence of third party made
this a profitable option for the businesses. The recent interest of the Chinese government in its
own crypto currency is expected to give a boost to this new system.

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