Analyzing the Economic Impact of Cryptocurrencies on Global Markets

The rapid advancement of digital currencies such as Bitcoin poses significant questions for modern economics. As decentralized systems gain popularity, they challenge traditional financial models by offering alternative means of transaction without governmental oversight. This analysis explores the impact of cryptocurrencies on economic stability and growth, focusing on critical issues like scalability, which affects network efficiency; privacy concerns arising from potential misuse for illicit activities; and regulatory challenges due to their borderless nature. The assignment references authoritative sources such as Arvind Narayanan's work in 'Bitcoin and Cryptocurrency Technologies' and the discussions by Kevin V. Tu and Michael W. Meredith on virtual currency regulation, highlighting both opportunities and threats posed by these digital innovations.

Running Head: CRYTOCURRENCY VERSUS REGULAR CURRENCY; A
COMPARATIVE ANALYSIS
Crytocurrency Versus Regular Currency; A Comparative Analysis
Name of the Student
Name of the University
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1CRYTOCURRENCY VERSUS REGULAR CURRENCY; A COMPARATIVE ANALYSIS
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

2CRYTOCURRENCY VERSUS REGULAR CURRENCY; A COMPARATIVE ANALYSIS
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.

3CRYTOCURRENCY VERSUS REGULAR CURRENCY; A COMPARATIVE ANALYSIS
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.

4CRYTOCURRENCY VERSUS REGULAR CURRENCY; A COMPARATIVE ANALYSIS
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

5CRYTOCURRENCY VERSUS REGULAR CURRENCY; A COMPARATIVE ANALYSIS
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.

6CRYTOCURRENCY VERSUS REGULAR CURRENCY; A COMPARATIVE ANALYSIS
Namecoin were launched. Ripple, Dogecoin, Primecoin and Mastercoin came in to operation
form the year 2013. Aurorarcoin has been launched very recently in 201410
Compared to physical existence of real currencies, crypto currencies follow electronic
creation and storage so that they can be saved on websites and computers for further use.
These currencies are helpful in purchase of virtual elements like internet services, hosting,
and domain and so on beside the things that physical currency can purchase11. These make
crypto currencies appealing in the modern era of digitized market system.
Supply-demand interaction in Bitcoin market
The interaction of supply and demand is one of the key drivers of Bitcoin price. The
demand for Bitcoin depends on is value as an exchange medium or by the value for future
exchange. The Bitcoin stock in circulation determines the supply of Bitcoin. Suppose B
represents the current stock of Bitcoin and PB is the exchange rate Bitcoin. The total Bitcoin
money supply is then given by
M S =PB B
Now suppose the Bitcoin demand in circulation is denoted as MD. Assuming that the demand
depends on general price level, P, size of Bitcoin market, Y and Velocity of Bitcoin in
circulation. The Bitcoin demand is then given as
M D = PY
V
The equilibrium price of Bitcoin is then determined as
M S =M D
10 CryptoCurrency Facts. (2017). How Does Cryptocurrency Work? - CryptoCurrency Facts. [online] Available
at: http://cryptocurrencyfacts.com/how-does-cryptocurrency-work-2/ [Accessed 30 Nov. 2017].
11 Bulgakov, Dmitry, et al. "Problems of Using Digital Cryptocurrency Bitcoin." (2014).

7CRYTOCURRENCY VERSUS REGULAR CURRENCY; A COMPARATIVE ANALYSIS
¿ , PB B= PY
V
¿ , PB = PY
VB
The price of Bitcoin thus increases with expansion of Bitcoin economy and level of inflation
while price decrease with an increase in velocity and stock of Bitcoin12.
The basic functions of a regular currency
The four basic function of money include use of money as a medium of exchange, as
a unit of measure, a standard of measure and a store of value.
Medium of exchange
Money is an acceptable medium of exchange for both parties of transaction. It
therefore provides a more efficient medium for satisfying wants.
Unit of measure
Money act as a common denominator to measure the value of goods and services. All
the goods and services are measured in terms of money. Money thus enables people to
compare goods and services in terms of their relative price based on their relative values13.
Standard of deferred payments
In addition to act as medium of current exchange, money also serves the purpose of
future deferred payments. This actually forms the basis for credit transaction.
Store of value
12 Ciaian, Pavel, Miroslava Rajcaniova, and d’Artis Kancs. "The economics of Bitcoin price formation." Applied
Economics48.19 (2016): 1799-1815.
13 Arestis, Philip, and Malcolm Sawyer, eds. Finance and the Macroeconomics of Environmental Policies.
Springer, 2015.

8CRYTOCURRENCY VERSUS REGULAR CURRENCY; A COMPARATIVE ANALYSIS
People uses money as a suitable way to store wealth for future. Money thus acts as a
store of value14.
In order to behave like a regular currency, cryptocurrency need to satisfy the
properties of a regular currency. The next section makes a comparative analysis of potential
supply growth, credibility and stability between cryptocurrency and that of a regular
currency.
Supply Growth
In the list of well-documented cryptocurrencies, Bitcoin is the currency having the
lowest projected supply growth in future. After passing the initial phase of high growth rate
the supply growth of Bitcoin has now reached to the level of stable global currency reserve.
By the early 2020’s the supply is projected to fall below that of gold reserve. The supply
growth of Litecoin, came shortly after Bitcoin is not much above than the Bitcoin. However,
the supply is expected to increase in future though in both currencies the growth rate is
projected to fall below 1% by the late 2020’s15. For Ethereum, the supply growth is expected
to remain at a moderately high level without dropping below 5% until 2030.
14 Bernanke, Ben, Kate Antonovics, and Robert Frank. Principles of macroeconomics. McGraw-Hill Higher
Education, 2015.
15 Raymaekers, Wim. "Cryptocurrency Bitcoin: Disruption, challenges and opportunities." Journal of Payments
Strategy & Systems 9.1 (2015): 30-46.

9CRYTOCURRENCY VERSUS REGULAR CURRENCY; A COMPARATIVE ANALYSIS
Figure 2: Present and future growth of Bitcoin, Ether and Litecoin16
When the supply growth of Bitcoin is compared with the growth rate other national
currencies and gold, Bitcoin is found to experience a relatively short life of transition from a
phase of high supply growth to its current rate similar to regular currency. The figure below
represents growth of global currencies reserve and that of gold from the past 25years to future
25 years and compares it with the growth rate of Bitcoin supply. From this projection, the
supply of Bitcoin in the coming 25 years will increase by 27% while for Gold it is 52%, for
Yen it is 64% and for Swiss Franc, US dollar, Euro and British pound it is 269%, 372%,
386% and 530% respectively17. If the current trend continues then Bitcoin might have appeal
as a store of value.
16 Ammous, Saifedean Hisham. "Can cryptocurrencies fulfil the functions of money?." (2016).
17 Cohen, Benjamin J. Currency power: understanding monetary rivalry. Princeton University Press, 2015.

10CRYTOCURRENCY VERSUS REGULAR CURRENCY; A COMPARATIVE ANALYSIS
Figure 3: Comparison between expected growth of cryptocurrency and that of national
currency18
Credibility
The digital currencies will gain a monetary role like a regular currency only when it
can assure the potential holders that there will be no unanticipated issuance of currency
supply. In the cryptocurrency list, only Bitcoin has achieved a credible commitment in terms
of announced issuance schedule19. In contrast to other coins, for Bitcoin no free allocation is
allowed to the creators. People have to obtain it either buying or mining it. Ethereum has not
yet committed to a clear issuance schedule. It rather has a high degree of discretionary
autonomy over the decision of supply growth20. Litecoin involves more than fifty percent
chance to attack or to collusion among miners and coders. Unlike regular currencies,
cryptocurrencies do not receive any political or democratic oversight on its issuers and
therefore lacks credibility.
18 Ammous, Saifedean Hisham. "Can cryptocurrencies fulfil the functions of money?." (2016).
19 Franco, Pedro. Understanding Bitcoin: Cryptography, engineering and economics. John Wiley & Sons, 2014.
20 Ammous, Saifedean Hisham. "Can cryptocurrencies fulfil the functions of money?." (2016).

11CRYTOCURRENCY VERSUS REGULAR CURRENCY; A COMPARATIVE ANALYSIS
Stability
Without presence of central bank to control the money supply, cryptocurrencies fail to
offer stability. Because of highly volatile and unpredictable demand, the predicted supply
does not match with predicted purchasing power. The values of cryptocurrencies since their
introduction have revealed a highly volatile trend21. The cryptocurrencies could become
stable when it will be the only form of money used globally and no one will exchange it with
other currencies. This in turn implies such currencies are unlikely to be used as a unit of
account.
Benefits of Cryptocurrency
Elimination of Middleman:
Most impressive benefit of this currency is that it discards the options of intermediary
component in transactions like expensive brokers, lawyers and so on. In transaction made
through real currencies upon purchasing real properties these brokers and intermediaries play
huge role to raise the prices that in turn raises the cost22. Crypto currency can actually act as
large property rights database, which further can be used in execution of two party
transacting contracts in the automobile, real estate sector. These eliminate the cost of legal
fees and brokerage charges23.
Market accessibility:
21 Frieden, Jeffry A. Currency politics: The political economy of exchange rate policy. Princeton University
Press, 2014.
22Lipovsky, W. and Lipovsky, W. (2017). The Benefits of Using Cryptocurrency - Due. [online] Due. Available
at: https://due.com/blog/benefits-using-cryptocurrency/ [Accessed 30 Nov. 2017].
23 Narayanan, Arvind, and Jeremy Clark. "Bitcoin's Academic Pedigree." Queue 15.4 (2017): 20.