CRYPTOCURRENCY

I-Consult
The Consulting and Strategy Club
IIM Indore, Mumbai Campus

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 “[Bitcoin] is a remarkable cryptographic
achievement… The ability to create something which
is not duplicable in the digital world has enormous
value…Lot’s of people will build businesses on top of
that.”- Eric Schmidt
“I think the internet is going to be one of the major
forces for reducing the role of government. The one
thing that’s missing but that will soon be developed, is
a reliable e-cash.”- Milton Friedman

Benefits
Better Security
Complex cryptographic algorithms and the magic of big numbers makes it
impossible to break this scheme. There is currently no transaction mechanism
that is currently more safe and secure than those that use cryptocurrency. It is
very less prone to attacks by hackers as a transaction after confirmation is
irreversible. No one can reverse it not even the bank or Satoshi or your miner.

Universal base
Global business entails exchange rate risks ether. Fortunately, with
cryptocurrencies like Bitcoin, that is a non-issue, as the digital currency is
universally recognized at a given value. This helps to save any fees associated
with exchanging money from one form to another as well as protects us from
risk of devaluation of home currency.

No Central Issuing Authority

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“THE BLOCKCHAIN KEEPS EVERYONE HONEST, AND A WHOLE LAYER OF
BANKING BUREAUCRACY IS REMOVED, LOWERING COSTS.” — PAUL VIGNA
Cryptocurrency involves a decentralized peer-to-peer network to store ledger
accounts and hence does not involve any intermediary for the transaction to
take place eliminating the need for any third party delay and transaction fees.

How Cryptocurrency works

 A transaction say, “Bob gives X Bitcoin to Alice“ is signed by Bob‘s private

key using basic public key cryptography.
 After signing, the transaction is broadcasted in the network, sent from
one peer to every other peer. This is a basic peer-2-peer technology. The
transaction is known almost immediately by the whole network.

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  Next the transaction is validated which takes on an average 10 minutes.
The confirmation is done by miners who employ computers with
enormous amount of processing power in a cryptocurrency network.
Mining involves solving complex cryptographic problems (in bitcoin it is
based on SHA-256 algorithm) and the miner who does it first gets
rewarded with a specific number of cryptocurrencies.
 After a transaction is confirmed by a miner, it can build a block and add
it to the blockchain. Every node has to add it to its database.
 When a transaction is confirmed, it is set in stone. It is no longer forgeable,
it can‘t be reversed, it is part of an immutable record of historical
transactions: of the so-called blockchain.

Challenges to Bitcoins
Extreme Volatility

Investment in cryptocurrencies involves very high risk, as prices have been

extremely volatile. Many experts are sceptical about bitcoin as an investment
primarily because there is nothing for them to analyse. People are therefore
investing with imperfect information and the herd of speculators. Since these
cryptocurrency prices are not regulated, as more people enter the market lured
by the high prices, the prices climb ever higher. This might lead to formation of
a bubble that will eventually burst and cause widespread losses. Prices crash
every time when governments ban a particular currency in that particular
country.

Neither commodity nor currency

Lack of clarity about its origin is another big issue related to bitcoin. In olden
days, highly priced metals like gold, silver, etc. were used as currency. Though
its proponents claim that cryptocurrency is ‘mined’ using complex mathematical
formulae, they are reluctant to call it a commodity. They also claim that it is not
controlled by any government and so, it is ‘democratic’. Therefore,
cryptocurrencies don’t fall into the ‘currency’ category either. “It can be very
risky for businesses, industry and people to trade or invest in bitcoins as it is

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just a formula, not backed by any tangible asset like infrastructure, fertile land
and skilled labour which will drive factors like inflation, interest rates,
government spending etc but by sheer demand. Though some vendors or
companies may accept cryptocurrency as payment options, for any government
to implement it may be a great challenge.

Besides these factors there are a lot more factors like 40% of Indian workforce
still does not have a bank account, which is a must for all the cryptocurrency
transaction. Transactions are manufactured by an anonymous group of
individuals called as miners, thus the typical middle class will always fear the
currency on the grounds of accountability.

Some Other Threats

1) The transfer is instantaneous and money once sent is sent. It’s impossible
to reverse a transaction the way a bank can.
2) One major hurdle in the path of Indian investors, who are interested in
investing in cryptocurrency, is the confusion about its legal status. While
they haven’t been declared illegal, cryptocurrencies are not recognised by
the Reserve Bank of India (RBI) or any other authority in India, as a
‘currency’.
3) It is much more difficult to track illegal activities in the cryptocurrency
space, such as increased chances of money laundering and financing of
terrorism. This risk also lowers the chances of cryptocurrencies becoming
mainstream in India, leaving the future of the market mired in
uncertainty.

Volatile pricing of bitcoin and other such crypto

currency
Cryptocurrency currency are majorly used for speculation purpose. There is no
actual way to determine its intrinsic value. It’s not a company or a government.
We can determine a company’s value by using its profit, EPS. Value of a
nation’s currency depends on factors like inflation, Balance of payments,

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interest rates, but we cannot do it for cryptocurrency. Thus, the value of such
currencies varies by as much as 20 – 30 % if some important events occur.

Some major events which caused major fluctuation (predominantly increase)

recently especially Bitcoin.

 Limited Supply and supply/demand.

Each cryptocurrency is created in limited number. There is a limit to the
number of bitcoins that can be generated i.e. 21 million by 2040.
 Energy put in in the form of electricity to secure the block chain
Huge amount of electricity is required by miners to maintain the network.
Thus, if level of energy level required is reduced this will increase its
demand driving up its prices

 Block chain difficulty level.

More the difficulty level of block chain, more will be its security, which will
increase the demand increasing the prices.
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  The utility of the currency, and how easy it is to use and store.
If we consider example of India, very few merchants are ready to exchange
goods for cryptocurrency. Recently only a handful of companies like Dell
accept cryptocurrency

 Perceptions on its value by the public.

More is the trust of people in cryptocurrency more will be the demand,
more the price

 Scams.
Some Hackers stole 72 million worth of bitcoins from a Hong Kong
exchange, Bitfinex. Following the price of bitcoin which went down by 20 %
immediately

 Innovation.
In 2017, lightening protocol became successful which increased speed in
Block Chain methodology without compromising its speed, following which
the price of bitcoin sky-rocketed to the levels we know.

 Legal / Governmental issues.

In 2017, US gave its nod for trade in Bitcoin futures, after which it’s price
increased exponentially. Japan agreed to accept bitcoin, now Japan already
has a problem of very loose monetary policy and still very low demand,
under such circumstances, it accepting cryptocurrency as an asset boosted
its value exponentially