NATIONAL LAW INSTITUTE UNIVERSITY, BHOPAL

RISE OF BITCOIN AS MACROECONOMICS PHENOMENON

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Index

s. no. Topic Page number

1 Introduction

2 Article I: The Trouble with Cryptocurrency’s Viral Growth 4

3 Article II: Bitcoin bubble inflates again after pre-Christmas rout 5

4 Critical Analysis 6

5 References 7

6 Appendix 8
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Introduction

BitCoin is a peer-to-peer payment system created in 2009. It is the first open source digital currency
managed by an open source software algorithm that uses the global Internet network both to create
BitCoins as well as to record and verify its transactions. Being a cryptocurrency, BitCoin uses the
principles of cryptography to control the creation and exchange of BitCoins. Access to the BitCoin
network requires downloading a BitCoin software on a personal computer and joining the BitCoin
network, which allows participants to engage in operations, as well as update and verify transactions.
Compared to a standard fiat currency, such as dollars or rupees, the key distinguishing feature of
BitCoin is that the quantity of units in circulation is not controlled by a central authority or
government, but by a software algorithm. BitCoins are created in a ‘mining’ process, in which
computer network participants, i.e., users who provide their computing power, verify and record
payments into a public ledger called blockchain. In return for this service, they receive transaction
fees and newly minted BitCoins. A fixed amount of BitCoins is issued at a constant publicly known
rate, according to which the stock of BitCoins increases at a decreasing rate. In 2140, the growth rate
of BitCoin will converge to zero, when the maximum amount of BitCoins in circulation will reach 21
million units; according to the current algorithm it will not change after 2140. Bitcoins can be used for
purchase of goods and services with the condition that transaction partner should accept bitcoins.

Although, with recent trends of rising bitcoin usage it is being considered as a problematic
phenomenon.The common issue which economist have predicted with usage of BitCoin is economic
bubble.Economist refer to this bubble as ‘speculative bubble’ which could be destructive in near
future. As more and more people are pumping money in cryptocurrency the aftermath of bubble burst
would be borne by larger number of people leading to great economic and market crash. The recent
fall in cryptocurrency value are examples and signals of market crash and it is considered that
cryptocurrency market would not be able to recover anytime soon. Although, it is still debatable that
is Bitcoin actually a bubble? Economists have argued that it is not a bubble because it started at zero
and it has to increase over time whereas Andreas Park, an associate professor of finance at the
University of Toronto agrees that Bitcoin is a bubble, but argues that because the digital currency has
been assigned value in an unregulated exchange.
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Article I:The Trouble with Cryptocurrency’s Viral Growth

The New York Times, Sept. 25, 2018

The newspaper talks about the recent Bitcoin 2018 crash wherein the peer to peer digital payment
system, Bitcoin lost its value by nearly 50% and is being considered as one of the major crash for the
Cryptocurrency market. The article tells that how bitcoin was designed to act as mode of digital
payment not a tool for speculative activities, Bitcoin usage should be mainly for large organisations
and government and not for ordinary citizen as it has huge tendency to expect a sudden drop in its
value. The article addresses that cryptocurrenciesare dependent on exponentially growing technology
and the public has adopted the new technology rapidly without accounting for its restrictions and
limitations. It might lead to major economic losses and crisis in future, the cryptocurrency cannot
replace the ordinary currency at least for the usage of ordinary and non-technical citizens.

On analysing the article it is deduced that bitcoin is mainly a bubble in several ways than one;
considering the bandwagon effect, one after the other several people starting investing in the bitcoin.
People have developed the idea that by investing in Bitcoin they could become millionaires.
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Article II:Bitcoin bubble inflates again after pre-Christmas rout

The Guardian, 26th December 2017

The year 2017 had been a good year for Cryptocurrency with its rising market value which realised
around 20 times increase in its value from beginning of the year but the bitcoin realised a fall of 30%
(from $19,666 to $11,159) in its price on December 17 2017 alarming the bitcoin market crash. This
created a sudden commotion in International monetary market Shmuel Hauser, the chairman of the
Israel Securities Authority declared ban of companies based on Bitcoins from trading on the Tel Aviv
Stock Exchange. Singapore’s central bank also gave warnings a week before crash saying that risk in
sharp fall of prices is high.
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Criticalanalysis:-

Bitcoin emerged as mode of digital payment which sooner turned into a speculative tool for public. It
was said that Bitcoin would remove the central bank one day and would become the alternate
currency for public but with recent declines and crash it could be seen that Bitcoin can act as an
alternate currency. In addition to that bitcoin has more threats such as giving power to the dark web,
the section of the web that is not accessible through the search engine. By using crypto currencies like
Bitcoins people can make illegal transactions without giving any information about themselves.
Cryptocurrencies like Bitcoins are a way to empower such transactions across the globe which will
ultimately result in increased cybercrime. Bitcoin can also secretly launder money outside the country
it could create loopholes in the current bank’s data about the money transactions leading to inability to
track economic activities.

It could be a time for economic revolution, maybe cryptocurrencies could take up place of fiat money
in near future but sudden and rapid acceptance of advanced technology by ordinary citizens without
knowing technology’s restrictions and limitations would lead to an chaotic economic system.
Innovations are important contributors of economic development and it brings new solutions to
6+market, but it could face some problems in the first stage of development.
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Appendix:-

Article I:The Trouble WithCryptocurrency’s Viral Growth

Cryptocurrencies like Bitcoin have lost over half their value so far in 2018, and more than that since
late 2017. These virtual currencies have crashed before, but this time they seem in no hurry to gain
back lost ground, largely because recent evidence has revealed problems with the new technology.

In one recent study, a team of academic researchers said that market manipulation might have been
behind Bitcoin’s steep increase in value in 2017. And a recent report by the New York attorney
general’s office found substantial risk that consumers who invested in cryptocurrency could lose
access to it, either temporarily or permanently, if there were problems at their exchange. The report
also uncovered that many of the exchanges had traded on their own markets, essentially creating a
conflict of interest in which they were trading against their own customers.

It wasn’t supposed to be like this. Cryptocurrencies like Bitcoin were started not as a way to get rich
but to provide an electronic payment system that was more secure and resistant to fraud than credit
cards and eliminated the need for trusted intermediaries like financial institutions. Because
cryptocurrencies were not controlled by a central institution like a government or even a governing
nonprofit, they were supposed to give the holder the reliability of gold, without the inconvenience of
having to transfer a physical item to make a transaction.

Large organizations and technically savvy users may have valid reasons for using cryptocurrencies,
especially for transactions between governments or large multinational corporations. However, for the
ordinary citizen, cryptocurrency is in fact less secure, more vulnerable to sudden drops in value and
— surprisingly — more dependent on trust in an intermediary institution than fiat currency like the
United States dollar.

In the world of cryptocurrency, there are two categories of intermediary institutions. The first
category contains the exchanges where users buy, sell and store their virtual currency. These
exchanges include Coinbase, which the New York attorney general’s report claimed traded on its own
platform, and the now-bankrupt Mt. Gox exchange, which lost over 700,000 of its users’ Bitcoins to
hackers in 2014. The second category is made up of the people and companies who create and sell
their own cryptocurrency, using initial coin offerings. This year, two founders of a virtual currency
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called Centra were arrested and charged with “conspiracy to commit securities fraud, securities fraud,
conspiracy to commit wire fraud and wire fraud.” In May, The Wall Street Journal found that
hundreds of initial coin offerings were “using deceptive or even fraudulent tactics to lure investors.”

More recently, social networks such as Facebook promised to connect everyone in the world and give
users a platform to speak freely. As we’ve seen, they did not make things free; they opened us up to
manipulation by anyone, anywhere. There is a feeling I get when I log in to Facebook and am
assaulted by clickbait news, overly intrusive ads and a confusing inability to configure my feed to
show me the updates from friends that I came here to Facebook to read. “Free” is not the word for it.
Facebook has become less free than an ordinary real-life conversation, not despite the ability to
connect to to anyone but because of it.

We saw something similar in peer-to-peer lending, where people could take the savings of one person
who needed to invest and transfer it to another person who needed to borrow. The system was
supposed to make the economy work more fairly, by removing the arbitrary and inefficient banker
middlemen. Instead of following through on its promise, peer-to-peer lending in China has resulted in
a lot of lost money for ordinary citizen savers, creating an unstable financial sector.

In software engineering, we have a phrase for this: “That’s not a bug, it’s a feature.” Established
systems (such as customs, regulations or software) are the way they are, for many reasons, some of
them now forgotten. Sometimes we never know all the reasons a system needed restrictions or
limitations until we discover a way to make new systems without them and discover (for better or for
worse) what happens without those constraints. Cryptocurrency, peer-to-peer lending, and anonymity
and pseudonymity in communication are all impressive feats of engineering. They are also all
excellent at showing us the value of a society that requires a stable identity, government support of a
currency and oversight of its financial systems.

Bitcoin’sfirst commercial transaction was in 2010; by late 2017 it had grown to a value of over $100
billion. Facebook grew to one billion users in about the same amount of time. The word “viral” is
often used to describe such exponential growth, but viruses grow exponentially for a reason, and it has
nothing to do with a benefit to the host. If a new technology grows exponentially, that ought to make
us wary, not excited.
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We need time to discover and address the problems in any new system. We also need time to revisit
the restrictions and limitations of established systems, and see if they still apply. The underlying
danger is that some of these new systems and technologies have grown too fast and have been adopted
for general use before we recognize the problems caused by their lack of restrictions.

Many of the so-called limitations of government-regulated currencies are features, not bugs. There is
a place for cryptocurrency, though I don’t believe it’s for the average, nontechnical user. In general,
cryptocurrencies are not a replacement for ordinary currencies. That’s not in spite of their freedom
from government control but precisely because of it.

Ross Hartshorn is an independent software developer.

Follow The New York Times Opinion section on Facebook and Twitter (@NYTopinion)
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Article 2: Bitcoin bubble inflates again after pre-Christmas rout

Bitcoin, the world’s biggest and best-known cryptocurrency, lost more than a quarter of its value in a
single day, falling 30% at one stage on Friday to $11,159.93. Despite a late recovery, it had its worst
week since 2013.

The digital currency had risen around twentyfold since the start of the year, climbing from less than
$1,000 to as high as $19,666 on 17 December on Bitstamp and to more than $20,000 on other
exchanges. However, it has posted heavy declines since.

While bitcoin investors and analysts believe the decline in its value was a natural correction after a
heady run-up in prices, there have been further warnings from market regulators and central banks.

There is no right current price which would reflect the right current valuation,” said Andrei Popescu,
Singapore-based co-founder of COSS, which describes itself as a platform encompassing all features
of a digital economy based on cryptocurrency.

“Taking profit is right, while buying into a long-term projection is also right. You don’t have to be
right in this market, just less wrong than the rest,” Popescu said.

Shmuel Hauser, the chairman of the Israel Securities Authority, said on Monday he would propose
regulation to ban companies based on bitcoin and other digital currencies from trading on the Tel
Aviv Stock Exchange.

Singapore’s central bank warned last week against investment in cryptocurrencies, saying it
considered the recent surge in prices to be driven by speculation and that the risk of a sharp fall in
prices was high.

Prices of rival cryptocurrencies, which slid along with bitcoin last week, have also recovered, with
Ethereum, the second-biggest cryptocurrency by market size, quoted around $771, up from Sunday’s
low of $689 but still far from highs of around $900 hit last week.
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