Hong Kong Shue Yan University

Course Code and Title: FIN243 Money and Banking

Term: Fall 2021
Name of Lecturer: Joe Wong
Section No.: 1 Group No.: 1
Date of Submission: 22nd Nov 2021

Topic of the term paper:

Is Bitcoin A Scam?

We certify that the material now submitted is entirely our own work and we have cited all
sources used and have faithfully indicated their origin.

Student Names Responsible Number

Student No. For Figure No. / of Words
(Number 1 is the group leader.) Table No.

1 Kong Hau Yan 182060 Figure 4 823

2 Keung Yin Hei 209005 Figure 2(a, b) 688
3 Tse Wing Yin 182030 Figure 3 823
4 Wong Shun Hang 204014 Figure 5 600
5. Kung Kwong Yuen 213034 Figure 1 947

Total number Figures; Tables

of Figures, Tables and Words:

1
Content Page
no.
1. Introduction (Kong Hau Yan, 182060, xxx words) 3
2. Current issues and Development of Bitcoin Nicky
a. The Birth and Evolution of Bitcoin
b. Bitcoin players and how they traded in financial markets
c. Current issues of Bitcoin 

3. Case Study of Bitcoin

a. Why people invest on bitcoin
b. Significant news and cases
c. Is Bitcoin a safe investment?

4. Risk & Scam (Tse Wing Yin, 182030, 823 words)

a. Volatile prices of Bitcoin
b. Cyber Criminal activities and illegal transactions
c. Customer protection

5. Regulation and Law in United State (Kong Hau Yan, 182060, xxx words)
12
a. The Existence of Regulation and Law in United State
b. Argument on the Current Protection Law in United State
c. Further Discussion – What is the Solution?

6. The possible future of Bitcoin in Financial Market (Wong Shun Hang, 204014, xxx words)
a. The Financial Crisis before Bitcoin
b. Investor Behavior and the Development of Bitcoin
c. The Potential role of Cryptocurrencies in Financial Market

7. Conclusion (Kong Hau Yan, 182060, xxx words)

8. Reference

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Kong Hau Yan, 182060 (xx words)

1. Introduction

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Kung Kwong Yuen, 213034 (947words)

2. Current issues and development of Bitcoin

a) The birth and evolution of Bitcoin

The first cryptocurrency, Bitcoin was released on 3 January 2009. It is created by
network mining, which employs cryptography for administration and control. In other words,
issuers and Bitcoin investors utilize a string of numbers as transaction or identifying identities,
and Bitcoin employs "blockchain" to verify and record all Bitcoin transactions.

Bitcoin is not the same as traditional legal tender. traditional legal tender is government
issues and regulates legal money, and the quantity is infinite. Bitcoin is the peer-to-peer virtual
money that is decentralized, is not governed by the government, banks, or regulations, holding
anonymously, there is no need to enter any investor personal information during the transaction,
etc. In order to avoid Bitcoin's in financial market inflation, the quantity is set at 21 million, and
it exclusively allows online transactions and has no entity.

In recent years, cryptocurrencies have evolved from niche financial items to mainstream
financial tools. Many online retailers in order to avoid exorbitant processing fees, time-
consuming processes fees, time-consuming processes, and regulatory concerns, Bitcoin as a
transaction medium, which is widely used by online retailers extensively utilized and accepted as
a legitimate source of funds, such as Microsoft, Expedia, Playboy, and others.

b) Bitcoin the players involved

 Bitcoin Users
Bitcoin users are essential Bitcoin players since the more the number of Bitcoin users, the
greater the financial market acceptability. Bitcoin users can get Bitcoin by mining or
direct purchase, and then use it to buy products and services.
 Miners
It is tough to get bitcoins due to their scarcity. Miners may be needed by investors to
calculate cryptography in order to produce blockchains and newly generated bitcoins.
When miners get a new bitcoin, they can become bitcoin users themselves, or they can
sell bitcoin in the new financial market, allowing investors to participate in the financial
market.
 Trading platforms
The trading platform is a platform that brings together various bitcoin users, allowing
investors to gain a more thorough grasp of the bitcoin market and investment

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 requirements, and investors to purchase and sell bitcoin directly on the platform. And this
platform will not oversee or manage investors; instead, it will simply provide a
comfortable and fast online trading platform for bitcoin investors.
 Wallet providers
To begin with, a bitcoin cold wallet is an offline wallet. When conducting transactions,
traders just need to connect to the network and submit a password, lowering the danger of
hacker assaults and bitcoin theft. It provides a high level of security and is ideal for
holding big sums of bitcoin. Second, hot wallets are online wallets, which include mobile
apps and web-based online exchanges, among other things. These online storage options
make it easy for investors to examine and exchange their assets. Bitcoin transactions and
transfers in Hong Kong have become incredibly convenient and direct as a result of the
Internet connection, but it also raises the danger of Bitcoin being stolen by hackers. If
investors just have a few Bitcoins, they can use hot wallets.

c) How Bitcoin traded and invested in financial markets

 Bitcoin ATM
To begin with, many nations now provide Bitcoin ATM services that are simple to use,
bitcoin users just need to deposit the amount of cash to purchase bitcoin directly from the
ATM, but the Bitcoin number is restricted in ATM and the handling charge is more than
the current price.

 Bitcoin exchange
Second, make a direct purchase from the exchange. This is the most popular method of
investing in Bitcoin. You may buy a particular number of Bitcoin from a current
reasonably major trading platform, such as Binance, Huobi, coinbase, and so on, and then
store it in Bitcoin Coins in the wallet.

 Credit card
Furthermore, investors can purchase Bitcoin directly using a credit card. But not every
credit card is available, and high interest rates will be charged.

 FPS
Finally, through C2C (crypto to crypto) transactions with FPS, USDT or USDC-type
USD stablecoins can be purchased, and the stablecoins can be input to the exchange to
conduct p2p (peer to peer) transactions, thereby purchasing Bitcoin.

d) Current issues of Bitcoin (central point) – related to the discussion of scam

Bitcoin, as an innovative encrypted trading currency, has piqued the interest of both
illegal and legal investors, resulting in a slew of illegal transactions and a polarized view of
Bitcoin. What people think about bitcoin is as follows:

5
 First, there's money laundering. Although the development scope of bitcoin is not as
broad as that of cash circulation, because it is an anonymous transaction, so it is possible for it to
become a tool for money laundering. because bitcoin low transparent, and difficult to track back
via legal means, unlawful investors can launder money by transferring illegal monies to other
wallet addresses and using virtual currency to purchase services and goods. such as bitcoin
ATMs, ICO fundraising, virtual currency p2p lending platforms, virtual currency exchange c2c
transactions, and online transactions are all examples of common virtual currency money
laundering.

Second, because Bitcoin is not subject to any legal limits, government or bank oversight,
it is utilized in many criminal websites as a transaction, such as the dark web and other illegal
trade websites for guns, narcotics, and so on. because many nations may now legally use Bitcoin
as a payment method for online gambling, the danger of criminality grows, because using
Bitcoin as a transaction can remove legal restraints and geographic restrictions.Buyers and
sellers employ virtual payments and transactions in the form of money, lowering traditional cash
transactions.

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Keung Yin Hei, 209006 (688 words)

3.Case Study of Bitcoin

a. Why people invest on bitcoin

Traditional finance has developed for a long time. After many people have their own assets, they
often start to come into contact with traditional financial products such as stocks and funds. In
addition to the long history, relatively stable market conditions and the belief that the threshold is
low may also be the reasons why people choose to invest.

With the advent of cryptocurrency, people began to profit through the operation of
cryptocurrency. From October 2013 to November 2021, Bitcoin appreciated from US$196.02 to
US$67,292.14, making cryptocurrency gradually gain attention. At the same time, more people
are investing in cryptocurrency, hoping to "strike it rich."

Bitcoin can increase the overall return of an investment portfolio. Given the frequent plunge and
rise in the value of Bitcoin, investors seeking high returns without volatility may not be attracted
by cryptocurrencies such as Bitcoin. For investors, what is important is not necessarily the risk of
investing in a single project (Bitcoin), but its contribution to the volatility of the entire
investment portfolio.

"Don't put all your eggs in one basket." Investors should consider a diversified investment
portfolio, for example, investors who hold two weakly correlated or uncorrelated assets, when
the value of one of the assets plummets, the other may not fluctuate. Some investors may hold
asset portfolios that include stocks, bonds, real estate funds in different regions, and certain types
of precious metals (such as gold). The two assets with the highest returns, stocks, and real estate,
tend to move in the same direction at the same time when prices change, when real estate prices
rise, some real estate-related stocks will also rise; on the contrary, when real estate prices fall,
some real estate-related stocks will also fall. The price of the asset portfolio is highly volatile,
and investors could lose a lot of wealth. In order to reduce volatility, investors can add
investment instruments with low volatility, such as bonds, but doing so often leads to lower
overall returns.

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 b. Significant news and cases

Elon Musk, the world's richest man and CEO of Tesla, is an investor in Bitcoin. His words and
deeds can greatly affect the volatility of Bitcoin prices.

On January 28 this year, Musk added the "#Bitcoin" hashtag to his own Twitter account. The
price of Bitcoin rose from US$30,404.00 on the 27th to US$33,374.80 on the 28th, an increase
of nearly 9.77%. Subsequently, on February 8th, Tesla purchased $1.5 billion worth of Bitcoin,
as the largest electric vehicle and solar panel company in the United States, the massive purchase
of Bitcoin caused the price of Bitcoin to skyrocket, from US$38,852.90 on February 7 to
US$46,395.70 on February 8, an increase of 19.41%. It shows that Musk has a great influence on
the price of Bitcoin.

Figure 2a: Bitcoin price in U.S. dollars (Jan to Feb 2021)

Sources: investing.com
Bitcoin Price (BTC) | Bitcoin Value - Investing.com

On May 12, Musk tweeted that Tesla has suspended accepting Bitcoin as a payment method for
the purchase of its cars, citing concerns about Bitcoin's carbon footprint. The price of Bitcoin
began to fall rapidly by 12.90%, from US$56,695.70 (May 11) to US$49,384.20 (May 12). Since
then, the price of Bitcoin has continued to fall. On May 19, the price of Bitcoin was only
US$36,720.50, which has fallen by more than 35% compared to May 11 (US$56,695.70).

Then on May 19, Musk wrote in a tweet through text and emoji: "Tesla has diamond hands", in
the stock market, a "diamond hand" means someone who holds a firm share, despite the potential
risks and losses, implying that Tesla will not sell their $1.5 billion in Bitcoin. The next day (May
20), the price of Bitcoin rose by more than 10% and briefly returned to above $40,000.

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From May to June, the overall Bitcoin price trend was downward, among which, on June 13,
Musk pointed out on Twitter that if Bitcoin miners are proven to use a reasonable proportion of
clean energy, which is in line with the future trend, Tesla will resume the transaction model that
can use Bitcoin to buy cars. The price of Bitcoin once again rose by 10.02% because of his
remarks. Even if the price of Bitcoin continues to fall afterward, it still proves that Musk can
affect the price of Bitcoin.

Figure 2b: Bitcoin price in U.S. dollars (May to Jun 2021)

Sources: investing.com
Bitcoin Price (BTC) | Bitcoin Value - Investing.com

c. Is Bitcoin a safe investment?

9
Tse Wing Yin, Alexandra 182030 (823 words)

4. Risk and Scam

a. Volatile prices of Bitcoin

Bitcoin is highly volatile, holders of Bitcoins would have to bear the extremely high risk of
holding, buying or selling it. Because if you are buyers, there might be a chance of you paying a large
amount of money for a bitcoin, then its value instant dropped to almost nothing after you bought it, then
it equals to you lost a bunch of money getting a valueless thing; if you are sellers, you would have to
decide when to sell to get the highest profit. The price might continue to rise hence to sell it afterwards
could get a more favorable profit, but it might also just turn into nothing in just a minute. There are just
way too many possibilities in the market of cryptocurrencies.
An actual example that shows how dramatic the chance of prices of Bitcoin would be, in 2017,
Bitcoin has once rallied to nearly $20,000. But its price collapsed and lost a third of its value in a just a
day, and in 2018, it dropped to as low as $3,122 (CNBC, 2021), and billions of dollars from the total
cryptocurrency market value has lost just like that. Investing in Bitcoin, you have to bear an extremely
high risk.

b. Customers’ protection

Nowadays, people value their privacy and personal information a lot, and most of them do not
concern about it when it comes to Bitcoin. Bitcoin allows users to transact without revealing personal
information or identity, it's not totally anonymous. Each bitcoin transaction is documented on a digital
ledger called the blockchain, where a user's cryptocurrency "wallet" is represented as a unique series of
random numbers and letters. Through this, a scammer could potentially be traced after the fact.
Thanks to Blockchain, Bitcoin is extremely hard to hack. In the case of Bitcoin’s case, blockchain
is used in a decentralized way. Therefore, no single person or group has control. (Investopedia, 2021)
Blockchain is useful for preventing hackers from stealing information or accounts of users as it has
a unique set of security system, which is about hashes and proof-of-work, changing one block requires
time, and to track the valid hash is too. Just like Paul Vigna, the markets reporter at The Wall Street
Journal said, "To hack it, you would have to take over the network, and to take over the network, you
would need your own network of computers running 24/7, and to do that, it would cost billions of
dollars" (CNBC, 2021)

Though, by saying that it is hard to hack, does not mean it is not possible to get hacked. Many
cryptocurrencies buying and selling platforms, Liquid Global and MtGox, were once got hacked, and the
cryptocurrencies of many users got stolen. The worst part is, those money are almost impossible to be
get back. In the case of MtGox, none of the customers have been reimbursed yet. For the fact that it got

10
hacked in 2014, it has been 7 years already, many has already seen it as impossible to get back the
money.

c. Cyber Criminal activities and illegal transactions

Also, to see the whole thing in another way, although it is sort of protecting the personal
information and privacy of users of the platform, it is also potentially making fraud and scams easier to
happen.
Having it hard to trace who is the account holder or who is involve in some particular suspicious
transactions would make it almost impossible to find out who the scammers are when scams happen.
Which might lead to, if there are scams and victims are trying to get back their money, it would be
difficult to handle. And the whole scam would be impossible to solve, and more scammers would be
attracted, creating and building a cycle of swindles.
The amount of cryptocurrency spent on those dark net markets is very large, that, of course,
includes Bitcoin. According to data released by the firm, Chainalysis, that tracks every single Bitcoin
transaction and serves as an adviser to an array of government authorities, a rose of 60 percent of illegal
transactions including drugs, has already reached a new high of $601 million dollars back in 2019
(Popper, 2020).
Also, according to the figure below, it shows that there is a trend of an increase of the value of
Bitcoin being sent to and from dark net markets (The New York Times, 2020).

Figure 3: Value of Bitcoin sent to and from dark net markets

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 Source: The New York Times
Website: https://www.nytimes.com/2020/01/28/technology/bitcoin-black-market.html

An increase of the value of Bitcoin being sent to and from dark net markets is proving that,
people are getting more and more involve into using Bitcoins as a way to trade illegal things, including
drugs and services. The trend somehow is also showing us, Bitcoin has the ability of driving and
boosting illegal transactions of these sorts, as its customers’ protection policies are actually also

305
protecting the traders and their personal information as well, making Bitcoin a kind of way for them to
escape from laws and sanctions.

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Kong Hau Yan, 182060

5. Regulation and Law in United State

a. The Existence Regulation and Law in United State

United State is the place where holding the largest Bitcoin value in the world and it is probably the
reason incurs US to be the first country to establish a legal framework for the regulation of bitcoin in
2015– The New York BitLicense. (Prasolov, 2018) It is a business license issued for any engagement in
process of virtual business activities in US or by US citizens, ranging from the transaction of virtual
currency over a certain amount for financial purpose, services on handling and managing virtual
currency in place of others, the performance of exchange services to issue or control virtual currencies.
For example, money transmitters like Paypal, has to acquire the legal license to exercise Bitcoin
transactions and must holding surety bonds and safety investment as insurance in advance of failure
transaction.

In addition to the released BitLicense, there are existed consumer protection laws for general
application on Bitcoin and other cryptocurrency related business. (Perkins, 2020) One is the declaration
of Section 5(a) : “unfair or deceptive acts or practices in or affecting commerce” from the Federal Trade
Commission Act (FTC), which aims to avoid people to engage unlawful or deceitful acts and it has
applied to the possible activities in related to cryptocurrency over the past few years. (Perkins, 2020) At
the same time, the Consumer Financial Protection Bureau (CFPB) has the authority to enforce financial
laws to the similar deceptive activities and encompasses a broad spectrum of financial product and
business. In fact, there are laws and regulations established through the level of state authorities
regarding to cryptocurrency related business in each of state in US.

b. Argument on the Current Protection Law in United State

The existing regulations and laws, as adequate as it may seems, are brought to the debate that
whether the current regulations are sufficient enough to protect consumer engaging in cryptocurrency
related business and other illegal transactions. Although previously mentioned law enforcements have
covered the field of cryptocurrency, some of the existing regulations are not applicable to the
circumstance of cryptocurrency. Bitcoin has being well known of its decentralised and pseudonymous
features, there is no financial institution involved in any part of process. Unfortunately, the Electronic
Fund Transfer Act can exercise its regulations exclusion to transaction with the involvement of financial
institution due to the some specific requirements such as revelation of the transactions and to reverse
transactions which is not applicable to Bitcoin and other cryptocurrencies. (Perkins, 2020)

At the same time, it worth to examine the concern that how the existing regulations can be
effectively executed to practices. After the creation of BitLicense, undesirable result shown that 30
companies in operation of Bitcoin have relocated to the other state and only 25 legal BitLicense has
been issued till now, and not to mention the fact that no state has follow the same regulation of Bitcoin
as New York did. (Rrasolov, 2018) In view of this, another concern arouse upon the uniformity of laws

307
and regulations across the states in US, in which consumers might not be given sufficient protection
under inequivalent convergence of certain execution of enforcement.

Cryptocurrency supporter points out the policy gaps applied to the activities associated with
cryptocurrency, despite they defends against the necessity of regulations and laws on the development of
cryptocurrency. Based on those applicable regulations, such as section 5(a) and associated regulations
by CFAB, it was designed for the risks and scams which caused by the use of fiat money and protect
consumers in the transactions of traditional money and related business. (Perkins, 2020) Apart from that,
they also identified the basic differences of traditional money and cryptocurrency in term of transaction
services and the resulted risks, for example the requirement of transmitters to hold relatively amount of
surety bonds as protection to customers, which is not suitable for applying in cryptocurrency
transactions. Undeniably, existing risks under Bitcoin exchanges and other cryptocurrencies cannot
simply be solved by merely holding some safety investment as safeguards, especially the transaction
value could be unbelievable high. Sometimes, consumer suffers loss of value in cryptocurrency due to
lacking of adequate knowledge about Bitcoin or other cryptocurrencies and it could misleading
consumer to invest or buy cryptocurrency under unreasonable or safety conditions. For example like, a
consumer is unknowingly charged excessive fees during cryptocurrency transaction.

There is, indeed, no federal law oriented on the scope of consumer protection on activity specific
in Bitcoin and other cryptocurrencies and there are conditions that occur accordingly due to some
specific features or characteristics of a particular cryptocurrency. It is arguable upon the nature of
irreversibility of Bitcoin, because consumers would have no right of recourse if their money was stolen.
Therefore, the United State now faces two problems – whether the current regulations and laws are
sufficient and whether there is a needs to establish new laws and regulations exclusion to
cryptocurrencies.

c. Further Discussion – What is the Next Step?

According to the discussion above, the necessity of cryptocurrency is an issue exclusive to the
United State but all around the world. According to the figure below, the percentage increase in
cryptocurrency received from stolen funds declined from 244% in 2018 to merely 4% in 2020, in spite
of the slightly increase of its percentage from -59% in 2020 to 4% in 2020. While the percentage
increase in Scams was tremendously high as 512% in 2019 and then decreased again to its -71%.
Figure 4 : Crime categories by percentage increase in cryptocurrency received

308
Wong Shun Hang 204014 (600 Words)

6. The possible future of Bitcoin in Financial Market

a. The Financial Crisis before Bitcoin

For millennia, most currencies have had little practical function other than to serve as a medium
of exchange. Metal coins, such as grains, crowns, and jewels, are used as money. It is true that the status
of regular cash as legal tender will be safeguarded to some extent if people trust the government.
However, if faith in the government is fully lost during a period of hyperinflation, such as in Zimbabwe
in 2008 or Venezuela lately, trust in the currency is shattered. However, if faith in the government is
fully lost during a period of hyperinflation, such as in Zimbabwe in 2008 or Venezuela lately, trust in the
currency is shattered. As a result, Bitcoin's most crucial function in the future financial system may be as
a new asset class. Bitcoin has worth if enough people believe in it and are willing to pay conventional
money for it.

b. Investor Behaviour and the Development of Bitcoin

Bitcoin is designed using P2P technology, it differs from traditional currencies in that it can
prevent inflation and deflation caused by bad central bank policies and human intervention, as well as

309
lowering transaction costs and providing anonymity. Bitcoin is a product of the modern period, and its
application system isn't just for payments. It is the technology of permissionless innovation. The
technology applies the concept of ownership transfer to financial assets or other items, using the Bitcoin
system as a prototype. The owner of the property directly conducts transactions with anybody through
third-party verification, such as automobile rental, and the borrower can use Bitcoin or other media as
the key to start the car under the decentralized communication system. The management and leasing of
various assets will become more convenient and simpler using the same way, particularly for short-term
point-to-point leasing. In the future, Bitcoin will become a mainstream currency. It has a lot to do with
the global pandemic that has plagued the world over the last year, since people are concerned that the
central bank's economic stimulus measures in reaction to the virus will lead to inflation. They can
diversify risks by purchasing cryptocurrencies in the event of uncertain economic prospects. Large
companies started to participate in the purchase of Bitcoin. Companies have produced a desire for
diverse asset allocation amid the global financial environment of low interest rates and the depreciation
of the US dollar, according to the CEO of MaiCoin, Taiwan's largest digital asset exchange. A publicly
traded firm in the United States MicroStrategy and Tesla, have all began to buy Bitcoin as part of their
asset allocation. In contrast to the previous ten years, mainly retail transactions have occurred, causing
the currency price to naturally rise. The changes of the world general environment. Countries have been
forced to close cities and labor from afar because of the covid 19. Many business activities have been
moved to the virtual realm. During this time, the money flow has likewise shifted toward digitization.
Cryptocurrency has gotten a lot of interest as a virtual payment option.

c. The Potential Role of Cryptocurrencies in Financial Market

In recent years, network security, money laundering, terrorist funding, pyramid schemes,
unlawful fundraising, fundraising fraud, and other difficulties using encrypted digital currencies have
shown up on occasion. As a result, it is critical to improve and reinforce legal oversight of encrypted
digital money to ensure the currency's healthy development while also ensuring its transfer and payment
capabilities. In the realm of encrypted digital money, strengthen collaboration with connected sectors
and scientific research organizations. Faced with international competition from encrypted digital
currencies, the government should first use unified planning. This system includes overall planning and
comprehensive coordination, prioritizes financial innovation, and incorporates encrypted digital
currency into a key strategy for the digital economy's development. Second, relevant organizations
should have an international view and vision, look at the world, take the lead in financial technology and
technical innovation, and engage in the initiatives and applications of encrypted digital currencies in
diverse industries. Third, academic institutions should fully acknowledge the far-reaching impact of
encrypted digital currency on traditional mo’netary theory and legal tender mechanisms, and actively
engage in cross-disciplinary, cross-institutional, cross-border, and cross-industry collaboration on related
issues, as well as strengthen digital comprehensive, systematic, in-depth, and specific currency research.
Government regulations, academic research, and industry applications should all work together to
support blockchain and decentralized technology innovation, turn digital currency development into
global development productivity, and make Bitcoin the mainstream currency.

310
 As a result for the future of the bitcoin, the markets are cyclical. Bitcoin tends to cycle every four
years. With another halving scheduled for 2024, the price of Bitcoin will start to rise once again as the
supply is reduced. Therefore, bitcoin have huge potential value.

Figure 5: Bitcoin Price Prediction

Source: PrimeXBT PrimeXBT Experts

https://primexbt.com/for-traders/bitcoin-price-prediction-forecast/

Kong Hau Yan 182060 (xxwords)

7. Conclusion

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