Abstract
The increased importance of cryptocurrency peculiar to the recent several years contributed to significant attention devoted to the investigation of this potentially beneficial means of payment. At the same time, there are also numerous attempts to oppose it to the traditional options such as precious metals and fiat money that have been used for a long period. In this regard, the paper delves into the peculiarities of cryptocurrency and its production regarding the stable popularity of other means of payment. Bitcoin is taken to investigate factors that impact the market and forces that might contribute to the increase or decrease of their potency. At the same time, the paper revolves around precious metals and fiat risks as the modern alternative and factors affecting the sphere. Perspectives associated with these means are discussed, probabilities for financing and benefits are also revealed. At the end of the paper, the conclusion is made.
Introduction
The last several years are characterized by the rapid rise of Bitcoin. Its rates achieved the highest ranks and provoked a powerful reaction in the market of virtual currencies (Andrianto & Diputra, 2018). Investors and coins owners acquired a potent tool to perform financial operations and guarantee particular stability. The given shift of priorities from traditional to innovative currencies also preconditioned the emergence of multiple debates regarding the future of this payment method and its use in deals. At the same time, the popularity and power of precious metals were doubted (Grier, 2014). However, the rise of Bitcoin was followed by its downfall as its price quickly became lower and created the ground for a new wave of discussions about the reliability of the coin and its ability to be used at the international level (Andrianto & Diputra, 2018). For this reason, there is the need for in-depth research of the given aspect with the primary aim to determine its potency, nature, and correlation with alternatives such as precious metals.
Nevertheless, bitcoin is not the only virtual currency that is used in the modern world. There are also Ethereum, Dash, Litecoin, and Monero that are characterized by the ability to accumulate money and serve as the promising investment to monitor the state of the market and play on forex rates (Andrianto & Diputra, 2018). Therefore, at the moment, it is one of the most well-known coins because of the recent rise and shock caused by its blistering growth. However, precious metals trading has always been an alternative to innovative methods because of their traditionally high reliability and understandable character (Grier, 2014). Cogitating about the forces impacting both these options, researchers assume that they are vulnerable to similar processes happening within the market and stock (Andrianto & Diputra, 2018; Grier, 2014). For this reason, the need for an in-depth investigation of the current situation along with the analysis of the perspectives and problems associated with these cryptocurrencies becomes obvious.
Problem Statement
At the moment, the wide use of the new payment method poses a certain threat to the market. The problem is that Bitcoin, Ethereum, Dash, Litecoin, and Monero, same as fiat money, do not have intrinsic value (Cuardas-Morato, n.d.). In this regard, the rapid downfall of this currency can be associated with the lack of a specific ground that supports the stable position of the coin (Papp, 2014). There is another concern related to cryptocurrency. The fact is that the anonymity peculiar to all transactions involving Bitcoins complicates the ability of the government to trace financial flows that might result in hyperinflation and other problems (Malik, 2016). Its use in the shadow economy and the high energy consumption introduces numerous doubts regarding the nature and future of this form of electronic cash (Bonneau et al., n.d.). For this reason, a particular problem with its management, mining, and use as the currency of the future emerges. Investigators suggest several methods to analyze this cryptocurrency and combat with oscillations of this course.
In such a way, the existing problem can be described as the lack of confidence regarding the mechanisms of the functioning of cryptocurrencies, their future, and perspectives as the would-be form of cash used on the Internet. The research is needed to determine several factors. First, aspects impacting the demand for Bitcoin, Ethereum, Dash, Litecoin, and Monero, precious metals as the alternative, and fiat money should be investigated. Second, the peculiarities of their management and manufacturing should be discussed. Finally, these means of payment should be compared to understand the advantages and disadvantages and their potential (Morisse, 2015). The problem is complicated by the fact that there is no generally accepted methodology utilized to investigate all peculiarities of the currency. For this reason, there is also the need for the in-depth investigation of sources devoted to the issue with the primary aim to determine approaches the authors used to acquire credible data needed for the research. Only considering these elements an appropriate analysis can be made.
Literature Summary
The bigger part of the modern literature devoted to the issue focuses on several aspects of cryptocurrency. These include phenomena impacting the evolution of coins, the state of the market benefit for the development and rise, mechanisms of their mining, management, and comparison with such traditional options as precious metals and fiat money (Sovbetov, 2018). At the same time, the literature also discusses central determinants for value formation and it is becoming an important tool for trading or investment. Under these conditions, investigating the works, specific attention to the criteria should be given. The pivotal aim is to outline the existing regularities, and mechanisms of Bitcoins formation and existence to be able to select the most appropriate research methodology that will help to collect credible data and provide a relevant conclusion.
The paper by Sovbetov “Factors influencing cryptocurrency prices: evidence from Bitcoin, Ethereum, Dash, Litcoin, and Monero” examines the factors that affect the value the of most commonly used cryptocurrencies, including Bitcoin, Litecoin, and others as determining the impact of various factors on cryptocurrency can help to predict future fluctuations. The given article contributes to the improved understanding of the mechanisms peculiar to the modern market and the way Bitcoins generate value and enter global operations and other deals on the Internet. To acquire credible information about the current situation in the market, the author included samples of five commonly used cryptocurrencies: Bitcoin, Ethereum, Dash, Litecoin, and Monero. Sovbetov (2018) states that they sampled “top 50 crypto coins that have proportional contribution to market capitalization weights” (p. 7). As a result, the sample covered about 92% of the entire crypto market, making up for a sufficient sample size to generalize the findings to other cryptocurrencies.
The methodology selected for the research presupposes the introduction of two variables. The weekly prices of crypto coins were the dependent variable, whereas measures including market beta, capitalization, trading volume, and SP500 index were the independent ones (Sovbetov, 2018). The researcher used the ARDL technique to establish the correlation between the variables.
Due to the utilization of the sample mentioned above and specific methodology, Sovbetov (2018) concludes that market variables, such as market beta and volatility, had a statistically significant effect on the prices of all five currencies examined as part of the study. Moreover, the attractiveness of coins to the audience, measured by their market capitalization, also had an influence on cryptocurrency prices in the long term (Sovbetov, 2018). The SP500 index also influenced some of the currencies (Bitcoin, Litcoin, and Ethereum), but this variable was not conclusive in predicting short-term prices.
Altogether, the given paper contributes to the examination of cryptocurrency production and manufacturing in three ways. First of all, it offers a framework for predicting coins prices in the long term, which could positively affect cryptocurrency trading and increase the demand for some of them. Secondly, the study proved that the attractiveness of a cryptocurrency had a significant impact on its price. As the attractiveness develops over time, cryptocurrency producers could use this information to impact the value of crypto coins. Finally, the study showed that the prices of a new form of money were not affected by exchange and interest rate, as well as gold prices, thus indicating that cryptocurrencies can develop independently of other traded money.
In other words, the research proves the idea that the demand for cryptocurrency will increase in the future, which is crucial for the investigation of the potency and nature of this phenomenon. Another central idea that should be used later in the research is that the value and price of coins remain independent from gold prices or interest rates. It means that virtual currency can be considered a direct rival to traded money, while the situation with the fiat ones remains complex.
Hayes (2017) provides another investigation of the given sphere. In his paper “Cryptocurrency value formation: An empirical study leading to a cost of production model for valuing bitcoin” he aims at the identification of the “the likely determinants for cryptocurrency value formation, including for that of bitcoin” (Hayes, 2017, p. 1308). The study sought to develop a model for evaluating bitcoin depending on the cost of production, which is why it is relevant to the field of coin manufacturing. To improve the understanding of numerous coins peculiarities, the author includes plenty of cryptocurrencies including Bitcoin, 365Coin, 42Coin, Alphacoin, Ixcoin, and 60 more in the sample. (Hayes, 2017). At the same time, he introduced the dependent variable which was the observed market price of a crypto coin. The independent variable was the cost of production, which was measured as the hash power, price of electricity, and hardware energy efficiency. Those measures were used to determine the production and thus were hypothesized to influence mining decisions and the resulting price of a cryptocurrency.
Due to the utilization of the given methodology, the author manages to formulate three critical predictors of cryptocurrency value. Firstly, the level of competition among producers positively impacted the value of all coins observed. Secondly, the rate of unit production contributed to mining decisions, thus indirectly increasing the cost of some cryptocurrencies by increasing the demand and competition. The difficulty of the mining algorithm also predicted the level of demand and had a negative correlation with the value of most alternative means of payment.
Altogether, the given study shows how mining decisions and the demand for cryptocurrencies correlate with their value. The author also proposes a model for determining the prices of coins based on production costs, thus contributing to their previous research on valuing and production.
The article “Precious metals under the microscope: a high-frequency analysis” by Caporin, Ranaldo, and Velo (2015) is focused on the investigation of precious metals as one of the direct rivals of all existing cryptocurrencies. The pivotal aim of the paper is to analyze patterns in spot prices, returns, volume, and selected liquidity measures of precious metals. For this reason, the sample included high-frequency observations of quotes and trades of gold, silver, palladium, and platinum. The data collection period was five full weekdays, during which the observation frequency was 100ms. The measures used to assess patterns in trading included prices, trade volume, log transaction prices, and the number of quotes and trades.
In the course of this investigation, Caporin et al. (2015) manage to show that there are certain periodic patterns based on the trading hours of the most active markets. Therefore, time variabilities in spot returns in precious metals are similar to those of other assets, including currencies. The authors also proved that gold is the most liquid and volatile asset, whereas platinum is the least. However, the research uncovered a strong commonality among precious metals in terms of their market liquidity and the variables affecting them.
In such a way, the study describes the characteristics of precious metal trading to discover how it compares to that of other financial assets. The results of the study provide important information on the liquidity of certain precious metals, which could affect their trading and influence the demand for production (Caporin et al., 2015). When considering a relationship between metal production and cryptocurrencies, the results of the study could mean that the growth in demand for cryptocurrencies could affect precious metals liquidity and trading volumes.
Another area of interest related to cryptocurrency is its impact on financial assets, investments, and the financial market. For this reason, researchers try to investigate this domain to improve its comprehension. Thus, Andrianto and Diputra (2018) conduct a study in this field and provide its results in the article “The effect of cryptocurrency on investment portfolio effectiveness”. The central purpose of this study is to figure out what effect cryptocurrency has on the “conventional asset investment portfolio” (Andrianto & Diputra, 2018, p. 229). Also, the goal is to trace the risks of producing cryptocurrency in the conditions of a specific model observed. Investor opportunities are assessed in terms of developing investment portfolios to maximize profits and avoid the threat of losing a significant part of the capital.
The authors note that to acquire credible data, it is critical to take the period from December 2013 to December 2016 as it will show the peculiarities of cryptocurrencys rise and it is becoming a potent asset. The sampling includes data from these periods compared to other financial indicators. However, commenting on sampling, it should be said that according to Cheah and Fry (2015), “the historical record alone will not be sufficient to quantify the true level of risk in the market” (p. 34). As Pavlovski (2015) remarks, a relevant security policy should be ensured to secure existing assets and prevent the production of cryptocurrency losses. Also, the author notes that the spread of virtual money with a decrease in the manufacturing of precious metals is due to the natural development of society towards digital progress (Pavlovski, 2015).
Nevertheless, Andrianto and Diputra (2018) implement the Modern Portfolio Theory approach as the mean of assessing an opportunity to develop an investment portfolio. Specific assets are used to compare the outcomes of the study. Three types of cryptocurrency are used as tools for intervention. Risk assessment as a percentage is conducted to draw up a comprehensive picture of the work performed and, consequently, to find ways to deal with potential financial threats.
The authors conclude that the effectiveness of the portfolio may be increased in two separate ways through the introduction of the model with cryptocurrency. Firstly, the standard deviation is minimized, which, according to Andrianto and Diputra (2018), can allow calculating the success of using this method of work. Secondly, investors receive a real opportunity to choose the possibility of allocating money without fear of losing a significant part of their financial resources because of dynamic rates and a drop in positions in the exchange market.
Altogether, utilization of the Modern Portfolio Theory helps to implement investments successfully and avoid fiat risks through the comprehensive monitoring of financial transactions and profit dynamics (Cuardas-Morato, n.d.). The approaches described above prove that the modern information field allows tracking the market of the cryptocurrency to make timely decisions regarding asset management. However, the lack of thoughtful methods, on the contrary, is fraught with losses caused by financial risks and volatile exchange rates.
As it has already been stated, there are some concerns related to the reliability of Bitcoin because of the nature of this cryptocurrency. That is why researchers also analyze the popular idea it can be a financial bubble. For instance, in the article “Speculative bubbles in Bitcoin markets? An empirical investigation into the fundamental value of Bitcoin”, Cheah and Fry delve into the factors that precondition the high value of this financial asset.
The purpose of the study is to investigate “economic and econometric modeling of Bitcoin prices” and assess how the production of precious metals can interact with the cryptocurrency (Cheah & Fry, 2015, p. 32). Also, the authors’ study is aimed at finding the factors affecting the formation of the Bitcoin course and the work of the virtual money market (Cheah & Fry, 2015). The fundamental value of the cryptocurrency under consideration is the basic direction of research. In the paper, the production of precious metals is compared with the manufacturing of cryptocurrency, and the perspective is calculated by using formulas. Assumptions regarding the influence of economic factors on the growth and decline in the prices of virtual money are extorted. The authors argue that “Bitcoin’s digital mining processes are intended to replicate the production costs associated with precious metals” (Cheah & Fry, 2015, p. 33).
Thus, analyzing sampling peculiar to the article, it should be said that other researchers provide similar ideas. Andrianto and Diputra (2018) cite the example of the cryptocurrencys prices and note that “Bitcoin issued in 2009, the value is not more than USD 10, but in early June 2017, Bitcoin is worth about USD 3000” (p. 229). Also, they argue that volatility is one of the features that are typical for virtual money (Andrianto & Diputra, 2018). “The precious metal was substituted for a minted form of paper currency” (Pavlovski, 2015).
In the course of the investigation, Cheah & Fry (2015) assume that the behavior of Bitcoin in the financial market is more like an asset than a cryptocurrency. The outlook for development does not provide accurate forecasts regarding the growth or fall in value. “Bitcoin’s main attraction seems to lie in being an object of speculation instead of functioning as money” (Cheah & Fry, 2015, p. 34). The value of precious metals is not compared with the cryptocurrency since, for instance, gold can be exchanged for services or goods. The behavior of markets depends on the interaction between the fiat risk and return.
Altogether, the authors argue, “the fundamental value of Bitcoin is zero” (Cheah & Fry, 2015, p. 35). Speculative procedures are the typical feature of the work of the cryptocurrency markets. Academic studies on Bitcoin are insufficient to make comprehensive conclusions regarding the possible the currency’s tendencies to fall and grow. Compared to precious metals, the risk of producing cryptocurrency is high, since there are not enough opportunities to be realized with the help of virtual money.
Finally, speaking about works devoted to the investigation of Bitcoin and its ability to impact the banking sphere, another article should be mentioned. Pavlovski (2015) in his paper “Reference architecture for cryptocurrency in banking” study the possibilities of using cryptocurrency in the banking sector and the introduction of this asset in the financial production processes. According to the author, “the availability of a practical electronic currency has only recently gained actual adoption” (Pavlovski, 2015, p. 74). A framework for investigating the impact of cryptocurrency on the financial activities of banks is proposed, and potential risks are assessed based on the effect on existing assets.
The fact is that as Cheah and Fry (2015) note, “the status of Bitcoin as an alternative currency or another kind of speculative asset is still unclear and subject to on-going debate” (p. 33). At the same time, Andrianto and Diputra (2018) assume that investors with high-risk tolerance prefer to implement virtual money in their activities, and banks with a stable financial base may allow this initiative. For this reason, the basis for the selection of the given topic and particular sampling is the fact that “cryptocurrencies have received considerable attention recently by consumers and merchants” (Pavlovski, 2015, p. 74). That is why the relevance of the given research cannot be doubted.
To conduct a study, the author proposes “a reference architecture for supporting two forms of electronic currency” (Pavlovski, 2015, p. 74). Also, the relationship between cryptocurrency and standard cash is considered for compiling the comparative analysis of opportunities and risks. Supporting systems are described as methods for avoiding potential threats. Visual schemes are made for the easy perception of the results obtained.
Thus, Pavlovski (2015) states that banks with high-risk tolerance can allow using cryptocurrency as one of the assets. The effectiveness and performance of security protocols are the most important features that ensure the safety of electronic money. Cryptocurrencies are unlikely to displace paper money and precious metals from financial markets. However, an increasing number of people prefer to use virtual currency as a means of payment. For this reason, the author concludes that the use of cryptocurrencies in the banking sector is acceptable if a particular organization has sufficient capacity to protect assets. The value of electronic money is high on the Internet, but in a normal financial environment, some risks arise, and the application of traditional currency and precious metals is still relevant. The choice of clients in favor of cryptocurrencies may be due to the convenience of paying for services and exchange.
In such a way, all these works prove the idea that the modern financial markets are impacted by cryptocurrency that has become a real perspective to such traditional options as precious metals. At the same time, the manufacturing of Bitcoin is opposed to the production of metals as a resource-demanding process is replaced with a new one that rests on calculations and other tasks performed by computers. That is why a new form of financial assets is considered an appropriate perspective to the old ones. At the same, there is the need for further investigation to acquire data about the relevance of cryptocurrency and its ability to satisfy growing demands.
Analysis of Research Methodologies
The investigation of the problem shows that the majority of authors are united in the necessity to analyze how the production of and oscillations in the course of Bitcoin are reflected in different journals to understand the existing attitude to the cryptocurrency and its future. In such a way, literature review remains one of the central methods. However, there are also original researches that collect different data sets related to factors that impact Bitcoin.
For instance, Sovbetov (2018) uses the ARDL technique to establish the correlation between the variables which are the price of coins and market beta, capitalization, trading volume, and SP500 index were. It helps to understand the situation in the market and predict the further development of coins. There is also a research method that presupposes the creation of detailed models that can be utilized to predict the way Bitcoins impact the market, prices for precious metals, and other assets (Andrychowicz, Dziembowski, Malinowski, & Mazurek, 2014). Bohr and Bashir (2014) in the research create specific graphs that represent his model and demonstrate the velocity of these cryptocurrencies if to compare with USD value, Satoshi Dice volume, and precious metals, which turns out to be an efficient approach.
Another methodology that is used is the in-depth investigation of the cost of production of all known cryptocurrencies including the price of electricity, hardware, and energy consumption. This method becomes central while comparing this option to the traditional use of precious metals as the way to enter markets or finance different ventures. Finally, researchers investigate the ability of coins to impact the market by tracing alterations that happened under the impact of its blistering rise (Bohr & Bashir, 2014). These methods contribute to a better understanding of the topic and its comprehensive investigation.
Analysis and Evaluation
From the literature mentioned above, we can understand that Bitcoins are one of the main factors impacting the modern financial market. The blistering rise of multiple cryptocurrencies triggered various processes in the world. However, it endangers a traditionally potent position of precious metals which has been used as the central financial assets and objects of interest for investors. Moreover, the weakening of their position impacts fiat money that does not have intrinsic value but is opposed to those which has it. In such a way, differences in the position of Bitcoin affect the whole market and other financial tools that have a significant impact on the global market. There are multiple fears related to the nature of these coins. The use of cryptocurrency presupposes complete confidentiality and the absence of monitoring (Biryukov, Khovratovich, & Pustogarov, n.d.). It creates the basis for the emergence of multiple uncontrolled flows of money that will be used for transactions on the Internet. This tendency might have a pernicious impact on the governments ability to regulate inflation and introduce appropriate measures to attain its needed levels.
Regarding these facts, oscillations in cryptocurrencies prices and their velocity might pose a significant threat to the traditional financial system, the market of precious metals, and fiat money. The increase of fiat risks can also trigger the development of various processes in countries where they are introduced (Biryukov et al., n.d.). At the same it, it can precondition the emergence of undesired changes in the global economy and financial crisis. For this reason, the investigation of the problem becomes critical for the creation of the appropriate solution.
Recommended Research Design
The significance of the problem contributes to the emergence of a need for deep research of the way Bitcoins, and other cryptocurrencies might impact the worlds financial market and how precious metals and fiat money will react to the empowerment or weakening of Bitcoin. As it has already been stated, there is a specific correlation between the price of cryptocurrency and precious metals that come from the high potential of this payment method (Caporin et al., 2015). Even though manufacturing processes are different, they both demand resources. For this reason, one of the possible research designs is the comparison of resources and money needed to create a particular amount of Bitcoins and precious metals. Furthermore, the paying capacity of these pieces and their position in the market should be compared. It will help to understand the opportunities and the potential for investments (Wolfson, 2018). At the same time, the level of inflation in countries using Bitcoins most of all during the period of its rise should be analyzed to outline its impact on fiat money, and governments ability to monitor the state of the financial sector. The slightest alterations will help to understand whether Bitcoins have a pernicious impact on the worlds economy or not.
Conclusion and Future Research
Altogether, cryptocurrency can be considered an important tool in the modern financial sphere. Its central advantage is another approach to its manufacturing and the possibility to be used on the Internet that becomes the main platform for various deals. However, the rise of this payment method might threaten the position of precious metals and fiat money because of the emergence of a direct rival and numerous opportunities for new investments (Caporin et al., 2015). For this reason, future research should be focused on the investigation of Bitcoins ability to become the central financial asset that will attract the attention of all potent players and replace other currencies that are not so innovative. The understanding of these mechanisms is fundamental for further analysis.
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