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Chapter 4 Bitcoin Analysis
4.1 Past Studies
Given the relatively new development of this digital currency, it is hard to find relevant data and researchers in the area. Even though the beginning of Bitcoin’s existence appears to be 2008, it was not until the prices of the Bitcoin started to rise since the year 2013, as shown in Figure 18 below, that it has attracted worldwide attention.
Figure 18 Average USD market price across major Bitcoin exchanges Source: Blockchain (2017)
However, in recent years there are some studies which show both very positive results about the Bitcoin situation and at the same time wrong concepts and ideologies of this digital currency, being one of the worst characteristics, its volatility and therefore uncertainty that it brings to its holders.
One of the main beliefs which started very early is the fact that people complain about the manipulation from central banks in the supply of money according to their necessities, mainly for political and economic gains among other reasons; cryptocurrencies, therefore, have a great opportunity to replace fiat currencies. Indeed, they are starting to have an impact on the currency market (Staiger and Sykes, 2010).
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For Kaplanov (2012) the reason why many people start using this new digital currency is because they are looking for a currency which is free from any regulation. In other words, people are refusing to trust governments and their currencies. This example might be definitively the case of Latin America in which the financial crisis has created a lack of confidence in their government and financial institutions.
As with any other currency, if it cannot be used to purchase something, there will be no value given to it, but the fact that many retailers accept Bitcoin on their websites also makes this digital currency more trustworthy in the eyes of its users. This move will create at the same time a consensus among sellers that the idea of digital currency is a positive one (Rice, 2013).
Finding papers more related to what this report is trying to focus on is hard, and the amount of research done for the Latin-American region is even more scarce. Nonetheless, there is still some analysis direct to emerging and developing economies as a whole; Latin America fitting this selection means those researchers also need to be taken into consideration.
Carrick (2016) conducted a fascinating research exploring the use of Bitcoin not as a replacement of fiat currencies, but instead as a complement to them. In more detail, his research focuses on the study of Bitcoin because it is the first currency to reach such traction, as a complement to emerging market currencies. In his findings, he first actually compares major currencies such as USD, EUR, AUD, GBP, JPY and it is clear that Bitcoin is not as stable as these major currencies. When comparing Bitcoin to emerging and developing market currencies, while the difference is not as pronounced as in contrast with major currencies, Bitcoin still presents more volatility than currencies in emerging markets. In both cases, Bitcoin
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shows a significant negative correlation between both types of currencies, making it clear that Bitcoin could be used to offset the risk on the market currency basket.
One of the biggest impediment to using this technology “Bitcoin” is the access that developing countries have to the Internet. However, things are changing and by 2015 Internet penetration was above 60% in emerging markets (Agarwal and Wu, 2015), and the trend is expected to continue given the early adoption of new technologies by young people.
Even more accurate to this very paper, (Haesly, K.B, 2016) explicit declare that Bitcoin has the potential to supplement volatile fiat currencies in countries like Venezuela in which capital controls are dysfunctional, and the government mismanages economic policies.
Citizens should take action to obtain financial power and use options such as Bitcoins available at their fingertips.
Looking now at bad comments about Bitcoin, Swartz (2014) is very clear to mention that Bitcoin creates problems for both investors and regulators. The risks Bitcoin bring with it are:
1. A Bitcoin bubble since it has no intrinsic value,
2. It represents a huge risk to investors since it is a speculative investment, and
3. Opposition to regulation, since its law, will increase the demand for Bitcoin, creating the opposite desired effect. It is hard to decide what actions to take against Bitcoin in the case the government would like to take some, if any.
Adding to Swartz (2014), one of the main reasons why scholars have ignored this digital currency is because it is relatively new and the risk it presents cannot be precisely
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analyzed. Because of this, many economists suggest that the usage of Bitcoin should be avoided (Folkinshteyn, et al., 2015). Insufficient data is without any doubt a discouragement for analysts and researchers.
As mentioned earlier, the number of scholars researching on this topic is limited but it is increasing rapidly, and more and more coverage will be given to address to this current hot topic certainty.
So far, different researchers expose different concerns, and no clear direction judging Bitcoin is fine. As a way to escape economic difficulties rather than an investment option, Bitcoin is seen as a medium to empower citizens to take control of their finance and make it possible to evade the many serious problems that countries in developing countries are suffering from. For small countries in economic terms which have little impact on the world economy, the usage of Bitcoin is not seen as a problem but more as a solution. On the other hand, the expansion and usage of Bitcoin in developed economies looks like a problem regarding regulations and presents a risk to investors who are not willing to use this digital currency but store it only as a profitable speculative purchase.