Economic Analysis of Cryptographic Currencies on the Basis of Bitcoin

Table of Contents

1 Introduction

1.1 Course of investigation

1.2 Information on linguistic usage

2 The evolution of money

2.1 Functions of money

2.1.1 Medium of exchange

2.1.2 Measure of value

2.1.3 Store of value

2.2 Characteristics of money

2.3 Creation of money

2.3.1 The European Central Bank

2.3.2 Money creation by commercial banks

3 The concept of cryptocurrencies

4 The infamous Bitcoin

4.1 History

4.2 How Bitcoin works

4.2.1 Double spending

4.2.2 Creation of Bitcoins

4.2.2.1 Difficulty

4.2.2.2 Mining

4.2.2.2.1 Solo Mining

4.2.2.2.2 Pool Mining

4.2.2.2.3 Time and costs

4.2.2.2.4 Revenue by mining

4.2.2.3 Alteration of the Bitcoin protocol

4.3 Characteristics of Bitcoin

4.3.1 Transaction security

4.3.2 Transaction fees

4.3.3 Storage security

4.3.4 Counterfeit protection

4.3.5 Anonymity

4.3.6 Irreversible payments

4.3.7 Volume of bitcoins

4.4 Forms of trading with Bitcoin

4.4.1 Wired transfer

4.4.2 Near Field Communication (NFC)

4.4.3 QR-Code

4.4.4 Coins

4.4.5 Debit cards

4.5 How to acquire bitcoins

4.5.1 Bitcoin exchanges

4.5.2 Mining

4.5.3 ATM machine

4.5.4 Donations

4.5.5 Businesses accepting bitcoins

5 SWOT analysis

5.1 Strengths

5.2 Weaknesses

5.2.1 Volatility

5.2.2 Supply shortage

5.2.3 Energy Consumption

5.3 Opportunities

5.3.1 Independent online payments

5.3.2 Micropayments

5.3.3 Developing countries

5.4 Threats

5.4.1 Crime

5.4.1.1 Silk Road

5.4.1.2 Money laundering

5.4.1.3 Botnet

5.4.2 Risks

5.4.2.1 Risk of loss

5.4.2.2 Risk of prohibition

5.4.2.3 51% Attack

5.4.2.4 Niche currency

6 Classification of bitcoin

6.1 Taxation

6.2 Comparative Analysis

7 Theory of speculative bubbles

7.1 Dutch tulip mania

7.2 Digital gold fever

8 Scenario Analysis

9 Discussion

9.1 Matter of trust

9.2 The great scheme

9.3 The evil Bitcoin

9.4 The question of questions

9.5 Deflation versus Inflation

10 Conclusion

11 Appendix: Excursus on hash function

12 Bibliography

Research Objectives & Topics

The primary research objective of this thesis is to conduct an economic analysis of cryptocurrencies, specifically focusing on Bitcoin. The central research question seeks to evaluate how Bitcoin functions, identifying its benefits and risks, determining how its price is established, assessing whether it can be currently identified as money, and predicting future developments for the Bitcoin system.

• Theoretical evolution of money and fundamental economic functions
• Comprehensive analysis of the Bitcoin protocol, creation, and transaction mechanics
• Evaluation of Bitcoin through a SWOT analysis (strengths, weaknesses, opportunities, threats)
• Classification of Bitcoin in the context of current economic theories and taxation
• Discussion of Bitcoin in relation to speculative bubbles and future scenarios

Excerpt from the Book

Summary of Chapters

1 Introduction: This chapter introduces the rise of Bitcoin, its emergence from the 2007 financial crisis, and establishes the core research questions regarding its nature and future sustainability.

2 The evolution of money: This section details the fundamental functions and characteristics of money, tracing its development from barter systems to modern electronic and fiat currencies to establish a basis for evaluating Bitcoin.

3 The concept of cryptocurrencies: This chapter defines cryptocurrencies as a digital medium of exchange and an administrative system, while distinguishing between open source and closed source software models.

4 The infamous Bitcoin: This comprehensive chapter explores the history of Bitcoin, its decentralized workings, mining processes, protocol alterations, and various practical characteristics like security, anonymity, and acquisition methods.

5 SWOT analysis: This analytical section performs a SWOT evaluation of Bitcoin, covering its technological strengths, volatile weaknesses, opportunities in payments and developing countries, and threats involving crime and regulatory risks.

6 Classification of bitcoin: This chapter examines the classification of Bitcoin, arguing against its simplistic identification as fiat money and discussing its treatment under taxation regimes.

7 Theory of speculative bubbles: This section provides a theoretical framework for speculative bubbles, illustrating their emotional nature through historical examples like the Dutch tulip mania and the specific case of Bitcoin's price development.

8 Scenario Analysis: This chapter presents various hypothetical future outcomes for Bitcoin, ranging from extinction to potential dominance as a payment system, ranked by their relative probability.

9 Discussion: This section engages in a critical discussion regarding trust, the "Ponzi scheme" allegations against Bitcoin, its relation to illicit activities, and whether it qualifies as money under economic regression theories.

10 Conclusion: The final chapter summarizes the findings, reiterating that while Bitcoin is not yet money in the traditional sense, it holds significant potential as a transactional system, provided it overcomes its volatility and regulatory challenges.

Keywords

Bitcoin, Cryptocurrencies, Money, Blockchain, Mining, Double spending, Volatility, SWOT Analysis, Speculative Bubbles, Taxation, Peer-to-Peer, Transactions, Decentralization, Electronic Money, Satoshi Nakamoto

Frequently Asked Questions

What is the core subject of this thesis?

The work provides an objective economic analysis of cryptocurrencies, with a primary focus on Bitcoin as its most significant representative.

What are the central topics covered?

The thesis covers the evolution of money, the technical functioning of the Bitcoin protocol, a SWOT analysis of the currency, its classification regarding taxation, and a discussion of its susceptibility to speculative bubbles.

What is the primary research goal?

The goal is to understand how Bitcoin works, what its benefits and risks are, how its price is determined, whether it qualifies as a form of money, and what its future development might look like.

Which methodology is employed?

The author uses a qualitative research approach, including a review of existing literature, technological evaluation of the Bitcoin protocol, a SWOT analysis, and the application of economic theories such as Mises' regression theorem and Gresham's Law to analyze Bitcoin's nature.

What does the main body explore?

It details the technical history and mechanics (mining, blocks, wallets), identifies strengths and weaknesses (volatility, energy consumption), evaluates opportunities (online payments, developing countries), and analyzes threats (crime, prohibition, 51% attacks).

Which keywords characterize the work?

The most relevant keywords include Bitcoin, Blockchain, Mining, Double spending, Volatility, Speculative Bubbles, and Decentralization.

How does the author categorize Bitcoin in terms of money?

The author argues that while Bitcoin is used as a medium of exchange, it currently lacks the necessary widespread acceptability and store-of-value stability to be fully identified as money in the classical sense.

What is the "New Technology" phenomenon mentioned?

It is a phenomenon where the efficiency gains from new, more powerful mining hardware are negated by increased adoption and competition, leading to a rise in total network difficulty, mining time, and ultimately higher total electricity consumption.

How does the author view the risk of Bitcoin being used for illegal activities?

The author acknowledges the use of Bitcoin in illegal markets (like Silk Road) and for money laundering but notes that the scale of such activities is vastly smaller compared to the estimated volume of money laundering performed with fiat currencies.