Introduction
Cryptocurrency is a growing conventional financial system that has massively impacted modern financial practices and theories. The public lost trust in the conventional banking system after the 2007-2008 global financial crisis. The 2007-2008 global financial crisis occurred due to the lowered housing prices and the increased number of those who took loans but could not pay (Aslan & Sensoy, 2020). This happened because the banks provided cheap credit with loose borrowing restrictions. Attempts to recoup the money borrowed resulted in people losing their homes, possessions, and employment. The banks were left with trillions of dollars in unprofitable investments. Beyond the financial institutions, the crisis has affected international central banks, including Goldman Sachs, JP Morgan, and Morgan Stanley. The crisis was solely attributed to the financial institution giving unrestricted and uncollateralized lending, leading to a liquidity shortage (Houben & Snyers, 2020). As a result, financial institutions dented their reputation at an international level. A digital currency was birthed from this distrust of banks. Cryptocurrency was introduced to respond to some of the inequities by financial institutions. For instance, the need for a system that would allow people to transact with many efficiencies, such as the cost of transactions and urgency, and without the banks as intermediaries for every transaction.
Theoretical framework
Cryptocurrency is a digital currency that provides transactional security using cryptography. Unlike banks which issue regulatory authority at a central position to record and keep a tab on transactions, transactions in crypto are described digitally and do not require verification (Houben & Snyers, 2020). Cryptocurrency is a peer-to-peer system that allows users to transact anywhere, anytime. The system first replaces traditional financial theories by replacing physical money with digital money. Transactions carried out in Cryptocurrency are recorded in a public ledger, and the currencies store in private wallets. Transactions are also secured since they are sent under encryption which needs verification to complete. This means storing currency in wallets, transfers, and exchange involves advanced coding as security measures.
Bitcoin is still the most popular Cryptocurrency since it was founded in 2009 (Afzal & Asif, 2019). The currency units are created by mining which involves arithmetical solutions done using a computer and requires much energy to run a computer system. The coins from mining are created and end up with users through brokers and are stored in crypto wallets. The digital currencies are distributed through blockchain, and the holders hold and update the transactions. Holders of the currencies own an encrypted key that allows them to transfer the units freely to other people without a third party. Cryptocurrency is gaining significance in conventional financial systems and is massively impacting modern financial practices and theories. The use is getting more popular since digital currency works as an independent variable, beating the modern financial theories dictated by financial institutions (Charfeddine et al., 2020). For instance, transferring digital coins only requires the holder to have the key, while bank transactions require banks or other financial institutions to be the third party. As an independent variable, digital currency also does not have a central place where the transactions are generated since every holder can generate a transaction. These traditional theories and practices by the financial institutions informed the invention and need for digital currency to allow users to conduct transactions efficiently, seed, and without a third-party player. Even though Bitcoin has been used since its invention in 2009, digital currency and blockchain technology have increased.
Literature review
Currently, multiple businesses and startups are trading Cryptocurrency. Cryptocurrencies have considerably helped in the exponential global expansion of online trading. The growth of the digital currency market enables efficient and discreet international trade while increasing financial liquidity. Cryptocurrency was initially explored in 1989, and a year later, David Chaum developed digital cash, which cleared the way for the development of pure independent digital money(Jebran, 2020). Bitcoin was the first digital currency founded in 2008 by Satoshi Nakamoto. Without an institutional broker, Bitcoin allows direct transfers between two parties. Nakamoto explains that transactions without financial institutions playing intermediaries are more secure. After the creation of Bitcoin, the digital currency proliferated between 2010-2014 after the foundation. As the price of Bitcoin began to rise dramatically, other digital currencies like Litecoin and Ripple entered the market (Alam & Zameni, 2019). According to (Rejeb et al., 2021), online trading peaked in 2012 at more than USD 1 trillion and has grown by about 15% annually. Similarly, estimates of Bitcoin usage indicated 60,000–70,000 transactions daily, totaling between € 15 and € 30 million. Because of digital currency’s quick, inexpensive, and effective nature, many significant transactions are possible. Sceptics received the adoption of the new digital currency as people gradually accepted it. Due to a lack of regulation, from 2014 to 2017, bitcoin saw an age of fraud, during which new crypto was created quickly, and with the aid of ICOs (initial coin offerings), numerous crooks stole millions from consumers. Cryptocurrencies have been controversial and debated due to scams and curiosity. However, there has been an increase in market interest since 2010, which has resulted in increased investment and acceptance (Alam & Zameni, 2019). Additionally, the cryptocurrency market is experiencing tremendous growth because of the attraction of transparency and confidentiality. Ide (2023) states that the adoption of cryptocurrencies from 2019 to 2021 has been immense, and there has been a massive rise in interest from regulatory organizations in more regulation due to customer concerns. The significance of Cryptocurrency is pegged on its pricing, which is a dependent variable. Bitcoin market price in USD is used as a dependent variable. Kozachenko et al. (2022) explain that as a new asset, the digital currency has emerged in new studies of its economic behavior in a global financial market. The interest in this new asset is mainly on its rapid rise and its interest in the financial market. The lack of a central authority that oversees and maintains the monetary worth of Bitcoin and the knowledge that its value is predicated on the expectation that the digital currency will maintain its growth makes it highly susceptible to facts and market fluctuations. There are still chances to profit from Bitcoin’s liquidity and volatility (Calcaterra et al., 2020). Three factors influence the dependence on Cryptocurrency; microeconomic factors such as the stock exchange index and dollar quotation (Civelli & Jackson, 2023). Secondly, it is affected by value attractiveness, such as the rate of increased interest in the currency, as indicated by its gradual appreciation. Lastly, it is also affected by the dynamics that exist between supply and demand. Modern portfolio theory is one of the modern financial theories that resonates with Cryptocurrency as an independent variable. The theory states that risk elimination can be conducted by creating a diversified portfolio. This has been an issue with financial institutions since they operate in a traditional system that has centralized risk by having a concentrated risk in a centralized system. For instance, the global financial crisis was due to the dependent centralized system in the global banking system. The liquidity crisis affected different parts of the world due to a lack of risk distribution.
Discussion
By examining Cryptocurrency as an emerging asset class, it is crucial to explore the implication of digital currency in the financial sector, dissecting traditional practices and theories by the bank that will be more effective using crypto. Cryptocurrency payments may be made between wallets or accounts without the involvement of a third party, which lowers transaction costs and improves security and anonymity. The cheap transaction costs that the Bitcoin system provides consumers give it the edge over other payment methods in popularity. Berg et al. (2019) claim that combining cryptocurrencies with blockchain technology can reduce the cost of reliability, a crucial component in the financial system, in various ways. These expenses include commissions paid to the third-party financial institution, contract entry and maintenance fees, negotiation costs, cybersecurity costs, and authorization charges. Customers must trust banks to protect their funds and act on their interests. Due to its conventional practices and theories, the financial industry faces several difficulties and has recently gone through crises. For instance, the global financial crisis of 2008 caused millions of individuals to lose their livelihoods and properties. Financial institutions with centralized systems are more likely to experience societal losses and dangers due to concentrated risks, assert Calcaterra, Kaal, and Rao (2020). Cryptocurrencies have the potential to solve a number of issues inherited from the current financial institutions, such as disintegration risk and other issues, including a lack of confidence, ineffective transactional methods, and volatility.
Secondly, Cryptocurrency enhances efficiency due to its shorter settlement time in its transactional process than conventional payment methods. The short settlement period could also solve settlement disruptions during the settlement process. Transactions in conventional banking systems might take longer, unlike in digital currency, which takes an incredibly shorter time despite the complexity of the transaction. Money transfers could be dangerous in the real world, but users of Cryptocurrency can do them fast and covertly. Due to their efficacy, the Bank of England has raised awareness about the potential use of cryptocurrencies to speed up settlements between banks. Calcaterra & Kaal (2021) states that several players in the financial services sector assert that the availability of cryptocurrencies might be a workable replacement for financial institution settlement instruments that lower risk and boost the effectiveness of commercial financial transactions. Additionally, using cryptocurrencies may eliminate the need for banks to maintain transaction accounts on their financial statements. A single shared ledger, such as a blockchain, may instead store all cryptocurrency transactions to simplify banking arrangements. Auer (2019) explains that the proof-of-work approach is often employed in cryptocurrency settlements; all transactions are recorded on a blockchain, protecting users from fraud and enhancing effectiveness by making transactions tractable.
Criticism
The rapid growth of Cryptocurrency has also been met with criticism, typical of new developments in every sector. Despite the numerous advantages of traditional financial institutions, the digital payment system has risks. The concerns, especially in integrating digital currency in a widescale or global financial system, emerge from a point of concern about the absence of legislation control or a centralized control standard. Due to their capacity to subvert established regulatory frameworks and circumvent governmental control over fiscal policy, cryptocurrencies are often linked to illicit activity. Similarly, cryptocurrencies are considered one of the world’s biggest uncontrolled marketplaces. Most European nations lack Cryptocurrency use rules or regulations (Alonso & Luis, 2019). Transactions based on cryptocurrencies are decentralized, making them more challenging to track and potentially assisting in the concealment of illegal activity. Since the advent of digital currency, black markets have been revived to the advantage of their anonymity. The expansion of illegal online marketplaces is accelerating due to digital money. Due to the anonymity in its transactional system, it is challenging to pin down the identities of the users; thus, bitcoin is actively resurrected illicit marketplaces and offers a variety of options for safe means of payment for such activities. Due to its ability to circumvent government enforcement, Bitcoin is the ideal instrument for conducting transactions and other financial interactions in the black market (Nani, 2022). The structure of the illicit markets could shift due to digital currencies. According to Senjyu et al. (2021), cryptocurrencies are frequently employed in criminal dark web platforms to facilitate selling of illicit drugs, firearms, and other illegal commodities. Using bitcoins similarly promotes criminal activities such as money laundering, and the drug trade is encouraged. Due to this, the security of people’s livelihood, activities, and earnings is threatened by the widespread existence of illicit markets in regulated economies.
Lastly, Environmental sustainability concerns are linked to mining cryptocurrency coins. Cryptocurrencies have garnered negative press by allegations that cryptocurrencies use a significant amount of energy and harm the environment. Bitcoin is expected to spread into other fields and impact other businesses as they become more well-known and popular. Blockchain, the underlying technology of cryptocurrencies, significantly relies on using power-hungry computation, graphics processing units, and energy usage to mine coins. According to Vaz and Brown (2020), transactions made by Bitcoin require about fifty-eight times as much energy as payments made using visa transactions. The authors contend that even though Visa depends on several financial and institutional systems that require vast amounts of energy to operate is nowhere near compared to the transaction by Bitcoin transaction.
Conclusion
In conclusion, the flaw in the conventional banking system contributed to the emergence of digital currency. Cryptocurrency was invented in 2008 during the global financial crisis that impacted the liquidity of currency negatively, causing loss of livelihood and properties. The public lost trust in the traditional banking system, practices, and theories. Cryptocurrency has been used to fill in some ineffectiveness by traditional banks. For instance, it breaks the barrier intermediaries, which contributes to inconveniences. For instance, the need for a system that would allow individuals to transact efficiently, such as the cost of transactions and urgency, and without the banks as intermediaries for every transaction. However, Cryptocurrency has been criticized for inefficiency. The digital currency has facilitated the black market, which has promoted illegal trade such as money laundering, drug trafficking, and the sale of firearms. It has also been associated with environmental pollution since the mining of coins requires the use of massive powered computers.
Reference
Afzal, A., & Asif, A. (2019). Cryptocurrencies, blockchain, and regulation: A review. The Lahore Journal of Economics, 24(1), 103-130. https://www.academia.edu/download/86730094/05_20LJE01_20Afzal_20ED_20AAC_20ttc.pdf
Alam, N., & Zameni, A. (2019). Existing regulatory frameworks of Cryptocurrency and the Shari’ah alternative. Halal Cryptocurrency Management, 179-194. https://link.springer.com/chapter/10.1007/978-3-030-10749-9_12
Alonso, S. L. N. (2019). Activities and operations with cryptocurrencies and their taxation implications: The Spanish case. Laws, 8, 1. https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/laws8§ion=20
Aslan, A., & Sensoy, A. (2020). Intraday efficiency-frequency nexus in the cryptocurrency markets. Finance Research Letters, 35, 101298. https://www.sciencedirect.com/science/article/pii/S1544612319308025
Auer, R. (2019). Beyond the Doomsday Economics of “Proof-of-Work” in Cryptocurrencies–Globalization Institute Working Paper No. 355–Dallas Fed. https://policycommons.net/artifacts/1699950/beyond-the-doomsday-economics-of-proof-of-work-in-cryptocurrencies-globalization-institute-working-paper-no/2431598/
Berg, C., Davidson, S., & Potts, J. (2019). Blockchain technology as economic infrastructure: Revisiting the electronic markets hypothesis. Frontiers in Blockchain, pp. 2, 22. https://www.frontiersin.org/articles/10.3389/fbloc.2019.00022/full?ref=keennotes.net
Calcaterra, C., & Kaal, W. A. (2021). Decentralized Finance (DeFi). DECENTRALIZATION TECHNOLOGY’S IMPACT ON ORGANIZATIONAL AND SOCIETAL STRUCTURE, DEGRUYTER PUBLISHERS (2021). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3782216
Calcaterra, C., Kaal, W. A., & Rao, V. (2020). Stable cryptocurrencies: First order principles. Stan. J. Blockchain L. & Pol’y, 3, 62-64. https://assets.pubpub.org/ndc8dfu4/11578223064725.pdf
Calcaterra, C., Kaal, W. A., & Rao, V. (2020). Stable cryptocurrencies. Wash. UJL & Pol’y, 61, 193. https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/wajlp61§ion=12
Charfeddine, L., Benlagha, N., & Maouchi, Y. (2020). Investigating the dynamic relationship between cryptocurrencies and conventional assets: Implications for financial investors. Economic Modelling, 85, 198-217. https://www.sciencedirect.com/science/article/pii/S0264999318310691
Civelli, A., & Jackson, L. E. (2023). Cryptocurrencies, Stocks, and Economic Policy Uncertainty: A FAVAR Analysis. Available at SSRN 4375132. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4375132
El Mahdy, D. (2021). The economic effect of Bitcoin halving events on the US capital market. Accounting and Finance Innovations, p. 65. https://books.google.com/books?hl=en&lr=&id=27ZaEAAAQBAJ&oi=fnd&pg=PA65&dq=The+2007 2008+global+financial+crisis+and+cryptocurrency&ots=FVDWnMxsGn&sig=r41Nvf_xUWV88QVygqLyoZnLxhU
Houben, R., & Snyers, A. (2020). Crypto-assets: Key developments, regulatory concerns, and responses. https://repository.uantwerpen.be/docstore/d:irua:463
Ide, J. (2023). Analyzing the Value, Function, and Regulation of Cryptocurrency. https://digitalcommons.liberty.edu/honors/1287/
Mikhaylov, A., Danish, M. S. S., & Senjyu, T. (2021). A new stage in the evolution of cryptocurrency markets: Analysis by Hurst method. In Strategic outlook in business and finance innovation: Multidimensional policies for emerging economies (pp. 35–45). Emerald Publishing Limited. https://www.emerald.com/insight/content/doi/10.1108/978-1-80043-444-820211004
Nani, A. (2022). The Doge worth 88 billion dollars: A case study of Dogecoin. Convergence, 28(6), 1719-1736. https://journals.sagepub.com/doi/abs/10.1177/13548565211070417
Pakhnenko, O., Rubanov, P., Girzheva, O., Ivashko, L., Britchenko, I., & Kozachenko, L. (2022). Cryptocurrency: Value formation factors and investment risks. Journal of Information Technology Management, 14(Special Issue: Digitalization of Socio-Economic Processes), 179-200. https://jitm.ut.ac.ir/article_88896.html
Rejeb, A., Rejeb, K., & Keogh, J. G. (2021). Cryptocurrencies in modern finance: a literature review. Etikonomi, 20(1), 93-118. https://pdfs.semanticscholar.org/a898/14602f23e1b0d092aa396b056c6cc335371b.pdf
Umar, M., Hung, N. T., Chen, S., Iqbal, A., & Jebran, K. (2020). Are stock markets and cryptocurrencies connected? The Singapore Economic Review, 1-16. https://www.worldscientific.com/doi/abs/10.1142/S0217590820470050
Vaz, J., & Brown, K. (2020). Sustainable development and cryptocurrencies as private money. Journal of Industrial and Business Economics, 47, 163-184. https://link.springer.com/article/10.1007/s40812-019-00139-5
write