Popularity of the cryptocurrency concept in the global financial community has surged in recent years. Patrons of the novel digital currencies have increased in recent periods. The term cryptocurrency comprises two significant words. These include ‘crypto’ and ‘currency’. The term crypto connotes ‘hidden’ while currency could be described as a synonym for ‘money’. Thus, cryptocurrency could be explained fundamentally to mean a hidden currency or money (Ashley, 2018). The term crypto is described by Reiff (2020) as complicated cryptography which facilitates creation and processing of virtual currencies and their related transactions across decentralised systems.
Further, the author defined cryptocurrency to include a monetary instrument that is digital or virtual in nature; takes the form of a coin or token; and characterised largely by intangible usage or application in the financial world, with ‘snippets’ of use in the areas of credit cards and other projects.
The European Business Review (2020) believed the term crypto in the name cryptocurrency is indicative of how cryptography ensures the safety of digital financial data; and protects same from hackers. Many cryptocurrencies rely on blockchain technology and platforms for their circulation and usage. Kirk (2016) defined blockchain as a cryptographic ledger in which virtual currency transactions are verified; the transactions are verified by computers contributing data to the blockchain.
Since its introduction and application over a decade ago, the cryptocurrency industry has been inundated with different forms. Reiff (2020) found as of January 2020, there were over two thousand different forms of cryptocurrencies in circulation globally. These cryptocurrencies which come in the forms of coin and token have gained tremendous popularity among committed investors and backers who relish the art of trading in cryptocurrencies across the globe.
The level of evolution witnessed in the global industrial community in recent years is equally witnessed in the global cryptocurrency industry; new tokens are invented almost ‘every day’. Thus, the global financial community may wake up the next day to witness the invention and introduction of greater token or coin than the existing ones.
As Reiff (2020) noted, the list of cryptocurrency types in circulation may not be exhaustive. As a result, few were considered for discussion in the current research. Examples of cryptocurrencies in circulation and considered for discussion in this section included litecoin, bitcoin cash or BCH, tether, libra or LIBRA, EOS, monero or XMR, ethereum or ETH, bitcoin SV or BSV, binance coin or BNB, ripple or XRP, and bitcoin or BTC (Kirk, 2016; The European Business Review, 2020).
The ten afore-mentioned cryptocurrencies were invented and introduced to the global financial market after bitcoin – the eleventh example. Collectively, all cryptocurrencies modelled after bitcoin are called altcoins. As the name implies, these are alternative coins and have the tendency to be introduced as improved or modified versions of bitcoin (Reiff, 2020). Altcoins were invented to serve as alternatives to bitcoin not only in the cryptocurrency industry, but also in the global financial market; and in the global business environment. Altcoins were introduced to address challenges inherent in the functionality of the original cryptocurrency, bitcoin.
During 2011, litecoin was launched and introduced to the cryptocurrency industry and to the global business community in general. Some financial analysts described litecoin as one of the early cryptocurrencies to be invented after bitcoin; and if bitcoin were a gold, litecoin were its silver. Invention of litecoin was credited to Charlie Lee, former Google engineer and graduate of the Massachusetts Institute of Technology (MIT) in the United States of America (USA). Litecoin operates on an open-source global payment network with no central authority control; it employs ‘scrypt’ as a proof of work; and can be decoded with the assistance of computer power units (CPUs) of consumer grade.
Litecoin is similar to bitcoin in many facets. However, the former has superior attributes, such as faster block generation rate and faster transaction confirmation time. The acceptance of litecoin as a medium of transaction among merchants is on the ascendancy in recent years. The foregoing attribute adds up to its growing popularity among programmers and systems developers (Reiff, 2020). Statistics released by Reiff (2020) indicated the respective per-token value and market capitalisation value for litecoin as at 8th January, 2020 were US$46.92 and US$3billion. These values implied litecoin was the sixth-largest cryptocurrency globally during the period.
In August 2017, bitcoin cash or BCH was introduced to the global financial market as one of the legion of cryptocurrencies to be introduced after bitcoin. The introduction of bitcoin cash as a separate digital currency was born out of a split, the by-product of protracted debates and disagreement between developers and miners. The central argument leading to the invention of bitcoin cash is related to the issue of scalability; bitcoin cash needed a block size of eight megabytes while the Bitcoin network maintains a strict block size limit of one megabyte.
Reiff (2020) described BCH as one of the earliest and most successful hard forks of the novel bitcoin. Generally, in the world of cryptocurrencies, arguments and debates between miners and developers result in a fork. This fork or stalemate could result in the split of the affected digital currency – a basis for the ‘birth’ of bitcoin cash. Performance of BCH in the digital financial market is quite encouraging. For instance, as at 8th January, 2020, the respective market capitalisation and per-token values for bitcoin cash were US$4.4billion and US$240.80. Due to the foregoing, bitcoin cash was believed to hold a unique role in the history of altcoins; its per-token value (US$240.80) was the highest during the period.
Volatilities in the global financial markets and business environment in general made it imperative for developers and miners to consider the creation of coins that would ensure stability by pegging value of the newly-created coins to a currency or any other identified external reference point. Consequently, tether was introduced as one of a group of stable coins to iron out price differentials and fluctuations, so as to attract conservative investors and users who hitherto, would have stayed away from the virtual financial markets.
The effectiveness of tether in the cryptocurrency industry is evident in its general performance: as of 8th January, 2020, tether had a value per token of US$1 and market capitalisation value of US$4.6billion. The latter value was superior to the respective market capitalisation values recorded by bitcoin cash (US$4.4billion) and litecoin (US$3billion) during the period. Tether was launched in 2014 as a blockchain-enabled platform, so it could facilitate digital utilisation of sanctioned currencies. Practically, tether allows investors to use blockchain network and related technologies in the transaction of traditional currencies while reducing complexities and volatilities often characteristic of digital currency trading to the barest minimum. As at 16th December, 2020, tether’s market capitalisation value had more than quadrupled – about 4.3 times – to US$19.794billion while its value per token remained at US$1 (Coin Market Cap, 2020).
In early to mid-year 2018, there were speculations in the global cryptocurrency industry about the development and introduction of a new digital currency by Facebook, Incorporated – a leading social media organization – across the globe. On 18th June, 2019, the prior speculations were confirmed; Facebook released a white paper to formally announce and confirm its resolve to create a new digital coin called libra.
However, as of January 2020, Facebook was yet to launch its new digital currency. This notwithstanding, tentative date to launch the libra was 2020. Libra is expected to attract patrons from within and outside the cryptocurrency industry. It is worth re-emphasising the formal announcement by Facebook confirmed earlier speculations about the possibility of Facebook launching its version of the digital coin.
This announcement increased chances of the new digital currency performing very well, given the global reach of Facebook, and volumes of transactions and exchanges across its platform. Launch of libra was delayed partly due to Facebook’s resolve to first address regulatory challenges to ease operations. The functionality of libra would be supervised by Calibra, one of Facebook’s subsidiaries in charge of financial services.
A report by the Financial Times – as cited in Entrepreneur Staff, 2020b – noted postponement of the launch of libra to early 2021. Libra is expected to be a dollar-backed digital currency and its launch would be in a more limited format than earlier predicted. That is, the launch of libra would not include a combination of several currencies owing to pressures from regulatory bodies and banks.
Issuance of libra would be subject to approval of the financial regulator in Switzerland, the Financial Market Supervisory Authority (FINMA), which is in charge of banking supervision, financial markets and insurance firms, among others. Barring any future changes, libra is expected to be launched by the Geneva-based Libra Association. After its launch, libra would compete with digital currencies such as trueUSD (TUSD), tether (USDT) or USD coin (USDC). These tokens are linked to the American dollar and described as relatively stable virtual currencies. The stability makes them suitable for payments or cash transfers.
EOS is a digital coin that has made valuable contributions to altcoins and the cryptocurrency industry in general. This digital currency was invented by Dan Lorimer, one of the pioneers in the cryptocurrency industry. He is noted for establishing the Bitshares exchange and Steemit, a blockchain-based social media platform. The initial coin offering (ICO) of EOS was on record as one of the longest and most profitable in the annals of cryptocurrency history. The ICO of EOS fetched about US$4billion through crowd-sourcing efforts which lasted over a year.
As at 8th January, 2020, EOS had per-token value of US$2.85 and market capitalisation value of US$2.7billion. EOS’ per-token value (US$2.85) was higher than the value recorded by tether (US$1), albeit the latter had a superior market capitalisation value (US$4.6billion) during the period. Generally, traders of EOS are offered a delegated proof-of-stake mechanism. This mechanism is expected to provide scalability beyond offerings by competitors while its complex systems are intended to present a network that is more decentralised, democratic and user-friendly than those operated by its competitors in the cryptocurrency industry.
Similar to the networks of other altcoins, EOS has a platform which allows developers to build decentralised applications. EOS lacks the mining mechanism to generate tokens. As a result, it is described by experts in the cryptocurrency industry as revolutionary (Reiff, 2020).
A digital currency which employs a special technique known as ring signatures to assure complete privacy of traders is monero or XMR. Launched in April 2014, this currency is described as private, secure and untraceable. It was launched with strong emphasis on scalability and decentralisation. Development of monero was completely community-driven and donation-based.
Immediately after its launch in 2014, monero became very attractive to connoisseurs of cryptocurrency and the cryptography community. As at 8th January, 2020, available statistics indicated monero had respective market capitalisation and per-token values of US$994million and US$57.16. However, increased privacy associated with the monero network has spiked notoriety in its usage for criminal activities globally. The foregoing notwithstanding, some analysts believed monero adds significantly to the pool of digital currency inventions in the cryptocurrency industry (Reiff, 2020).
Ethereum is an altcoin that provides strong protection for its traders and users. Invention of this virtual currency included development of a decentralised software platform that allows decentralised applications (DApps) and smart contracts to be built and run. Generally, these software applications are carried out without any interference, fraud, downtime or control from third parties. Ethereum has platform-specific cryptographic token called ether on which its applications are run.
Developers seeking to develop and run applications inside ethereum look for the ether, which navigates like a vehicle on the ethereum platform. Ether was launched in 2015. It has market capitalisation value of US$15.6billion and value per token of US$142.54 – the second-highest after BCH (US$240.80). Ether’s market capitalisation value was the highest among altcoins and the second-highest among all cryptocurrencies after bitcoin; its market capilisation value was equivalent to one-tenth of bitcoin’s value during the period. The pre-launch of ethereum in 2014 had overwhelming response from investors and backers.
Ethereum’s initiative ushered in the era of initial public offering in the cryptocurrency industry. The functions and benefits of ethereum are multi-faceted; its usefulness in codifying, decentralising, securing and trading in the financial and broader business environment cannot be over-emphasised. In 2016, there was an attack on DAO. This resulted in the split of ethereum into ethereum classic (ETC) and ethereum (ETH) (Reiff, 2020; The European Business Review, 2020).
Bitcoin SV or BSV is another digital coin that was born out of stalemate or split. Reiff (2020) noted the acronym ‘SV’ means ‘Satoshi Vision’. Bitcoin SV was derived from a split of bitcoin cash, implying it was created from the original Bitcoin network, following debates and arguments between developers and miners in the bitcoin cash community. A planned network upgrade for bitcoin cash in November 2018 culminated in extended debate and factions; and eventual creation of bitcoin SV.
An observed common thread in the cryptocurrency industry is the emergence of hard fork – end-result of debates and arguments usually between developers and miners, often leading to splits and creation of new digital currencies. Proponents of bitcoin SV argued its invention has important benefits. First, it would facilitate development of other digital coins to increase stability while allowing for scalability in the cryptocurrency industry. Second, it would increase security of traders while improving on transaction processing times.
Finally, bitcoin SV is expected to restore Satoshi Nakamoto’s original protocol. Bitcoin SV’s value per token as of 8th January, 2020 was US$114.43 while its market capitalisation value during the period was US$2.1billion. Bitcoin SV had the third-highest per-token value after bitcoin cash (US$240.80) and ethereum (US$142.54) (Reiff, 2020).
During 2017, the Binance cryptocurrency exchange platform was founded; and in January 2020, Binance was described as an exchange that had evolved to become the largest in terms of trade volumes in the virtual currency industry. Official token of Binance exchange is known as the binance coin or BNB. Payments for certain goods and services – including travel fees, and others – and payments for transaction fees on the Binance exchange could be made using binance coin.
Users of binance coin have the opportunity to trade in multiples of cryptocurrencies on the Binance platform. The respective per-token and market capitalisation values for binance coin as of 8th January, 2020 were US$14.71 and US$2.3billion (Reiff, 2020).
Creation and launch of ripple or XRP in 2012 allowed its developers to emerge with a real-time global settlement network useful for low cost, instant, and certain international payments. Ripple is known as the banker’s coin (The European Business Review, 2020) because it has growing popularity among banks across the globe. Ripple facilitates international banking transactions; it allows banking institutions to settle payments across borders with relative ease, ensures end-to-end transaction transparency, and successful completion of international banking transactions at lower costs.
These attributes make ripple very attractive to traditional banking institutions who seek to expedite international payments. Tokens for ripple were mined prior to its launch in 2012, implying there is no ‘room’ for creation of new ripple over time; the existing number of ripples would be rotated in the market through buying, hoarding and selling over time. This helps to reduce network latency and to minimise use of computing power in the transaction process. Market capitalisation value for ripple as at 8th January, 2020, was US$9.2billion, making it the third-largest cryptocurrency during the period. Ripple’s value per token during the period was US$0.21, one of the lowest in the cryptocurrency industry (Reiff, 2020; The European Business Review, 2020).
Bitcoin remains a pacesetter in the cryptocurrency industry. It was the first digital currency to be created and used in the cryptocurrency industry and in global financial markets as well as the global business environment. Reiff (2020), Urquhart (2020) and The European Business Review (2020) described bitcoin as trendsetter and de facto standard for all cryptocurrencies. The presence of bitcoin has encouraged the emergence of myriad of cryptocurrencies in the global financial markets and business environment.
Bitcoin’s dominance in the cryptocurrency industry in terms of popularity, user base and market capitalisation is unequalled. In the conduct of any empirical research on the phenomenon, it may be imperative to examine the impact of bitcoin’s trade values on global gross domestic product (GDP) values over a given period. A detailed explanation on bitcoin, which formed the basis of this publication is presented in the following section.
Background
In 2008, Networking P2P Foundation published a white paper on a novel cryptocurrency to be introduced to the global financial community. The white paper was believed to have been authored by Satoshi Nakamoto. Content of the white paper provided briefs on the new digital currency intended to be released to the financial world in the not-too distant future. On 3rd January, 2009, a new digital coin was created and introduced to the global financial market. This virtual currency is called bitcoin.
However, the original creator of the bitcoin remains a mystery to the global financial community. The new digital currency, bitcoin, was introduced with fundamental objectives. That is, to introduce a virtual currency that would serve as a medium of payment with universal acceptance, facilitate globalisation of the financial markets at an accelerated pace, remove bottlenecks witnessed in the global financial market, and to facilitate payments for transactions across borders, among others (Anonymous as cited in Ashley, 2018; Urquhart, 2020).
Although the white paper publication on bitcoin identified the author as Satoshi Nakamoto, no name accompanied release of the cryptocurrency on 3rd January, 2009. As a result, financial pundits attributed invention of the bitcoin to Satoshi Nakamoto. Stated in different words, Satoshi Nakamoto is believed to be creator of the original reference of the digital coin and its implementation.
Historically and more importantly, Satoshi Nakamoto is recognised as the maiden inventor to have succeeded in addressing the challenges of double-spending characteristic of digital coins. Earlier debates on development of blockchain databases factored the implementation process of bitcoin into the discussions. The name Satoshi Nakamoto still remains a mirage in the cryptocurrency world. However, some experts argued a pseudonym was substituted for the original name in the creation of the virtual currency (Hodge as cited in Ashley, 2018).
Anonymous (n.d.) and Yellin, Aratari and Pagliery (n.d.) described bitcoin as the first digital coin to experience global decentralisation. Stated differently, bitcoin remains the maiden digital currency with no requirements for middlemen in its transaction processes; it is the maiden digital coin with payment system that does not require sole administrator; and does not require the involvement of central banks. The foregoing affirms the non-requirement of banks in bitcoin transactions.
These features underscored the importance of the current research. That is, to examine the activities of bitcoin traders; how those activities affect investments and revenues; and the resultant effect of bitcoin trade values on values for all cryptocurrencies and on global output (GDP). Further discussion in this section is presented under the following sub-headings: measurement, markets and circulated bitcoins; and bitcoin’s historical prices and values.
Measurement, markets and circulated bitcoins
Generally, bitcoin is measured in multiples of a satoshi. On 3rd January, 2009, a ledger was created and started for bitcoin. This ledger has a supply limit of twenty-one million (21,000,000) bitcoins. The algorithm inherent in the Bitcoin network ensures the number of bitcoins in circulation is not in excess of 21 million. Further, the Bitcoin network allows for each bitcoin to be divided into different fractional parts; one bitcoin can have fractional parts up to eight (8) digits.
The foregoing implies a bitcoin can be divided into 100,000,000 units (1 ÷ 100,000,000 = 0.00000001). Each unit of bitcoin derived thereof is known as satoshi. The smallest unit in a bitcoin is the satoshi (0.00000001 BTC). It is likely for a bitcoin to have a fractional part up to three (3) digits. Such a bitcoin is called a millibitcoin (1 ÷ 1,000 = 0.001 BTC) (Anonymous; Yellin et al. as cited in Ashley, 2018). The transfer of bitcoin occurs between 34-character alphanumeric addresses. These alphanumeric addresses appear in the blockchain, but do not reveal the identity of individuals who control the funds (Kirk, 2016; The European Business Review, 2020; Urquhart, 2020).
Several exchange marketplaces were established to expedite trading in the digital coin and to sustain and consolidate gains from the markets for bitcoin. These exchange markets, most of which exist virtually, allow traders to purchase and sell bitcoins and other cryptocurrencies using currencies of different countries. Some of the exchanges that were established earlier to consolidate gains from bitcoin and to sustain the virtual currency market in general included Coinbase GDAX, Bitstamp, Coinone, ShapeShift, Changelly, Ripple, Litecoin, Bitfinex, Mt. Gox, Kraken, Bitcoin Suisse, 37coins, Xapo, LocalBitcoins, Dogecoin, Monero, BitGo, Airbitz, WazirX, Zebpay, Unocoin, LakeBTC, BX Thailand, Bitso, bitFlyer, CEX.IO, OKCoin.cn, Korbit, Bithumb, Gatecoin, LiteBit.eu, Cointed, Coinsecure, BitQuick, BitcoinFundi, Wirex, TradeSatoshi, Jubi, CHBTC, TuxEchange, BitBay, BitMarket, BTER, Liqui, Cryptopia, Exmo, BTC100, BitcoinToYou, Mercado Bitcoin, Luno, itBit, Coinfloor, Bitsane, RippleFox, USD X, Allcoin, Cryptomate, Bitcoin Indonesia, LiveCoin, HitBTC, GDAX, Bittrex, Poloniex, among others (Coinpedia.org as cited in Ashley, 2018; De Best, 2020b).
Recency of the virtual currency technology makes it difficult for some retailers to accept payments in bitcoins. Collectively, the foregoing markets are often called Bitcoin or Virtual Exchanges. In addition to the online exchanges, automated teller machines (ATMs) have also been identified as a means of trading or buying and selling bitcoins and altcoins (De Best, 2020a & b; Kirk, 2016; The European Business Review, 2020).
BTC China is the leading bitcoin exchange in the People’s Republic of China while Mt. Gox exchange dominated the bitcoin market in Japan. In 2018, these two exchanges recorded strong volumes of bitcoin trading at the global level. Other bitcoin exchanges with greater investor participation include Coinbase GDAX, Bitstamp, Blockchain, Bitfinex, Tether, Ethereum, and Litecoin (Ashley, 2018; De Best, 2020a & b). Available data from the website of Blockchain revealed as of October 2013, about 11.9 million bitcoins were in circulation globally through the various virtual financial exchanges.
As of 15th January, 2018, the total number of bitcoins in circulation had increased to 16.8 million, representing 80 percent (16.8 million ÷ 21 million) x 100% = 0.8 x 100% = 80%) of total bitcoins mined and available for circulation (21 million); and implied the availability of only 4.2 million bitcoins (21 million –16.8 million = 4.2 million) for circulation globally. The outstanding bitcoins (4.2 million) were equivalent to 20 percent (4.2 million ÷ 21 million) x 100% = 0.2 x 100% = 20%) of total mined bitcoins during the period.
As at the end of the third quarter of 2020, there were 18.5 million bitcoins in circulation globally. This was about 0.43 percent increase over the 18.42 million in circulation at the end of the second quarter (De Best, 2020a & b). However, it was very likely the number of bitcoins would not be increased beyond its current threshold of 21 million; Satoshi Nakamoto has not given any indication of further increase in volume of bitcoins.
Bitcoin’s historical prices and values
Generally, one observes a relationship between volatilities in the global virtual financial markets and bitcoin value. That is, volatilities in the financial markets tend to have an effect on per-token and market capitalisation values for bitcoin. This explains the evolution of per-token value for bitcoin relative to the American dollar in prior and recent periods. To illustrate, the value per token for bitcoin as of July 2010 was US$0.08 – that is, 1BTC to US$0.08. However, earlier in the month of July 2010, the per-token value for bitcoin was US$0.008, implying 900 percent (US$0.08 – US$0.008) ÷ US$0.008) x 100% = 900%) surge in price per token over the period.
Popularity and prominence of bitcoin among local and international traders in the cryptocurrency industry did not vacillate and wane; they continued to increase in tandem with growing acceptance of the token as a medium of exchange in the international virtual financial markets. The advent of bitcoin culminated in local and international traders heaving a sigh of relief; they believed a medium of exchange that would eliminate increasing and complex regulations in the international financial markets had been invented and introduced (Ashley, 2018).
Growing popularity of bitcoin was met with increase in its per-token value as evidenced between February 2011 and April 2011 – 1BTC was traded at US$1. The per-token value for bitcoin on 8th July, 2011 was phenomenal; a token of bitcoin was traded at US$31. However, the significant hike in price could not be sustained; there was a bubble burst in December 2011 as per-token value for bitcoin plummeted to US$2, representing about 93.55 percent decrease, and rebounded later to trade at 1BTC for US$13.00 (La Monica as cited in Ashley, 2018).
Nonetheless, the financial effervescence of the novel digital currency, bitcoin, was not impacted negatively by the foregoing challenges related to its per-token and market capitalisation values; the per-token value for bitcoin began to increase in significant folds. In early April 2013, bitcoin’s value per token was US$266, representing about 1,946.15 percent increase over the previous price (US$13); and in a matter of days, it plunged to US$54 per token.
However, later in the month of April 2013, the per-token value of bitcoin appreciated to US$150; and remained unchanged until June 2013 when it plummeted to US$70. At the close of day on 24th October, 2013, the per-token value for bitcoin was US$233.40, implying about 233.43 percent increase in the value (US$70) recorded in June 2013 (La Monica as cited in Ashley, 2018).
As of 5th August, 2017, bitcoin had a per-token value of over US$3,000. This was a significant achievement in the history of bitcoin and the cryptocurrency industry. A week later, on 12th August, 2017, the per-token value for bitcoin was over US$4,000. By 14th August, 2017, the value per token for bitcoin had surged to US$4,400 while the per-token value in September 2017 was US$5,013.91. A token of bitcoin as at 5th March, 2018 was traded at US$11,455.50.
This represented significant increase in value per token of over 128.47 percent (US$11,455.50 – US$5,013.91) ÷ US$5,013.91) x 100% = 1.28474 x 100% = 128.474%) between September 2017 and March 2018. Data accessed from Ycharts (2020a & b) revealed the closing market value per token for bitcoin on 10th December, 2019 was US$7,199.39 while the closing value per token on 10th December, 2020 was US$17,926.11. The recent value (US$17,926.11) represents about 149 percent (US$17,926.11 – US$7,199.39) increase over the previous value (US$7,199.39).
Identified challenges
The first digital currency to be introduced to the global financial market is bitcoin. Due to its originality, bitcoin is described as the ‘mother’ of all digital coins in the cryptocurrency industry and believed to be one of the fastest media of growing one’s investment in the global financial and business community. Many investment analysts are of the firm belief that bitcoin is a useful financial tool in the investment world.
However, it is fraught with challenges. For instance, bitcoin traders in the cryptocurrency industry are not spared of risk inherent in technological challenges which negatively impact the smooth and successful investments in the virtual financial environment. As an example, it is not uncommon in recent periods to hear of hacking into the systems of digital exchange companies by predatory and unidentified hackers. These cyber-attacks often result in loss of valuable investment sums by investors and virtual exchange operators to the hackers (Ashley, 2018).
Sanger (as cited in Ashley, 2018) and Kasner (as cited in Ashley, 2018) noted that failure on the part of managements of various digital exchanges to identify, develop and implement strategies that would consolidate and assure protection of their respective digital systems and networks would have dire consequences for the cryptocurrency industry and investors. This corroborates Baboo and Kumar (as cited in Ashley, 2018) who found the absence of adequate security measures could have strong negative implications for firms in the global virtual currency markets. For instance, in early 2014, the system of Mt. Gox in Japan was hacked into and bitcoins totalling 850,000 were lost to hackers.
These bitcoins were valued at US$474million. The loss led to the collapse of the Mt. Gox virtual exchange market in February 2014 although Mt. Gox later found 200,000 of the stolen bitcoins. The compromise on Mt. Gox’s virtual currency platform was blamed on transaction malleability (Kirk, 2016) – the tendency for a chain of unconfirmed transactions to be transmitted to recipients.
However, the nefarious activities of predatory hackers continued unabated. In June 2016, an experimental investment fund known as the Decentralised Autonomous Organisation was hacked into and ether worth US$55million was stolen. On 2nd August, 2016 Bitfinex, one of the largest American dollar-denominated bitcoin exchanges across the globe, announced a hack into its digital currency platform and loss of 119,756 bitcoins as a result thereof to hackers. The system-hackers were able to hack into the virtual exchange in Hong Kong and the value of bitcoins lost to the hackers was estimated at US$69million based on the exchange rates on 4th August, 2016. The system-hacks affected the market value for bitcoin, and there was 20 percent drop in bitcoin’s market value following Bitfinex’s announcement on hacks into its digital financial systems.
The losses incurred by Bitfinex were the second-highest after Mt. Gox (Kirk, 2016). In 2018, the global cryptocurrency markets were saddled with another system-hack. The initial target, however, was NEM coins exchange located in Singapore. Eventually, the platform of Coincheck, a leading Japanese digital exchange, was hacked into, and investments worth US$530million were lost to the sophisticated hackers.
The general management problem relates to the inability of Bitcoin exchanges in the global digital currency markets to develop, adapt and implement measures that would curb significantly security breaches and ensure valuable investments of investors are adequately protected. Bertot, Jaeger and Hansen (as cited in Ashley, 2018) argued firms in the virtual currency industry require novel strategies to effectively avert the activities of predatory hackers who periodically hack into their systems to deny investors of their valuable investments. Though evidence of the phenomenon exists, there are limited empirical studies to clearly establish the effect of bitcoin trading activities on all cryptocurrencies and on the global economy.
The specific management problem remains the level of employee skills and training needed to ramp up the level of expertise in information technology for digital currency control applications by the various Bitcoin exchanges in the cryptocurrency industry in particular, and in the global virtual financial markets in general so as to minimise the frequency of huge investment losses to hackers. The present study sought to examine how trading activities related to bitcoin affect all cryptocurrencies in the global digital currency markets and global output.
The foregoing challenges affirmed ‘knowledge gap’, and underscored the need for empirical research toward assessing the measurement module and markets for bitcoin; evaluating risk and economic value for bitcoins; analysing the market capitalisation value for bitcoin relative to total market capitalisation value for all cryptocurrencies and global GDP value; and making recommendations for successful adaption and implementation of bitcoin for accelerated development of the global digital financial markets to facilitate their alignment with the mainstream global financial system.
Author’s note
This write-up was extracted from an earlier publication on “Effect of Bitcoin Trading on the Global Economy” by Ashley (2022) in the Global Scientific Journal.
