For the purpose of this research, token referred to a unit of bitcoin and other cryptocurrencies referenced thereof. Further, digital coin, digital currency, and digital token were used interchangeably to refer to bitcoin and other cryptocurrencies in the global virtual financial markets. Also, value per token, per-token value, price, price per token and market price were used interchangeably with the same underlying meaning. That is, the unit price of bitcoin and any other cryptocurrency referenced during the research period. Finally, market capitalisation and market cap were used interchangeably to explain the total market capitalisation value for bitcoin and alternative coins (altcoins) referenced during the research period.
The quantitative approach to scientific inquiry was adapted and used in the current research. Specifically, a cross-sectional design, an example of survey design, formed the basis of the research. This design allowed the researcher to gather relevant research data over a specific time frame (Ashley, Takyi & Obeng, 2016; Creswell, 2009; Frankfort-Nachmias and Nachmias, 2008). Data required for the conduct of the current research were obtained mainly from secondary sources. These included text books, peer-reviewed articles published in journals, newspaper publications, and digital currency markets. Other sources were Google Search Engine including statista.com, ycharts.com, crowdfundinsider.com, finance.yahoo.com; and electronic databases of the World Bank, IMF and OECD, among other significant sources. Respective data on quarterly circulated bitcoins, quarterly bitcoin prices and quarterly market capitalisation values for bitcoin from 2012 through 2020; annual market capitalisation values for all cryptocurrencies from 2013 through 2020; and annual global GDP data from 2012 through 2020 were used in the study.
Descriptive statistics and regression models were used to describe the research variables; and to evaluate their behaviour over the stated time frame on global GDP. Measures such as standard deviation and range were employed to describe the extent of dispersion about the central tendency (Ashley et al., 2016; Creswell, 2009; Frankfort-Nachmias & Nachmias, 2008). These measures were used to describe trends in circulated bitcoins, value per token, market capitalisation values for bitcoin and all cryptocurrencies; and annual global GDP values during the research period.
The independent research variable was annual bitcoin market capitalisation value while the dependent research variables were the relative effect of annual bitcoin market capitalisation value on the annual market capitalisation value for all cryptocurrencies; and the effect on annual global GDP value.
Regression statistical model was adapted to measure the effect and level of interaction of annual bitcoin market capitalisation value on annual market capitalisation value for all cryptocurrencies; and on global GDP value over the research period. With the recent spate of system-hacks and eventual loss of large amounts of bitcoin and huge sums of money (often quantifiable in American dollars) by virtual exchange operators and investors to predatory hackers, it was imperative to examine the impact of bitcoin operations on all cryptocurrencies in the global virtual financial markets; and the impact of same on the global economy, so we could determine the extent to which investment losses through bitcoin trading could have devastating impacts on development of the global virtual financial markets; and telling effect on global GDP.
Stated differently, it was necessary to assess how a loss by bitcoin traders to system-hackers could negatively impact the global financial markets and the global economy in general. Every economy thrives on the efficiency and effectiveness of its financial system. Thus, it was imperative to examine the extent to which bitcoin trading activities could affect rigidity and robustness of the global financial system, and by extension, the global economy.
The research sought to measure the extent to which in a given financial year, cryptocurrencies such as bitcoin could significantly impact on the outcome of economic activities at the global level, controlling for other determining factors such as outputs and performance of the agricultural, industrial and services sectors. Bitcoin and other cryptocurrencies’ trading activities could be traced to the services sector. The Microsoft Excel analytical software was adapted and used in the research. Diagrams and tables were derived from Microsoft Excel to explain the research data.
The current research tested causal relationships between annual bitcoin market capitalisation values and annual market capitalisation values for all cryptocurrencies; and between annual bitcoin market capitalisation values and annual global GDP values, using the following null and alternative or research hypotheses:
Ho: µ1 = µ2; this implies annual bitcoin market capitalisation value has no strong effect on annual market capitalisation value for cryptocurrencies.
H1: µ1 ≠ µ2; this implies annual bitcoin market capitalisation value has strong effect on annual market capitalisation value for cryptocurrencies.
Ho: µ1 = µ2; this implies annual bitcoin market capitalisation value has no significant effect on annual global GDP value.
H1: µ1 ≠ µ2; this implies annual bitcoin market capitalisation value has significant effect on annual global GDP value.
FINDINGS AND DISCUSSIONS
Extant research (La Monica, 2013; Reutzel et al.; Rooney, 2013; Stalnaker, 2013; Price, 2016; Hodge, 2018; Tassev, 2018) revealed divergent views expressed by financial analysts on the prospects of bitcoin in the medium- and long-term. Some crypto experts predicted the per-token value of bitcoin would soon be quoted at US$30,000 while others argued the future of bitcoin cannot be predicted with ease; it is quite challenging to predict with precision, what would become of bitcoin in the medium- and long-term due to the inherent characteristic of high volatility (Brown & Whittle, 2020).
However, Urquhart (2020) and Potts and Rennie (2020) argued relatively stability and frequent upward price adjustments were indicative of low bitcoin volatility in the global virtual currency markets; and the likelihood for the virtual currency to witness price-surge.
The lopsided argument on prospects of bitcoin favoured proponents of bright future for the virtual currency. As of 4th January, 2021, per unit price of bitcoin was over US$31,000. The price of gold per ounce on 7th January, 2021 was quoted at US$1,926 (Monex.com, 2021); and the price per token of bitcoin during the period was US$37,489.16 (Coindesk, 2021), implying a bitcoin was equivalent to 19.47 ounces of gold. That is, one required about 19.47 ounces of gold to obtain a token of bitcoin during the period.
Ashley (2018) revealed China was least fancied as a free market in the global economy. Yet, China has made giant strides at the national level to adapt and use bitcoin and other cryptocurrencies for transactions and payments while the Apostles of free market economy, the United States, were still struggling to come to terms with the dynamics and prospects of cryptocurrencies, including bitcoin for national economic stimulation and growth.
In 2013, bitcoin gained national recognition in China; it was positively featured in state-run CCTV television network and government-backed newspapers. During the period, Chinese investors expressed strong optimism about the future prospects and potential growth of bitcoin and other cryptocurrencies in the global financial and business markets.
The optimism expressed by Chinese investors had come to fruition during the research period; unforeseen and foreseen internal and external factors which affect performance of mainstream financial investment assets such as stocks make bitcoin and altcoins strong investment alternatives, in addition to gold.
Strides made by bitcoin, the original cryptocurrency since 2009 till date, are simply phenomenal and remarkable. Evidence on performance of bitcoin in the global virtual currency markets thus far supports the “Yea-Sayers” and not the “Nay-Sayers.”
In April 2013, bitcoin survived a bubble burst in the financial markets. This led some crypto analysts to conclude the virtual currency had come to stay; and that, it has the requisite shocks to withstand the test of financial turmoil. This was corroborated by the outcome of research conducted by the Chicago Federal Reserve which revealed the use of bitcoin in mainstream financial and business transactions was limited.
However, the virtual token could be adapted and used by banks and governments because its technical and conceptual achievements are simply remarkable. In September 2013, Bitcoin Investment Trust was launched in the United States to manage cryptocurrency assets. It is one of the pioneering trust companies dedicated solely to cryptocurrency asset management. The company was able to accumulate US$15 million barely two months after its launch (Ashley, 2018).
Ashley (2018) argued although gains from investments in cryptocurrencies remain very strong and attractive, the stakes are still high, implying massive investment in bitcoin and altcoins would be appropriate for aggressive and moderately aggressive investors. Cryptocurrency investments may not be conducive for conservative investors until regulatory measures are firmed-up in individual economies to assure higher safety of investors’ funds.
Economic Benefits to Traders
Rooney (2013), Price (2016), Reutzl et al., Yellin et al., Jorner (2020) and Licardo (2020), among others, ascribed diverse reasons to justify relevance of bitcoin to local and international transactions in the 21st century and beyond. Some of the reasons outlined by these authors included first, the absence of potential middlemen such as banks and other deposit-taking financial institutions in bitcoin transactions. This allows traders to avoid the challenges associated with using banks for business transaction purposes.
Second, financial activities and transactions of bitcoin are not regulated by central banks; the approvals or sanctions of central banks are not required to use bitcoin. Here, strict supervision and imposition of taxes and charges through the commercial banks are avoided (Ashley, 2018).
Third, using mobile apps and computers, traders could circulate bitcoins among themselves. The mode of transmission is not distinct from what pertains in the realm of digital cash transaction systems. Like mobile money transactions, bitcoin increases the amount of money in circulation in various economies; bitcoin reduces, considerably, the amount of money kept in personal vaults in homes and offices.
It is envisaged, bitcoin and other digital currencies would ensure the financial inclusion of more than 2.5 billion unbanked individuals across the globe (Ashley, 2018). As at 31st December, 2020, there were over 18.6 million bitcoins in circulation. Given the price of each bitcoin at US$29,053.17, the market capitalisation value for circulated bitcoins on various virtual exchanges across the globe was equivalent to US$540.4 billion (US$29,053.17 x 18,600,000 bitcoins = US$540,388,962,000), representing about 71.47% of market capitalisation value for all cryptocurrencies (756.1 billion) during the period.
Fourth, individuals and organisations seeking to book hotel accommodations for leisure and business purposes could conclude such transactions on Expedia.com, Binance cryptocurrency exchange and other virtual exchanges using bitcoin. Fifth, institutions and families seeking to acquire furniture for offices and homes could finalise their transactions on Overstock.com and other virtual exchange platforms, using bitcoin.
Sixth, parents and young adults interested in acquiring Xbox games and other products could purchase them, using bitcoins. Seventh, bitcoin is a strong substitute for credit cards; it makes local and international payments easy given that strings and regulations attached to banking activities are virtually non-existent in this case. Large, small- and medium-sized businesses could employ bitcoins in their transactions since they attract comparatively low fees and charges.
Eighth, bitcoin facilitates trade and business within and among economies: individuals are able to conclude transactions with relative ease; necessary goods and services for trade purposes are obtained devoid of stringent foreign currency bottlenecks (Ashley, 2018).
Ninth, bitcoin serves as a major source of wealth creation for investors. Like gold, other valuable minerals and stable currencies, individuals invest in bitcoin with the expectation that it would surge in value to increase return on their investments (Ashley, 2018). As an example, suppose an investor bought 100 bitcoins when each was trading at US$32.00 in 2013. That is, 1BTC to US$32.00; and held on till when it was trading at 1BTC to US$29,053.17 in 2020. The investor could derive US$29,021.17 (US$29,053.17 – US$32.00 = US$29,021.17) from the investment in each bitcoin. In all, the investor would be US$2,902,117 (US$29,021.17 x 100 bitcoins = US$2,902,117) richer. With an initial investment of US$3,200 (US$32 x 100 bitcoins = US$3,200), the investor could earn US$2,905,317 (US$29,053.17 x 100 bitcoins = US$2,905,317) as total return on investment; and net return on investment of US$2,902,117 (US$2,905,317 – US$3,200 = US$2,902,117).
Finally, trading in bitcoin serves as a major source of investment; proceeds from investment in bitcoins could contribute to economic growth (Ashley, 2018). In our earlier example, a trader with an initial investment of US$3,200 in 2013 could be worth US$2,905,317 in 2020. Similarly, an investor who purchased 1,000 bitcoins when it traded at 1BTC to US$0.008 would have invested US$8.00 (US$0.008 x 1,000 bitcoins = US$8.00) at the initial investment date.
In December 2020, the investor would be worth US$29,053,170 (US$29,053.17 x 1,000 bitcoins = US$29,053,170); the return on his or her investment would be US$2,291,098.40 (US$29,053,170 – US$8.00 = US$29,053,162). As pointed out by Licardo (2020), bitcoin has the potential of creating media and brand awareness for the selling company’s brand while the latter makes strenuous efforts to market the former. Thus, bitcoin has the potential of creating a win-win situation for sellers and buyers in the global digital currency markets.
An investor could purchase a satoshi, which is a fraction of or purchase full bitcoin depending on his or her investment strength. Traders are not under obligation to buy a full bitcoin for investment or day-to-day transaction purposes. The foregoing implies, though a token of bitcoin was traded at US$29,053.17 on 31st December, 2020, an investor was at liberty to buy say, US$100, US$200, US$1,000 or US$20,000 worth of satoshi (a fraction of the bitcoin).
Similarly, the investor was at liberty to purchase a full token at US$29,053.17 or in multiples, that is, two or more bitcoins. These investments could contribute significantly to the overall gross domestic product of the implied economies. The implication is an economy stands to benefit a great deal from successful transactions in bitcoin and altcoins trading (Ashley, 2018).
Thus, protection for virtual exchange platforms from nefarious activities of predatory hackers should not be the sole responsibility of virtual exchange operators; the responsibility must be extended to elected governments in global economies.
Challenges to the Investor Community
In spite of the numerous benefits, extant research (Sanger, 2012; Pagliery, 2013; Romm, 2018; Yellin et al.; Brown & Whittle, 2020) identified some challenges associated with adaption and use of bitcoin as a universal medium of exchange in the global financial and business markets. An immediate challenge identified relates to transactions’ security in the virtual currency markets.
A major setback introduced by improved technological standards to the global economy in the 21st century is system-hacks by sophisticated hijackers, which have the tendency to impact negatively on the investment fortunes of existing professional and amateur investors; and on potential investors in the global virtual currency markets.
Classic examples were the attacks on Bitfinex’s systems by hackers in 2016, resulting in loss of bitcoins valued at over US$10 million; and the cyber-attack on Coincheck, which resulted in loss of bitcoins worth more than US$530 million.
The initial target for the eventual cyber-attack on Coincheck was NEM coins based in Singapore. In some cases, traders’ bitcoins were fled with by some firms on the virtual exchanges. For instance, investigators into the cyber-attacks on Mt. Gox in Japan indicted the CEO of diverting valuable amount of bitcoins into private accounts (Kirk, 2016).
Yellin et al. (as cited in Ashley, 2018) revealed trading in bitcoins is carried out in a virtual environment. However, an investor’s bitcoin wallet could be destroyed by a virus, or the investor may accidentally delete the information from the system. This “accidental” occurrence may lead to loss of total investment.
Again, individuals with little or no knowledge in the use of computer and its related software may find it difficult to assure effective participation in virtual financial transactions. At best, potential investors with deficiency in the use of computers may rely on others with technological sophistry to conclude their transactions. This could lead to password disclosure to third parties and eventual depletion of an investor’s total investment by the former.
Another major concern is the issue of anonymity in virtual exchange markets. Holders of bitcoin accounts have the opportunity to buy goods and services on anonymity in some jurisdictions; buyers could purchase products without disclosing their identity. Original bitcoin transactions required only use of wallet identity numbers. This may sound refreshing to well-meaning traders who would like to conceal their identity in the Internet market space mainly due to security reasons.
However, in times of theft, it may be difficult to trace the perpetrator or perpetrators for redress. Anonymity has made bitcoin exchanges appropriate hub for some individuals to engage in illicit activities, including drug purchases which hitherto, may not be sold to those buyers. Consequently, bitcoin exchanges promote the culture of substance abuse; the exchanges allow individuals to trade in socially unapproved substances.
Some individuals hide behind the cloak of bitcoin account’s anonymity to trade in child pornography, engage in sex trafficking; and to hire assassins, among other universally unapproved socio-business activities (Ashley, 2018).
Unlike bank accounts, investments in bitcoin are not backed or guaranteed by the central banks of most economies in which they are traded. In the United States of America, the Federal Deposit Insurance Corporation (FDIC) used to guarantee a standard refund limit of US$250,000 per FDIC-insured bank, and per category of ownership in times of liquidation of a bank.
The FDIC insures deposits based on types of ownership and title of accounts held by depositors. In Ghana, no such amount has been predetermined. However, in times of liquidation, the Bank of Ghana intervenes as stipulated in the Bank of Ghana (Amendment) Act of 2016 (Act 918); and the Banks and Specialised Deposit-Taking Institutions Act of 2016 (Act 930) to ensure amicable settlement of any financial impasse between the implied banks and their affected depositors; and to ensure confidence of the general public in the financial system is not waned (Ashley, 2018).
Opponents of cryptocurrencies and their related trading activities believed bitcoin exchanges serve as a “fertile” ground for terrorist groups to mobilise funds for their nefarious activities. Funding activities of Al-Qaida, Boko Haram, Islamic State in Syria (ISIS), terrorist groups in Iraq, Afghanistan, Pakistan, Libya, Mali, among others, have been a source of worry to the international community; funding the activities of terrorist groups clandestinely thwarts global efforts aimed at ensuring cease fire and promoting peace among countries across the globe.
The ability to trade on grounds of anonymity stems the financial tide in favour of the terrorist groups. Stated in different terms, virtual currencies such as bitcoin afford some individuals and groups the opportunity to engage in money laundering and finance terrorism, financial transactions with widespread condemnation from most economies throughout the world (Ashley, 2018).
Tax evasion has been a major concern for elected governments of economies in which bitcoin and other cryptocurrencies are traded. As at the time of writing, the activities of bitcoin traders were not regulated directly by central banks in many economies. As a result, it was difficult for various economies, through their central banks, to determine effectively, volumes of trade in bitcoins and the amount to be charged in taxes to support national activities.
Indeed, the activities of bitcoin investors could boost economies through GDP growth, emanating from increased investments. However, direct tax revenue mobilisation by the governments may not be derived since investors are not under any direct obligation to pay taxes on their financial gains. Besides, governments have little or no control over bitcoin and its related transactions (Ashley, 2018).
Inkoom (as cited in Ashley, 2018) noted globally, the following monetary aggregates are utilised by most economies: M0, M1, M2, M3, and others. The following monetary aggregates are used in Ghana: M1, M2, and M2+. The Bank of Ghana describes M1 as the money supply or narrow money. It consists of currency with the public (that is, currency outside the banking system) and demand deposits.
In Kenya and many other economic jurisdictions, definition of M1 includes time deposits. M2 is described by the Bank of Ghana as the total liquidity or broad money. It includes M1 plus quasi-money which comprises savings deposit, time deposits, and certificates of deposit with the deposit-money banks (DMBs). M2+ is the broader definition of money; it comprises M2 plus foreign currency. Foreign currency is denoted by (+). Ghana uses M1, M2, and M2+ to target her macro-economic objectives.
One of the numerous efforts geared toward strengthening and improving the financial sub-sector’s contribution to GDP growth is encouraging the general public to increase the aggregation of money that passes through the banking system. That is, discouraging the growth of M1 monetary aggregate in the financial system.
Evidently, the prevailing bitcoin system does not support the foregoing cause; bitcoin transactions do not require middlemen – no banks are required to initiate and finalise transactions – this affects the volume of money that passes through the banking system (Ashley, 2018). However, the foregoing economic challenge persists because financial regulators in many countries are reluctant to officially recognise and issue licence to virtual exchange operators.
Stalnaker (as cited in Ashley, 2018) revealed the world’s largest bitcoin exchange is located in China. Also, Baidu, one of the largest Internet firms in the world, is incorporated in China. Baidu, Incorporated integrates and uses bitcoin. Though refreshing news to the People’s Republic of China, there are dire financial implications for other countries across the globe. For instance, should ownership of the largest bitcoin exchange translate into highest share in bitcoin ownership (say, 50.1% or more), China stands the chance of influencing bitcoin-related transactions and controlling the cryptocurrency industry across the globe.
Ashley (2018) noted value of the Chinese renminbi relative to the American dollar is low. However, holding large volumes of bitcoin would help China to reduce the value of American dollars in her possession; fewer bitcoins would be required to pay off huge amounts in American dollars. Similarly, strong stakes in bitcoin would allow China to exert economic influence in Africa; China could purchase more commodities from Africa at relatively cheaper prices due to the value of bitcoin.
Thus, African and other continents’ economies stand to lose a great deal from China’s strong interest in digital currencies. To get even on economic gains from bitcoin and altcoins transactions, other countries spread across the various continents must equally develop strong interest in the operations of the global cryptocurrency markets.
Sporadic surge in value of bitcoin and other digital currencies could worsen the plight of already-weak currencies of some economies on the African and other continents. As at 31st December, 2020, a token of bitcoin was traded at US$29,053.17. The implication is the United States may face challenges in concluding oil contracts with oil-producing countries that have no membership in the Organisation of Petroleum Exporting Countries (OPEC); and denominate their crude oil prices in bitcoin: more dollars would be required to pay for the same number of barrels of crude oil with prices quoted in bitcoins (Ashley, 2018).
The research revealed regulation of decentralised systems may be difficult to achieve unless the desired regulation is built into the source code of the implied decentralised systems. Salami (2020a) believed to realise this objective, regulators would have to co-operate with developers of blockchain software in the virtual currency industry.
Nonetheless, a major challenge to this approach is the tendency to cede too much power to system developers, which could lead to manipulation of system-codes to circumvent regulatory oversights with convenience by developers. Thus, instead of choosing to co-operate with system-developers, Salami (2020a) argued regulators would be better-off with an option to ban unregulated virtual financial trading activities.
The foregoing notwithstanding, the decision to ban or shut down decentralised systems in the cryptocurrency industry may be a daunting task, if not impossible. This notwithstanding, Salami (2020a) catalogued possible steps that could be taken to achieve this objective: access to IP addresses, co-operation with Internet service providers in the localities, heavy reliance on national regulatory authorities, identification or trace of physical location of system-users, and use of the police to effectively shut down the activities or platforms.
These identified steps are expected to discourage potentials who hitherto, employed the digital systems for illicit trading activities, albeit difficult to achieve on a universal scale. Besides, complexity of the decentralised systems of virtual exchanges makes the location and prosecution of any virtual exchange within a jurisdiction quite challenging.
The above 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.