CRYPTOCURRENCIES – ADVANTAGES AND

DISADVANTAGES
ISSN 1857-9973 336.743:004.031.4

Flamur Bunjaku1, Olivera Gjorgieva-Trajkovska2, Emilija Miteva-

Kacarski3
1Doctoral student, University Goce Delcev Stip, Faculty of Economics,
flbunjaku@gmail.com
2University Goce Delcev Stip, Faculty of Economics, olivera.trajkovska@ugd.edu.mk
3University Goce Delcev Stip, Faculty of Economics, emilija.miteva@ugd.edu.mk

Abstract

Recently, cryptocurrencies and bitcoin have become the main topics in the financial
industry. A cryptocurrency is a digital or virtual currency that uses cryptography for
security. A cryptocurrency is difficult to counterfeit because of this security feature. A
defining feature of a cryptocurrency, and arguably its most endearing allure, is its
organic nature; it is not issued by any central authority, rendering it theoretically immune
to government interference or manipulation. Cryptocurrencies have their benefits and
drawbacks. The paper elaborates different aspects of cryptocurrencies, starting with
their early development, challenges and risks, opportunities, advantages and
disadvantages, and their future. In addition, the paper covered issues related to the
practical and technical function of cryptocurrencies. It was concluded that is not easy to
predict the future of cryptocurrencies, since there is a lot to be done especially in the
field of formal regulations. However, the banks and other financial institutions should
see and consider cryptocurrencies as an alternative for the financial transactions in the
future.

Key words: cryptocurrencies, development, advantages disadvantages, financial transactions

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1. Introduction

In a historical retrospective, markets in general and financial markets in particular, have

experienced a huge development. In this regard the instruments used as exchange instruments
have also experienced change and have evolved in accordance to the markets needs aiming to
make trade transactions as easy as possible. Those instruments used to intermediate the
exchange of goods are known as money. Most of the economists define money as something
that serves as a medium of exchange, a unit of accounting, and a store of value. Money is a
medium of exchange in the sense that we all agree to accept it in making transactions.
Merchants agree to accept money in exchange for their goods; employees agree to accept
money in exchange for their labor. As a unit of accounting, money provides a simple device for
identifying and communicating value. Money serves as a store of value in that it allows us to
store the rewards of our labor or business in a convenient tool. In other words, money lets us
store the value of a long, hard week of work in a tidy little stack of cash. Without money, how
would we set aside the compensation we receive for later use? From the era of barter to
commodity money, metal and coins, to gold and silver, continuing by modern monetary systems
and checks and ending with the latest global currency developments, such as introduction of
cryptocurrencies known as bitcoin and ethereum and alike, have passed centuries. Each type of
the money has played it indispensable role in transaction activities for the respective time
period. However, as the human society in general and markets in particular evolved, there was
a need for more sophisticated goods exchange instruments. In this regard the introduction of
cryptocurrencies has revolutionized the international payment system in a scale that just few
years ago were unimaginable. A cryptocurrency is a digital or virtual currency that uses
cryptography for security. A cryptocurrency is difficult to counterfeit because of this security
feature. A defining feature of a cryptocurrency, and arguably its most endearing allure, is its
organic nature; it is not issued by any central authority, rendering it theoretically immune to
government interference or manipulation. Cryptocurrencies have their benefits and drawbacks.
The main benefits of cryptocurrencies use are that they make it easier to transfer funds between
two parties in a transaction; these transactions are facilitated through the use of public and
private keys for security purposes. These fund transfers are done with minimal processing fees,
allowing users to avoid the steep fees charged by most banks for internet online based
transactions. The threat of hacking is the biggest threat of cryptocurrency system of payments.
For example, In Bitcoin's short history, the company has been subject to over 40 thefts,
including a few that exceeded 1 million USD in value. However, despite the potential risks, still,
many observers look at cryptocurrencies as hope that a currency can exist that preserves value,
facilitates exchange, is more transportable than hard metals, and is outside the influence of
central banks and governments. There are approximately 856 cryptocurrencies (see the
following link https://coinmarketcap.com/all/views/all/. According to Gandal and Halaburda [3]
the market of competing cryptocurrencies is an interesting market to analyze for several
reasons. First, it was a brand new market, with many players entering and competing. It is also
an excellent laboratory with well defined and high quality data on prices and volumes over time.

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In regard of market capitalization Bitcoin is the lider in the long list of crypto currencies, followed
by Ethereum and Ripple, which have double million digits. The other crypto currencies have less
value, with an increasing trend (see the above link).

2. Literature review

Cryptocurrencies in general and bitcoin in particular came outside of the academia. However,
since their introduction contribution of academia in this financial monetary field has been very
significant. However, since the cryptocurrency market is evolving with an enormous speed and
there is a significant dose of confusion of what is going on, it is in our opinion that academic
research in this field should be taken with reserves and caution. Despite these facts, academic
research on cryptocurrencies has contributed by exposing limitations and pitfalls of
cryptocurrency system of payments, but also by proposing ways to overcome those. [1] The
above mentioned authors claim that the main three advantages of cryptocurrencies are
anonymity, privacy and confidentiality. However, it is our opinion that the most important feature
of cryptocurrency system of payments is transparency.
One may ask why! The reason we believe that transparency is the key to success of
cryptocurrency system of payments is the fact that in this system unlike the conventional bank
system of payments where the client has information only about its own account. Whereas, in
crypto-currency system of payments, everybody within the system can see the financial
transactions of all other participants, thus, making the system extremely transparent. Hence,
although not backed by a sovereign authority, it is the high level of transparency that makes
cryptocurrencies acceptable for its users. However, some authors, such as Camoron (2016)
claims that it is very unlikely that governments will allow the use of cryptocurrencies in the way
that are currently operating. On the contrary claims the author, most of the governments are
well positioned to prevent integration of cryptocurrencies within current formal financial
institutions. Without these institutions, claims the author, the hurdles cryptocurrencies face to
supplanting more legally privileged and centrally issued currencies appear to be
insurmountable. In regard of exchange rate issues of cryptocurrencies against traditional
currencies such as US Dollar, despite receiving extensive public attention, theoretical
understanding is limited regarding the value of blockchain-based cryptocurrencies. In this regard
Li & Wang [5] have conducted a theory-driven empirical study of the Bitcoin exchange rate
(against USD) determination, taking into consideration both technology and economic factors.
According to above mentioned authors, in the short term, the Bitcoin exchange rate adjusts to
changes in economic fundamentals and market conditions. The long-term Bitcoin exchange rate
is more sensitive to economic fundamentals and less sensitive to technological factors. The
latter authors furthermore claim that they have identified a significant impact of mining
technology and a decreasing significance of mining difficulty in the Bitcoin exchange price
determination.
Some authors, such as Smalley [8] have raised the issue of cryptocurrencies and tax, claiming
that there is more to be done in this aspect since the taxability of cryptocurrency transactions

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are not yet regulated formally. Finally, Vora (2015) claims that cryptocurrencies and variants of
virtual currencies are a welcome development, they will offer competition to the existing
modalities of money and governmental regulation, they will provide alternative means to
economic agents for their transactions, and their innovative existence should be encouraged so
that their beneficial features outperform any deleterious ones. Bitcoins are here to stay suggest
the above mentioned author, unless considered illegitimate by governments or banned by
regulatory actions.

3. What is Bitcoin and how does cryptocurrencies (bitcoin) work

According to Sarah Meiklejon et al (2016) Bitcoin is a purely online virtual currency, unbacked
by either physical commodities or sovereign obligation; instead, it relies on a combination of
cryptographic protection and a peer-to peer protocol for witnessing settlements. Consequently,
Bitcoin has the unintuitive property that while the ownership of money is implicitly anonymous,
its flow is globally visible. Bitcoin initially was introduced by the (pseudonymous) Satoshi
Nakamoto in 2008. From that time it has experienced a huge boom and generated millions of
profit to those engaged in this business. But how the bitcoin works? The above mentioned
authors, Sarah Meiklejon et al (2016, p. 87) explain that as follows: “Briefly, a bitcoin can be
thought of as a chain of transactions from one owner to the next, where owners are identified by
a public key from here on out, an address that serves as a pseudonym; that is, users can use
any number of addresses and their activity using one set of addresses is not inherently tied to
their activity using another set, or to their real-world identity.
In each transaction, the previous owner signs using the secret signing key corresponding to his
address a hash of the transaction in which he received the bitcoins and the address of the next
owner. (In fact, transactions can have many input and output addresses, a fact that we exploit in
our clustering heuristics in Section 4, but for simplicity we restrict ourselves here to the case of a
single input and output.) This signature (i.e., transaction) can then be added to the set of
transactions that constitutes the bitcoin; because each of these transactions references the
previous transaction (i.e., in sending bitcoins, the current owner must specify where they came
from), the transactions form a chain. To verify the validity of a bitcoin, a user can check the
validity of each of the signatures in this chain. To prevent double spending, it is necessary for
each user in the system to be aware of all such transactions. Double spending can then be
identified when a user attempts to transfer a bitcoin after he has already done so. To determine
which transaction came first, transactions are grouped into blocks, which serve to timestamp the
transactions they contain and vouch for their validity. Blocks are themselves formed into a
chain, with each block referencing the previous one (and thus further reinforcing the validity of
all previous transactions). This process yields a block chain, which is then publicly available to
every user within the system. This process describes how to transfer bitcoins and broadcast
transactions to all users of the system. Because Bitcoin is decentralized and there is thus no
central authority minting bitcoins, we must also consider how bitcoins are generated in the first
place. In fact, this happens in the process of forming a block: each accepted block (i.e., each
block incorporated into the block chain) is required to be such that, when all the data inside the
block is hashed, the hash begins with a certain number of zeroes. To allow users to find this

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particular collection of data, blocks contain, in addition to a list of transactions, a nonce. (We
simplify the description slightly to ease presentation.) Once someone finds a nonce that allows
the block to have the correctly formatted hash, the block is then broadcast in the same peer-to-
peer manner as transactions. The system is designed to generate only 21 million bitcoins in
total. Finding a block currently comes with an attached reward of 25 BTC; this rate was 50 BTC
until November 28, 2012 (block height 210,000), and it was expected to halve again in 2016,
and eventually drop to 0 in 2140”.

4. Evolution of cryptocurrencies

Historically, cryptography was mainly used by military, secret services and intelligence agencies
as a protection from the leak of classified information. Most of the academics of this field believe
that an autonomous digital currency that is not connected to any government or other
intermediary such as a bank is appealing because of the anonymity and liberty that it affords.
Transfer of money across geographic regions both domestic and international can be easily and
quickly accomplished without worrying about governmental regulations. A pioneer of
cryptography in USA is considered Horst Fietsel with its publication of the Digital Encryption
Standard (DES) on March 17, 1975 in the Federal Register. Fitsel, in that time IBM researcher,
working on a project codenamed Project Lucifer, filed a patent application for a 48-bit block
cipher cryptographic system (also known as the Lucifer cipher). The project was commissioned
by Lloyds Bank for encrypting ATM transactions. In 1972, the National Bureau of Standards
(NBS) identified the need for an encryption standard for encrypting unclassified but sensitive
government documents, and in May 1973, solicited proposal for such a system. The NBS then
chose, with the approval of the National Security Agency (NSA), a modified version of IBM’s
algorithm. The project was commissioned by Lloyds Bank for encrypting ATM transactions. The
original algorithm was strengthened to a 56-bit block cipher by a team led by Walter Tuchman
and aided by Carl Meyer [2]. The publication of DES did lead to many discussions and debates
in the academic community and civil society. Some academics such as Martin Hellman and
Whitfield Diffie at Stanford University felt that the original 56-bit block cipher was altered by IBM
at NSA’s behest to provide that NSA a backdoor into the cryptographic system (Subramanian
and Chino) [7].
There were also questions raised that time regarding the security of 56 bit cipher. However,
DES became very popular and was soon adopted internationally as the encryption standard.
Another development that contributed in cryptocurrency creation is the so called Cypherpunk
movement that “formally” emerged in the early 1990s. The cypherpunk movement is an activist
movement whose participants seek to engineer social and political change and subvert the
status-quo by enhancing security and privacy through cryptographic techniques. The founders
of the cypherpunk group were Eric Hughes, a UC Berkeley mathematician, Timothy C. May, a
former chief scientist at Intel, and John Gilmore, one of the early employees (the fifth employee)
at SunMicrosystems and founder of Cygnus Support as well as the Electronic Frontier
Foundation. All three were wealthy, and shared a strong libertarian streak. The group started
with a meeting in 1992 in the Bay area of San Francisco. They started the cypherpunk mailing

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list in 1992 and within two years, the mailing list garnered over 600 subscribers. Another major
contributor to creation of cryptocurrency is David Chaum, a cryptologist who got his doctoral
degree from the University of California Berkeley. As a doctoral student in the 1980s, Chaum
explored several concepts and developed several methods focusing on anonymous
communication and anonymous financial transactions. In 1981 Chaum published the article
“Untraceable Electronic Mail, Return Addresses, and Digital Pseudonyms” which described a
method, using public key cryptography, to hide the identity of a participant in an email
communication, as well as the contents themselves. He explained one of its uses in elections
where an examiner could verify that all the votes have been correctly counted without revealing
the identity of the voters. A huge contribution of Chaum in this field is creation of a digital
currency based on cryptography that he called E-Cash, and in 1990 founded a company called
DigiCash, an electronic money corporation. The world’s first electronic cash payment took place
in May 1, 1994. However, most attempts at creating a workable cryptocurrency have failed to
gain consumer acceptance, until bitcoin was introduced in January 2009 when Satoshi
Nakamoto who is believed to use this name as a pseudonym mined the first block of bitcoins,
known as the genesis block, gaining a reward of 50 bitcoins.

5. The future of cryptocurrencies – advantages and disadvantages

There are different and confronting opinions regarding the future of cryptocurrencies in general
and bitcoins in particular. Whils, those with libertarian views of life are optimistic and embrace
the cryptocurrency system, other authors, economists, and scholars from this field are not
enthusiastic about the use of cryptocurency in the system of payments and financial
transactions. The optimistic view of cryptocurrencies use is backed by the fact that they make it
easier to transfer funds between two parties in a transaction; these transactions are facilitated
through the use of public and private keys for security purposes. These fund transfers are done
with minimal processing fees, allowing users to avoid the steep fees charged by most banks. In
addition, many countries have started to accept bitcoin as a valid currency. Especially, countries
that aim to get rid of cash have a very friendly approach to cryptocurrencies. An argument that
promoters of bitcoin use is Market Capitalization of bitcoin, ethereum and other
cryptocurrencies, claiming that cryptocurrency market has become very large and powerfull, so
banning it would be to costly for any country.
On the other side the opponents of cryptocurrencies claim that cryptocurrencies are very
volatile, can be used for money laundry or financing illegal activities. In this regard, Tymoigne
(2015) for example, is not enthusiastic over cryptocurrency use, providing reasons why he
believes bitcoins are not a viable electronic currency. He notes that bitcoins are illiquid and have
shown high price volatility, and that the discounted cash value of a bitcoin is zero. He further
observes the currency lacks a central issuer, and that there is no financial or economic basis for
its creation. Ivaschenko [4] provides the advantages and disadvantages of bitcoin as stated
below.

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5.1. Advantages

1. Open code for mining crypto currency – BTC applies the same algorithms that are used
in online banking. The only difference of Internet banking is the disclosure of information
about the users. All information about the transaction in the BTC network is shared (how,
when), but there is no data about the recipient or the sender of the coins (there is no
access to the personal information of the owner`s wallet).
2. No inflation – the maximum number of coins is strictly limited by 21 million Bitcoins. As
there are neither political forces nor corporations able to change this order, there is no
possibility for development of inflation in the system.
3. Peer-to-peer cryptocurrency network – in such networks there is no master server, which
is responsible for all operations. Exchange of information (in this case — money) is
between 2-3 or more software clients. All installed by users program-wallets are part of a
bitcoin network. Each client stores a record of all committed transactions and the
number of bitcoins in each wallet. Transactions are made by hundreds of distributed
servers. Neither banks or taxes, nor governments can control the exchange of money
between.
4. 4. Unlimited possibilities of transaction – each of the wallet holders can pay to anyone,
anywhere and any amount. The transaction can not be controlled or prevented, so you
can make transfers anywhere in the world wherever another user with a Bitcoin wallet is
located.
5. No boundaries. Payments made in this system are impossible to cancel. The coins
cannot be faked, copied or spent twice. These capabilities guarantee the integrity of the
entire system. Every month the number of online shops, resources, and companies to
accept BTC is expanding.
6. Low BTC operation cost. The BTC cryptocurrency works as physical cash, combining
the functions of e-commerce. No need to pay commission and fees to banks and other
organizations. The main part of such process is mathematics, which does not need
money. The commission fee in this system is lower than in any other. It amounts to 0.1%
of the transaction amount. The operation interest charges go to BTC miner’s wallets.
7. Decentralization. There is no central control authority in the network, the network is
distributed to all participants, each computer mining bitcoins is a member of this system.
This means that the central authority has no power to dictate rules for owners of bitcoins.
And even if some part of the network goes offline, the payment system will continue to
operate stable.
8. Easy to use. Taken into account that the procedure of opening an account for the
company in Ukrainian banks is overcomplicated and can be refused without explanation,
using BTC is convenient for companies. The company needs approximately 5 minutes to
create a BTC wallet and immediately starts to use it without any questions and
commissions.
9. Anonymity. It is completely anonymous and at the same time fully transparent. Any
company can create an infinite number of bitcoin addresses without reference to name,
address or any other information.

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 10. Transparency. The BTC stores the history of transactions that have ever taken place. It
is called a sequential chain of blocks or blockchain. The block chain keeps information
about everything. So if the company has publicly used the BTC address, then anyone
can see how much BTC is owned. If the company address is not publicly confirmed, then
no one will ever know that it belongs to this company. For complete anonymity
companies usually use the unique BTC address for every single transaction.
11. Speed of transaction. The ability to send money anywhere and to anyone in a matter of
minutes after the BTC network will process the payment.
12. It belongs only to the wallet owner. There is a unique electronic payment system where
the account belongs to the owner only. For example, on PayPal if for any reason the
company decides that the owner somehow uses the account in a wrong way, the system
has the right to freeze all funds on the account without even warning the owner about it.
Verification of the proper usage of account is the total responsibility of the owner. With
BTC, the owner has a private key and a corresponding public key, which is the address
to the BTC wallet. No one but the owner can withdraw bitcoins [6].
13. . No chances to use some personal data for fraud. This is an important point. Today the
majority of purchases are made with credit cards. They are unreliable. Filling forms on
websites, customers are required to enter the following data: card number, expiration
date and code. It’s hard to come up with a less secure way to make payment. Therefore,
credit cards are very often stolen. BTC transactions do not require disclosure of any
personal data. Instead, it uses two keys: public and private. The public one is available
to all (i.e. the address of BTC wallet), but the private key is known only to the owner. The
transaction needs to be signed by interacting private keys and applying a mathematical
function. This creates evidence that the transaction is performed by the owner.
14. The possibility of investing funds in the transparent and profitable resource

5.2. Disadvantages

According to above mentioned author, Ivaschenko (2016) the disadvantages are as follows [9]:
1. Strong volatility – almost all of the ups and downs of the BTC value depend directly on
the declared statements of the governments of different countries. This volatility creates the
problem in the short term.
2. Large risks of investing in cryptocurrency that should be considered in the medium and
long term.
It is our opinion that the list of cryptocurrency (bitcoin) disadvantages are much longer, and are
related to risk of money laundry, terrorist and other illegal activity financing, lack of a central
issuer, which means that there is no legal formal entity to guaranty in case of any bankruptcy,
and alike. However, although it is very difficult to predict, many academics and professionals of
this topic claim that the future of cryptocurrencies is bright since it will remove trade barriers and
intermediaries, it would decrease the cost of transactions, and therefore boost the trade and the
economy. Nevertheless, we should consider and pessimistic voices in the academic world as

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well, suggesting that the high risk of volatility, hacking risks, and lack of institutional backup
makes the future of cryptocurencies not very optimistic [10].

6. Conclusions

The paper aimed to provide analysis of cryptocurrency use in general and of the bitcoin in
particular. Our empirical research found that the future of cryptocurrencies could be bright if
some institutional – formal conditions are fulfilled. The advantages of cryptocurrency use in
facilitating trade, cost reduction, and alike, are recognized by majority of academics. Bitcoin and
other cryptocurrencies have the potential to replace traditional and new payment methods. But
to achieve that and become a dominant power in global system of payments, they must provide
distinctive incremental value, to address and overcome a number of critical challenges, such as
formal regulatory issues. That is unlikely to happen in the short time period. But banks should
look closely at the technology underlying these cryptocurrencies as a potential generic new way
to transfer ownership of value in the longer term.

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