Bekzat Abdrazak IT-1901

Asylzhan Utegen IT-1902

Madiyar Sabyrbek IT-1902
Literature review

The world of cryptocurrency is still a blind spot for most people, despite the fact that a
new era of the Internet has begun. A few years ago, many of us didn't care what
cryptocurrency was or what its future was. If you had asked then what cryptocurrency is,
most people would have answered roughly like this: it is something dark that would involve
the banking system of the underworld, and the users are those who sit behind shady
computers and do their dark deeds. But it's really funny that a lot of things are changing,
many people already know the truth and have begun to understand that cryptocurrency and
the crypto world in general have a huge future. And we are already stepping into that future.
Currently, the term "cryptocurrency" is firmly rooted both in everyday vocabulary and in
specialized literature. In fact, this word hides a set of accounting, emission and exchange
mechanisms. Unlike electronic money, cryptographic currency is not controlled by a
government or organization and is not tied to real money. Since such systems are
decentralized, the correct operation is ensured with the help of the so-called chain of
transaction blocks "Blockchain", built on the basis of cryptographic algorithms. This
mechanism does not allow forging new or previous transactions, compromising the state of
accounts. There are countless cryptocurrencies at the moment. This is due to the relative
simplicity of implementation of such systems based on open source codes. However, there
are not so many really popular ones - only a few dozen of these currencies have a market
capitalization exceeding $10 million. The most famous and largest cryptocurrency, BitCoin,
had a capitalization of $12 billion at the time of the announcement. (Zakorzhevskiy, 2016)
Bitcoin is now widely used in day-to-day activities. In fact, there is a lot to talk about. So let's
take a look at the different views of different scholars on the world of cryptocurrencies.
As we mentioned above, cryptocurrency is a digital substance and it is distributed to
big computers all over the world. And this structure is called a decentralized structure.
According to the work of Mainelli and Smith (2015), decentralization means that the chain of
transactions is not stored in any one place, but in the wallets of all participants. In addition, it
is stored in encrypted form, which protects it from hacking and alteration, providing good
security. All operations necessary for the functioning of the network are performed in an
electronic environment by different devices such as video cards, processors, etc., depending
on the mechanism of a particular blockchain or cryptocurrency. In addition, the blockchain
cannot be changed in the absence of a consensus decision by network participants. Finally,
cryptocurrencies are open and simultaneously pseudonymous (in rare cases anonymous)
systems. This means that information about transactions between participants is available
"online," but information about the participants themselves is hidden. But why was the
decentralized scheme used for cryptocurrency in the beginning?
Following the global financial crisis in 2008, an unknown group, organization of
people or an unknown individual operating under the name “Satoshi Nakamoto” exposed to
the world their/his peer-to-peer system, based on the cryptocurrency. According to their/his
research, the current financial system is suffering from the trust model, which means every
transaction must go through intermediaries. And because of these intermediaries, it
increases the transaction cost by limiting the minimum practical transaction size and cutting
off the possibility of small random transactions, and the broader cost is associated with the
loss of the ability to make irreversible payments for irreversible services. The solution for that
is a peer-to-peer electronic payment system, which is a distributed timestamp server based
on cryptography, which doesn’t depend on any intermediaries. (Nakamoto, 2008) Thus,
bitcoin gave an answer to all financial institutions, which hid their profits and socialized
losses, that cryptocurrency can bypass third party intermediaries, such as banks, etc. (Lerer
& McGarrigle, 2018)
In his book, Mark Fisher says (2009) that in the capitalist world, all processes of
society and all existing phenomena: science, religion, culture; everything is passed through
the sieve of capitalism, everything is assigned a monetary (market) value, everything is
bought and sold. But the crisis that occurred in 2008 had a strong impact on the current
financial system. The general public has lost confidence in such a system of "financialism"
(situations of the merging of financial and industrial capital and their concentration in the
hands of a limited circle of people), and this gave rise to a new search for alternative options
for organizing economic life, one of which was cryptocurrencies
In addition to decentralization, bitcoin has other significant differences from other
electronic money. As Malyshko mentioned in her work (2016), bitcoin has 8 more
differences, which are transparency, maximum protection, anonymity of transactions, speed
and convenience, independence, narrow distribution, rate fluctuations and risks,
unpredictability
Transparency. Thanks to cryptocurrency technology, all transactions with electronic
money are stored indefinitely, so absolutely any user of the network has the ability to check
the balance of the cryptocurrency wallet, as well as all transactions made on the payment
account, knowing only its number.
Maximum protection. Cryptocurrency cannot be counterfeited.
Anonymity of transactions. Wallet number, a set of symbols - this is what other
users of the system know about you. Anonymity increases the attractiveness of
cryptocurrency in terms of taxation, going into the shadow economy.
Speed and convenience. It is much harder to open a bank account than an e-wallet.
At the same time, the speed of transactions made with cryptocurrencies is much higher and
the commission is lower.
Independence. State authorities do not regulate the circulation of cryptocurrencies.
Narrow distribution. Bitcoin can only be used to pay in certain areas.
Exchange rate fluctuations and risks. Due to the fact that the bitcoin system has a
limited number of coins, all sorts of large transactions can cause fairly large exchange rate
fluctuations. The price of bitcoins depends only on the demand for them by users of the
system.
Unpredictability. At the moment bitcoin has safely passed the initial stage of its
development. It is quite difficult to predict its further development.

Cryptocurrencies have become a global sensation as a result of the discussion that

they would soon replace traditional banknotes. It is growing rapidly, owing in part to the
globe's move toward a cashless economy. The truth that certain individuals currently trade
with cryptocurrencies supports the idea that cryptos will be the economy of the future.
Nevertheless, given the enormous hostility from authorities throughout the world, it'll be a
long time until cryptocurrencies make their way into the market. Virtual currencies are
obtaining a competitive advantage as a result of increased industrialization and technological
participation. Bitcoins are one such cryptocurrency. This well-known phrase is recognizable
to most of us. Virtual currency seems to be the only thing that is perplexing. What are the
advantages and disadvantages? Is it worthwhile to invest? The key pros and cons of
Cryptocurrencies are listed below. So, without any more ado, let's get this started.

The first advantage of cryptocurrencies is the high-return potential. The

opportunity for huge profits is indeed one of the key reasons in favor of digital currencies.
For instance, the S&P 500 index of big capitalization US shares has accumulated at an
annualized total growth of 14.5 percent over the 5 years to December 31, 2020. The value of
bitcoin in US dollars has grown at a cumulative annualized rate of 131.5 percent around the
same time frame(Graphic below, Bloomberg, EFG calculations, January 29 2021).

In the environment of incredibly low official bond rates, the promise of big gains becomes
really appealing. Moreover, individuals who feel that equities profits would just be less for
some time after last year's spectacular performance may find high prospective profits
enticing. Second one, Diversification possibilities. Diversification has been highlighted as
an useful strategy of making any investment, with a few claiming that it may be used as a
hedging tool in portfolios as a replacement to gold. For instance, the S&P 500 dropped in 17
of the 60 months leading up to December 2020, while the value of bitcoin rose in 7 of them.
Within 5 years leading up until the end of 2020, a strategy investing fully in the S&P 500
would have produced cumulative average growth of 14.5 percent. A portfolio with 10 percent
invested in btc and 90 percent in the S&P 500 would have achieved a compounded yearly
return of 26.8 percent. Furthermore, the cumulative average increase to annualized volatility
ratio – a simple data ratio – jumps from 0.95 for the S&P 500 alone to 1.5 for the diverse
portfolio 10% btc. Third one, limited supply. Bitcoin has the unique attribute of having a
limit of 21 million pieces that may be minted. Currently, roughly 18.5 million bitcoins have
been mined, with fewer than 3 million left to be created(Graphic below, Blockchain.com, EFG
calculations, January 29 2021).
A major implication is that the pace of btc creation declines due to a method named as
halving, in which the quantity of btc awarded for generating a block is halved periodically
based on pre-circumstances. After the most recent halving in May 2020, every block
generated is currently worth 6.25 btc, down from 50 btc in 2009. Furthermore, it is estimated
that roughly 20% of the current bitcoin value has been lost or is unavailable due to missing
passwords. For certain individuals, bitcoin's rarity appeals to its attractiveness. If the desire
for cryptocurrency grows more and quantity is constrained, the cost may rise. This stockpile
is a characteristic of several coins overall. Fourth advantage, defend against depreciating
currencies and the possibility of higher inflation. In 2008/09 Global Financial Crisis
(GFC) prompted the banking system throughout the worldwide to pursue unconventional
monetary and fiscal policy, including big property acquisitions. The financial statements of
the US Federal Reserve and the European Central Bank, each have risen by over US$6
trillion since the GFC began, whereas the Bank of Japan's financial statement has increased
by slightly less under US$6 trillion. The Government's financial statement has grown by 8
times, the ECB's by just below 4 times, and the Bank of Japan's by about 7 times. Some fear
that this would lead to a significant depreciation of the monetary system, similar to what
occurred under the Weimar Republic in the 1920s when the marks turned useless. People
who hold such viewpoints believe that btc and other virtual currencies provide choices which
can be devalued in the same case, mainly since supply is limited and partially since digital
currencies really aren't subordinate to the same political and financial stresses as national
financial institutions, such as bank intervening in foreign exchange markets and financial
institutions being required to help the economy throughout periods of crisis by buying
government bonds. Supporters of this viewpoint argue that cryptocurrencies will give far
greater security of growing inflation as a consequence. Cryptos appeal to such people
exactly since they are unaffected by government intervention. The last advantage of
cryptocurrencies is growing acceptance and usage. As mentioned in the beginning, an
increasing amount of electronic payments are now accepting cryptos for operations.
According to a report from last year, Coinbase generated $135 billion in bitcoin merchant
transactions in 2019, up 600 percent from 2018. The same article references a Chainalysis
analysis claiming that merchant accounts handled $4 billion in bitcoin transactions in 2019.
Additionally, according to another study, at least one third of US smaller firms accept bitcoins
as a payment option. Furthermore, during the last several years, there was a considerable
growth in the number of btc digital wallets established, albeit it is hard to tell for what reasons
they are utilized. In addition, a growing number of fund managers, like Blackrock, are
considering investing in cryptos. Grayscale Investments, a self-described "recognized
authority in virtual currency investment," revealed that investment banks, largely asset
managers, accounted for 86 percent of the $5.7 billion in inputs into its goods in 2020.

Now consider the drawbacks of investing in cryptocurrencies, many of which directly

counteract the benefits. High volatility and possibility of losses. The volatility of bitcoin
price is measured to be about 90% in US dollars. This is the reason why investors should
know that they can get large profits or large losses when investing in bitcoin or another
cryptocurrency. In 2021, the UK Financial Conduct Authority warned that the investors
should be aware of losing all their money when investing in cryptocurrencies. The financial
organizations claim that cryptocurrencies have speculative characteristics and India even
announced that they are going to ban all private cryptocurrencies. Moreover, all
cryptocurrencies are different, so while some currencies perform strongly, others do not. The
example is EOS, which is not as well-known as bitcoin, falling both in 2019 and 2020. So,
the losses and profits depend on which cryptocurrency is selected. Correlations.
Cryptocurrencies correlate with each other and when one currency is going up or down
rapidly, it can correlate with another currency. For example, when S&P 500 cryptocurrency
had a bad performance for 17 months, bitcoin also was falling in 10 of them. Also, the bitcoin
price growth positively influenced the S&P 500 price. What should be noted is that the
impact of having different types of cryptocurrencies will depend on which is chosen. Endless
potential supply. Even though it is known that the greatest number of bitcoins produced will
be 21 million, and other cryptocurrencies have their limit, nowadays nothing can stop the
growing number of new cryptocurrencies. Bitcoin now is considered the preferred
cryptocurrency, but it can be changed quickly by fashion and tastes. It is possible that when
the limit of bitcoins will be reached, this will lead to bitcoin fall and growing investments in
other cryptocurrencies. Moreover, some banks are observing the possibility of creating their
own digital currencies, which can correlate to private ones and promote their fall. Limited
acceptability and a poor store of value. While bitcoin and other cryptocurrencies are now
accepted on an increasing number of payment platforms, there is still a long way to go. The
number of locations where bitcoins can be exchanged The market for genuine goods and
services is quite limited. Other than that, In general, one cannot enter a coffee shop or a
restaurant in Venezuela. restaurant (depending on lockdown restrictions) or other store and
Use a cryptocurrency to pay – most locations won't accept it. it. This is due to the fact that
cryptocurrency revenue varies greatly when converted back into a fiat currency. The
currency in which the merchant normally transacts his or her business. The difficulties are
exacerbated by the massive volume of information available. Variation within the day (
Figure below) .If a lot of people pay using cryptocurrency this may result in a large mismatch
with the merchant’s cost structure.
Cryptocurrencies are also a poor store of value because of their inherent volatility. Even on
an intraday basis, the value of cryptocurrency savings when converted back into an
individual's base currency — the currency in which they conduct most of their transactions
and in which their assets and liabilities are expressed – will fluctuate significantly. The
absence of stability makes cryptocurrencies less appealing as a wealth store. Unregulated
and unbacked. Cryptocurrencies are a private-sector invention with no government
oversight or regulation. This means that cryptocurrencies are vulnerable to being exploited
by criminals, who can then use them to defraud unsuspecting investors. This is
unquestionably one of the reasons why central banks and regulators are eager to
participate. Of course, there are completely legal ways to invest in cryptos, but the lack of
regulation makes them an appealing playground for those who do not follow the law.
According to a 2019 academic study, 25% of bitcoin users engage in illicit activities, while
46% of bitcoin transactions are related to illegal conduct. Traditional financial systems, as
well as the currencies they utilize, are not without flaws, but they are carefully controlled.
This not only deters illegal action, but it also ensures that if a problem arises, a set of norms
(often enshrined in legislation) and organizations are in place to assist in its resolution. Most
modern banking systems, for example, have some form of deposit insurance in place, and
credit and debit cards often have some form of fraud protection. Furthermore, a country's
own currency has a specific legal tender status, which means that a creditor must accept it
as payment for a debt. Financial systems are underpinned by this fundamental trait, which is
augmented by monetary policy norms and trust in elected government. Cryptocurrencies, on
the other hand, are not backed by anything other than faith in the system, therefore any loss
of that faith makes the coin extremely vulnerable.

Although we have attempted to explain the main benefits and drawbacks of investing
in cryptocurrencies, This list is not intended to be exhaustive. While we're here, no opinion
on the price of bitcoin or any other cryptocurrency. We bring the reader's attention to other
cryptocurrencies. Particularly in light of the possibility for significant losses. Those who
support Cryptocurrency proponents say that the negative risk is minimal. countered by the
possibility of high gains and the fact that the risks are low can be controlled by sizing a
cryptocurrency correctly. a stake within a diversified investment portfolio. The overall
decision to include bitcoin exposure in a portfolio is based on each individual's judgment of
the balance of benefits and drawbacks, which we have attempted to emphasize in this note.

Separate from a discussion of the merits of investing in cryptocurrencies, we observe that

there are a number of potential benefits to incorporating blockchain technology into the
financial system more widely. In a recent BIS report, it was suggested that, despite the
current absence of regulation of cryptos, blockchain might be an effective regulatory tool.
Blockchain might potentially be used to cut costs and improve the efficiency of the financial
system. However, a more in-depth exploration of blockchain's possible benefits is outside the
scope of this note.

References:

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rynki i fi nansovyy inzhiniring. 3. (4). – 281-295. doi: 10.18334/grfi .3.4.38017

Mainelli, Michael and Mainelli, Michael and Smith, Mike, Sharing Ledgers For Sharing Economies: An
Exploration Of Mutual Distributed Ledgers (aka Blockchain Technology) (December 01, 2015).
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Nakamoto, S., (2008). Bitcoin: A Peer-to-Peer Electronic Cash System. SSRN Electronic Journal,.
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Lerer, M., & McGarrigle, C. (2018). Art in the Age of Financial Crisis. Visual Resources, 34(1–2),
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