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The Role of Cryptocurrency in International Business

The Role of Cryptocurrency in International Business

 



Nika Chitadze. Professor of the International Black Sea University.

 

Director of the Center for International Studies.

 

 

Abstract

 

Cryptocurrency is a type of digital currency, the accounting of internal accounting units of which is provided by a decentralized payment system (there is no internal or external administrator or any of its analogs) (Greenberg, 2011), operating in a fully automatic mode. By itself, the cryptocurrency does not have any special material or electronic form - it is just a number that denotes the amount of data of payment units, which is recorded in the corresponding position of the information packet of the data transfer protocol and is often not even encrypted, like all other information about transactions between system addresses.

 

Keywords: Bitcoin, Blockchain, Transaction fee, Mining, Governance

 

Introduction

 

When talking about cryptocurrency, first of all, it should be noted that everything can be used as money if people agree on it and give the money the appropriate function. Humanity does not yet know how the function of money can be changed in the future. Money must meet several criteria, be a means of payment, a means of accumulating/storing value, a means of accounting, etc. According to many experts, the impact of cryptocurrencies is gradually increasing at this stage. The rubicon is overcome, paper banknotes gradually fade into the past.

 

As it is known, money as the equivalent of universal exchange has existed for many centuries, the conception of economic relations led to its gradual development. People have agreed since the immemorial time to carry out the process of exchange with each other. It was necessary to come up with such a universal standard for something that could be exchanged for everything. As a result, the idea of a universal equivalent unit was born and developed. This unit was constantly changing at different stages of human development with the changing level of progress of the society. At various times it was wheat, commodities, gold coins, banknotes, and today it is already a cryptocurrency.

 

The purpose of this paper is to analyze the main principles of the cryptocurrency functioning and its reflection on business relations on the domestic and international levels. 

Research Questions:

1) How the cryptocurrency, particulalrly bitcoin promotes the development of business relations?

2) What are the main strenghts and weaknesses of cryptocurrency?

3) What are the main business operations, which are implemented in the framework of cryptocurrency functioning?

With regards to the research Methods, the following methods have been used:

1) Quantitative research methods were used in the research paper, particulalry determination the volume of trade by cryptocurrencies etc.    

2) Methods of comparative analysis – related to the analysis of the different trade operations by cryptocurrencies etc.

3) Content analysis - the study of for example the content of the researches of leading specialists in the field of business relations;  

4) Narrative analysis – related to the deep analysis of all those processes, which are going on in the sphere of cryptocurrency business.  

As for the methodological framework of the paper, the concept of the positive business will be used. As it is known, a positive business is one that creates value and can continue to develop products and services that make a positive impact on society. In order to create economic value, businesses need to think long term and determine how they can continue to be a financially sustainable business.

With regards of the findings of the paper – it is detailly analyzed the different version related to the role of cryptocurrency in the modern business relations.   

 

The role of Bitcoin in business relations

Bitcoin is a worldwide cryptocurrency and electronic means of payment (Castillo, 2013). It is the first decentralized digital currency. His invention relates to a person or group of people known as Satoshi Nakamoto (The Economist, 2016), who publicly announced his invention in late 2008 and published a document proving it, and has since launched it on a computer network since 2009 (Joshua, 2014). The system is built on the principle of P2P, which means that two computer systems can exchange information with each other or one computer can provide information to the other directly, without the involvement of any third party, bypassing the main server; Transactions are verified in the appropriate systems of digital networks and stored in a publicly independent database called a blockchain. Bitcoin can be exchanged for different currencies, products and services (CNN Money, 2015). By February 2015, it had already been accepted as a means of payment by more than 100,000 commercial establishments. Bitcoin can also be used for investment. According to a 2017 study by the University of Cambridge, the number of unique and active users of the cryptocurrency wallet increased from 2.9 million to 5.8 million between 2013 and 2017. Most users are Bitcoin users (Hileman, 2017).

 

Terminology

The word bitcoin first appeared on white paper (Nakamoto) in 2008. It is a combination of two words - "bit" - small money and "coin" - coin (Oxford Dictionary, 2008).

 

Unit of measurement

The basic unit of measurement for Bitcoin is the word "Bitcoin" itself. Small bitcoins, or satoshes, represent one hundredth of a bitcoin, it is the smallest unit of measurement of bitcoin (in 1 sato = 0.00000001 bitcoins (Mick, 2011)). It was named after its creator, Sato Nakamoto.

 

Blockchain

A blockchain is a public database that records completed transactions. It all happens without the intervention of a third party. Blockchain functionality is provided by interconnected blocks on which Bitcoin software is also based (Investopeadia, 2018). Network blocks perform the following operations: determine the validity of transactions, add them to the database, and then, for greater security, distribute these transactions to other blocks. About six times an hour, a new set of authenticated transactions is added to this chain of blocks, which quickly spreads to other blocks. This helps the bitcoin platform to determine that a particular amount of bitcoin has been spent and to exclude its so-called bitcoin. The problem of double spending.

 

Transaction fee

Transfer fee margin is different and it is optional. Users should decide for themselves whether to use high-fee or low-fee sites. The transaction price depends on the number of bitcoins transferred.

 

Property rights

 

Bitcoins in the blockchain system are registered on Bitcoin addresses. In order for an owner to be able to transfer bitcoins, he must know his own asymmetric cryptosystem, or key. This key is very important, because if the user loses it, he will no longer have the right to own it, ie the bitcoins in his possession will be lost and he will not be able to use it. For example, in 2013, Welsh citizen James Howell said he lost 7,500 bitcoins, valued at $ 7.5 million (CSAIL, 2017), when he threw his own computer hard drive in the trash. He could not return the bitcoins. This laid the groundwork for the creation of platforms that enable wallet recovery, such as, for example, Coindesk.com (Laurie, 1997).

 

Mining

 

Miners are people or groups of people who use powerful computer capabilities to extract bitcoins. This process is called mining.

Mining is an accounting manufacturing service that is completed with the help of computer processing (Dai, 2018). Mines ensure blockchain stability, completeness, and immutability (IEEE Spectrum, 2020). All of this is due to the fact that they are constantly verifying transactions and connecting them very quickly to other blocks. Each subsequent block contains the cryptographic hash of the previous block, which uses the SHA-256 algorithm, so that all the blocks are connected to each other, hence the name "blockchain" - a chain of blocks.

Delivery

 

General Number of Bitcoins.</ref> name="Blockchain.info" />

About 16 million bitcoins have been produced in the beginning of the second decade of the XXI Century. Its creator, Sato Nakamoto, established the so-called Monetary policy that the number of bitcoins that can be produced is 21 million. As time goes on, their extraction becomes more difficult, and the reason for this is the complicated logarithmic cryptocurrency that miners face in the process of extracting bitcoin. Monetary policy also stipulates that the number of bitcoins produced will be halved every four years. For example, if miners min 1 million bitcoins from 2016 to 2020, this number will be halved by 2024, or become 500 thousand. A successful miner who finds a new block is rewarded with newly created bitcoin and transaction costs (Brito, 2013).

Wallet

The wallet stores the necessary information about bitcoins. It is used to store bitcoins and for transactions. By its very nature, it is inseparable from the blockchain system.

There are several types of wallets. A "software wallet" that connects to a network and allows you to spend bitcoins, simply store them, and verify ownership. This particular wallet is also divided into two parts: full-fledged clients and limited-clients.

• Full-fledged customers directly verify transactions on the local full copy of the blockchain (p. 134 as of October 2017 () or most of it (2 GB)

• Clients turn to full-fledged clients for assistance in receiving and sending bitcoins without a full copy of the blockchain. They have the advantage of registering faster in the system and also using less powerful, less powerful devices (e.g. smartphones). Owners of both types of wallets are responsible for all security of the personal key.

In addition to software wallets, there are so-called. Online wallets that have the same features and are easier to use. In this case, users 'bitcoins are stored in online wallets and not on their computers' hard drives. For this reason, the user should completely trust the online wallet maker, however, the latter’s malicious intent or server breach could lead to the loss of bitcoins. A similar case in 2011 is related to Mt. With Gox (Wayback Machine, 2013).

 

Bitcoin versions

The first wallet program was released in 2009 by Sato Nakamoto as an open source program (Joshua, 2011). Sometimes referred to as the "Sato Client", it is also known as the reference client because it serves to define the Bitcoin protocol and acts as a standard in other implementations. At version 0.5, the client switched from the wxWidgets interface to Qt and was referred to as Bitcoin-Qt as a whole. After the release of version 0.9, the software package was renamed Bitcoin Core, thus making it easily resolvable on the network. There are several types of Bitcoin core today: Bitcoin XT, Bitcoin Classic, Bitcoin unlimited, Parity Bitcoin and BTC1.

Privacy

Bitcoin is a pseudonym, which means that the money is not tied to the real world, but rather it is tied to Bitcoin addresses. The owners of Bitcoin addresses are not explicitly identified, however all transactions on the blockchain are public. In addition, transactions can be related to individuals and legal entities (Simonite, 2013). At bitcoin exchanges where bitcoins are traded in traditional currencies, it may be necessary to disclose personal information as required.

To increase financial confidentiality, a new address can be generated for each transaction (McMillan, 2013). For example, hierarchically defined tabs create randomly selected "moving addresses" for each transaction, with only one "secret phrase" to remember to keep all transaction addresses together and verify them later. Researchers at Stanford University and Concordia University have also shown that Bitcoin exchanges and other organizations can present assets, liabilities and solvency without disclosing their addresses using "zero proof" (Association for Cryptologic Research, 2015).

Governance

Bitcoin was originally led by Sato Nakamoto .In 2010, Nakamoto handed over the network key to Gavin Andersen (Odell, 2015). Andersen said he further sought to decentralize the control mechanism: "After Satoshi's resignation, once the project fell on my shoulders, one of the first things I tried was to decentralize, so if the bus crashes, it is clear that the project will continue" (Odell, 2015). ). That fact must be taken into account. "

Classification

Bitcoin is commonly referred to by terms such as digital currency, digital cash (Murphy, 2013), virtual currency, electronic currency, or cryptocurrency. The question of whether Bitcoin is a currency is still controversial (Joyner, 2014). According to The Economist in January 2015, Bitcoins, as a currency, have three useful properties: they are "difficult to obtain, limited in supply, and easy to verify" (The Economist, 2015). Economists define money as a store of value, a medium of exchange, and an account unit, and agree that Bitcoin has the ability to meet all of these criteria (The Economist, 2014). It's best as a means of exchange.

Number of users

The number of users was between 300,000 and 1.3 million in the beginning of the second decade of the XXI Century, and since that number has grown significantly, according to a 2017 Cambridge University study, there are 2.9 to 5.8 million users who use a cryptocurrency wallet, most of them Bitcoin users (The Economist, 2014).

 

Trade objects

 

In 2015, users could pay with Bitcoin in more than 100,000 merchants (International Business Times, 2015). Usually, instead of 2-3% according to credit card procedures, Bitcoin payment users were charged a 2% to 0 fee (Wingfield, 2013). Firms that recognized Bitcoin as a means of payment in 2014: Paypal (Ellison, 2014), Microsoft (Warren, 2014), Dell (Ember, 2014), and Newegg (Newegg, 2014).

 

Financial institutions

 

Bitcoin companies found it difficult to open traditional bank accounts because bank representatives feared issues related to illegal activities (Sidel, 2013). According to Antonio Gallippe, co-founder of BitPay, "Banks are wary of dealing with Bitcoin, even when they really want to" (Carter, 2013). Said about Bitcoin Hedge Fund Services (Mike, 2014). Nevertheless, Australian banks have made significant contributions to the introduction of Bitcoin-based blockchain technology (ACCC, 2016). In a 2013 report, Bank of America Manager Meryl Lynch stated, “We believe that Bitcoin can become a major means of payment and also a serious competitor to traditional money.” (Kashmir, 2013). Made possible (The Week, 2014).

 

Investment

 

Some Argentines bought bitcoins to insure their own savings from high inflation and the risk that the state would seize their savings (Lee, 2013). Bitcoin purchases increased during the Cypriot financial crisis in 2012-2013, due to the high risk of losing savings deposits (Kirsten, 2013).

 

Winklevoss twins have invested in Bitcoin. According to the Washington Post in 2013, they owned 1% of existing bitcoins (Lee, 2017). Another method of investing is Bitcoin funds. The first regulated Bitcoin fund was established in Jersey in July 2014 and it was recognized by the Jersey Financial Services Agency (BBC, 2014). Well-known and authoritative publication Forbes in December 2015 published arguments in favor of investing in Bitcoin (Shin, 2015). The same publication recognized Bitcoin as the best way to invest in 2013. There are also negative expectations: In 2013 and 2014, the European Banking Authority and the Financial Industry Regulatory Authority (FINRA), the self-regulatory organization of the United States, stated that investing in Bitcoin carries significant risks (Stempel, 2014).

 

Venture capital

 

Companies like Peter Thiel's Founders Fund, which has invested $ 3 million in BitPay, do not buy bitcoins themselves, they prefer to invest in companies that provide bitcoin payment to merchants, or companies that promote bitcoin trading, and so on. (Simonite, 2013). In 2012, Adam Draper, with financial support from his father, founded a Bitcoin-focused startup incubator. Adam's father, Tim Draper, the so-called "mystery shopper" entrepreneur and capitalist, owns one of the largest bitcoins since he won 30,000 bitcoins at auction (Sidel, 2014). The company aims to fund 100 bitcoin businesses over the next 2-3 years. Investors are also investing in bitcoin mining (Robin, 2014). .According to a 2015 study by Paolo Tascai, the total volume of bitcoin startups in three years was about $ 1 billion (Q1 2012 - Q1 2015) (Tasca, 2015).

Price and fluctuations

 

 

Price on the left vertical and price changing on the right side

 

Mark T. According to Williams, in 2014, Bitcoin fluctuated seven times as much as gold, eight times as much as the S&P 500, and 18 times as high as the US dollar (Williams, 2014). According to Forbes, there are cases where instability has no effect, such as online games where bitcoin is generated and international remittances (Lee, 2013). In 2011, the value of one bitcoin rose rapidly from about $ 0.30 to $ 32 (Lee, 2013). In the second half of 2012 and in parallel with the financial crisis in Cyprus in 2013, Bitcoin began to rise in price, reaching above $ 266 on April 10, 2013 (Lee, 2013). On November 29, 2013, the value of one bitcoin reached $ 1,242 (Rooney, 2013). In 2014, prices fell sharply. As of August 2014, one bitcoin was $ 600 (Nasdaq, 2015). In January 2015, Bitcoin fell to its lowest level since 2013 and stood at $ 224 (Embler, 2015). Also in January 2015, a business insider said that it was voiced by drug dealers that they were losing revenue in proportion to the price drop because they could not exchange bitcoins for other currencies quickly and safely for them. There was also a danger that Bitcoin owners would lose possession of them, sell them, and thus give more impetus to the price to fall (Price, 2015). According to an article in the Wall Street Journal, as of April 19, 2016, Bitcoin was more stable than gold in the previous 24 days and it is suggested that its price will become more stable in the future (Yang, 2016). On March 3, 2017, the price of bacon first exceeded the market value of an ounce of gold (BBC, 2017).

 

Legal status, taxes and regulation

 

Due to the decentralized nature of Bitcoin, it is impossible to restrict or ban it, although its use may be criminalized. The legal status of Bitcoin differs substantially between countries. Some countries have allowed its use for trade and other purposes, while others have banned it altogether. Regulations and prohibitions that apply to Bitcoin may also apply to other cryptocurrencies (Tasca, 2016).

 

Criminal

The use of Bitcoin by criminals has come to the attention of financial regulators, legislators, law enforcement and the media (Lavin, 2013). The SEC issued a warning about investment schemes using virtual currency, and the US Senate held a hearing on virtual currencies in November 2013 (O'Brien, 2015). Several news releases have suggested that as bitcoin grows in popularity, its illegal use will increase even more (The Economist, 2013). In 2014, researchers at the University of Kentucky found “solid evidence that enthusiastic programmers and illegal activities are becoming the subject of interest in Bitcoin” (Wilson, 2014).

 

Cryptocurrency is the most modern form of technological development of money

 

The history of cryptocurrencies dates back to the birth of Bitcoin in 2008. Even before Bitcoin, there were many attempts to create global electronic money, but all efforts were vain. Cryptocurrency has no physicality; it seems to be expressed by a simple combination of numbers. But things are not so simple. In the case of Bitcoin, behind these records is a record book known as a blockchain. A blockchain can be represented as a decentralized database with no single control center, no single computer, where all information is accumulated. In exchange for one center, the information is redistributed to multiple computers called nodes. On these computers, the nodes all have the same copy (in the case of Bitcoin, there are about 110,000 nodes in the world), the nodes function exactly as written in the Bitcoin algorithm. That is, there is only one version of the truth on the web. It is impossible and pointless to try to falsify information here because, despite the chance of theoretically falsifying information on one node, information on other nodes throughout the network is still unchanged. It is about the same as trying to prove that North Korea won the World Cup final, although it makes no sense when the outcome of the final is already known around the world, and the world population has the relevant information. Accordingly, the nodes about the transactions carried out and the changes made in the record book, the computers are constantly broadcasting to each other, are in contact with each other, disseminate information, provide each other with information about changes in the blockchain. This information is constantly synchronized between them. This language of communication is called the "rumors, rumors" protocol, which allows hundreds of thousands of nodes/computers to have constantly updated information about the state of the record book.

 

Based on the above, it is necessary to explain what a blockchain is. Various transactions in the Bitcoin network are sorted/recorded in blocks. Each new block is added to the previous block through cryptographic functions, which makes it impossible to change the information stored in the previous block. This is how a long chain of bundled blocks is formed, which is why this record book is called a blockchain. Information is recorded or placed in transaction blocks by miners responsible for the system's operation. Miners have the function of validating all transactions carried out in the Bitcoin network. In return for the work done, they are rewarded accordingly in the form of newly printed bitcoins from the system.

 

The whole Bitcoin architecture is built on a system of motivation to encourage honest behavior on the part of all players and not to treat players/system participants with dishonest behavior, for which they will be punished and held accountable. The Bitcoin system is additionally unique because, for the first time in the history of electronic systems, system security has been taken out and entrusted to the free market. The consensus model that Bitcoin uses is known as Proof of Work. New, more modern models of consensus (Poof of Stake) have now been developed, which require much less, almost minimal power consumption, and can be just as durable and unbreakable as the so-called bitcoin - PROOF of WORK.

The whole architecture of cryptocurrencies is based on the most difficult cryptography and higher mathematics; game theory is used to create effective models of consensus. In the case of Bitcoin, the system is decentralized, balanced, the rules of the game are clear to everyone and written from the beginning with a protocol, no one trusts anyone, good behavior is encouraged, bad behavior is punished.

 

According to many economists, Bitcoin is a revolutionary innovation - a technology that fundamentally changes the perception of money. Satoshi Nakamoto is considered to be the creator of Bitcoin. Satoshi introduced a model of decentralized finance and thus laid the foundation for a new wave of decentralization.

It is noteworthy that in early 2021, the price of Bitcoin for the first time exceeded $60,000. The most popular cryptocurrency in the world, the price of which tripled between 2019-2021, has gained the support of leading companies. This became the reason for its record price increase.

During the same period, the total volume of the Bitcoin market has already exceeded $1 trillion.

As early as February 2020, Elon Musk announced that electric car maker Tesla had bought $1.5 billion worth of bitcoin. According to him, he will also add Bitcoin to the means of payment. Mastercard plans to make a similar decision (Chitadze, 2021).

The coronavirus pandemic has also had a significant impact on cryptocurrency prices, as much of the world's population has switched to online trading. On the other hand, the growing popularity of cryptocurrencies has a huge impact on the environment, as their production requires large amounts of electricity.

 

Conclusion

In general, the question may be asked, at least what does digital money mean and how does it differ from the standard currency?

Bitcoin is the most popular and the first decentralized cryptocurrency created in 2008. As it was mentioned above, the origins of Bitcoin are linked to a programmer known as Sato Nakamoto. It was he who created and launched the Bitcoin protocol on the network. Unlike standard currencies, it is not physically printed, but generated, stored and spent electronically. It is completely decentralized as it is not controlled by any state or bank.

How is Bitcoin created and what is mining?

The origins of Bitcoin are realized through a computer network and as a result of complex mathematical processes. This is another important difference from traditional currency: traditional currency is based on the value of gold. In contrast, Bitcoin is based on mathematics. The process of creating Bitcoin is called mining. The mathematical formula used in mining is completely public and anyone can use it. As well as the software needed to create open bitcoin, which makes the process even more accessible.

The existence of computers and servers is essential for bitcoin mining, but recently special applications have become more and more active, which make it possible to generate bitcoins from a smartphone.

It is known that the number of bitcoins is finite - their total number in the world can not exceed 21 000 000. However, it is also possible to divide them into smaller units.

Fraudulent transactions with Bitcoin are almost impossible because the transaction data is stored fragmentarily on not a single server. Bitcoin payments are already allowed in online stores such as Amazon, eBay, Zappos and others.

 

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