Discuss About The Algorithmic Regulation Automating Financial.
Crypto currency is threatening financial businesses like blanks and other firms that deliver financial services (Treleaven & Batrinca 2017, pp.14-21). Many business people have chosen to embrace crypto currency financial services due to their numerous benefits including the untraceable transactions. Crypto currency is a new technological innovation invented by Satoshi Nakamoto which allows the users to transfer money and other financial documents through the internet using the blockchain applications. The crypto currency applications include Bitcoin, Dash, Ripple, Power Ledger, Car Vertical, Wabi, Ethereum, and Wanchain (Seppälä 2016, p. 34). The fast growth of crypto currency business has made scholars launch studies to research on the technology to find results on its impact on economy. Therefore, the case study herein investigates and analyse the growing use of crypto currency by studying bitcoin, dash, and ripple.
After Satoshi Nakamoto invented the blockchain protocol, many crypto currency networks emerged lead by bitcoins network in 2008 (George, McGahan & Prabhu 2012, p. 661). Bitcoin is a technological payment system in the internet and also has its bitcoin currencies. The financial markets today consider bitcoin has a digital gold because currently, one bitcoin currency is traded at $ 10, 000.
Figure1. The figure show bitcoin currency trade in the crypto currency market (Ciaian, Rajcaniova & Kancs 2016)
Apart from bitcoin there are other crypto currencies that control the digital blockchain business and they include dash and ripple. Dash is blockchain app developed by Evan Duffield on January 18th 2014 as a Xcion and its features are more improved than those of bitcoin protocol. A Dash currently trades at $ 394 accoring to Glaser et al. (2014, p. 78). Ripple on the other hand is a crypto currency developed Ryan Fugger in 2004 is serving as payment protocol and is currently trading at $ 0.682584 (Glaser et al. 2014, p. 78).
PESTEL analysis is a marketing tool used by the marketing managers to analyse and monitor the external environment factors that have effect on the business (Anderson et al. 2015). The factors include political, economic, social, technological, environmental, and legal (Glaser et al. 2014, p. 78). The crypto currency as a business is also affected by PESTEL factors because the market has attracted many persons’ attention and its usage is growing faster. Starting with politics, the political activities can affect crypto currency badly. For example, when South Korean government reported that it had closed the crypto currency exchange, the market in South Korea collapsed and people who invested in the business there suffered big losses (Garcia et al. 2014). Some political regulation by countries can affect the flow of crypto currency for example, when China banned mining activities, the crypto currency was affected negatively because the mining industry is one of the largest market. However, there other political actions that are helpful for the crypto currency market for example, the policies that protect customers.
Figure2. Shows political influence on bitcoin prices (Garcia et al. 2014)
Figure3. Show the effect of closure of crypto currency trade in South Korea (Anderson et al. 2015)
The second factor is the economy, crypto currencies need the world to be financial stable because it its fiat nature. The devaluation, inflation, and the dependency on enmities affect the crypto coins trade because the crypto currency is vulnerable and young. Many people do not use the currency because the economic news on media and prefer banks despite the simplified services they produce. Socially, the community does not like the crypto currency payment methods because they believe that the method is mostly used to by criminals and terrorists who disturb the social life of people. Yli-Huumo et al. (2016) reported that the anonymity, privacy and non-traceable characteristics of crypto currencies like bitcoins has made the society led by the law enforcement agencies to interfere with the service delivery of the protocol affective their markets. The technological advancements have affected the crypto currency markets. bitcoin has upgraded its service delivery through new technology and its demand have increased drastically. Technology has also been challenge to the existing blockchain protocol because it gives room for invention of more sophisticated blockchain protocols.
The environmental factors include the competition around the business, the ethical issues, and the target markets. Crypto currency is competing for customers with banks and other financial organisations. Many people have come up with their own blockchain protocols that work similar to bitcoin and even perform better that bitcoins. The banks have introduced good rates for currency exchange which outweigh the services of crypto currencies. The business is technological in nature hence, it cannot cover every place in the world because some countries especially in Africa are technologically backward and cannot use bitcoins rather they prefer banks (Petrella 2010, p. 257). The last PESTEL factor that affects crypto currency is legal issues in most of the countries. For example in China, there are legal policies that monitor how the state owed crypto currency is trading. The law of the Republic of China does not allow any other digital currency everything is centralised to the central bank.
According to Sharples et al. (2016), although crypto currencies have gained popularity since its invention in 2008, the field is so competitive because currently, there are more than 10 blockchain protocols which provide financial services. Forex also compete with bitcoins for customers, without forgetting financial institutions that provide hard currencies (Polasik et al. 2015, p. 10). To understand better the competitiveness of crypto currency business Porter’s Five Forces analysis will be used. According to Sharples et al. (2016), the competitive analysis tool developed by Michael Porter looks at competitive rivalry, supplier power, buyer power, threat of substitution, and lastly threat of new entry. Crypto currency business is attractive although it has many competitors. If somebody wants to invest in the industry he/she should consider buying bitcoins currencies because it is the leading currency in the market.
Figure4. Showing the leading crypto currency protocol up to March 2018 (Polasik et al. 2015, p. 10)
There are other blockchain protocols that compete with bitcoins in the crypto currency markets and the two major ones are Ripple and Dash. Ripple has global market and it delivers international financial transactions which are instant, of low fee, certain and private. The protocol is very transparent and transactions are real time. Dash provides transactions that are more untraceable and anonymous that Bitcoin and Ripple, its payments are more secret. Supplier power is the second analysis where the business must know the power of their supplies. If an investor wants to enter the crypto currency business they must know who they will ask to supply them with technological equipment to design the protocol and the expertise of the technicians.
The crypto currency is a business where price of currencies fluctuate depending on many factors including the buyer power. The investor should understand their buyers very well so that they can determine their currencies. As Hassan Al-Tamimi (2012) suggested, bitcoin learn their customers first before demining the price of bitcoin crypto coin. Crypto currency has threats of substitutions. The banks and other financial institutions threaten the existence of crypto currencies. Other threat to the crypto currency is where people may decide to conduct their business transactions manually face to face to avoid being traced or suspicion from authorities especially the criminals. The last factor that an investor should put into consideration is the threat the new entry will bring to his/her business. As the technology is growing everyday there are many new blockchain protocols that are being developed which affect the sales of biotcoin coins (George, Schillebeeckx & Liak 2015, p. 270).
Competition is crypto currency is very high because blockchain protocols like bitcoin, ripple, and dash compete for customers with other institutions that deliver the same services but in hard copy style in the other word the hard currency. Most governments prefer using the hard currency because it can be easily taxed but the soft currency is hard to tax. The power lies on the crypto currencies. Most people love the crypto currencies because they provide quick payments in a private which cannot be traced easily. Crypto currencies are also people’s favourite because of less fee they charge and anonymity of the persons conducting the transaction. The crypto currency system is also transparent and free from corruption. The benefits that come with crypto currencies have made it powerful payment method in the world today.
Figure5. Shows tight competition in the crypto currency where bitcoin dethroned litecoin and dash (George, Schillebeeckx & Liak 2015, p. 271)
Risk Analysis
According to Doran et al. (2017, p. 33) crypto currency is same as e-currency or e-money like the pay pal or Webmoney and like any other e-money service crypto currency has some risks that include one, hacking payment made by a client. Ngoc Nguyen and Stewart (2013, p. 268) reported that in 2017 many users lost their payments from Etereum protocol through hacking. The hackers used the social-engineering software and convinced the customers that they were the owners of the app’s domain and managed to steal over $ 300, 000 (Ngoc Nguyen & Stewart 2013, p. 268). Another risk is spoofing a user address by a hacker. Most crypto currency investors lose a lot of money when hackers spoof their user address and place a fake one. For example, in 2017 a hacker got away with over $ 2 million in one day after replacing fake user address during an Initial Coin Offering (ICO) Jamal Zeidan 2012, p. 70). The third risk is loss of a wallet file where a user can lose his/her file, the file can be stolen by a malware function or it can get lost when a hard disk of a personal computer crashes. The above risks are not all risks created by crypto currency, there other more and they can be avoided by the below recommendations.
The following activities should be done by investors in the crypto currency industry to prevent the risks in the business. First, the users should always verify his/her wallet address before accepting to send payments. They should also avoid following pop ups links when on transaction process. Second, the user should always check to verify the address of the receiver, the transaction charge and the amount of money to be sent. Third, the crypto currency user should have the wallet file backup written in his/her hard copy files. Fourth, a crypto currency investor should always think critically before engaging in the blockchain business. Fifth, install high-quality antivirus to prevent invasion of hackers and lastly the user should not invest all his/her assets in crypto currency.
Verification of user address and the receiver address prevents transaction of payments to the wrong person. Backup information of the wallet file can help the user to restore the wallet if it was lost or it crushed with a personal computer. Making wise decision is important and an investor should spare some money y not investing all of it. Antivirus protects the PC from hackers.
Conclusion
Crypto currency business has improved the financial payment services by improving the time taken to transact the payments, reducing the cost, increasing transparency. However, the system has been used by criminals, terrorists, and drug dealers for payment services. They have used the system because it provides anonymity, privacy, and the transaction records cannot be traced. Some even chose to use the crypto currency to run away from paying taxes. The crypto currency has threatened the hard currency business like banks because it offers cheap services. The fast growth of crypto currency has called the attention of the most powerful economic countries. Countries like China developed interest in crypto currency and have even developed state owned crypto currency. The business is attractive but, investors should trade carefully.
References
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