Payment System – An Introduction, Evolution Of Cryptocurrency And Pitfalls In Electronic Payment
Overview of Cryptocurrency
The report is based on Cryptocurrency which is a digital or virtual currency which is used as a medium of exchange that uses cryptography to secure its transactions (Investopedia, 2018).The report includes the details related to the payment system and its disadvantages. This payment system comprises of cash, electronic payment and digital cash (which include Cryptocurrency). Along with this, it includes the types of Cryptocurrency which are used by people for transactions. Further, the report includes the mining process, technology, and pitfalls of bitcoin which is a cryptocurrency with the use of the example of bitcoin. In the end, it reflects the Transaction Lifecycle and capability of a Bitcoin along with the legitimacy concerns and risk that are associated with the use of technology.
Cryptocurrency make it easier for the consumer to transfer the funds among the two parties in transactions. These transfer of cryptocurrency facilitated with the use of the public and private keys for the security purpose. The minimal processing fees are the effective way through whicg the transfer of firm is done. Bitcoin is the digital currency which is mostly used by numerous numbers of customers for the transactions. In the month of September 2015, there were more than 14.6 million bitcoin in circulation were available with the total market value of $3.4 billion.
A payment system is a financial system that supports the transfer of funds from suppliers to users or from payers to payees through the exchange of credit and debits financial institutions. This fund can be in the form of paper-based mechanism or handling drafts and checks or can be electronic funds transfer which is high in demand nowadays (Dzemydiene, et.al, 2010). There are numerous ways through which the customer can accomplish a transaction and can pay for the goods and services. Some of the payment methods are: –
- Credit and debit card system
- Direct debit payments
- Online payment
- Cash payments
- Bitcoin and digital currencies
It is a form of liquid funds that are given by consumers to the provider of goods or services like a compensation for receiving those goods or services. With the evolution of the technology, there is an impact on the evolution of the currency also.
The payment in the earlier century was done with the exchange of goods and services which is known as a Barter system. In this system of exchange, the goods and services were directly exchanged for other goods or services without using a medium of exchange (money). The change in the generation brought the change in the currency as well. After barter system, there was a use of pennies which were issued by the ruler of the country with their symbol. The customer started making use of those for purchasing goods. This reflects the legacy of the cash at an ancient time. The pennies were converted into the coins and notes which are currently used by consumers. This cash is changed again in the form of debits and credit card. These changes came into existence due to growth and expansion of the countries and their business in this competitive situation (ACI, 2011). Currently, people like to make use of debit and credit card instead of cash payment. Moreover, the evolution of digital currency is replaying the use of credit and debit card for the transaction. Most of the people rely on digital currency for the payments as they find the transparent control on the currency with the use of mobile which is convenient for the customers.
Payment through cash is no longer dominating the market because of the evolution of technology. There were numerous predictions done by the people on the coin and paper currency which is declining. In the year 2013, the Federal Reserve payment study reflected that the payment through the card is increasing. In Europe, cash payment accounted for 78% continents was 388 billion retail transactions in the year 2008. This shows that by the year 2008, most of the payments were made through cash (Finextra, 2018). The total cost of managing, distributing, processing and handling of cash payment was €84 billion which was equal to 0.6% of GDO of Europe or EUR 130 per person. The dominance of cash is reducing day by day with the emergence of new technologies and mode of payments. In the initial stage of the 21st century there was cash dominance in the market for making payment but after that, the expansion and merges brought vast changes in the currency. Though, there are still few countries where people like to make the daily payment through cash because these people are willing to make use of other modes of payment (Kennedy, 2014).
There are numerous disadvantages that are associated with the use of cash money for making the transactions. Some of the disadvantages are discussed below: –
- Financial records: – It is essential for the customer to keep the track of the amount that a person is spending. With the use of cash, it is very difficult to keep the record manually but the use of credit and debit card automatically record the transactions that were made irrespective of how often you made it (Krueger and Seitz, 2018).
- Rewards: – The use of credit card provide an opportunity to the customer to make use of different types of perks, rewards, and pints which can be used by them in travel, shopping, dining, etc. The use of cash doesn’t provide such benefits to the consumer.
- Protection and convenience: – The consumer can only carry a small amount of cash with them for the day to day purchase and daily expenses. It is not convenient and saves to carry a large number of customers. Moreover, there is risk associated with the cash that it might get stolen or lost.
Electronic payment refers to as the payment for goods and services on the internet. This payment can be done through credit card, debit card, bank transfer and many others.
The evolution of electronic payments began when baking sector started offering banking services through ATM, online, mobile tablets to meet the needs of their customers and for establishing a strong customer base (FineTech Futures, 2013). The innovation in the electronic payment facility provided the opportunity to the customers and small business customers to process the payments related to the bill, transfer of cash, and personal payments through online which reduce the cost of technology. This reflects the evolution through banking services to personal services with the help of innovation in electronic payments (Vlasov, 2017). The card payments were on the boom in the electronic and then the digital mobile introduced. In the year 2007, the first digital mobile wallet came into existence and this system was introduced by M-Pesa. Further, in the year 2009, bitcoin was the first digital currency came into the market which raised the use of digital currency. In the year 2011, the highly-recognized company Starbucks started accepting mobile payments to reach maximum customers (Wallace, 2013).
- Increased convenience and speed: – E-payment is the fasted payment mode and convenient. The customers can make the payment at any time being it day or night along with this they don’t have to wait to turn a request to the transaction.
- Increased Sales: – E-Payment has contributed to the development of the economic and in the rise of the GDP of many countries by increasing the sales of businesses. According to the survey conducted in 2014, bank rate established more than 75% of those surveyed carry less than $50 a day which shows that the use of e-payment is increasing (Green, 2018).
- Reduced transaction cost: – There are no additional charges or interests that are associated with the e-payments which save the amount of the customers.
- Security: – This is one of the major concerns because with the rise in the use of technology there is a rise in the hacking and breaches of the security. These threats might affect the usage of the e-payments by many of the customers across the world (Turban, et.al, 2015).
- Increased business cost: – The businesses have to bear the cost that is associated with the e-payment. Businesses that are making the use of e-payment they prepare in-house e-payment systems which include the additional cost of procuring, installing and maintain sophisticated payment security technologies.
- Disputed transactions: – There are many fraudulent transactions which take place and there is no opportunity to win the claim of loss because these transactions are made by hackers or unknown person with whom you are not aware.
Password threats: – In the case of e-banking the consumer has to register themselves with the particular website and this is ensured by the companies with the involvement of the one-time password. This one-time password ensures the safety or protection of the personal details. If any customer is having multiple accounts then there are high chances of password leak which is a major risk to customers.
Loss of cards: – All the electronic payments are done with the help of smart cards and these cards involve risk of theft and loss. If these cards fall into the wrong hand then the money of customers got stolen. Though, the customer has the opportunity to get that card blocked till the time there is the threat of uncertainty (Weather How, 2018).
Digital cash refers to as a system of purchasing cash credits in relatively small amounts, strong the credits in the company and then making the electronic transactions (Tech Target, 2018).
Below are some points that reflect the need for the digital cash: –
- Widens the range of options for monetary policy: – The implementation of the digital cash allows new monetary policy tools to be used. The digital cash contributes to increasing the aggregate demand which contributes in forming monetary policy.
- It makes the financial system safer: – The digital cash allows the private sector company, consumer, and other people to directly settle the amount in the central bank rather than the deposit which reduces the credit risk associated with the payments system (Positive Money, 2018).
- Encourage innovation and competition in payment system:- It provides a convenient way to the new entrants to the payments sectors so that they can offer the payment account and competition to the existing banks. This payment would also reduce the need for the most to run their payment through larger banks.
In the year 1983, the research paper presented by the David Chaum reflected the idea of the digital cash. In the year 1997, the Coca-Cola Company offered the opportunity to their customer to use vending machines and make payment through mobile. Just after that PayPal came into existence in the year 1996. Then the major evolution in the digital currency came in the year 2008 when bitcoin was introduced and it was a start of the digital currencies. After 2008, the currency was not in demand but slowly the demand of the bitcoin increased in the market which made the use digital currency popular across the world (Gautham, 2015). There are many countries who legally accepted the use of digital currency in their country but some of them rejected the same.
A distributed ledger is a consensus of shared, replicated and synchronized digital data that get spread across the different countries, sites and institutions (Bauerle, 2018).
The rise of the bitcoin presented the world to Cryptocurrencies, distributed consensus ledgers (DCLs) and the blockchains. DCL technology has the potential to increase the efficiency, trust, transparency, innovation, reach in the financial market for the Cryptocurrencies. In the payment cases, DCL has proven to be most valuable. This is very that clear that DCL makes the difference between the digital payments space comparing it with the existing technology (Berke, 2017). DCL enables the distributed, democratic and evenly-situation control to be exercised in the situation where is not possible currently for the digital cash (Cryptocurrency). This ledger can go beyond the capabilities of existing technology by providing transparency where it was difficult to be achieved. For instance: Anti-money laundering (AML).
Cash legacy system
The first distributed ledger is Bitcoin that need a native on ledger currency to operate. These currencies are known as tokens in the nomenclature of the blockchain community. This tokened ledger is that ledger which needs a currency to be a function that is typical to pay the miners or to make the denial of service attacks economically challenging. Mainly tokenless ledger doesn’t need a currency to operate (Deloitte, 2018).
There are different types of Cryptocurrency that are available in the market at present and some of them are discussed below: –
It is the most famous digital currency in the world with the currency exchange rate of INR 3, 70,000 which is approximately more than $5000 USD. According to the analysis, the value of the bitcoin increased at 750% in a year. Moreover, this digital currency is the most actively used current in the market with approx. up to 300,000 transactions per day. This digital currency was first launched in the year 2009 in the market (Rajpal, 2017). This is the fact that Bitcoin is known as the original Cryptocurrency with the most liquidity and the network effect in the world. There are many companies who accepted this currency including Overstock, Expedia, Shopify and many others. They started accepting payment in Bitcoin from their customers.
In addition, Bitcoin is known as first decentralized digital currency which performs the activity without the involvement of the any banks and regulatory body. The transaction of the bitcoin takes place between the buyers and sellers of the currency and there is no involvement of any third party at the time of the transaction. There are many consumers who invest in Bitcoin considering it as an investment. There are different ways that is used by the consumer for acquiring the bitcoin. Some of them are given below: –
- Buy on an exchange: – In market there are numerous number of exchange centre who work for the exchange of currency. The leading bitcoin exchange available in the country includes Bitstamp, Coinbase, Bitfinex and many others.
- Transfer of bitcoin: – The transfer of bitcoin is another way which helps the consumer to conduct the transfer of bitcoin from one person to another person with the use of their computers and mobile apps as digital money.
- Mining: – This is the most important way through which the consumer can acquire the bitcoin. The consumer who wants to ac quire the Bitcoin they make use of the computer to solve the puzzle of math to get the bitcoin in reward.
This is another popular type of cryptocurrency in the market. Ethereum is mainly used for the transaction between the users which is known as peer to peer transactions. This is the fact that the consumer can make use of this digital currency for a different purpose than other cryptocurrencies.
Litecoin was second popular digital currency before Etherum took its position. Litecoin is Cryptocurrency that operates in a similar capacity to its contemporaries. This digital currency enables the smaller transactions in the short span of time. This is the fact that another cryptocurrency has taken the market share of Litecoin but this digital currency as its own competitive advantage with the strong network effects.
Unobtanium is the digital currency with the cap limit of 250,000 coins which enables the user to perform the trade with the decent value. This digital currency fluctuates a lot which might be a risk for the consumers who are making use of it (Rajpal, 2017). The most important element of Cryptocurrency is mining which is a most strenuous work in case of Bitcoin, Litecoin, and Black coin. In the mining of bitcoin and other coins, there is a need for skills and patience. Considering the fact that Unobtanium is merged with Bitcoin it goes through the same mining. This digital currency is secure high-difficult blockchain than the bitcoin which is approx. 3 times faster. Unobtanium is rare currency in terms of coins, fair launch, and distribution.
This cryptocurrency came into existence in the year 2014 by Rat4 and it performs the peer to peer based transactions. Comparing this currency with bitcoin, this digital currency can complete the transaction much faster than the bitcoin. This currency relies on the proof-of-stake system in order to verify the transaction performed by the customers. In simple words, this means that the users of this currency stake coins from their wallets on the right to verify the next transactions. If in case the transactions they are willing to verify doesn’t match what gets accepted by the system the customers simply lost those coins (Prakash, 2017).
Market capitalization of the currency is the aggregate valuation considering the current share price and the total number of the outstanding stocks. The below image reflects the different types of digital currency and their market capitalization across the world. The total market capitalization of all the cryptocurrencies is $160 Billion.
Mining process of Bitcoin
Bitcoin is considered as the most popular and in-demand currency due to which it is used as an example of Cryptocurrency. Bitcoin Mining refers to as the process through which the transactions are verified and added to the public ledger that is known as Blockchain. In simple words, it refers to as the process through which new bitcoin get released (Acheson, 2018). Any customer who has interest in the mining process can participate in mining with the help of internet and suitable hardware. In the mining process, the participated candidate has to solve a computationally difficult puzzle. The participant who solves the puzzle gets the place in the next block on the blockchain and can easily claim for the rewards which they will get in the form of Bitcoin (Yermack, 2015).
Disadvantages of cash payment
The amount of new bitcoin launch with the each mined block is known as block reward. This block reward is halved every 210,000 blocks or approx. every year. In the year 2009, the block reward system was started at 50 which are now in the year 2018 is 12.5 (Hong, 2018). Further, it is expected it will continue to decrease in the coming years. This diminishing block reward will reflect the result in which a total release of bitcoin approaches till 21 million. The mining of the bitcoin is totally depended on the level of puzzles that the participant will solve to get the new bitcoin. These participants put efforts into mining across the network so that they can earn bitcoin as a reward. The difficulty of mining can be adjusted and is going to be adjusted by the protocol every 2016 blocks or roughly every 2 weeks (Investopedia, 2018).
At the initial days of the bitcoin, the mining was done with the use of CPUs from normal desktop computers. This is the fact that the graphics processing units or graphics cards are more effective at mining than CPUs as bitcoin has gained popularity and graphics processing units became dominant. The hardware with the name Application-specific Integrated circuit was designed with the motive for mining bitcoin and the first ASIC was released in the year 2013. At present, mining process is very competitive with the increase in a number of participants. Along with this, currently, the mining can be done today profitably with the help of latest ASICs.
Hashing refers to as the conversion of a string of characters into usually shorter fixed-length value or key that signifies the original string (TechTarget, 2018). This technology is mainly used to index and retrieve items in a database as it is faster to find the items with the use of the shorter hashed key rather find it with the use of original value. This is the fact the hash technology has been used in the Cryptocurrency due to which many people heard about Cryptographic hash function.
A hash function is one of the important parts of not only bitcoin protocol but also for the information security as a whole. Basically has function is a mathematical process that takes input data of any size, performs an operation and return output data of a fixed size. The common use of the hash function is to store passwords (Crosby, et.al, 2016). For instance; whenever a user creates an account with the web services needs a password and that password run through a hash function.
In the bitcoin protocol, has functions are the important and major part of the block hashing algorithm which is required to write new transactions into the blockchain through the mining process. In the mining process of bitcoin, the inputs for the function includes all recent, not-yet confirmed transactions. In the code example, if there is a change in the small part of the input for a hash function that results in a totally different output. Therefore, this is the fact that this property is crucial to the proof of work algorithm involves in the process of mining (Faife, 2017).
When the participant’s miners try to solve the puzzle then they combine all of the inputs with their own arbitrary piece of input data in such a way that it results in the hash start with a particular number of zeroes. Solving a hash for the bitcoin that is a block of bitcoin needs a large amount of the computation. The bitcoin block starts at the time of writing with 18 zeroes. Hash technology requires a large amount of the processing power which reflects the new bitcoin get mined over a long period of time. In order to earn bitcoins through mining the participants required to put in the huge amount of work which is required to solve a block.
Data integrity refers to as the maintenance of the assurance of the accuracy and consistency of the data over its entire life-cycle. It refers to the accuracy and the consistency of the data that is stored in the database, data warehouse, data mart or another construct. The blockchain is a decentralized transaction and the data management technology that was first developed by the Bitcoin Cryptocurrency (Blackwell, 2017). Therefore, the bitcoin make use of cryptocurrency for the data integration activity. The blockchain is a common ledger shared by all bitcoin nodes which keep the data of the owner of each bitcoin holder. There is as such no central place where the ledge of the transaction is stored.
Bitcoin, a digital currency relies on the public blockchain a system that keeps the recording of the transactions that allows anyone to read or write the transactions related to the bitcoin. Blockchain technology was developed to track the transactions related to the bitcoin and to authenticate of the transaction. Moreover, the technology provides bitcoin a securely recording and sharing data. Considering the Paxful Bitcoin wallet, the blockchain technology plays a vital role in the development of the cryptocurrencies (Blackwell, 2017). This data management technology is mainly used in the applications like Skry, Smart cars, Insurance and many others. All these trends reflect that the data integrity technology used by the bitcoin can also be used in different industry for a different purpose. Blockchain technology was developed with the intention to enhance the data integrity of bitcoin. In the last few years, the bitcoin has become popular in the market along with its technology due to which this technology is used by many people for a different purpose.
Evolution of Electronic payments
Consensus refers to as an ambiguous and problematic word which can mean several different things both in bitcoin and elsewhere. The consensus mechanism of the bitcoin has specified the set rules for the bitcoin such as blocks of bitcoin can only create a certain number of bitcoin. If in case a block creates additional bitcoin that it is allowed, all the full notes will reject this block even if the nay other person or miner across the world has accepted it. The consensus rules are only concerned about the validity of the transactions and blocks (Shi, 2016). The mechanism of the consensus is the centralized system, an administrator that manages the files to store and update them. Bitcoin maintains the concept of the consensus in their peer-to-peer network and has a protocol. The consensus mechanism that is used by Bitcoin is known as Proof of work (PoW).
PoW is the mechanism that needs the nodes to prove that they have completed their work to achieve the right to add the transaction to the blockchain. This work that is performed in the bitcoin is energy intensive as it involves the nodes hashing data through high-performance and the ASIC chips (Bitcoin, 2018). In the context, the participants solve cryptographic puzzles in which they require highly efficient hardware. Bitcoin has gone from mining using CPUs on the desktop to use ASICs that mainly design the mining rigs. To acquire the mining hardware there is need of the high cost of the electricity along with the initial capital which makes the blockchain network to use PoW.
There are numerous hidden risks that are associated with the cryptocurrency which stop the people to make an investment in bitcoin. Some of the pitfalls are discussed below with the help of bitcoin: –
One of the major risks to the bitcoin is forks of bitcoin this shows that the digital currency is about to fork (split into two different digital currency) two more time in the coming years (Kiviat, 2015). The first fork is Bitcoin Gold, it seeks to remedy this by employing a new proof-of-work mining algorithm which permits the consumer to mine bitcoin gold coins through their computers. In the last fork of the bitcoin, the new coin that was created was Bitcoin Cash (DeMichele, 2017). At that time, whoever was the owner of bitcoin automatically became the owner of the new coin– bitcoin cash. Then, the value bitcoin cash increased and reached to the million-dollar. This risk of bitcoin fork might stop the customers to invest or make use of bitcoin as this is one of the major pitfalls of bitcoin (Schroeder, 2017).
Advantages and disadvantages of Electronic payments
This is one of the crucial pitfalls of the bitcoin digital currency. The rise in the demand of the cryptocurrency Bitcoin has increased the energy wastage. Miners are making use of their personal CPUs so that they can win the reward after solving the puzzle. This leads to a rise in the consumption of the electricity. The total electricity use in the bitcoin mining has increased by 30% in the past month. Moreover, harder puzzles increase the time of the participants which leads to the rise in the prices of electricity and the speed. It has been estimated that the marginal cost of each bitcoin will more than double from $6,611 in the fourth quarter to $14,175 in the second quarter of 2018. At the start of the year 2017, the cost was $2,856 which rising and this leads to a rise in the risk for the miners as a price tumble (Bloomberg, 2017).
The price of the bitcoin as a cryptocurrency is too volatile. The virtual currency is known because of its wild fluctuations in the price. Price of the bitcoin is the only reason due to which most of the customers are not willing to invest the amount in bitcoin. In the year 2013, the prices of the bitcoin reached to $1,135.89 and it was a sudden hike in the prices of bitcoin. The sudden rise and decrease in the prices of the bitcoin is the bad news for the consumers. Though, this is also a fact that that bitcoin had a more than 100% return on investment considering the data in the year 2016. It has been observing that it’s five times more volatile than the S&P 500 (Close, 2017). This reflects that bitcoin is such a risky investment which stops the people to invest.
Hacking isn’t one and the only danger of using bitcoin but there are many scams that took place related to bitcoin which has stopped the consumer to invest. For instance, in the year 2013, New York man was arrested in the first federal securities fraud case that involves bitcoin investment scheme. There are many other scams related to the fake bitcoin wallet, phony bitcoin exchanges, phishing schemes and many others. Scams are also a pitfall of the digital currency bitcoin.
At present, there are thousands of bitcoin transactions which are made with the use of Bitcoin. All the digital transaction made by the user or consumer are digitally signed for the security of the coins and whole bitcoin network is aware of every bitcoin transactions. Therefore, each transaction of the bitcoin can be traced back to the root which reflects the point from where the bitcoins were produced (Ankalkoti and Santhosh, 2017). There are records of transactions between the wallet addresses with a balance that sometimes decrease and increase. Every transaction that takes places gets a store in the vast public ledger (Blockchain) that is used by Bitcoin. If the user of the bitcoin is looking to find out the balance of any bitcoin wallet address then they can do it but this data doesn’t get reflected in the wallet address. The consumer has to reconstruct all the transactions with the help of blockchain.
Pitfalls in electronic payment
The capability of the transaction can be measured with the help of the scalability. A full node of bitcoin can be modified to scale to much higher transaction rates. VISA handles on average around 2,000 transactions per second (tps), so call it a daily peak rate of 4,000 tps. It has a peak capacity of around 56,000 transactions per second. In the present time, the bitcoin network is limited to a continued rate of 7tps due to the bitcoin protocol limiting block sized to 1MB. In the year 2014, the PayPal handles approx. 10 million transactions every day on an average of 115 tps. Considering the analysis, the on the chain transaction processing capacity of the bitcoin network is limited by the average block creation time of 10 minutes and the block size limit. The transaction processing capacity of the bitcoin is estimated in between 3.3 and 7 transactions per second.
In addition, the transaction capacity of bitcoin varies from bitcoin cash. Bitcoin cash is the fork of the bitcoin which set its block size to 8 MB. The rise in the block size enables the coins to process much more transactions because the block size is 8MB which is greater than bitcoin. In addition, the transaction fees of the bitcoin cash are less than bitcoin. There is no as such specific number that can identify the capacity of the transaction of Bitcoin cash.
The calculation of the transaction per second is given below: –
Block Time: 10 Minutes = 600 seconds
Block Size: 8 MB = 8388608 Bytes
8388608 Bytes / 600 s = 13981.01 Bytes/s
The bitcoin cash network can process up to 13981.01 bytes worth of transactions per second on an average (Coin analysis, 2018).
Legitimacy concerns of bitcoin
Legitimacy over here represents the confirmation of the law or rules. Bitcoin is biding continuously for the legitimacy of the bitcoin. There is a debate going on bitcoin of which there are many supports who are supporting for the bitcoin (Weber, 2014). These loyal followers believe that bitcoin is the future of the medium of exchange and stores of value are in currency constructs that are outside the purview of central banks and governments. These supports include investors, pundits, consumers who perform a transaction with the help of bitcoin and many others. These supports believe that bitcoin provide them a unique and lasting advantage (El-Erian, 2017). Considering the supporters point of view, it has been accepted that the bitcoin will be accepted and adopted by the broader population of users whether they are using it for the transaction or for the other purpose.
Some governments and companies were interested and agreed to the opinion shared by the supports for the legitimacy of the bitcoin across the world. In the year 2017, CME Group Inc. declared that they will offer the vast future opportunities to the bitcoin. Along with this, Japan shared their decision related to recognition of the cryptocurrency as the legal tender. Though, there are many other governments who opposed the adoption of currency as a legal currency.
At the end of the discussion, there are many countries who said yes to the bitcoin but some said no to the bitcoin. UK, Canada, Australia, the European Union and many other accepted the use of bitcoin as a cryptocurrency in their country. On the other hand, Iceland, Vietnam, Bolivia, Ecuador and many others said no to the cryptocurrency. Therefore, it can be said that the matter of Bitcoin Legitimacy is still in doubt in few countries (Bajpai, 2018).
Legitimacy concerns related to the cryptocurrencies is still a matter of discussion in the current market. The people know the fact that digital currency is new technology and people are making use of this technology for the day to day transactions (Böhme, et.al, 2015). There are numerous types of risk that are associated with those users who are making use of it. Some of the risks of cryptocurrency are given below: –
Bitcoins are not legal at every place due to which this is considered as the rival of the government currency. This digital currency is mainly used by the people for the black market transactions, money laundering, illegal activities and many others (Willams, 2017). In the year 2015, the New York State Department of financial services has finalized regulations under which they would require the companies to keep the data of transactions and customers.
The transfer of digital currency involves the risk of security due to hackers, malware, and operational glitches. This technology is even risky for the stock exchanges as hackers can also target the bitcoin exchanges to gain the access to the thousands of digital wallets. In the year 2014, Mt. Gox a bitcoin exchange in Japan was forced to close down after millions of dollars’ worth of bitcoins were stolen. Therefore, the use of the digital currency is not safe for the people who use it (Investopedia, 2018).
There are some kinds of investment that are insured through the securities investor protection corporation. FDIC insured the bank account but the bitcoin wallets, exchanges, and accounts are not insured by any type of federal government.
There are many cases related to the fraud in bitcoin transaction were reported. When a consumer makes use of bitcoin the private key encryption is used to verify the owners and registered transactions then they get involved in different types of frauds. In the year 2013, July, the SEC brought legal action against an operator of the bitcoin-related Ponzi scheme.
There is wild swing or fluctuations in the value of the bitcoin due to high volume purchase and sell of the bitcoin in the market. Considering the fact shared by CFPB, the price of the bitcoins fell by approx. 61% in a single day in the year 2013 while the one-day price drop in the year 2014 has been as big as 80%. The high fluctuation in the price leads to the major risk for the customers who invest in the bitcoin (Investopedia, 2018).
In the end, it can be concluded that the cryptocurrency is one of the recent topics across the world. It has through light on the payment system which includes electronic payment, cash payment, and digital payment. Considering the fact, that there is a change in the technology which has brought changes in the payment system. There are different types of cryptocurrencies present in the market which are discussed. Moreover, it includes the mining process of bitcoin, the technology used in bitcoin and the consensus mechanism of bitcoin. Along with this, it also reflects the pitfalls related to the bitcoin. In the end, the report reflects facts related to the Transaction cycle of Bitcoin, transaction capability, legitimacy concern, and the risk that are associated with the use of this technology.
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