HI6008 Business Research Project Assignment, Holmes Institute, Australia
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Assessment Title - Literature Review
This unit aims to give you an opportunity to combine many facets of your acquired MBA skills into the production of a high-quality research project.
Answer - Business Research Project: Cryptocurrency
2.0 Literature review
Cryptocurrency has become a massively popular digital asset, as it enables secure financial transactions and uses a decentralised line of control, which is different from the other centralised digital systems of currency. This control of the cryptocurrency usually functions with the help of a distributed ledger technology known as blockchain, and this serves as a transaction database as well (Narayanan, et al., 2016). The focus on blockchain technologies and cryptocurrency has increased, as the world of digital currency has ushered in a new era that has increased the excitement of the public and led to an acceleration in the profits.
Cryptocurrency has become one of the most innovative drivers of creativity due to its opportunities for innovation (Wang and Vergne, 2017). Investors who want to make profits are thereby drawn to this opportunity, and due to the subsequent psychological ramifications, more and more people are willing to invest in the same. However, there is definitely no guarantee in this case, since cryptocurrency assets are mostly in their embryonic stages, which means that there is little or no precedent for comparing the market in which it functions (Hughes and Middlebrook, 2015). Surprisingly enough, this ambiguity has given rise to many start-ups as well. This can perhaps be attributed to the fact that there are no boundaries regarding the restrictions to innovation, which implies that start-ups have complete freedom to choose their own path. Moreover, the capital is available quite easily, and the entrepreneurs enjoy their ambitious outlook as a means for developing an eco-system that is at a rather young stage (Hayes, 2017).
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2.1 Cryptocurrency in Australia
In Australia, the market for digital currency has been growing at an impressive rate for the past couple of months. A joint study by the Australian Digital Commerce Association and Accenture has revealed that the growth of the digital currency market has been exponential over the course of 2017, which has led to a shift in its trajectory towards financial markets that are somewhat mainstream (Harris, Di Santo and Giurietto, 2018).
The increase in the growth of digital currency exchanges has been at an incredible speed, and many industry leaders have also collaborated with the governments in an attempt to bring about a regulation in the arena. In early 2018, it became mandatory for the DCEs to register themselves with AUSTRAC (Australian Transaction Reports and Analysis Centre), which meant that they would have to follow a specific set of rules and regulations pertaining to money-laundering and terrorist activities, the aim being to prevent the occurrence of these instances (Harris, Di Santo and Giurietto, 2018). This new policy however did not bring about much changes for the larger enterprises, as they already had a set of rules and codes of conduct that they adhered to.
These new changes in the regulations are estimated at bringing about a change in the relationship that the DCEs have with the major Australian banks. These banks have forever been rather cautious in their approach, as they had not been very sure of these institutions due to their possible linkage with the risky sectors. Start-ups however continue to face a high degree of uncertainty as it is not yet clear if these changes would bring about more uncertainties to the banking sector (Harris, Di Santo and Giurietto, 2018). Many believe that the relationship with the banks would change completely, as they may also see numerous lucrative opportunities in cryptocurrency.
Digital currency formats are constantly evolving both in Australia and around the world. This requires businesses as well as consumers to adapt to these changes. Regulators need to identify more measures for protecting consumer data, especially from fraudulent entities and also from system failures. The extent to which cryptocurrency has gained popularity indicates that more consumers need to be educated in that regard, so that they can find ideas on how to be responsible investors. Transparency pertaining to the transactions between banks and DCEs will also help the digital currency industry to improve its relationship by ensuring appropriate governance and oversight procedures (Harris, Di Santo and Giurietto, 2018). The government needs to find additional measures for securing the exchanges, especially in international platforms. The best way to implement this would be by strengthening the local markets. Central banks and other institutions have an important role to play when it comes to consolidating the foundation for better usage of cryptocurrencies.
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2.2 Impact of blockchain and cryptocurrency on businesses
Cryptocurrency is a technology that has the capacity of being disruptive to the entire society, as it has the potential to impact the manner in which friends, families, colleagues, customers and entities such as banks, transact with one another (Raymaekers, 2015). One of the most noteworthy cryptocurrencies, that is Bitcoin, has further put the blockchain technology in the picture, which has brought about major changes regarding the same.
Many enterprises around the world now accept bitcoin and other cryptocurrency formats as a mode of payment, and even pay their workers' wages through the same technology. The introduction of the blockchain technology has further brought about enhancements in the security as well as the efficiency of the processes across various industries (Fanning and Centers, 2016).
However, there is also a high degree to volatility associated with cryptocurrency, which implies that its application or implementation is dependent on the degree of risk that the business or the individual can withstand (Conrad, Custovic and Ghysels, 2018). This is because the value of the various cryptocurrencies is based completely on the digital platforms, meaning that they could have virtually zero monetary value within the next 24 hours (Bakar and Rosbi, 2017). There are also numerous operational considerations, such as the custody aspect, which deals with the secure storage of the currency, and the administrative aspect, which deals with trade tracking, receipts and payments. There is also a definitive lack of regulation when it comes to cryptocurrency, as there is no specifically designated body, which would settle or address the disputes when and if they arise (Pittman, 2016). The structure of this digital platform is highly decentralised, and this can be a serious threat especially if one has invested significantly or conducts business with it.
Businesses that wish to start using cryptocurrency need to have an exceptionally good understanding of its basic concepts. The easiest way to do this is by working with an advisor who is trustworthy and has sufficient knowledge regarding the various aspects. Using cryptocurrency can benefit a business in several ways. For instance, when a company endorses cryptocurrency as a payment method, the customer base is expanded significantly (DeVries, 2016). Since the usage of this digital currency is a global phenomenon, it will be easier to access the international marketplaces as well. Additionally, the processing and other transaction fees can be lowered as well by endorsing payments through cryptocurrency. This is because the charges levied in this case are significantly lower compared to that of the regular credit cards. Moreover, the transactions once carried out are permanent, and therefore there are no chargebacks as well. It is essentially an extremely secure mode of financial transaction because of its enhanced encryption features, provided it is managed efficiently (Nigam, 2016). Companies can also diversify their assets through the use of blockchain technologies.
Many countries as well as their local governments have started using cryptocurrency in an attempt to reduce the burden and responsibilities that come with real estate sale and transfer of titles (Hughes and Middlebrook, 2015). This has reduced the need for paperwork, and the digitisation of the proceedings have ensured that there is little or no scope for forging the records. The automotive industry has also utilised blockchain for streamlining its supply chain management processes, and for reducing the instances of human error and waste, and also for providing additional manpower in every step
Cryptocurrency makes it possible for the healthcare industry to implement data exchange systems that are highly secure due to the encryption methods - a highly preferred benefit for safeguarding the patient records (Zhang, et al., 2017). Various banks have also implemented these technologies for reducing the instances of fraud by allowing the spreading of information over various databases, which are verified separately. Cryptocurrency methods are also being used to transfer money in a cheaper and faster way, and it also helps obtain compliance from the customers especially when negotiating with the different regulators.
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2.3 Cryptocurrency and the global market
Cryptocurrencies have become the convenient option that can be used as an alternative to the real-world currencies, and the fact that they are based on digital platforms and are comparatively easy to use (Andrianto and Diputra, 2017). Many countries such as those in the European Union and the United States view cryptocurrency as a novelty, but there are also nations such as Venezuela, that have mismanaged their domestic currency, leading to a sky-high inflation rate (Choo, 2015). This has resulted in the deteriorated living conditions of the common people, as they do not have access to the external currencies.
Cryptocurrency is prone to wild changes and therefore might seem risky to most investors, but Venezuelans might find this whimsical nature quite agreeable, owing to the fact that the domestic currency has declined considerably in its value, with virtually no sign of slowdown. In other words, many countries might view cryptocurrency as a medium that helps manage the inflation, as the number of coins that can be mathematically circulated is limited in any given period of time (Harwick, 2016).
Many countries have quite strict controls when it comes to controlling the flow of finances and have in place very high taxes and charges as well. Cryptocurrency can be used to overcome these tax barriers and even though the mechanism may not be entirely legal, the consumers as well as the businesses have increased the market demand for this technology (Sapovadia, 2015). However, many countries have also taken strict measures to counter these transactions as they are often deemed as being illegal.
Banks and other financial institutions have been rather lukewarm in their support towards cryptocurrency. There are parties who have been very receptive and supportive towards it, while there are organisations that have been extremely cautious due to its high volatility and security issues that have been faced in the recent past. Concerns have also been raised due to the issues pertaining to capital controls and tax evasions.
In terms of global investments, cryptocurrency has a number of benefits, which can be attributed to its smooth transactions and tendency to control inflation. Many investors are also utilising this digital currency format to add diversification to their portfolios, by using them as a low-risk entity such as gold. Numerous options have therefore sprung up due to this versatility.
However, many experts fear that a crash in cryptocurrency could impact the market on a much wider scale and in a very adverse manner. This effect would be somewhat similar to securities that are backed by mortgages and therefore have the potential to spark a financial crisis on a global scale (Vovchenko, et al., 2017). One reassuring fact is that the entire capitalisation of the circulating cryptocurrencies is comparatively lesser than that of most public companies, which implies that the effect a crash might have could be less dangerous on a global scale. Investors often treat cryptocurrency as a vehicle for creating a hedge against inflation, and the market size does not really present any systematic risk as of now.
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2.4 Challenges related to cryptocurrency
Despite the horde of benefits cryptocurrency brings, there are a long list of challenges that cryptocurrency is faced with. These issues are both functional and structural, and they arise due to a number of reasons such as the market situations, the economic of the technology, and much more.
The excessive volatility is by far the most major issue that cryptocurrency has brought to the table. The prices of cryptocurrency are prone to dramatic rises and falls over very short periods of time. The activities of the whales, or the individuals who have massive shares of the cryptocurrency, are largely responsible for this challenge (Raymaekers, 2015). This is because they have the power to swing the market by spending large amounts of money on a particular trading platform. This is a major issue for regular investors who cannot afford to invest such huge amounts, as the prices of the cryptocurrencies go up.
One of the most integral characteristics of the cryptocurrency market is that of the ICO schemes. Investors buy these tokens in exchange for money, and therefor there is little or no regulation regarding these transactions (Raymaekers, 2015). This is a problem because the entrepreneurs often speculate a lot behind the coins, which drives up the prices and attracts the investors. The latter often gets left at a loss when the entrepreneurs cash out, as they are left with coins that have little or no monetary value.
Cybercriminals have time and again tried to undertake heists and attacks ever since the advent of cryptocurrency. Millions of dollars have been stolen as a result, and many investors and traders have lost their money, especially when the raided platforms decided to cease their operations after the attacks. The prices of many of the cryptocurrencies have also dropped to a large extent, which has resulted in many issues. Many blockchain operators have therefore deployed various security measures to ensure that the trading processes can be protected from attacks by the hackers (Delmolino, et al., 2016). Offline wallets are sometimes used to hold the currencies, as in this way they cannot be accessed by the online criminals. This has however further complicated the entire trading process.
There is also an apparent lack of price uniformity across the various cryptocurrency platforms. In order to trade any commodity or asset, the price charting is an essential step. The challenge lies in the fact that the monetary value of a cryptocurrency is vastly different across various platforms, and these differences are sometimes quite extreme (Raymaekers, 2015). This, coupled with the market volatility, has further caused many issues to the cryptocurrency front.
The market for cryptocurrency is laden with transaction delays. Opening an account, verifying the credentials - almost every transaction consumes some amount of time or the other, and the entire system can thus seem a little slow to many. Blockchain technology was integrated with the aim to make these processes faster, but it seems there is still a lot of work to do in this regard.
Cryptocurrencies are not accepted everywhere. Although many platforms such as Bitcoin have gained a significant amount of acceptance, there is still a lot to go. The high volatility, together with the expensive fees have discouraged people from trading using this platform. There are a limited number of places where cryptocurrencies are accepted (Raymaekers, 2015), and thus this is a challenge that needs to be overcome.
The market is rather unregulated, and there are several technical limitations. There is virtually no hard and fast regulation when it comes to cryptocurrency, as there are questions pertaining its legitimacy. Few countries have legalised it, but the others are yet to accept this format as a trading currency. Moreover, around 10 to 100 transactions can be carried out every second as of now, which inhibits many major businesses from fully exploiting the benefits that blockchain technology has to offer.
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