Report Example on Cryptocurrency Formation

Introduction

Cryptocurrency refers to digital money with its currency accepted among online users. It is based on a decentralized system, making it different from other currencies based on the centralized system. The decentralized system is based on the network technology known as blockchain technology. The digital currency records are stored in a database that is secured using cryptography technology. The essay will provide an analysis on the cryptocurrency value formation and how the market price is derived for the cryptocurrency.

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Value Formation

Value formation in cryptocurrency occurs when the cost of production determines the price. During the value formation of the cryptocurrency, it occurs in the margin. The main cost of production is electricity (Sovbetov 2016). Currently, the value of bitcoin is revealed to seven billion dollars. The assumed value that changes hands daily is estimated to be sixty million dollars. The bitcoin market has been growing rapidly over the years. This means most people recognize the existence of digital currency. The use of Bitcoin gives an alternative option to store their money in a digital form. It is revealed that there are sixty-six currencies.

The three factors crucial in the cryptocurrency value formation include unit production, the algorithm used in mining, and competition among the producers. Also, electricity plays a major in terms of the cost of production of a single digital currency. It is an arbitrage-free condition that is good for the cryptocurrency market. The use of a regression model has identified the three factors. The major cryptocurrency is the bitcoin, which has become vibrant in its value and production. However, cryptocurrency has incorporated several fields, and they include finance, information systems, computer science, applied cryptography, and economics (Tavares et al. 2020).

Digital currency is a threat to the traditional currency system because it is based on a decentralized system. It disrupts the monetary transactions that were traditionally established by the monetary authorities and banking sectors. This can lead to less financial services to financial institutions such as banks. It is considered to be a less costly money transfer method in comparison to the traditional currency. The Digital currency also appreciates; thus, most people will prefer to store its value against the traditional currency, which is prone to depreciation value. Price fluctuations exist between digital currencies such as bitcoins, and traditional currencies such as the dollars are volatile. In terms of the digital currency's economic valuation, it is difficult as the price volatility makes a lot of noise that results in the analysis being difficult (Yiying & Yeze 2019).

Various Trading Pairs

The liquid market for cryptocurrencies exits for various trading pairs, such as the altcoin to bitcoin trading pairs. The altcoin is one of the digital currencies that exist and is based on an original open-source code known as the Bitcoin code. Through the analysis of the bitcoin denominated relative price; thus, there is a need to withdraw the traditional external currencies. This will result in removing the price volatility and noise that will aid in making a better analysis. Objective factors were used in the analysis of the sixty-six cryptocurrencies. The comparison is based on the bitcoin currency production compared with the sixty-five other digital currencies to estimate the bitcoin's value. The value formation of the currency is based on the production at the margin, which is much similar to the traditional based currencies, and thus Bitcoin itself is derived from the cost of production (Tavares et al. 2020).

Bitcoin is regarded as the first cryptocurrency on all of the digital currencies that exist. However, this digital currency deploys a data technology that is regarded as the blockchain secured with cryptography technology. Bitcoin is an online software-based system of payment that was invented in the year 2008. The payment records are kept ina shared ledger that is also known as the blockchain. In the recording, it's symbolically represented as XBT or BTC.

Transaction of the digital currency such as Bitcoin occurs between peer to peer network and ther is no a single administrator. It is a decentralized system as the networks are anonymous. However, the new bitcoins are generated as a reward for the users who have opted to offer their computing power in verification and to record payments into a public ledger, which is also referred to as mining. Several parties can do this act of mining the digital currency, and thus these parties may include companies and individuals. Minning is an essential factor in terms of obtaining digital currency. It is also a vital factor in the blockchain network that is public and does not reveal that participants are involved in the transaction. However, the mining process's sole reason is to discourage anonymous participant from acting in ways intended to undermine the system. The resource-intensive validation activity controls the scam and fraud issues that may arise during the transactions.

Mining Process

The mining process is carried out in specialized hardware known to generate specific computational power measured as hashes. The hashes are used as the machine's CPU chip's processing power used in the mining process. However, the hashes that are generated from the CPU microchip are measured in hertz. The hertz is used to define the amount of the individual computational required to be achieved within a second. However, for every Giga hash entered, the amount will be added to the online public ledger. Mining is a competitive area as individuals who can mine with greater computational power have a better chance of finding a new bitcoin. The computational effort used in mining is also referred to as mining effort, hashing power, hash rate, and hash power. Hash refers is an algorithm alteration used in cryptography. However, besides mining the bitcoin, it can also be obtained over exchanging the traditional currencies with a centralized system. However, users will use an online free wallet to aid them in sending and receiving bitcoins over internet-enabled devices.

Bitcoin moneyness system has its weaknesses as a currency as it lacks an intrinsic value. The several reasons why the bitcoin does not have an intrinsic value is because it is intangible, and the labor input in mining it is computational power. This means that the bitcoin cannot be compared with gold, which is a tangible intrinsic value. Many issues that hinder the virtual money from mass acceptance Price volatility as expressed in dollars are high. Another issue is that the dollar prices may vary in different exchanges. This can create issues in the analysis of price data.

In the bitcoin analysis, it is always one BTC while other cryptocurrencies are based on decimal points in x.xx BTC. The many cryptocurrencies exist in pairwise trading with the dominant denomination, which is bitcoin. However, as for altcoin to dollar trading is fr less in comparison to the altcoin to bitcoin trading pair determination of the cryptocurrency source of value is entirely based o the Bitcoin., As Bitcoin floats against other cryptocurrencies. in terms of the market valuation. This means that Bitcoin has money properties that act as a store of value and medium of exchange. The reason why the market price of bitcoin is in dollars is because of the limited supply. A single bitcoin is divisible to eight eight decimal values.

Technological Value

Bitcoin is viewed as a technological value towards solving the expenditure problem (Hayes 2017). The bitcoin valued by applying regression models to the market price against the independent variables. The variables include market prices of gold, google searches of bitcoin, and bitcoin velocity are some of the independent variables used in quantifying the value of the bitcoin. The variables used in estimating the cryptocurrency value are based on a five percent significance level. Again, these variables are analyzed using the time series models with a significance level of one percent.

The bitcoin price formation is a result of its transactional needs and how popular it is. Google search results are also used as one of the variables in quantifying the bitcoin's value formation (Hayes 2019). The rapid price increase of the bitcoin as a result of media attention and internet searches. Thus through the two variables, the bitcoin value increased its value. However, in mining and transacting, people in the bitcoin business will never input the word bitcoin in their search engines. However, those who want to know about the business will input in their search engines, and thus, the Internet searches contribute to the value increase of the digital currency.

In the cryptocurrency businesses, the business transactions are arbitrage-free. The small sample size makes it incomplete. Thus, the base rate used is the dollar instead of bitcoin itself. Money markets tend to be less volatile when it comes to cryptocurrency transactions. Transactional friction and noise generated are the reasons it is seen as a gross trading opportunity. However, there is the variable cost of the bitcoin production and thus includes mining difficulty, market price, and electricity costs. Through the three variables, it becomes easier to quantify the intrinsic value of the bitcoin. However, it will be difficult to quantify its intrinsic value due to the frequent market price fluctuations and extreme volatility.

Altcoin shares some similar lineage with Bitcoin and thus have the same inbuilt variables tha makes it a cryptocurrency (Makarov & Schoar 2019). However, the altcoin is differentiated from bitcoin by the digital currency, but they both use the same units. There exist seven variables that are used in estimating the bitcoin value. First is that the total number of coins created in bitcoin denominations was twenty-one million, which is the total money in supply all over the world. Secondly, the block found by mining contains a certain number of units ad. Currently, it is twenty-five BTC, but initially, it was fifty BTC. And is regarded as the number of coins that are generated in a block. Thirdly a block of coins is achieved through mining throughout the interval. These bitcoins mines are found every ten minutes, and they are referred to as the block time. Fourthly is the network, which plays a major role as it ensures certain numbers of blocks are achieved. The algorithm utilized is known as the cryptology hash function, with each of the cryptocurrencies having their different cryptology function used in mining the digital currency. The computational power is also used to determine the hash power level employed in the network to mine the digital currency. Lastly is the market price, which is observable via the exchanges where the altcoin to bitcoin trading pairs are listed (Sokolenko et al., 2019).

Conclusion

Based on the seven factors highlighted in the previous paragraph, the objectification of the bitcoin and other cryptocurrencies' intrinsic value will increase the computational powere, which means that the one's mining power has increased of an individual (Cankaya & Findikci 2019). Suppose an individual introduces a powerful technology that can mine in terms of Peta hashes per second. In that case, the networks will detect and adjust accordingly, which will render other technologies inferior. They will achieve fewer counts of BTCs, thus resulting in the inferior technology being obsolete.