The purpose of dialogue 3 is to introduce you to, or expand your thinking on, cryptocurrencies. It is an issue affecting corporations. Several leading firms including Square and Tesla are transacting in bitcoin. Among the true believers, cryptocurrency is an emerging digital currency as evidenced by its use to facilitate electronic transactions in early adopter marketplaces. The crypto bears believe it is purely speculative and will go away on its own as Tulip mania did in the 1600’s, or due to central bank electronic currency regulation. An informative description of the largest cryptocurrency, Bitcoin, can be found at the following.
To evaluate digital currencies it is helpful to review the definition and characteristics of money. Most definitions of money are based on the acronym MUSS – medium of exchange, unit of account, store of value, standard of deferred payment (Croushore, Money & Banking 3e, 2015). The characteristics of currency are also remembered with the acronym DDUPAL: durable, divisible, uniform, portable, accepted, limited supply.
As of early 2021, leading cryptocurrency bitcoin had a total market value of approximately $1 trillion. Other well-traded cryptocurrencies include Ethereum and Litecoin. There is no practical limit to who may issue a new virtual currency, though the supply of Bitcoin, Ethereum and Litecoin is well defined.
Coinbase is the largest dedicated wallet and exchange. Coinbase enables an individual to hold virtual currency in a personal e-wallet. Coinbase also facilitates round the clock trading of most cryptocurrencies. Coinbase is a good source for information on the market value of leading digital currencies and expected supply growth.
Currently the U.S. Dollar is the reserve currency of the world. A reserve currency is the foreign exchange security held by the central banks of nations to facilitate trading with other nations and maintain stable internal monetary fundamentals, including money supply and inflation. The U.S. Dollar has been the undisputed global reserve currency since about 1992 when the British Pound lost its global reserve currency status. Over the long run the supply of US dollars has grown around 5% per year. In times of economic crisis, such as during the Covid-19 induced recession, money supply grows much faster.
For background with this dialogue I have attached on blackboard a simplistic supply demand model for cryptocurrency. It is constructed in the context of estimated global currency and US dollar reserves. The noteworthy items include the total market value of global currency, the US dollar and dominant cryptocurrencies Bitcoin, Ethereum and Litecoin. Sources for the data in the model include the U.S. Federal Reserve, the U.S. Central Intelligence Agency and the World Bank. The purpose of the model is to demonstrate key variables rather than to suggest any future value of any cryptocurrency, which could easily be close to zero at points in time.
Answer the following questions: a) Is cryptocurrency a passing fad or significant future trend? b) Is bitcoin a currency? c) Assume you are the CFO of a fortune 500 company. Would you hold any firm cash reserves in bitcoin? d) If you were the CFO of a fortune 500 company would you accept bitcoin as payment? e) Assume you have opened a Coinbase account for your personal use. Which of the three leading digital currencies (Bitcoin, Ethereum and Litecoin) would you buy first? Why?
