Money and Banking 1

Running Head: Financial System

The Evaluation of Financial System

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Introduction

This study aims to analyze the recent developments in the financial system, such as

Bitcoin, and its structure. The study will do the critical analysis of the Rober Shiller

viewpoint, analyze the usefulness of gold and difficulty of using bitcoin, the security of easy

payment through gold and bitcoin, and analyses the stability of the bitcoin and gold and their

usage as a financial instrument.

  Critical Analysis of The Rober Shiller Argument

 As per the Franck, (2017), the honorable economist from America Rober Shiller

stated during his interview with CNBC interview, that Bitcoin are nothing but a fad by

comparing it with the fade of bimetallism during the 19 century, during the acceptance of

gold and silver as the standards currency for legal payments. The main reason of his

argument was because of the increase in the use of  Bitcoin at a very scale, and increasing

dependence of financial markets on the Bitcoin as currency instrument, as mentioned by  

Franck, (2017), Bitcoin reached a record high peak of $5,856.10 during 2017 with a market

capitalization of $96.7 billion.  He is concerned that it might cause crises for the financial

system as caused by bimetallism during 1987. The Bitcoin was also considered a bubble by

various researches. The study conducted by Godsiff, (2015), has stated that the Bitcoin could

cause bubble for the financial system because of skyrocketing prices of assets, as the prices of

assets with United Kingdon increased by more than 5000% after the introduction of Bitcoin

currency in 2008. As per Swartz, (2014), the Bitcoin is causing a bubble for the financial

system due to the increasing prices of assets and its increasing usage within the financial

transaction. According to Achieng, et al.  (2015),  the Gold and silver were used as the stands

currency for the legal transaction all over the world before early 1980. However, the

advancement of the financial system such as the introduction of the dollar as the standard
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currency caused a bubble of bimetallism to burst due to the high dependence of financial

institutions in on the gold and silver.

The fad can be defined as the reverting deviation in the intrinsic value due to some

events such as social, physiological, and business. In recent years, the cryptocurrency has

improved its value even more than gold does have, due to increasing market capitalization

and increasing usage of it within the financial system. Due to which the Rober Sheller has

termed it as creating a bubble for the financial system that can burst at any time (Franck,

2017).  As per Aggarwal, (2019),  the investors have considered Bitcoin as a fad  due to the

doubts that surround on its nature and characteristics. according to Gates, (2017),  the

business and people involved in the Bitcoin transaction has refused that Bitcoin did not create

fad which will pass to others. He further stated,  it has also been dismissed by the internet that

Bitcoin causes fad for the financial system in the early days because of its usage through the

internet and greater understanding of financial experts. Moreover, it hs been stated that

Bitcoin has become common jargon within the world financial system.

All of the above literature is showing mixed results, some of the researchers have

stated Bitcoins has created a bubble for the financial system, that can burst at any time and

result in big financial crises for the whole financial system of the world. While others have

considered it a fad for the financial system due to its volatility in prices and a higher risk of

reducing value. However, the financial system of the modern era is more focusing on the use

of technology and advancement in technology and digital payment system of the world, for

the purpose of reducing transaction costs, reducing legal and physical barriers, and need of

third party involvement.

Advantage And Disadvantages Of Bitcoin

Advantages Disadvantages
 
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It is difficult to identify and track It still needs to be accepted by many

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the Bitcoin transaction that makes this organizations at large scale

system more secure (Murphy, 2015).

It provides freedom of payment It has a high risk of volatility due to

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because it facilitates the direct transfer of rapidly increasing or decreasing the prices.

money to anyone within any part of the Therefore, big investors do not want to

world with the help of peer to peer invest at large scale

transaction facilities (Murphy, 2015).

It does not require higher Due to its ongoing development

3
transaction fee or don not have a introduction of new tool and techniques, it

transaction fee at all based on the makes difficult for new investors to know

requirement of a person making all features of it.

transactions.

It does not require personal Since the government can not

4
information of the person, therefore, control the Bitcoin market it might be

considered more secure and safe with possible to be banned by the government,

low merchant risk (Murphy, 2015). which would cause the closure of Bitcoin

Wallet operations within that country.

It provides the fastest delivery It can cause a recession for the

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and payment of transaction than banking economies due to high depending on
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channels (STEGĂROIU, 2018). speculators, which might harm the financial

system of the countries (STEGĂROIU, 2018).

The government can not interfere Deu to having a decentralization

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or control the transactions made through system, no organization or person can be

Bitcoin due to a decentralized transaction made responsible in case of emergency

system (Murphy, 2015). because of not having control over the

system (STEGĂROIU, 2018).

Usefulness Of Gold and Difficulty Of Using Cryptocurrency

The gold can be most useful for the transaction because it is something that exists in

the world in the form of assets. Moreover, the value of gold is increasing day by day which

cause profit for the investor holding it. while the Bitcon is a digital currency that does not

exist as hard currency, it has both an increase or a decrease in price possibilities. The

purchase and sale of gold is controlled and regulated by the governments, that have the

authority to manage the supply and demand of the gold according to the requirement of their

country. While curreptocurrecny can not be controlled and regulated by the government( Ali,

et al.  (2019). Since the curreptocurrecny like Bitcoin and Blockchain can not be regulated by

the government due to its decentralized system. It has a higher risk of money laundering,

financial fraud, and terrorist financing because the identity of the person doing transactions

can not easily be identified due to not having personal information of the user (Dyhrberg,

2016). The gold can be used as consumer goods in the shape of jewelry. It has low riks of

default. It is considered the safest asset due to the low supply and inability of markets to

manufacture it. Those investors who avoid the risk of volatility are more intended to invest in

gold because it rarely loses its face values and increases with time as compared to currency
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and share of companies (Abreu, & Pinho, (2018). On the other hand, the bitcoin is a type of

cryptocurrency that is used by blockchain technology, it is called as digital gold, the demand

for the bitcoin has increased but its supply remains static to the 21 million coins. Moreover,

due to its decentralized system and the inability of regulators to control it, it has a higher

possibility to be used for the criminal and other offenders that may increase the risk of

financial fraud and negatively impact the communities. Moreover, the difficulties in the use

of bitcoin include the inability to scaling well for using it as a global currency,  the

transaction of the processing is very low that degrade its usability. The account of the

investors are called the cryptonym that cannot be easily understood,  the individual who make

transactions through cryptocurrency, has the responsibility to manage its account, which

makes it difficult for them to manage the losses. It cannot be used as a currency due to the

high volatility of prices (Tanner, 2020).

Does Gold And Bitcoin Secure Easy Payments

 The gold is considered the safest heaven asset because it can be used in hedging and

could increase in values of the investment. On the other hand,  the Bitcoin is the digital

currency that made easy for the person to make payments in any country within a matter of

minutes without having high transaction fee or involving the third party such as banks to

make a transaction on behalf of his/ her, which result in high transaction fee that is charged

by the banks (Dumitrescu,2017). He becomes the master of his own kingdom through bitcoin

transactions. Moreover, the establishment of blockchain has made it more easy and secure for

the investors and businesses to ensure the security of their transactions because all

transactions are connected to each other through a chain and can not be changed any

transaction because the change in one transaction will disturb the whole chain which uses the

previous transaction in the second one ( Edwards,2018). The Bitcoin is considered the safest and

easy for online payment. It does not need to rely on physical assets as in the case of gold.
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Moreover, bitcoin has increased the ease of doing business due to the introduction of smart

contracts and another instrument under the umbrella of blockchain. The bitcon has saved

records of each transaction in case of fraud, the investor can provide the proof of transaction

which is not possible in every case of transaction made by the gold. It saves the time of

investors due to ease of making payments through digital technology anywhere in the world

(Eskandari, et al. 2018). While in the case of gold, the investor has to wait until it reaches its

destination, which might take several days. Due to the advancements of technology the

investors, as well as businesses, are more intended to use easier and safer ways of making

payment which cryptocurrency has made it possible. It has cut the boundaries across the

countries globally and reduce legal, financial, and other barriers for the businesses

(STEGĂROIU, 2018).

Stability and  Reluctance To Use Both Instruments

 The gold is considered more stable than cryptocurrency because it has low volatility

of risk than bitcoin. As per the outcomes of the study conducted by Shahzad, et al. (2019), the

gold is a more stable and safe investment than bitcoin within the G 7 countries. The gold has

a higher superior value in hedging than Bitcoin. Moreover, the investment made in gold has

proved to be more stable than Bitcoin.  As per Klein et al. (2018), the gold help investor to

reduce the risk of loss during financial crises, and proved to be more stable than bitcoin for

investment in equities and hedging facilities. As per the GoldSilver, (2020), there are many

similarities between gold and bitcoins, the Bitcoin is considered the digital gold by investors.

However, in many cases, bitcoin has become much better than gold. As per Yang, (2016), the

bitcoin has become more stable than gold due to a reduction in its volatility in recent years.

As per the NationWide coins, (2019), gold is more secure and stable for long term

investments. On the other hand, bitcoin is providing ease of transaction with fast delivery

within the lowest time. The Gold has a low risk of volatility than Bitcoin because of
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increasing in value with time, even during the time of recession it increases its value which

results in higher profit for the investor.

 Taking all these arguments into consideration, it can be stated that Gold is more

stable and have a low risk of volatility than Bitcoin. It is considered the best instrument for

hedging purposes and making an investment in equity markets. On the other hand, Bitcoin is

considered best for day to day transaction of business, it provides ease of doing business with

help of advancement in cryptocurrency instruments such as blockchain and use of smart

contracts within the blockchain. The cryptocurrency has eliminated the need for an

intermediary such as, banking channels, which reduces the transaction cost. Moreover, it

reduces the legal and physical barriers within the countries because of having a decentralized

system, not having control of the government, and other legal and physical boundaries within

countries.

The main factor that makes reluctant to use bitcoin is the political uncertainty within

the country, the major example is the Brexit deal of the UK, which increased the future

uncertainties for the businesses in the UK  and Europen Union countries. The use of  Bitcoin

by a terrorist is another factor that discouraged the use of Bitcoin by persons involving in it

(Murphy, 2015). While the main factors that discourage the use of gold include the need for

physical assets, investment of time during the transaction from one country to another, or

from one place to another. Another factor is the lower liquidity of the gold because it can not

be easily converted into liquid assets as currency and Bitcoin.

Conclusion

  To conclude, the advancement of technology has completely changed the structure

of the financial system. The introduction of cryptocurrencies such as Bitcoin and Blockchain

has increased the use of digital transactions within the financial systems. The people are more
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intended to use Bitcoin due to the ease of transaction, peer to peer transaction facilities, lower

cost of the transaction , fast delivery, and not having legal and physical barriers are just a few

examples. However, it has a higher risk of volatility, financial crime, and future uncertainties

because of not having an official governance system. On the other hand, gold is called safe

heaven for the investors due to low risk of volatility, an increase in face value with time, and

providing hedging facilities for investment in equioty or asset markets. The gold provides

safe investment security, while, the Bitcoin provides ease of doing transaction which is

necessary for the current business environment.

References

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Godsiff, P. (2015). Bitcoin: bubble or blockchain. In Agent and multi-agent systems:

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