CRYPTOCURRENCY VALUE FORMATION

( 06th October 2019 )

The aims to identify the likely determinants for cryptocurrency value formation, including for that of bitcoin. Due to Bitcoin’s growing popular appeal and merchant acceptance, it has become increasingly important to try to understand the factors that influence its value formation. Presently, the value of all Bitcoins in existence represent approximately $7 billion, and more than $60 million of notional value changes hands each day. Having grown rapidly over the past few years, there is now a developing but vibrant marketplace for bitcoin, and a recognition of digital currencies as an emerging asset class. Not only is there a listed and over-the-counter market for bitcoin and other digital currencies, but also an emergent derivatives market. As such, the ability to value bitcoin and related cryptocurrencies is becoming critical to its establishment as a legitimate financial asset.

1.1. CRYPTOCURRENCY MINING – TRANSITION TO CLOUD

Cryptocurrency, a form of digital currency that has an open and decentralized system and uses cryptography to enhance security and control the creation of new units, is touted to be the next step from conventional monetary transactions. Many cryptocurrencies exist today, with Bitcoin being the most prominent of them. Cryptocurrencies are generated by mining, as a fee for validating any transaction. The rate of generating hashes, which validate any transaction, has been increased by the use of specialized machines such as FPGAs and ASICs, running complex hashing algorithms like SHA-256 and Scrypt, thereby leading to faster generation of cryptocurrencies. This arms race for cheaper-yet-efficient machines has been on since the day the first cryptocurrency, Bitcoin, was introduced in 2009.

However, with more people venturing into the world of virtual currency, generating hashes for this validation has become far more complex over the years, with miners having to invest huge sums of money on employing multiple high performance ASICs. Thus the value of the currency obtained for finding a hash did not justify the amount of money spent on setting up the machines, the cooling facilities to overcome the enormous amount of heat they produce and electricity required to run them. The next logical step in this is to utilize the power of cloud computing. Miners leasing super computers that generate hashes at astonishing rates that have a high probability of profits, with the same machine being leased to more than one person on a time bound basis is a win-win situation to both the miners, as well as the cloud service providers. This paper throws light on the nuances of cryptocurrency mining process, the traditional machines used for mining, their limitations, about how cloud based mining is the logical next step and the advantage that cloud platform offers over the traditional machines.