Question

Cryptocurrencies saw a huge increase in price between the beginning and end of 2017 due in large part to a speculative bubble. It can be useful to think of cryptocurrencies as foreign currencies. For the sake of this question, assume that all cryptocurrencies are converted to Bitcoin before being exchanged for domestic currencies (this means that you can think of "cyrptocurrencies” as a single type of foreign currency). a) (5 points) What would happen to the price of cryptocurrencies if large retailers like Amazon, Walmart, and Alibaba begin to accept cryptocurrencies for payment? Why? b) (5 points) Assume that before large retailers began to accept cryptocurrencies, they were being used mainly for nefarious activities. What do you think would happen to the real price of those nefarious activities after large retailers begin to accept cryptocurrencies?

Answer 1

The price of crypto-currencies, as with any other asset, depends on demand and supply. Further, the price witnesses a lot of fluctuations, due to speculative buying and selling by people.

Globally, such currencies are used more for speculation, and less for transactions. People have made a lot of money by predicting the price ups and downs.
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a) If large retailers like Amazon, Walmart etc. begin to accept crypto-currencies for payment, the demand for such currencies will rise significantly. Till now, people have used them only as investments. Now, they will also be used for transactions.

Due to this rise in demand, the price of such currencies will also rise. In terminology of foreign exchange, such currencies will see an appreciation in value.
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b) As the price of crypto-currencies will rise, the price of dependent activities will also rise. Nefarious activities can not take place with official currency, due to the fear of being caught. Thus, it will still depend on crypto-currency.

Since the currency value has appreciated, the cost of nefarious activities will also rise, and people will have to pay a higher price.