University American College Skopje
The Future of Bitcoin and other Major
Cryptocurrencies
Computer Science Concepts in Research
Prof. Adrijan Bozinovski, PhD
University American College Skopje
The Future of Bitcoin and other Major Cryptocurrencies
Computer Science Concepts in Research Prof. Adrijan
Bozinovski, PhD
Abstract
The cryptocurrency market surpassed the $100 billion market capitalization by June 2017, and
around $260 billion in 2019. Despite its increasing relevance in the financial world, а comprehensive analysis of
the whole system is still lacking, as most studies have focused exclusively on the behavior of one (Bitcoin)
cryptocurrency. This paper will consider the history of the entire market and analyze the behavior of multiple
cryptocurrencies
Vasil Hadji introduced
Jordanovsince 2008. The paper will reveal that, while new crypto currencies appear and
disappear continuously and their market capitalization is fluctuating super-exponentially, several statistical
6/2/2019
properties of the market have been stable for years. These include the number of active cryptocurrencies,
market share distribution and the turnover of cryptocurrencies. Adopting a global financial system perspective,
the paper will show that a model of evolution is able to reproduce а number of key empirical observations,
despite its simplicity and the assumption of no selective advantage of one cryptocurrency over another. The
results will shed light on the properties of the cryptocurrency market and establish а formal link between
ecological (financial) modelling and the study of this growing financial asset system.
Keywords: Bitcoin, Cryptocurrency, Blockchain
The Future of Bitcoin and other Major Cryptocurrencies
1. Introduction
Cryptocurrencies, in particular Bitcoin (₿), are continuing to rise in popularity and value.
The total value of Bitcoins alone, currently in existence, is fluctuating around $150 Billion today
(1)
. This paper will explore Bitcoin’s dominant market position, its challenges, including
encryption and security, the impact of cryptocurrencies on traditional currencies regulated by
central banks, as well as regulatory and ethical challenges in a global system with no single point
of control. The paper will cover the "paradigm shift" needed to change the investor's mindset
from quantifiable/tangible investment (currencies included) into the realm of abstract
cryptocurrencies with no underwriting authority. The paper will also examine the adoption of
cryptocurrencies by traditional mainstream businesses around the world and the impact on the
traditional commercial banking. Finally, the paper will cover the complete technological process
of creating and valuing the cryptocurrencies, including the technical limitations, economic
obstacles and human resistance to changing the established set of rules and value systems.
Since the creation of Bitcoin in 2009, numerous private cryptocurrencies have been
introduced. Bitcoin is by far the most successful one. It has been getting а lot of media attention,
(1)
and its total market value has reached 260 billion USD in 2019. More importantly, а number
of central banks recently started to explore the adoption of cryptocurrency and block chain
technologies for retail and large-value payments. Many proponents believe that cryptocurrency
cryptocurrencies and blockchain technology will have а significant influence on the future
development of payment and financial systems.
While policy makers are concerned with the opportunities and challenges brought about
by these technological advances, there is very little guidance provided by economic theory
regarding the appropriate usage of these technologies and the optimal design of these systems.
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The Future of Bitcoin and other Major Cryptocurrencies
2. Evolution of the Cryptocurrencies
Bitcoin is а digital asset (currency) designed and intended to work as а medium of
exchange like any other traditional currency. Bitcoin owners can send and receive tokens, the
actual 'bitcoins', while collectively validating the transactions in а decentralized and transparent
way. The underlying technology is based on а global public ledger, or blockchain, shared
between participants and а reward mechanism in terms of Bitcoins as an incentive for users to
run the transaction network. It relies on cryptography to secure the transactions and to control the
creation of additional units of the currency, therefore the name “cryptocuпency” (2,3).
Since Bitcoin appeared in 2009, over 3000 cryptocurrencies have been introduced, about
(1)
2600 of which are still in existence and actively traded with today . All cryptocurrencies share
the underlying blockchain technology and reward mechanism, but they typically reside on
isolated transaction networks. Many of them are clones of Bitcoin, although with different
parameters such as different supplies, transaction validation times, etc. Others have emerged
from significant innovations of the underlying blockchain technology (4).
Cryptocurrencies are nowadays used both as media of exchange for daily payments, the
(5)
primary reason for which Bitcoin was introduced, and for speculation . Other uses include
payment rail for non-expensive cross-borders money transfer and various non-monetary uses
(5)
such as time stamping . The self-organization of different usages, both within а single
cryptocuпency and as an element of differentiation between cryptocurrencies, makes the market
of cryptocurrencies unique, and their price extremely volatile, as we have seen in the past several
years, see figures 1 and 2 below.
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The Future of Bitcoin and other Major Cryptocurrencies
Fig 1: Cryptocurrencies and Price Volatility
Source: cryptocurrencychart.com
Fig 2: Cryptocurrencies and Daily Changes in Value
Source: cryptocurrencychart.com
Between three and six millions of private as well as institutional constituents, actively
(6,7)
exchange tokens and run the various transaction networks . Bitcoin currently dominates the
market but its leading position is challenged both by technical concerns and by technological
improvements of other cryptocurrencies. Despite the theoretical and economic interest of the
cryptocurrency market, а comprehensive analysis of its dynamics is still lacking. Existing studies
have focused either on Bitcoin, analyzing the transaction network, the behavior of its price, or on
а restricted group of cryptocurrencies of particular interest. But even in this case, there is
disagreement as to whether Bitcoin’s dominant position may be jeopardized, or its future
dominance as leading cryptocuпency is guaranteed.
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The Future of Bitcoin and other Major Cryptocurrencies
3. Market Share and Trends
The Analysis of the cryptocuпency market covers the evolution between 2013 and 2019,
because of complete data reports in the global financial markets. The focus is on the market
shares of the different cryptocurrencies and the trend that Bitcoin has been steadily losing ground
to the advantage of the immediate runners up (Binance, Maker, BAT…). Adoption of an
'ecological' perspective on the system of cryptocurrencies captures the decrease in Bitcoin's
market share. This represent а first step towards а better understanding and modelling of the
cryptocurrency market.
Fig 3: Combined Market Capitalization of all Major Cryptocurrencies
Source: cryptocurrencychart.com
Bitcoin was followed by а second cryptocurrency, Namecoin, in April 2011. Since then a
host of new cryptocurrencies have been introduced, many of them being discontinued after
periods of time. First-mover advantage makes Bitcoin the most famous and dominant
cryptocuпency to date. However, recent studies analyzing the market shares of Bitcoin and other
cryptocurrencies reached contrasting conclusions on its current state. While Gandal and
Halaburda in their 2016 study concluded that 'Bitcoin seems to have emerged, at least in this
(8)
stage, as the clear winner , the 2017 report by Нileman and Rauchs noted that Bitcoin has
ceded significant market capitalization share to other cryptocurrencies (9).
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The Future of Bitcoin and other Major Cryptocurrencies
4. Stability of the cryptocurrency market
While the relative evolution of Bitcoin and rival cryptocurrencies is volatile, many
statistical properties of the market are stabilizing. However, due to the historical data being
available, trends begins to show in both areas. First, Bitcoin is losing market dominance to other
more investment attractive cryptocurrencies and second, being valid for the whole asset group,
the actual return on investment (ROI) has been consistently negative with few relatively short
positive outbursts of some currencies.
Furthermore, a long term study of the ROI trends empirically demonstrate that, while
short term gains are available in trading some components of the asset class, as in individual
cryptocurrencies, the asset class as a whole shows significant underperformance compared to
other more traditional asset classes like stocks and bonds. Figure 4 below clearly demonstrates
that long term gains or ROI are equal or below zero, which is significantly less than the DOW
average, which gained over 125% since 2013.
Fig 4: Long Term ROI
Source: cryptocurrencychart.com
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The Future of Bitcoin and other Major Cryptocurrencies
5. Conclusion
This paper investigated the overall cryptocurrency market between 2013 and 2019 in
global trends framework. It shows that the total market capitalization has entered а phase of
exponential growth by 2015, while the market share (not market capitalization) of Bitcoin has
been steadily decreasing. I have identified several observables that have been stable since the
beginning of our time series, including the number of active cryptocurrencies, the market share
distribution and the rank turnover.
Legislative, technical and social advancements will most probably impact the
cryptocurrency market seriously and our approach, together with recent results in computational
social science dealing with the quantification of financial trading and bubble formation, could
help make sense of the market evolution. In April 2017, for example, Japan started treating
Bitcoin as legal form of payment driving а sudden increase in the Bitcoin price in US dollars,
while in February 2017 а change of regulation in China resulted in а $100 price drop. Similarly,
the exponential increase in the market capitalization will probably attract further speculative
attention towards this market, at the same time increasing the usability of cryptocurrencies as а
payment method. How the self-organized use of cryptocurrencies will deal with this tension is an
interesting question to be addressed in future studies.
References:
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The Future of Bitcoin and other Major Cryptocurrencies
1. https://www.investing.com/crypto/currencies [Accessed June 2 2019]
2. Chiu, J., and T. Wong. (2015). “On the Essentiality of E-Money.” Bank of Canada
Working Paper No. 2015-43.
3. An Analysis of Cryptocurrency, Bitcoin, and the Future; DR. Peter D. DeVries,
University of Houston, September 2016
4. Evolutionary dynamics of the cryptocurrency market; Royal Society, GB, Group of
Authors, November 2017
5. The Economics of Cryptocurrencies– Bitcoin and Beyond; Bank of Canada, University of
Wellington, April 2017
6. International Journal of Blockchains and Cryptocurrencies
7. Gandal, N., and Н. Halaburda (2014). "Competition in the Cryptocuпency Market." Bank
of Canada Working Paper No. 2014-33.
8. Gans, Ј., and Н. Halaburda, (2013). "Some Economics of Private Digital Currency
Bank of Canada Working Paper No. 2013-38.
9. Rogoff, К.Ѕ., (2016). “The Curse of Cash.” Princeton University Press
10. cryptocurrencychart.com [Accessed June 2 2019]
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