Cryptocurrencies are digital currencies built on blockchain technology that allows verification of payments and other transactions. They have had a rapid rise and consequential fall over the past few years.
Cryptocurrency is a digital token that originated as an extensive financial software system and evolved in an unsettled manner and at an unprecedented speed over its short lifetime. It is used as an exchange element worldwide. Research on the industry is still infrequent.
Bitcoin is one of the first and leading cryptocurrencies in this industry that the majority of studies singularly focused on, rather than a more diverse spread of cryptocurrencies, and is regularly being outstood by movements and developments of the industry, including new coins, technological innovation, and increasing government regulation of the markets.
Cryptocurrencies Explained
Cryptocurrencies are built upon the transmission of engaging cryptographic methods to ensure legitimate, digital information and unique transactions, and also they rely on miners to validate transactions. Cryptocurrencies require robust and secure mining algorithms to allow users to reach a fast, powerful consensus for each transaction.
Cryptocurrencies rely on a safe distributed ledger data structure; known as Blockchain, with mining being an integral part of such systems. Mining adds records of past transactions to the distributed ledger and introduces wealth in the form of new currency units.
Although cryptocurrencies lack a central authority to mediate transactions because they were designed as peer-to-peer systems, moreover, significant attention has been paid to the dramatic ups and downs at the volume and price of cryptocurrencies. There has not been a systematic analysis of the trading and efficiency of cryptocurrencies markets. Today more than 50 million active investors trade bitcoin and other cryptocurrencies on more than 100 exchanges worldwide.
Based on Dr. Garrick Hileman & Michel Rauchs’ study on Cryptocurrency Benchmarking Studio, they have indicated that the total cryptocurrency market capitalization has increased more than three times since early 2016, reaching nearly $25 billion in March 2017. Finally, they estimated at least 1,876 people work full-time in the cryptocurrency industry.
It is impossible to know precisely how many people use cryptocurrency. The estimated number of unique active users of cryptocurrency wallets has grown significantly since 2013 to between 2.9 million and 5.8 million today.
Cryptocurrency Factors
There have been plenty of companies and projects trying to facilitate and provide products and services for mainstream users to use the cryptocurrency and build infrastructure for applications running on blockchains.
Cryptocurrency contents of a diverse set of actors build interfaces between public blockchains, traditional finance, and various economic sectors called a cryptocurrency ecosystem. These services add significant value to cryptocurrencies as they provide the means for public blockchains and their native currencies to be used beyond the broader economy.
The cryptocurrency industry has consisted of many essential actors and groups of companies. The study of Dr. Garrick Hileman & Michel Rauchs limits the analysis to the four key cryptocurrency industry sectors today.
Exchange
Exchanges provide services to buy and sell cryptocurrencies and other digital assets for national currencies and other cryptocurrencies. Exchanges play an essential role in the cryptocurrency economy by offering trading, liquidity, and price discovery.
- Of all industry sectors covered in this study, the exchange sector has the highest number of operating entities and employs the most people.
- 52% of small exchanges hold a formal government license compared to only 35% of large exchanges.
- 53% of exchanges support national currencies other than the five global reserve currencies (USD, CNY, EUR, GBP, JPY).
Wallets
Wallets provide means to store cryptocurrencies by handling key management securely.
A wallet generally is a software program used to securely store, send and receive cryptocurrencies through the management of private and public cryptographic keys. Wallets also provide a user interface to track the balance of cryptocurrency holdings and automate certain functions, such as estimating what fee to pay to achieve a desired transaction confirmation time.
- Mobile wallet apps are the most widely offered format, followed by desktop and web.
- 81% of wallet providers are based in North America and Europe, but only 61% of wallet users are based in these two regions.
Payments Companies
The payments sector comprises companies that provide a wide range of services to facilitate cryptocurrency payments. All cryptocurrency systems have an integrated payment network to process transactions denominated in the native token. While these systems promise that users can independently transact on these networks, there are many reasons why users prefer using services provided by third-party payment service providers.
- While 79% of payment companies have existing relationships with banking institutions and payment networks, the difficulty of obtaining and maintaining these relationships is cited as the sector’s biggest challenge.
- Cross-border payments generally have a higher transactional value than intracountry payments: 46% have a transaction size between $100 and $1,000, and 34% have a transaction size that exceeds $1000.
- The average business (B2B) payment has a transaction size of $1,878, whereas P2P transfers ($351) have higher average transaction sizes than consumer (C2B) payments ($210).
Mining
The mining sector is responsible for confirming transactions and securing the global record of all trades (the blockchain).
Miners play a crucial role in any cryptocurrency system as they are responsible for grouping unconfirmed transactions into new blocks and adding them to the global ledger (the ‘blockchain’). They provide the necessary computing power to secure a blockchain by computing vast numbers of hashes to find a valid block. Each correct block added by a miner to the blockchain generates a reward for the miner and makes it more difficult for an attacker to reorganize the ledger and double-spend already confirmed transactions.
What Is Bitcoin?
Bitcoin, the most famous and earliest cryptocurrency, was initially introduced in a paper by Nakamoto in 2008 and came into existence in 2009. Satoshi Nakamoto defined bitcoin as “an open-source, peer-to-peer digital currency.” Bitcoin, and every subsequent cryptocurrency, is mere “a chain of digital signatures” where “each owner transfers the coin to the next by digitally signing a hash of the previous transaction and the public key of the next owner and adding these to the end of the coin” so that ownership can dynamically be programmed into the coin.
Since then, the market for cryptocurrencies has evolved dramatically. Although the concept of electronic currency dates back to the late 1980s.
As Farell had explained in An Analysis of the Cryptocurrency Industry, the cryptocurrency industry consisted of over 550 coins with varying user bases and trade volumes. Because of high volatility, the market capitalization of the cryptocurrency industry changes dramatically. Still, it is estimated at the time of this paper to be just over $3.5 billion, with bitcoin representing approximately 88% of the market cap.
Furthermore, bitcoin’s value is purely a function of supply and demand. Unlike fiat currency that derives value from a government, bitcoin is neither created nor backed by any government. Bitcoin took the digital coin market one step further, decentralizing the currency and freeing it from hierarchical power structures. Instead, individuals and businesses transact with the coin electronically on a peer-to-peer network.
In conclusion, Dr. Garrick Hileman & Michel Rauchs have determined that bitcoins remain the main prominent cryptocurrency in terms of market capitalization. Other cryptocurrencies are increasingly cutting into bitcoins’ market share, while bitcoin’s market capitalization accounted for 86% of the total cryptocurrency market in March 2015, it has dropped to 72% as of March 2017.
Photo: Parilov/shutterstock
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