The end of 2017 saw the explosion of the cryptocurrency industry. Bitcoin, the market leader, surged in price from $900 at the beginning of the year to over $20,000 at its height. With more new cryptocurrencies being released all the time and with the price of coins such as Ripple, Litecoin and Ethereum rising rapidly at this very moment, it looks like 2018 will see more of the same.
Cryptocurrencies have been around for several years now and have been increasing in price fairly consistently, but since the middle of last year the burgeoning of crypto-exchanges has seen a marked rise in the number of non-financial people engaging in the cryptocurrency market. This ‘hype’ surrounding the industry has brought all sorts of new investors and had a cyclical inflationary effect, resulting in the volatile prices we see today.
The novel issue with cryptocurrencies is that they have little or no intrinsic value. The increasing demand is fuelled by the rapidly increasing price (bringing opportunities for profit), which then in turn increases the price further and attracts even more investors. There are currently very few practical uses for cryptocurrencies other than as a store of value, although this is likely to change in the future. It is also true that there are some uses for assets such as Ripple which were being used by financial companies before 2017, but the majority of investors are either unaware or uninterested in this. An interesting fact from the bitcoin revolution is that nearly 99% of all bitcoin users are male (coindesk, 2017), suggesting that it is not an ordinary asset.
There are several debates currently ongoing in the sphere of cryptocurrencies, ranging from questions about regulation to whether the market is a bubble, but as an economist I am interested to approach the discussion from an economics (/freakonomics) point of view and try to determine whether cryptocurrencies will indeed behave as any other asset would, or if it is unique. This will be an ongoing series and will involve several different angles of ‘Cryptonomics’. My first thoughts for this are to a) investigate whether cryptocurrencies are (on the surface) unique and b) to begin to develop a theoretical model which can be applied to the bitcoin market in particular. These may branch off and there may be many more other topics included. If you have any area of the cryptocurrency industry you would like me to explore then please comment and let me know!
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