This post, the first in the Cryptonomics series, will explore the apparent uniqueness of cryptocurrencies. Read back to the introduction to the Cryptonomics series (https://cbeconomics.com/2018/01/05/introducing-cryptonomics/) for more info.
There are three reasons why the cryptocurrency market has been hailed as distinct from the many other assets that came before it: lack of regulation, fixed supply and no intermediaries. I believe these are flawed suggestions.
I’ll start with the postulation that cryptocurrencies have no intermediaries. By this it is meant that there are no ‘cryptoshops’. If two people wish to transfer cryptocoins between them they can do so via their unique addresses and nothing more than an internet connection is needed. However, despite this opportunity for cutting out the middle man the majority of bitcoin transactions take place via exchanges, which charge a fee. The development of these exchanges has resulted in a marketplace that looks very similar to most other assets.
Secondly, the stipulation that supply is fixed. This arose from the fact that there is a finite supply of bitcoins in circulation. However as stated in my first Cryptonomics post, the primary value of cryptocurrency lies in the potential for profiting from price increases and as such, the proliferation of the industry and the success of subsequent newcomers means that there is an ever increasing number of substitutes for bitcoin. This is particularly relevant for new derivatives of bitcoin such as bitcoin cash and litecoin. Both of these and many other currencies give many other options for investors wishing to make some money and even if these people do not account for the entire industry they do form a significant part of it.
Thirdly and most interesting is the fact that there is no regulation of the cryptocurrency market. There are two worries here, first and foremost there has been ongoing debate about the use of cryptocurrency by criminals. Secondly is the worry that creators of cryptocurrencies and exchanges will take advantage of the lack of authority and attempt to steal coins from the public. I believe this is an unnecessary worry at the moment due to the extreme volatility of prices in the market at the moment. If any of these breaches occur, they are penalised by a significant decrease in the value of that which they have stolen and also the rest of their portfolio.
In conclusion the cryptocurrency industry, whilst being relatively juvenile, is not exactly unique and as such some of what we know about other assets and markets can be applied to bitcoins and their ilk. In the following posts of the Cryptonomics series I will be exploring how we can go about developing a model for the crypto-industry.
Thank you for reading and stay tuned at cbeconomics.com and on twitter @cbeconomic for more economic analysis and more Cryptonomics!