The Future of Bitcoin and other Major

Cryptocurrencies

Computer Science Concepts in Research, University American

College Skopje

Vasil Hadji Jordanov, MBA, MIS

adziavas@hotmail.com
 The Future of Bitcoin and other Major
Cryptocurrencies
Computer Science Concepts in Research, University American
College Skopje

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 introduced since
2008. The paper will reveal that, while new cryptocurrencies appear and
disappear continuously and their market capitalization is fluctuating super-
exponentially, several statistical 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

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 (https://www.investing.com/crypto/currencies [Accessed June 2
2019]). 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, and its total market value has reached 260 billion USD in 2019
(https://www.investing.com/crypto/currencies [Accessed June 2 2019]). More
importantly, а number of central banks recently started to explore the adoption of
cryptocurrency and blockchain technologies for retail and large-value payments.
Many proponents believe that 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.

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”( Chiu, J., and T. Wong.
(2015). “On the Essentiality of E-Money.” Bank of Canada Working Paper No.
2015-43.; An Analysis of Cryptocurrency, Bitcoin, and the Future; DR. Peter D.
DeVries, University of Houston, September 2016
Since Bitcoin appeared in 2009, over 3000 cryptocurrencies have been introduced,
about 2600 of which are still in existence and actively traded with today
(https://www.investing.com/crypto/currencies [Accessed June 2 2019]). 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 (Evolutionary dynamics of the
cryptocurrency market; Royal Society, GB, Group of Authors, November 2017) .

Cryptocurrencies are nowadays used both as media of exchange for daily payments,
the primary reason for which Bitcoin was introduced, and for speculation(The
Economics of Cryptocurrencies– Bitcoin and Beyond; Bank of Canada, University
of Wellington, April 2017). Other uses include payment rail for non-expensive
cross-borders money transfer and various non-monetary uses such as time stamping
(The Economics of Cryptocurrencies– Bitcoin and Beyond; Bank of Canada,
University of Wellington, April 2017). 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.

Fig 1: Cryptocurrencies and Price Volatility(cryptocurrencychart.com [Accessed June 2 2019])

 Fig 2: Cryptocurrencies and Daily Changes in Value(cryptocurrencychart.com [Accessed June 2 2019])

Between three and six millions of private as well as institutional constituents,

actively exchange tokens and run the various transaction networks (International
Journal of Blockchains and Cryptocurrencies; Gandal, N., and Н. Halaburda (2014).
"Competition in the Cryptocuпency Market." Bank of Canada Working Paper No.
2014-33). 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.

2. 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(cryptocurrencychart.com [Accessed June 2
2019])

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 stage, as the clear winner Gans, Ј.,
and Н. Halaburda, (2013). "Some Economics of Private Digital Currency Bank of
Canada Working Paper No. 2013-38), the 2017 report by Нileman and Rauchs
noted that Bitcoin has ceded significant market capitalization share to other
cryptocurrencies (Rogoff, К.Ѕ., (2016). “The Curse of Cash.” Princeton University
Press).

3. 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.

1. Fig 4: Long Term ROI (cryptocurrencychart.com [Accessed June 2 2019])

4. 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:

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]