Academic journal article The Cato Journal

The Market for Cryptocurrencies

Academic journal article The Cato Journal

The Market for Cryptocurrencies

Article excerpt

Cryptocurrencies like Biteoin are transferable digital assets, secured by cryptography. To date, all of them have been created by private individuals, organizations, or firms. Unlike bank account balances, they are not anyone's liability. They are not redeemable for any government fiat money such as Federal Reserve Notes or for any commodity money such as silver or gold coins. The cryptocurrency market is thus a market of competing private irredeemable monies (or would-be monies). Friedrich A. Hayek (1978a) and other economists over the last 40 years could only imagine how market competition among issuers of private irredeemable monies would work. Today we have an actual market to study. In what follows I will discuss the main economic features of the market. I also discuss whether the market is purely a bubble.

As an introduction to the topic, I offer the following comic verse about the contrast between Biteoin and the physical gold coins of the past:

   In the past, money's value was judged with our teeth;
   We bit coins to confirm they were real.
   Now a Bitcoin's just data, no gold underneath.
   That's okay if it buys you a meal. (1)

The Size and Composition of the Cryptocurrency Market

Bitcoin rightly gets the lion's share of media attention, but it is not alone in the market for cryptocurrencies. The authoritative website CoinMarketCap.com tracks the U.S. dollar price and total "market cap" (price per unit multiplied by number of units outstanding) for each of more than 500 traded cryptocurrencies. Bitcoin is the largest by far. On a recent day (March 9, 2015), the site showed Bitcoin trading at $291 per unit, with a market cap of $4.05 billion. The second and third largest cryptocurrencies, Ripple and Litecoin, had market caps respectively 8.5 percent and 1.8 percent as large. The entire set of non-Bitcoin cryptocurrencies (known as "altcoins") had a market cap of roughly $619 million, or 15 percent of Bitcoin's. Stated differently, Bitcoin had roughly 87 percent of the market, altcoins 13 percent. In percentage terms, altcoins do a higher share of Bitcoin's business than Bitcoin does of the Federal Reserve Note's business (currently $1.35 trillion in circulation). In trading volume the percentage share of altcoins (led by litecoin and Ripple) has been similar.

The cryptocurrency market has grown about fourfold in market cap over the last 22 months, with altcoins growing faster than Bitcoin. This is seen by comparing recent data to the oldest snapshot of the CoinMarketCap site available via the Internet Archive "Wayback Machine," which reports data for May 9, 2013. On that date, Bitcoin had a price of $112 per unit, and a market cap of $1.2 billion. The two largest altcoins at that time, Litecoin and Peercoin (aka PPCoin), had market caps respectively 4.7 percent and 0.4 percent as large. Only 13 altcoins were listed. Jointly their market cap was about 6 percent of Bitcoin's, giving Bitcoin 95 percent of the market. Since then, the market share of altcoins has doubled, and their market cap has grown ninefold. Trading volumes then were not reported.

At $4.05 billion, the market cap of Bitcoin, as of March 2015, was slightly smaller than the dollar value of the September 2014 monetary bases of the Lithuanian litas ($5.8 billion) and the Guatemalan quetzal ($5.5 billion), but larger than those of the Costa Rican colon ($3.3 billion) and the Serbia dinar ($3.3 billion). (2) The August 2014 figures from the Central Bank of the Bahamas do not provide the monetary base, but count Bahamian dollar currency in circulation at $210 million, less than two-thirds of Ripple's recent market cap of around $344 million.

Medium of Exchange, Store of Value, and Medium of Remittance Functions

The retail use of Bitcoin as a medium of exchange for goods and services is small to date, but is growing. In December 2014, Microsoft began accepting bitcoin payments "to buy content such as games and videos on Xbox game consoles, add apps and services to Windows phones or to buy Microsoft software" (BBC 2014). …

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