The future of Cryptocurrencyes (Part 1)

(Reading time 6 minutes)

In the recent posts regarding Bitcoin and cryptocurrencies I focused more on the basics about Bitcoin, Bitcoin mining, Crypto Exchanges, crypto wallets…. This post is a little bit different, then the others. Recently I came across a great report and analysis from Ryerson University regarding the future of Cryptocurrencies. They made analysis and comparison from Investor’s point of view, regarding Bitcoin and Ethereum the two leading crypto currencies at the moment. I found it to be very informative. So I want it to share some of the details from those analysis and what have they discovered.

Bitcoin and Ethereum are two highly disruptive cryptocurrencies looking to leverage blockchain technologies to drive innovation across numerous industries. The objective of the University was to analyze each cryptocurrency to develop the ideal investment strategy which must be held for five years without any additional trading. In order to develop an ideal investment strategy, they’ve analyzed both currencies. After looking at the qualitative similarities and differences between each currency, they analyzed the historical performances of both of them, and estimated these values in order to form a five-year projection. A lot of conversations with the industry professionals helped to identify the most probable and impactful factors for the future demand of both currencies.

After weighing these findings the appropriate investment ratio prove to be 69:31 for Bitcoin and Ethereum respectively. Bitcoin offered a higher expected value, but the volatility and speculative nature of cyptocurrencies indicated for diversification across platforms.

First let’s look at it historically:

What is money?

Since our societies transitioned from a barter economy (a cashless economic system in which services and goods are traded at negotiated rates) to using money as exchange, certain individuals invented systems that allow for rational ways to exchange money. In order to help make goods and services commensurable Aristotle came up with 4 criteria that help to dictate what is considered to be ‘’good money’’.

• It must be durable
• It must be portable
• It must be divisible
• It must have intrinsic value

Back in the days the preferred medium of exchange was gold, since gold was able to fulfill all the 4 criteria. As economies grew and the demand for a medium of exchange increased, governments were forced to create a more accessible medium of exchange that they could control and regulate. This was the birth of fiat currency. This medium of exchange has been adopted worldwide, however it has come with its own set of issues.

In order to help fix some of these issues, cryptocurrencies began to emerge in 2009, leveraging a disruptive technology called blockchain. A cryptocurrencie is a digital currency that uses cryptography for security. The blockchain specifically deals with the way in which data is structured and allows for the existence of decentralized digital ledgers where single organizations are not able to effect transactions. Currently the two most widely adopted cryptocurrencies are Bitcoin and Ethereum. If you would like to know more about Cryptocurrencies and Blockchain check out my blog posts.

The Contenders

Bitcoin is the most widely known and used cryptocurrency in the world. The current market capitalization is over $150 billion (USD). It was developed by Satoshi Nakamoto as a strictly peer to peer electronic payment system and as a solution to the problem of double spending. Bitcoin is designed to primarily eliminate the need of financial institutions or trusted third party entities. Bitcoin also eliminates the possibility of fraud, increasing efficiencies and providing objective proof of work to guaranteed validity and security in any transaction (Nakamoto 2008). Bitcoin’s multiversion concurrency control is unique and allows for safe consistent transactions without significant delay.

Ethereum’s main point of differentiation is the ability to leverage the application of smart contracts within it’s code. While growing at a much more significant rate over the past year. Ethereum has a total market capitalization of only approximately 20% of Bitcoin. Ethereum’s value is largely driven by its increased utility and ability to eventually eliminate third parties involvement in determining contractual obligations. The main benefit of Ethereum can be found in the belief that, as long as it can be coded properly, Ethereum’s smart contracts carry potentially unlimited utility.

Both Ether and Bitcoin are mined by solving complex computational problems. Additionally, as more blocks are mined, the difficulty of finding new blocks increases in both cases.

Comparison: Bitcoin is currently better positioned to leverage and be incorporated into innovations that occur across many industries, while Ethereum is trying to drive the innovations. Ethereum is at a greater risk of experiencing disruption, as their network is the major driver of value (While the Ether currency simply drives the network). This network which drives innovation opens up Ethereum to be disrupted by future entrants looking to build upon the existing framework. Bitcoin is largely safe from this threat of new entrants as Bitcoin;s explicit purpose of acting as a digital currency has been effectively accomplished, where future innovative networks can use Bitcoin as an underlying asset.

Shared characteristics

Cryptocurrencies, anonymous, no need for trust, blocks are mined with increasing difficulty,    underlying use of blockchain technology

Will history repeat itself?

Using historical data to forecast values of both Bitcoin and Ethereum in five years proved to be very difficult, as there was insufficient data to project future prices with confidence. When examining the trends in both sets of prices, the 5 years forecast for Bitcoin is growth of $2250 which represents growth of 301%, while Ethereum’s forecasted value is forecasted of $88, which represents growth of 634%. Both values represents absolutely incredible growth rates due to the dramatic growth driven by hype and adoption in the early stage of the life cycle. Ofcourse this are just predictions. We have witnessed in 2017 how Bitcoin growth from $2000 in a few months reached $20000. The price dropped rapidly after this unnatural growth at the beginning of 2018, and now it’s more stable. The current price is $9332, and it’s going down most to $7000.

Upon further analysis, the high growth and volatility of both Bitcoin and Ethereum are the result of news, hype and speculation. This is shown by the extremely high correlation between prices and Google searches for each respective currency. When looking at Bitcoin the correlation between price and Google searches for Bitcoin is 0.64, while Ethereu,’s correlation is even higher at 0.88. The Google searches led to a growth rate for Bitcoin of approximately 300%,while Ethereum around 506%. During the history Ethereum has experiences more growth.

With this analysis Ethereum appears to be the better investment. Additionally, given the highly volatile nature of both these currencies and the lack of extensive history, this forecast can’t be weighted significantly in the final decision.

TO BE CONTINUED…..

Thank you for reading

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