Crypto Currencies "Economics"

Economics

          Crypto-currencies are used primarily outside existing banking and governmental institutions, and exchanged over the Internet. While these alternative, decentralized modes of exchange are in the early stages of development, they have the unique potential to challenge existing systems of currency and payments.

Competition in cryptocurrency markets

         Today, there are over 700 digital currencies in existence. Entry into the marketplace is undertaken by so many due to the low cost of entry and opportunity for profit making through the creation of coins.

         Network effects play an important role in analyzing the development of crypto-currency markets. Since any given currency gains use value as the number of its users increase, popularity of a certain currency is integral in that currency's success. Economists postulate that large competitors (such as the most popular cryptocurrency: bitcoin) will attract more new users due to the size of their growing exchange pools and as a result will effectively dominate the market.

          A study entitled "Competition in the Crypto-currency Market" conducted by members of the NET Institute over three periods between 2013 and 2014 charts the analysis of changes in price data over time in regards to budding cryptocurrency markets. It analyzes bitcoin and other similar crypto-currencies referred to as "alt-coins". These include Lite-coin, Peer-coin, and Name-coin; crypto-currencies listed in order by which account for the largest percentages of digital market capitalization behind bitcoin (which accounts for 90%).

          The NET study found that of these four, all were early entrants into the digital currency marketplace, designed to correct perceived bitcoin's flaws and amass popularity in an infant market whose popularity was rapidly growing. This study introduced the question of the role of demand in crypto-currency markets, and what impetus demand has in relation to emerging coins. The study dealt namely with two common forces of demand that shaped the market: reinforcement and substitution effects. The reinforcement effect expects demand to increase based on usership, and that the crypto-currency that could gain the most buyers and sellers would win out above all others, thus dominating the marketplace. The substitution effect implies that as the price of bitcoins rose with increased usership, people would begin to look for other options in the crypto-currency market, thus discouraging any one coin from gaining complete dominance.

Indices

            In order to follow the development of the market of crypto-currencies, indices keep track of notable crypto-currencies and their cumulative market value.

Crypto Index - CRIX

          The cryptocurrency index CRIX is a conceptual measurement jointly developed by statisticians at Humboldt University of Berlin, Singapore Management University and the enterprise Coin-Gecko and was launched in 2016. The index represents crypto-currency market characteristics dating back until July 31, 2014. Its algorithm takes into account that the cryptocurrency market is frequently changing, with the continuous creation of new crypto-currencies and infrequent trading of some of the existing ones. Therefore, the number of index members is adjusted quarterly according to their relevance on the cryptocurrency market as a whole. It is the first dynamic index reflecting changes on the crypto-currency market.