An Analysis of the Cryptocurrency Industry

INTRODUCTION The cryptocurrency market has evolved erratically and at unprecedented speed over the course of its short lifespan. Since the release of the pioneer anarchic cryptocurrency, Bitcoin, to the public in January 2009, more than 550 cryptocurrencies have been developed, the majority with only a modicum of success [1]. Research on the industry is still scarce. The majority of it is singularly focused on Bitcoin rather than a more diverse spread of cryptocurrencies and is steadily being outpaced by fluid industry developments, including new coins, technological progression, and increasing government regulation of the markets. Though the fluidity of the industry does, admittedly, present a challenge to research, a thorough evaluation of the cryptocurrency industry writ large is necessary. This paper seeks to provide a concise yet comprehensive analysis of the cryptocurrency industry with particular analysis of Bitcoin, the first decentralized cryptocurrency. Particular attention will be given to examining theoretical economic differences between existing coins. Section 1 of this paper provides an overview of the industry. Section 1.1 provides a brief history of digital currencies, which segues into a discussion of Bitcoin in section 1.2. Section 2 of this paper provides an in-depth analysis of coin economics, partitioning the major currencies by their network security protocol mechanisms, and discussing the long-term theoretical implications that these classes entail. Section 2.1 will discuss network security protocol. The mechanisms will be discussed in the order that follows. Section 2.2 will discuss the proof-of-work (PoW) mechanism used in the Bitcoin protocol and various altcoins. Section 2.3 will discuss the proof-of-stake (PoS) protocol scheme first introduced by Peercoin in 2011, which relies on a less energy intensive security mechanism than PoW. Section 2.4 will discuss a hybrid PoW/PoS mechanism. Section 2.5 will discuss the Byzantine Consensus mechanism. Section 2.6 presents the results of a systematic review of 21 cryptocurrencies. Section 3 provides an overview of factors affecting industry growth, focusing heavily on the regulatory environment in section 3.1. Section 3.2 discusses public perception and acceptance of cryptocurrency as a payment system in the current retail environment. Section 4 concludes the analysis. A note on sources: Because the cryptocurrency industry is still young and factors that impact it are changing on a daily basis, few comprehensive or fully updated academic sources exist on the topic. While academic work was of course consulted for this project, the majority of the information that informs this paper was derived from …