Introduction to CryptoCurrency!!

What is money?

Since societies transitioned from a barter economy to using a money as a medium of exchange, individuals have tried to devise systems that allow for rational ways to exchange value. In order to help make goods and services commensurable the Greek philosopher Aristotle came up with four criteria that help to dictate what is considered to be ‘good money’ (Lee, 2009):

1. It must be durable

2. It must be portable

3. It must be divisible

4. It must have intrinsic value

Originally the preferred medium of exchange was gold as it was able to fulfill all four of these 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 particular 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 cryptocurrency is a digital currency that uses cryptography for security (Investopedia, 2016). 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 (Hackett, 2016). Currently the two most widely adopted cryptocurrencies are Bitcoin and Ether, the currency that is used to power the Ethereum blockchain.

The Investment

With the recent rise in popularity of cryptocurrencies many investors are now trying to determine how to invest into this new asset class. As with any investment into a new technology there are many factors to consider when assessing their future. In order to make an informed decision one must look at the origins of the technology as well as the potential applications and limitations in the foreseeable future.

This paper aims to evaluate what the price (in USD) of Bitcoin (BTC) and Ether (ETH) will be in the next 5 years using thorough quantitative and qualitative analysis. From this evaluation a decision will be made on an appropriate investment allocation between the two currencies for this crypto-portfolio.

The Contenders

Bitcoin is the most widely known and used cryptocurrency in the world. The current market capitalization of just over $10 billion (USD) (Crypto-Currency Market Capitalizations, 2016). Bitcoin was originally developed by Satoshi Nakamoto as a strictly peer-to-peer electronic payment system and a solution to the problem of double-spending (Nakamoto, 2008). It is primarily designed to eliminate the need of financial institutions or ‘trusted third-party’ entities. Bitcoin does this by eliminating the possibility of fraud, increasing efficiencies, and providing objective proof-of-work to guarantee validity and security in any transaction (Nakamoto, 2008).
The use of a public ledger as well as digital signatures allow for a secure and anonymous transaction without the need for trust, as the public network of nodes validates transactions through finding a consensus among a majority of nodes. Thus far, the primary use cases for Bitcoin revolve around increasing efficiencies and eliminating unnecessary time and costs that arrive from using multiple trusted third parties to facilitate transactions (Tapscott, 2016).

Bitcoin is highly adoptable in markets that are lacking in traditional financial infrastructure but have access to mobile data, as well as markets with highly inflated currencies that require tools to allow for the mobilization and exchange of currencies (Magee, 2015). Bitcoin’s multiversion concurrency control is unique and allows for safe concurrent transactions without significant delay (Greenspan, 2015).