The Rise of Encrypted Digital Currency: Understanding the Market and Its Challenges
The encrypted digital currency market has experienced a sharp rise in value over the past year, reaching a staggering $400 billion, approximately a quarter of the total market value of gold. Despite this growth, the market remains largely dominated by individual investors, although institutional investors are increasingly showing interest in the space. This article will delve into the key aspects of the encrypted digital currency market, including its geographical scope, ownership structure, and the challenges it faces.
Market Size and Ownership Structure
The encrypted digital currency market is characterized by a highly concentrated ownership structure, with a small number of early miners holding a majority of the outstanding digital currency. This is evident in Table 4, which shows that a mere 2.5% of the total number of addresses hold more than one credit address bit, yet these addresses account for over 95% of the coins in circulation. This concentration of ownership is not unusual for a new asset class like encrypted digital currency.
Individual Investors Dominate
Investment in encrypted digital currency is primarily driven by individual investors, who have flocked to the market in recent years, mainly for speculative purposes. A report by ARK Invest and Coinbase in 2016 suggests that more than half of Coinbase’s Bitcoin users were investing rather than trading in 2013-2016. Similarly, a survey by LendEDU found that over half of respondents invested in Bitcoin as a store of value or for speculative purposes, while approximately 40% believed it was a world-changing technology.
Transaction Size and Geographical Scope
The transaction size in the encrypted digital currency market is still relatively small, with a median deal size of less than $500 in the second half of 2017. However, the number of active transaction addresses on the Bitcoin blockchain has increased significantly, from 100,000 in early 2014 to 500,000 to 700,000 in 2017. The geographical scope of the market is also expanding, with the majority of encrypted digital currency ATM machines located in North America, followed by Europe and Asia.
Corporate Acceptance and Institutional Investors
Corporate acceptance of encrypted digital currency is gradually improving, with thousands of enterprises, including large corporations, allowing their customers to use digital currency to purchase goods and services. Data from coinmap.org and usebitcoins.info show that over 11,700 locations worldwide accept encrypted digital currency, with a focus on North America and Europe, as well as some Asian-Pacific countries.
Financial Institutions and Hedge Funds
Financial institutions are still relatively less involved in the encrypted digital currency market, with individual investors dominating the space. However, hedge funds are increasingly showing interest in the market, with over 100 funds established last year to focus on digital assets. Autonomous Next data show that investment fund assets under management range from $3 billion to $4 billion.
Competition and Challenges
The encrypted digital currency market faces significant competition, with over 1,000 types of digital currency available, each with its unique characteristics and functions. The competition between these digital currencies will become increasingly fierce, with surviving currencies gaining a competitive advantage, such as first-mover advantage, access to wide acceptance, or the formation of a broad ecosystem.
Anonymity and Illicit Activities
The anonymity of Bitcoin has been a major concern, with many believing it is mainly used for illicit activities. However, research has shown that the anonymity of Bitcoin is not absolute, and that block chain analysis tools can be used to track down users. A report by BlockchainIntelligence Group predicts that the proportion of Bitcoin used for illicit purposes will decrease significantly in 2017, from around 20% in 2016 to 50% the year before.
Conclusion
The encrypted digital currency market is a rapidly evolving space, with significant growth in value and a highly concentrated ownership structure. While individual investors dominate the market, institutional investors are increasingly showing interest. The market faces significant challenges, including competition between digital currencies and the need to address concerns around anonymity and illicit activities. As the market continues to evolve, it will be essential for investors and regulators to stay informed and adapt to the changing landscape.
Figure 15: The Proportion of All Exchange Transactions Each Month in the Currency Pair (with BTC Units)
Figure 16: Over the Past 30 Days the Proportion of the Transaction Amount Per Hour (to BTC Units)
Figure 17: Purchase 10 BTC Average Trading Price Difference (%)
Figure 18: The Market Value of the Three Encrypted Digital Currency Transaction Amount Each Month (One Billion US Dollars)
Figure 19: Bitcoin Daily Trading Amount of Futures Contracts (One Million US Dollars)
Figure 20: Open Interest in Futures Contracts Amount Bitcoin (One Million US Dollars)