Launched in early 2009, Bitcoin (BTC) is the dominant cryptocurrency with a market cap of $140 billion (representing one third of the CC market) and nearly 17 million BTC units in circulation (capped at 21 million). Bitcoins are created or “mined” by individuals (miners) when they complete the computational task of solving (processing) a Bitcoin transaction, unlocking new Bitcoins for that individual’s effort as a reward. Bitcoin was the first major cryptocurrency and has spawned many competing CCs and technologies, many of which still fall back to Bitcoin as a support currency. Bitcoin itself has split into two cryptocurrencies, Bitcoin and Bitcoin Cash, to improve liquidity (Huang).
Acceptance of Bitcoin at the enterprise level is still in its infancy. Thousands of businesses, including major companies, now allow the use of CCs in exchange for goods and services (Inkinen, Allen). Surveys suggest, though, that less than 10% of Bitcoin holders plan to use their CC to pay for goods and services. Most use CCs for investing or speculating. Transactions are dominated by individuals, with the average transaction size currently around 1 Bitcoin.
The anonymous nature of CC transactions makes it hard, if not impossible, to determine where the users are. We know the majority of miners and exchanges are in Asia, but ¾ of the ATMs that allow users to buy and sell CCs 1 Names in italic refer to the lead authors of the sections following for cash are in North America. Early on, there was a strong suspicion that much of CCs were used in the illicit economy, largely because of the way CCs were set up as anonymous and off-the-official-grid. But recent surveys, and the small size of Bitcoin transactions, suggest that the share of illegal transactions had fallen to 20% in 2016 and has continued to fall since. Part of this is due to authorities clamping down on dark web sites and tax authorities starting to demand tax information from companies that support the CC world (Inkinen).
Although Banks across the globe have had limited direct involvement in Bitcoin or other CCs, the industry has been very active in pursuing initiatives around the Blockchain technology that underpins Bitcoin. The opportunity set around direct CC trading seems relatively limited, due in large part to anti-money laundering (AML) and know your customer (KYC) concerns, but in the near- to medium term, business models will likely need to evolve around the cost benefits of technology, including distributed ledgers (Sinha).
Asset managers are in the early stages of cryptocurrency product development. There has been limited success in bringing products to market thus far. A leading issue is acceptance of the underlying cryptocurrency products, which yet appear to have the support of either the SEC or major distributors. While the recent launch of futures trading on the CBOE and CME would seem to help the fund industry with both improved Bitcoin price transparency and trading liquidity concerns highlighted by the SEC, we have yet to see product approvals and a growing number of funds are withdrawing applications. Security concerns have mounted in Bitcoin exchanges as hackers have infiltrated a number of cryptocurrency exchanges, generating large losses. Thus, while there has been a lot of talk about cryptocurrency funds, at this point in time there is little assets under management invested globally in such products (Worthington).