Cryptocurrency
The development and growth of cryptocurrencies and blockchain technology
has implications for many industries, including finance, media, and healthcare.
In a series of papers, we will discuss the variety of ways in which cryptocurrencies
and blockchains are being used in different fields. This paper, the first in our
series of three papers, discusses cryptocurrencies, including how they operate in
conjunction with the blockchain and how Bitcoin, the first major cryptocurrency,
compares to traditional, fiat currencies.
What is a cryptocurrency? Bitcoin, the most well-known cryptocurrency, is a
decentralized digital currency network that employs
blockchain technology to facilitate digital transfers of
value, without the need for a centralized or trusted
middleman. Bitcoin, together with the underlying
blockchain technology, was developed by one or more
developers, who used the pseudonym Satoshi Nakamoto
and published a white paper and accompanying open
source code on October 31, 2008. The Bitcoin network is
A cryptocurrency is a digital asset that can function open to the public (i.e., anyone can purchase or transfer
as a medium of exchange. As the name suggests, bitcoin) and allows for permissionless, trustworthy and
cryptocurrencies use cryptography to secure and verify secure transactions across the world.
transactions and control the production of new units
of the cryptocurrency. These transactions, in turn,
are stored on a “blockchain” ledger. Bitcoin, the first Quick Figures
cryptocurrency, was introduced in 2008 but did not (as of August 14, 2019)1
gain widespread public attention until early 2017.
Today, there are over 2,200 different cryptocurrencies,
Cryptocurrency:
some of the most notable of which are Bitcoin, Ether,
Number of Cryptocurrencies: Over 2,400
Ripple, Litecoin, Monero, and Facebook’s proposed
Number of Exchanges: Over 200
cryptocurrency Libra.
(regulated and unregulated)
Total Market Cap: Over $265 billion
What is Bitcoin?
Bitcoin:
Number of Bitcoins in Circulation:
Over 17 million (out of a total 21 million)
Total Market Cap: Over $180 billion
24-Hour Trade Volume: Over $19 billion
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Purchasing/Using Bitcoin Users can create an online account on a
cryptocurrency exchange, where the user can
provide credit card or bank account information
and purchase Bitcoin (or other cryptocurrencies) for
value.
Once a user purchases cryptocurrency, he or she is
assigned a “private key” – a unique numeric ID like a
In the years since its creation, purchasing Bitcoins has password consisting of a string of letters/numbers.
become relatively simple. Each private key is personal to and only known by
Users can store their private keys in a “wallet” and the user to which it is assigned.
can choose from several different types available The private key is used to access the purchased
from multiple providers, including mobile wallets, Bitcoins and to execute transactions.
web wallets and hardware wallets.
Comparison to Fiat Currency
This section explains certain key attributes of Bitcoin and other cryptocurrencies by comparison with traditional
cash or fiat currency. The following quick reference table provides a roadmap:
Cash Bitcoin
Security Anti-counterfeiting security Crypto security
No Double Spending Tangible exclusivity Ledger that records unique transactions
Regulatory Scheme Institutionally backed Decentralized peer-to-peer
(e.g., Central bank)
Accepted as Money Traditional payment method; Gaining acceptance by merchants and
global reciprocity consumers
Scarcity Central bank regulated supply Finite supply and computational limits
Stability of Value Generally stable, subject to Very volatile, to date
economic and policy factors
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Anti-counterfeiting Moreover, even a tiny difference in inputs produces
Cash a massively different output. Experts believe that
hacking the algorithm to reproduce the original input
is impossible with current computer technology.2
Second, Bitcoin transactions are subject to verification
before they are cleared to be included in the blockchain.
The blockchain ledger is itself cryptographically
hashed, and it is also distributed in hashed form
over multiple independent computer servers. This
makes the blockchain impenetrable according to
experts, earning it the nickname the “immutable
ledger.” As such, cryptocurrency transactions stored
Paper cash contains many security features to prevent in a blockchain ledger are considered impervious to
counterfeiting. These can include: randomly disbursed falsification or alteration.3
security fibers, watermarks, color-shifting ink that
changes from copper to green as the note is tilted 45 No double spending
degrees, a vertical security thread woven into the note’s Cash
fabric, and unique serial numbers.
Bitcoin
Vendor A –$10.00
–$10.00
Party A
Vendor A –$10.00
Vendor B –$10.00
– $20.00
Party B
The value of money depends, in part, on the inability
to spend the same unit of money (e.g., the same $5
Security features of Bitcoin are twofold: Bitcoin’s
bill) multiple times. With cash, this concept is easy to
security relies on: (i) cryptography and (ii) the blockchain
understand. If you pay for your morning coffee with a
(i.e., the distributed public ledger).
$5 bill, for example, you can’t use that same $5 bill to
Cryptography converts ordinary data into a unique pay for anything else. Paying with a credit card, or even
series of numbers and letters that is unintelligible a mobile payment service operates to preserve the
without decryption. The National Security Agency same principle. Each individual transaction is verified
has developed various cryptographic algorithms, by a centralized intermediary like a bank or credit card
including Secure Hash Algorithm 256, which is company, and the amount spent is debited from the
a widely used cryptographic hashing standard consumer’s account instantaneously. When a person
employed by Bitcoin. Bitcoin’s hash algorithm always initiates a subsequent transaction, her or his account
returns a unique, but unintelligible, output result for is debited again, and the balance is further reduced.
any unique, unencrypted, input content. That is, no This ensures that a person can never spend the same
two different inputs will ever return the same output. money twice.
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Bitcoin Regulatory Scheme
Unlike cash, digital currencies (like Bitcoin and other Cash
cryptocurrencies) could, in principle, be copied absent
a mechanism that prevents double spending. In
reality, a digital coin can be thought of as an encrypted
computer file, and like any other file, it could be copied
and transferred multiple times without some form of
external protection.
Bitcoin and other cryptocurrencies address this
problem by using the blockchain ledger to ensure that
no one can spend the same coin twice. When someone
tries to spend a Bitcoin, the transaction goes through
a verification process to confirm who is the current
In the United States, the Federal Reserve issues dollars
owner of that Bitcoin – this is done by comparing
and acts as a trusted third party to guarantee that
records maintained in the blockchain. If ownership is
currency. Fiat currencies of other nations are regulated
verified, then the transaction will be authorized; but, if
in substantially similar ways.
the ledger indicates that the Bitcoin has already been
spent by its purported owner, the transaction will be Bitcoin
declined.
DFCD 3454 BBEA 788A 751A
696C 24D9 7009 CA99 2D17
Accepted
Waits for confimation
Party 1
0086
ACC7 Abandoned Block Rejected
Waits for confimation
Party 2
Also, immediately upon its authorization, each new
transaction is recorded in the blockchain ledger. Bitcoin runs on a peer-to-peer network. Like the
Therefore, if the same person tried to spend the same Internet, no one person or entity controls it, and
Bitcoin twice, the transaction would be invalid because there is no single regulatory or other central authority.
the blockchain would already reflect the change of However, certain design and coding decisions have
ownership made in the first transaction. To reconcile historically been made by majority consensus amongst
near-simultaneous transactions, the blockchain uses the Bitcoin community. Other key decisions, like the
exact time stamps and a reconciliation protocol to ultimate supply of Bitcoins available, are hard-coded
ensure that the priority of transactions is preserved. into Bitcoin’s underlying algorithms.
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP 4
Accepted as money Bitcoin
Cash
Cash is a traditional payment method and is universally
accepted as a form of payment. Even mobile payment
services, like Venmo or Apple Pay, are traditionally
linked to cash.
Bitcoin
In a cryptocurrency system, there is no central authority
that regulates the monetary base. Instead, new units
of the cryptocurrency are created by the “nodes” or
servers that run the peer-to-peer network that stores
Certain merchants and larger companies (particularly and operates the underlying blockchain ledger. Bitcoin
in the tech space) have begun to accept Bitcoin. has a finite supply of 21 million Bitcoins, which is hard-
Companies that currently accept payment via Bitcoin coded into the algorithm that the Bitcoin “nodes” run.
include Overstock.com, Microsoft, Subway, Expedia However, other cryptocurrencies have no maximum
and others.4 Many of the companies that offer Bitcoin supply at all. For example Ethereum, which is the second
as a payment option partner with a third party payment largest cryptocurrency, has no supply cap.
processor to convert Bitcoin to local currency. The process to create new Bitcoins is called “mining”
However, as discussed further under Stability of Value and involves solving cryptocurrency problems to find
below, the high volatility of Bitcoin prices currently new secure hashing sequences.6 The computational
makes it difficult for consumers and merchants to rely power required to “mine” each new Bitcoin increases
on Bitcoin as an effective currency for transactions. with the number of Bitcoins in circulation. This is
because the calculations to find new secure hashing
Scarcity sequences become successively more difficult as the
Cash “easiest” possibilities are used up. The rate of new
In most major economies, currency is issued by as Bitcoin issuances is also programmed to decrease over
an instrument of policy. There was approximately time. While there are currently over 17 million Bitcoins
USD $1.70 trillion in circulation as of January 31, in circulation with a current market cap of over $180
2019, of which USD $1.66 trillion was in Federal billion, it is estimated that we won’t reach 21 million
Reserve notes.5 until 2140.7
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP 5
Stability of Value Bitcoin
Cash
Bitcoin (USD) Price, CoinMarketCap, <https://coinmarketcap.com/
currencies/bitcoin> (last visited June 10, 2019).
Bitcoin’s value is substantially more volatile and less
Though relatively stable, the value of cash fluctuates predictable than most traditional currencies. It has
based on a number of economic and policy factors. The fluctuated dramatically, and sometimes without
value of national currencies tend to be stable in most warning or clear correlations with other asset classes. In
major economies. However, in developing economies, 2017 alone, Bitcoin’s price rose from $973 in January to
currency can fluctuate dramatically. For example, $5,856 in October, and skyrocketed towards $20,000 by
as of November, 2018, Venezuela’s inflation rate hit year end. By February 2018, however, Bitcoin had fallen
830,000%.8 Zimbabwe’s inflation rate reached 500 below $7,600. Most recently, in June 2019, Bitcoin’s
billion percent at its peak in 2009. By contrast, the United price rose to approximately $10,000 and has stabilized
States, however, has maintained a rate of inflation of slightly since then.10 With its proposed cryptocurrency
around two percent or less over the past decade.9 called Libra, Facebook and other founding members of
the Libra Association aim to create a cryptocurrency that
is backed by a reserve of real assets, which theoretically
would be significantly less volatile than Bitcoin.
Conclusion
Many believe cryptocurrencies have potential to become widely accepted as a form of currency. However, extreme
price volatility and other factors currently pose headwinds for widespread adoption of cryptocurrencies. Nonetheless,
cryptographic security and the blockchain ledger offer unique qualities that arguably rival traditional currencies in
certain respects.
We invite you to read the next paper in our series, which focuses on blockchain, the distributed ledger technology that
enables cryptocurrencies. That paper also covers Ethereum, the most prominent platform for building blockchain-
based applications.
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP 6
1. CoinMarketCap, <https://coinmarketcap.com> (last visited August 14, 2019).
2. See What is Cryptography?, Techopedia, <https://www.techopedia.com/definition/1770/cryptography> (last visited Sept. 25, 2018); see also
Roger A. Grimes, All You Need to Know About the Move From SHA-1 to SHA-2 Encryption, CSO Online, <https://www.csoonline.com/article/2879073/
encryption/all-you-need-to-know-about-the-move-from-sha1-to-sha2-encryption.html> (last visited Sept. 24, 2018).
3. See Don & Alex Tapscott, Blockchain Revolution: How the Technology behind Bitcoin is Changing Money, Business and the World 6-8, 17-18 (2016).
4. Who Accepts Bitcoins as Payment? List of Companies, Stores, Shops, 99bitcoins.com, <https://99bitcoins.com/who-accepts-bitcoins-payment-
companies-stores-take-bitcoins> (last visited October 26, 2018).
5. FAQs, <https://www.federalreserve.gov/faqs/currency_12773.htm> (last visited, June 10, 2019).
6. See Primavera De Filippi & Aaron Wright, Blockchain and the Rule of Law: The Rule of Code at 21 22, (Harvard University Press 2018).
7. Controlled Supply, Bitcoin Wiki, <https://en.bitcoin.it/wiki/Controlled_supply> (last visited Sept. 24, 2018); JP Buntinx, 80% of All Bitcoins Will Have
Been Mined In a Year From Now, NullTX, <https://nulltx.com/80-of-all-bitcoins-will-have-been-mined-in-a-year-from-now> (last visited Sept. 24,
2018); see also CoinMarketCap, <https://coinmarketcap.com/> (last visited August 14, 2019).
8. Will Martin, Venezuela’s Inflation Rate Just Hit 830,000% — and is likely to keep rising, Business Insider, <https://www.businessinsider.com/venezuela-
inflation-rate-hyperinflation-2018-11> (last visited January 17, 2019).
9. Noah Smith, Venezuela is Living a Hyperinflation Nightmare, Bloomberg, <https://www.bloomberg.com/view/articles/2017-12-19/venezuela-is-living-
a-hyperinflation-nightmare> (last visited Sept. 24, 2018).
10. Hamza Shaban, The Highs and Lows of the Wild Year of Bitcoin, The Washington Post, <https://www.washingtonpost.com/news/the-switch/
wp/2017/12/29/a-look-at-the-year-of-bitcoin/?utm_term=.c7b7ee822499> (last visited Sept. 24, 2018); David Meyer, Cryptocurrency Traders Lose
$115 Billion in 24 Hours as Bitcoin Bloodbath Continues, Fortune, <http://fortune.com/2018/02/02/bitcoin-crash-8000-ethereum-ripple> (last visited
Sept. 24, 2018); Bitcoin (USD) Price, CoinMarketCap, <https://coinmarketcap.com/currencies/bitcoin> (last visited June 10, 2019).
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP 7
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Associates Jacobus J. Schutte, Anastasia V. Peterson, Marisa Seiss, Andrew J. Heffler, Deniz Gurbuz,
Patrick R. Kessock and Apeksha S. Vora contributed to this white paper.
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