Many people have always wondered whether cryptocurrencies like Bitcoin are an asset bubble or safe-haven assets. Over the recent past, Bitcoin has become quite popular. That’s because of the potential gains the proponents of this digital currency purport it has.
However, the volatility of this virtual currency involves dramatic loss risk. For instance, the Bitcoin price increased from $1,000 to over $19,000 in 2017. After that, the value of this cryptocurrency dropped to $9,700. And this indicates how volatile Bitcoin price can get.
Experts have noted that several factors can lead to the collapse of the Bitcoin market. Perhaps, you can use bitcointrader2.com to understand why the price of this cryptocurrency is so volatile. Back in 2017, Bitcoin’s initial coin offerings generated over $3.7 billion. And this led to the creation and introduction of more cryptocurrencies in the market.
Understanding Digital Currencies
A cryptocurrency refers to a virtual or a digital currency. Like fiat money, cryptocurrencies serve as an exchange medium. Crypto is a prefix that comes before word currency. That’s because cryptocurrencies employ cryptography to verify and secure transactions. Also, they use cryptography to crew new coins or currency units.
Cryptography enables users to encode something easier to decipher using a key. And without this key, solving the encoded thing becomes harder. Essentially, creating coins is difficult, while verifying transactions is easy.
Entries in the pseudo-anonymous database, called blockchain, are at the core of cryptocurrencies like Bitcoin. However, nobody can change the information of this database. The blockchain serves as a public ledger or record where miners verify different nodes. And the verification or mining process makes counterfeiting Bitcoin impossible or extremely difficult. Blockchain technology also makes tracing specific transactions between anonymous Bitcoin user wallets or accounts possible.
Bitcoin’s Global Appeal
Bitcoin provides a digital and easy-to-use alternative to fiat money. People that use this cryptocurrency from different parts of the world, such as the European Union and the United States, see it as a novelty. However, this currency’s popularity is even higher in countries where authorities mismanage domestic currencies.
For instance, the authoritarian regime in Venezuela is infamous for skyrocketing inflation. For this reason, millions of the country’s citizens have plummeting living conditions, where they can’t access external currencies.
In some states, citizens experience strict controls when trying to access capital. And this hinders cash flow. Taxes can also be relatively high. In such cases, citizens can use Bitcoin to circumvent taxes and capital controls. Such attempts have increased demand among businesses and consumers. Consequently, many countries are cracking down on cryptocurrency uses for illegal purchases, foreign sales, and tax evasion.
Most financial institutions and central banks have exhibited a lukewarm official response to Bitcoin and other virtual currencies. Some countries have shown their support for cryptocurrencies. However, most central banks are cautious about their use. Perhaps, that’s because of the extreme volatility of their market. Capital control and tax evasion issues have also raised widespread concerns.
In Venezuela, the government launched its cryptocurrency, known as Petro. Some people allege that this digital currency has the backing of crude oil barrels. According to official sources, the state raised a lot of money from cryptocurrency, though analysts have expressed skepticism about the figures.
When it comes to inflation control and frictionless transactions, digital currencies are beneficial in several ways. However, most investors see them as assets they can add to their portfolios for diversification purposes. The crypto market’s non-correlated nature makes these currencies a hedge against some risks, just like gold and other precious metals.
However, some experts have expressed their fears that a possible cryptocurrency crash can affect the broader market adversely, like the mortgage-backed securities that led to a worldwide financial crisis. However, most public companies like Microsoft Corp. have a larger market capitalization than all digital currencies. Thus, this might not have a significant effect on global markets.
Most investors see digital currencies as a speculation vehicle or a hedge against risks like inflation in a nutshell. However, the market size for cryptocurrencies does not represent any systematic risk.