Crypto will someday save the world, but how is still an open question. For one thing, it’s poorly understood. The code isn´t just complex, it is often inscrutable, and many new users have trouble even getting it up and running. But crypto is like a tapestry; every thread creates value only to the extent that it connects to other threads. So digital tokens like Bitcoin and Ethereum must be understood in the context of the innovations that gave rise to them – innovations in fields as diverse as computer science, neuroscience, music theory, synthetic biology, economics and game theory.
As money, it has so far failed: The volatility, transaction costs and carbon footprint of Bitcoin, have made it largely useless for purposes other than speculation and ransomware. The underlying blockchain technology, which allows people anywhere to transact and create indelible records without relying on a trusted intermediary. Right now the biggest players in the game are Bitcoin Cash (BCH) and Ethereum (ETH), which have each been struggling to establish themselves as viable alternatives to Bitcoin. But while BCH and ETH have gained popularity due to their perceived safety and higher buy-in prices than Bitcoin, neither has gained widespread acceptance as a serious contender for global reserve currency — yet.
Much attention has been paid over the years to the banking system, which is struggling to keep the economy afloat. Central banks have brought the economy back to the brink of the Great Depression. Now the cryptocurrency industry is becoming a true Western financial world with bogus investment funds and bank derivatives that allows visitors to take enormous risks – risks that could spill over into the traditional market and broader economy.
Savings and investment funds are no longer an option, given the threat of negative interest rates. With state control, it is only a matter of time before some sort of Decentralized Finance (DeFi) kicks in. If an error, hack or sudden market change leads to a recalculation of an algorithm that forces a hedge fund to sell assets in other markets to deliver billions more, this type of contagion tends to trigger a major collapse.
If low interest rates are not a deterrent, government bonds are one of the safest investments. Many individuals and institutions know exactly what qualifies to enter the bond market, and in times of crisis, bond yields can be raised to historically low levels.
In unsettling times for banks and the stock market, the appeal of real estate investment can be strong. Buying a company secures a return on your investment, provided, of course, that the company makes a profit.
As DeFi grows, big banks and institutional investors will get involved because they have done so much to rely on it. If one company or market gets into trouble, others will become more cautious and stop lending, triggering more fear of contagion to the real economy.
Whether this is a smart investment depends on believing the wild price forecasts of cryptocurrency enthusiasts who talk about the cryptocurrency market as if their investment were a capital gain on the financial market. To put the rise in prices into context and demonstrate the volatility of the market, the cryptodata company Coin Metrics reported that in January alone cryptocurrencies lost more than $150 billion in value in one day. Nonetheless, cryptocurrencies have outperformed the stock market and could fall further depending on whether the financial market collapses.
Before the coronavirus outbreak, banks looked safer than the volatile stock market. After a long-term record of solid returns, the stock market was littered with downturns that shook investor confidence.
There are a variety of applications, including exchange-banking-like platforms and derivatives brokers, where people can lend, borrow, and make highly indebted bets. Banks and organizations can operate stablecoins – representations of Fiat currencies working on the blockchain – for deposit insurance, emergency loans (the Federal Reserve has limited investments in Fiat currencies), and reserve-backed stablecoins.
Tether, one of the most popular stablecoins, got caught between the lines when it lent its dollar reserves to the affiliated cryptocurrency exchanges, claiming to hold volatile assets such as precious metals. When people buy bitcoin, they speculate on an increase in the price in the short term when investing, and then decide whether to bet that it will fall or take a short position. This is different from investing in the truest sense of the word, which is the long-term wager that an asset or company will do well when the price falls.
We spoke to investment experts and financial advisers who advise against putting too much of your portfolio into this asset class for precisely this reason. They work with clients to ensure that volatile crypto investments do not block other financial priorities, such as saving for an emergency fund or repaying high interest debt. Cryptocurrency prices have a speculative element that can tempt investors to make profits when the market value changes.
A Doomsday scenario in which financial markets no longer function is if those who hold gold, silver and other metals like platinum and copper keep their value but do not value it.
Regulated coinage could also be beneficial by making it easier and cheaper for migrant workers to send money home to their families. In addition to payment channels, stablecoins can contribute to development and one day serve as an infrastructure for digital money issued by sovereign central banks.
One of the biggest advantages of cryptocurrencies is that they do not involve financial institutions or intermediaries. Venture capitalists such as the Peter Thiels Founders Fund, which invested $3 million in BitPay, do not buy bitcoins themselves, but finance bitcoin infrastructure companies that provide payment systems for traders, exchanges, wallets, and services. For example, you can buy shares in companies that develop blockchain technology or operate crypto exchanges.
A stablecoin is a representation of the fiat currency that works on a blockchain, imitates bank deposits and claims to be worth one US dollar per coin.
Earlier this month, the Bank for International Settlements said banks holding crypto assets could be subject to stricter rules. The Financial and Banking Authority in China stated that financial institutions and payment companies cannot participate in transactions related to cryptocurrencies and cannot offer their customers crypto-related services.
The US Securities and Exchange Commission has begun approving exchange-traded bitcoin funds, making it easier for investors to get involved in the market. Investors and investment managers are still awaiting a decision from the SEC on whether to allow Bitcoin exchange traded funds (ETFs) to be traded on the stock market during trading hours. Some, such as the Bank of China, have declared that Bitcoin is not a currency, but an investment target.
The 2008 Bitcoin paper describes a software system that allows people to conduct secure online transactions between like-minded people without relying on banks or payment companies. Bitcoin appeals to tech-savvy libertarians because it exists outside the institutional banking system controlled by governments.
Kiara Sofia Smith
My current focus is blockchain technology and cryptocurrency. One could even call me a blockchain “enthusiast.” I have worked for almost a decade on several financial projects related to the stock market news, fundamental research and technical analysis for several blogs.
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