Fiat Currency Vs Cryptocurrency
Today the way we spend money has evolved significantly. Only 8% of the money in the world is represented in physical notes which simply means that the globe is swiftly progressing towards a cashless economy.
Experts believe that in the near future, fiat currency will be wiped out and will be replaced by digital currencies. Nonetheless, there is still a big debate between fiat currencies vs. cryptocurrency.
Over the past few years, there has been a heated debate on the differences between fiat currency and cryptocurrency. There are some who argue that cryptocurrency is fiat money in digital form, while others say cryptocurrency is the future and will soon wipe out traditional banknotes completely.
To understand these two currencies, let us look at what they are.
Inflation Of Fiat Currency
The price of the cryptocurrency would change with respect to that of a fiat currency. If the price of fiat currencies falls, the price of the cryptocurrency will go up. You will be able to get more of that fiat currency when you sell your cryptocurrency. As central banks in some economies keep printing more money and keeping interest rates artificially low, the value of cryptocurrencies will rise.
What Causes A Cryptocurrency To Increase In Value
Traditional currencies, like the US dollar and UK pound, are backed by a commodity like gold, and their prices are mostly determined by the basic rule of trading: supply and demand. Their value is somewhat imaginary since it was derived from the governments statement that it actually holds worth and the two independent parties are ready to put their trust in that value. In layman terms, currencies have value because the government says so, and the participants in transactions believe them.
Cryptocurrencies, on the other hand, are not regulated by any authority, and exchange markets are free and open for everyone to trade. Supply varies from coin to coin, some have a fixed number of coins from the start, while others keep changing the quantity. This means that inflation is non-existent. Cryptos are not backed by any goods and yet their prices keep fluctuating all the time.
Therefore, how is the value of the cryptocurrency determined and how can we predict the future variations? Here are some possible factors that should be taken into account.
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A New Type Of Connectivity
We can think of Ethereum as an infrastructure, one with the potential to revolutionize both finance and technology.
DeFi is potentially recreating the entire financial system. Ethereum-based applications are likely to impact markets, governance, public services, and perhaps even how identity is managed. In the future, we may use the Ethereum platform to change the way mortgage transfers, securities trading and many other fields work.
Whats more, this will happen on a network that can reach anyone, anywhere, who can connect to a public network.
As these ideas come to fruition, Ethereum is a bet on a whole new type of connectivity and innovation layer, another driver in the value of the network.
Ethereum already has an active developer community and user base. It is one of the most popular digital currency networks across all metrics for Github activity, including number of commits, total contributors, total project watchers, and total stars. All of this points to an expanding and diversifying Ethereum ecosystem. For a blockchain, thats the best story you can tell: a growing network, and key for the value of ether.
Circulating Supply Issues And Their Impact On Market Cap
While market cap is our best estimation of relative size for cryptocurrencies, its not perfect. This is largely a result of imperfections in circulating supplies.
Former BitGo engineer and Bitcoin proponent Jameson Lopp, has estimated that 4 million Bitcoins have been lost. This is primarily a result of early adopters who mined or purchased large amounts of the coin, then lost their hard drives or private keys. Unfortunately, nobody actually knows the exact amount of Bitcoin or other cryptocurrencies that have been lost. Therefore, lost coins are not excluded from circulating supplies.
Its important to consider that some amount of lost coins exist for nearly every cryptocurrency. However, you could estimate that Bitcoin, being the oldest cryptocurrency, has the most lost coins of any major cryptocurrency. If we could say with 100% certainty that 4 million Bitcoins were lost, then Bitcoins current market cap would only be $85 billion. With that said, it would still firmly be the largest coin by market cap.
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Future Of Digital Coins
Many believe that the biggest hurdle facing cryptocurrencies is their poor fundamentals. None of the digital coins, for instance, has yet proved its fundamental value as a currency that will be readily accepted by a huge population as a medium of exchange. This is in contrast to national currencies such as the U.S. dollar which are widely accepted by people as money. So crypto, in essence, continue to be viewed as a gamble by most. Governments across the world have not been keen on allowing cryptocurrencies to be used as alternative money as they view private currencies as a threat to their sovereignty.
Estimate Of Overall Cryptocurrency Market Cap Per Week From July 2010 To October 2021
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Availability On Currency Exchanges
Just as equity investors trade stocks over indexes like the NYSE, Nasdaq, and the FTSE, cryptocurrency investors trade cryptocurrencies over Coinbase, GDAX, and other exchanges. Similar to traditional currency exchanges, these platforms let investors trade cryptocurrency/currency pairs .
The more popular an exchange becomes, the easier it may draw in additional participants to create a network effect. And by capitalizing on its market clout, it may set rules governing how other currencies are added. For example, the release of the Simple Agreement for Future Tokens framework seeks to define how ICOs could comply with securities regulations. Bitcoins presence on these exchanges implies a level of regulatory compliance, regardless of the legal gray area in which cryptocurrencies operate.
How Secure Is Cryptocurrency
Cryptocurrencies are usually built using blockchain technology. Blockchain describes the way transactions are recorded into “blocks” and time stamped. It’s a fairly complex, technical process, but the result is a digital ledger of cryptocurrency transactions that’s hard for hackers to tamper with.
In addition, transactions require a two-factor authentication process. For instance, you might be asked to enter a username and password to start a transaction. Then, you might have to enter an authentication code that’s sent via text to your personal cell phone.
While securities are in place, that doesn’t mean cryptocurrencies are un-hackable. In fact, several high-dollar hacks have cost cryptocurrency startups heavily. Hackers hit Coincheck to the tune of $534 million and BitGrail for $195 million in 2018. That made them two of the biggest cryptocurrency hacks of 2018, according to Investopedia.
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Other Factors That May Affect Cryptocurrency Value
Aside from supply and demand, these are the factors that may affect prices as well.
- Security The cryptocurrency industry is safe from fraud and other criminal activities as there are some reports of hack attacks where someone lost $750,000 worth of Bitcoins. And with this, bitcoin dramatically dropped 36 percent. It is also the same with regular banks, which are not safe from security breaches and robberies. You will just have to educate yourself more on how to secure your money.
- Bitcoin Price Since bitcoin is the primary crypto player, anything that happens to it can significantly affect other cryptos. When it goes up, the market follows, and if it experiences downturns, so does the market. It is like, why should you buy if it is doing worst?
- Stability Since Bitcoin is not under a central authority, its security and transactions only rely on developers and miners. Resolving fundamental issues may take time, which is frustrating for its community.
- Scalability Bitcoins software can only handle three transactions per second. Even though there is not much demand for it yet, others are concerned because it may push investors against competitive cryptos. They are more comfortable if it will be faster transactions.
Should You Buy Gold Or Bitcoin
In the past year or so, many analysts and others in the world of economics have predicted a recession. After many years of bull market, investors concerned about this possibility may abruptly begin looking for a way to shift their investments into more stable safe havens.
The traditional move would be to hedge against stock volatility with gold. This has proven an effective method in the past, but a newer alternative is challenging the old-school safe-haven. Launched in 2009, bitcoin ushered in a new era of digital currencies. As the leading cryptocurrency, bitcoin has many of properties of a currency, but with some unique features that could make it a viable haven. Ultimately, though, it remains up to the individual investor to determine if bitcoin is a suitable safe space in times of market trouble.
Below, we’ll compare gold and bitcoin as safe haven options.
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Regulations And Legal Requirements
There’s some confusion about who should regulate the exchange of cryptocurrencies. The Securities and Exchange Commission says cryptocurrencies are securities like stocks and bonds, while the Commodity Futures Trading Commission says they’re commodities like coffee or gold.
Both can’t claim regulatory authority over cryptocurrency exchanges. A determining ruling could provide greater clarity and improve cryptocurrency values while opening the door for more widely traded crypto-related financial products.
Regulation is required to allow for easier ways to trade cryptocurrency. Products such as ETFs or futures contracts provide more access to cryptocurrency for investors, increasing its value. Additionally, regulation could enable investors to take short positions or bet against the price of cryptocurrencies with futures contracts or options. That should produce better price discovery and reduce the volatility of cryptocurrency pricing.
Regulations could also negatively impact demand for cryptocurrency. If a governing body changes the rules to disfavor cryptocurrency investment or use, it could send the price of cryptocurrencies lower.
A Functional And Decentralised Digital Currency
Bitcoin is . In other words, it functions via a dispersed peer-to-peer network, rather than through a central authority such as a central bank.
And it does this through the participation of Bitcoin miners. This is anyone who chooses to run software to validate Bitcoin transactions on the blockchain. Typically, these people are actively engaged with cryptocurrency.
They are rewarded with bitcoins, more of which are created every ten minutes. But the reward paid to miners halves every four years.
This gradual reduction was encoded into the network by creator Satoshi Nakamoto, who designed it this way to mimic the process of extracting actual gold easier at first, but harder with time.
Bitocoin miners today earn 6.25 bitcoins for every block mined, down from 50 bitcoins in the early years. This creates an incentive to get involved early, as scarcity increases with time.
Because of this, the price is expected to rise to meet demand. But because future scarcity is known in advance , the halving events tend to already be priced in.
Therefore, massive surges and falls in price typically reflect changing demand conditions, such as a growing number of new institutional investors. More and more public companies are now investing in bitcoin.
But what function does Bitcoin provide for society that has people so invested?
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Bitcoin As Currency And Why Currencies Have Value
Currencies have value because people think they do, and societies or groups have decided they are going to be used as a medium of exchange.
Fiat currencies became widespread after the elimination of the gold standard . Fiats like the U.S. dollar arent backed by any commodity, and have value because a broader system or society accepts that they do.
For example, you can take a $20 bill to the store and purchase $20 worth of goods, time, and effort. But the physical piece of paper that you use to pay holds no inherent value.
Bitcoin, a cryptocurrency that was created and released by a pseudonymous figure by the name of Satoshi Nakomoto, has some characteristics of a store of value that resemble existing currencies like the U.S. dollar or Japanese yen:
What Do Investors Need To Know
The price of Bitcoin fluctuates a lot, and its impossible to know whether it will continue to rise in value or fall into obscurity, which is why its smart to allocate only a small percentage of your overall assets to Bitcoin. Experts recommend keeping any cryptocurrency investments to less than 5% of your portfolio, just like any other speculative investment. And dont invest in any cryptocurrency at the expense of other financial goals like having an emergency fund or saving for retirement.
Similar to gold, people buy Bitcoin not because they expect to be able to go to the store and spend it, but because they expect it to hold its value, Galen Moore, director of data and indexes at crypto news outlet Coindesk, told NextAdvisor recently.
But Bitcoin is only the most famous among thousands of different cryptocurrencies. Other cryptocurrencies come with different considerations for investors.
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What Can Crypto Do For Your Company
To spark your companys thinking about crypto, here are some of the rationales behind why some companies are currently using crypto:
What Drives The Value Of Crypto
Everyone is talking about cryptocurrencies. But for those of us on the outside, their value is still something of a mystery
Thanks to Elon Musk and his 57.1 million Twitter followers, the noise around cryptocurrency is louder than its ever been before. While the Tesla and SpaceX CEO is far from solely responsible for the alternative digital assets rise to fame, his tweets have played a huge part in catapulting its value to new heights.
However, cryptocurrencies are intrinsically volatile. Since 2011, a year after bitcoin gained monetary value, the crypto poster child has fallen victim to its own inflated prices. That year, it went from highs of $32 to lows of $2. The scale is different in 2021, but the volatility remains, with the cryptocurrency reaching highs of $64,000 and lows of near $30,000.
Despite bitcoins fluctuating price, it continues to correct itself at higher values. In June 2020, the price of bitcoin sat at around $9,000. A year later, its value is fluctuating around $35,000. Thats an increase of nearly 290%, a notable gain for longer-term investors.
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What Determines Bitcoin’s Price
Bitcoin is a cryptocurrency developed in 2009 by Satoshi Nakamoto, the name given to the unknown creator of this virtual currency. Transactions are recorded in a blockchain, which shows the transaction history for each unit and is used to prove ownership.
Unlike investing in traditional currencies, bitcoin is not issued by a central bank or backed by a government. And buying a bitcoin is different than purchasing a stock or bond because bitcoin is not a corporation. Consequently, there are no corporate balance sheets or Form 10-Ks to review.
Why Is Bitcoins Price Rising
Last week the Swiss Financial Market Supervisory Authority , the countrys financial regulator, has announced its first cryptocurrency investment fund, which has helped push Bitcoins value up.
The surge was replicated by other major coins including Ethereum, Ripple and Dogecoin.
Finma said the investment fund would facilitate serious innovation in a consistently technology-neutral way.
Simon Peters, an analyst at trading platform eToro, said: Considering Switzerland has one of the largest banking sectors in the world and accounts for an estimated 25 per cent of global cross border asset management, the chance for investors to gain additional exposure to cryptoassets could be exciting for the space.
Then, on Wednesday, someone made a $1.6 billion Bitcoin purchase. This purchase immediately pushed the coins price up by 5 per cent. It is not known who made the purchase, but it is believed to have happened in Asia.
This boost comes just weeks after Chinese regulators announced a further crackdown on Bitcoin mining, and made it illegal to trade cryptocurrency, which caused a dip in the market.
Bitcoins price has also been affected by El Salvador earlier this year becoming the first country in the world to adopt it as legal tender.
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