Thursday, June 23, 2022

Is Cryptocurrency Backed By Anything

Is Crypto A Good Long

Next Stop In The Cryptocurrency Craze: A Government-Backed Coin | CNBC

Many cryptocurrencies like Bitcoin and Ethereum are launched with lofty objectives, which may be achieved over long time horizons. While the success of any cryptocurrency project is not assured, if a cryptocurrency project achieves it goals, then early investors could be richly rewarded over the long term.

For any cryptocurrency project, however, achieving widespread adoption is necessary to be considered a long-term success.

Bitcoin as a long-term investment

Bitcoin, as the most widely known cryptocurrency, benefits from the network effect — more people want to own Bitcoin because Bitcoin is owned by the most people. Bitcoin is currently viewed by many investors as “digital gold,” but it could also be used as a digital form of cash.

Investors in Bitcoin believe the cryptocurrency will gain value over the long term because the supply is fixed, unlike the supplies of fiat currencies such as the U.S. dollar or the Japanese yen. The supply of Bitcoin is capped at just under 21 million coins, while central-bank-controlled currencies can be printed at the will of politicians. Many investors expect Bitcoin to gain value as fiat currencies depreciate.

Those who are bullish about Bitcoin being extensively used as digital cash believe that, over the long term, Bitcoin has the potential to become the first truly global currency.

Ethereum as a long-term investment

Why Is It Valuable

Unlike ordinary money, which can be printed by a country’s government, bitcoin can only be created by powerful computers through a process called “mining.” Because the creation of new bitcoin is complex and power-intensive, and because there is a hard cap 21 million on the amount of bitcoin that will ever exist, there is a built-in level of scarcity.

This scarcity, combined with increased demand from institutional and retail investors alike, has helped turn bitcoin into a household name whose value has grown from less than a penny in 2009 to more than $50,000 today. Unlike traditional currencies which are backed by things like gold and silver, bitcoin’s value comes from the trust that investors have in the blockchain network it is built on.

In recent months, bitcoin has gotten a newfound level of legitimacy thanks to household names like PayPal and Square, which now allow their more than 350 million active users to buy and sell the coin on their platforms. This support helps create confidence that bitcoin will eventually become a mainstream currency.

“I think some big steps were what we’ve seen from Square, MasterCard and Tesla as of late,” Wedbush Securities analyst Dan Ives tells CNBC Make It. “That has started to legitimize crypto and bitcoin for transactions.”

How Stable Are Stablecoins

Stablecoins have provided an alternative to the adoption and product-centered focus of most cryptocurrency projects that have extremely volatile prices. But, the success of these projects is entirely dependent on their protocol design and model for liquidating their assets. One example of a major hiccup was the recent Tether hack. This hack reportedly made out with over $30 million in assets. This event triggered questions about the dollar-for-dollar backing that tether claims to possess for every token that is issued.

Some have claimed that Tether operates under a system where customers are promised future value for their coin, and one that may not exist at that very moment. They have claimed that these criticisms are false, and they have recently provided documentation verifying the backing of their total liability.

In order for stablecoins to be truly stable, the legal framework that underpins the platform must be sound. Smart contracts are the easiest answer, as they automatically enforce the rules and regulations surrounding the value pool of both the reserve and total value customers hold. Platforms such as the Dai coin use algorithmic smart contracts based on the Ethereum blockchain to protect users value from any interference. The inherent cryptographic encryption also ensures that it is decentralized and trustless.

Also Check: How To Receive Crypto On Coinbase

What Is A Fiat Currency

Fiat money is government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government. It is important to understand here that this demand and supply is decided by the participants of the network who are bringing a fiat currency into use. For example, within a network, I trade a $100 note for a mobile phone, I am essentially exchanging value worth $100 for the phone. The store-keeper, takes the $100 note and buys his meal with the same or invests it to create more value. Fiat currency or money establishes the exchange of value with the help of the governments backing

Here is the Value!

Similar to Fiat currency, Bitcoin is also not backed by any gold or silver hence does not have any intrinsic value. The value of any currency comes from the backing of the state and the trust that people have over the government. Hence, for any money to be established as an exchange of value within a network, it is important for the network to trust it regardless of who is backing it.

The understanding of the shift the culture of electronic mode of payments and digital currencies are bringing is pivotal for a user to understand this entire ecosystem.

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Factors Affecting Cryptocurrency Prices

Gold Backed Cryptocurrency Xrp
  • Supply and Demand. The supply of Bitcoin is limited by code in the Bitcoin blockchain. The rate of increase of the supply of Bitcoin decreases until the number of Bitcoin reaches 21 million, which is expected to take place in the year 2140. As Bitcoin adoption increases, the slowing growth in the number of Bitcoin all but assures that the price of Bitcoin will continue to grow.

Bitcoin is not the only cryptocurrency with limits on issuance. The supply of Litecoin will be capped at 84 million units. The purpose of the limit is to provide increased transparency in the money supply, in contrast to government-backed currencies. With the major currencies being created on open source codes, any given individual can determine the supply of the currency and make a judgment about its value accordingly.

Still, given the volatility of this emerging phenomenon, there is a risk of a crash. Many experts have noted that in the event of a cryptocurrency market collapse, that retail investors would suffer the most. According to Mohamed Damak, S& P Global Rating sector lead, For now, a meaningful drop in cryptocurrencies market value would be just a ripple across the financial services industry, still too small to disturb stability or affect the creditworthiness of banks we rate. Read more here on the bear case of the cryptocurrency market.

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Understanding Crypto Backed By Precious Metals

The idea of virtual currency backed by bullion like gold and silver has been tried numerous times. Arguably the most successful before the advent of cryptocurrencies like Bitcoin was E-Gold, co-founded by Douglas Jackson. The coin proved to be very popular at its peak in the 1990s, with at least 1,000 new accounts made each day. However, authorities cracked down on the coin and mandated Jackson to adhere to a variety of financial regulation rules and standards, turning E-Gold into a shadow of its former self.

An ideal modern-day stablecoin should be able to perform main functions. It should have the capability of acting as a medium of exchange to permit holders to buy and sell goods, function as a saving asset , and be used as a unit of account to compare the cost of goods and services.

Stablecoins backed by precious metals stand out for a few reasons. Cryptos backed by fiat currency, like Tethers USDT, remain the most well-known class of stablecoins. But many are wary of fiat currencies long-term stability, especially in 2020, as national governments pursue a variety of artificial stimulus to keep economies afloat during the coronavirus.

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The Value Of Digital Currencies

Any discussion about the value of Bitcoin must address the nature of currency. Gold was useful as currency due to its inherent physical attributes, but it was also cumbersome. Paper money was an improvement, but it requires manufacturing and storage and lacks the mobility of digital currencies. The digital evolution of money has moved away from physical attributes, and towards more functional characteristics.

Here’s an example. During the financial crisis, Ben Bernanke, who was then the governor of the Federal Reserve, appeared on CBS’60 Minutes and explained how the agency “rescued” insurance giant American International Group and other financial institutions from bankruptcy by lending money to them. Puzzled, the interviewer asked whether the Fed had manufactured billions of dollars. That wasn’t quite the case.

“So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed,” explained Bernanke. In other words, the Fed “manufactured” U.S. dollars through entries in its ledger. This ability to “mark up” an account exemplifies the nature of currencies in their digital form. It has implications for the velocity and use of currencies because it simplifies and streamlines transactions involving them.

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Crypto Is Not Regulated

Many crypto-assets and other digital assets are commonly not considered to be financial products. Because of this, the platforms where you buy and sell crypto may not be regulated by ASIC. This means you may not be protected if the platform fails or is hacked.

When a cryptocurrency fails, investors will most likely lose all the money they put in. In most countries, cryptocurrencies are not recognised as legal tender. You’re only protected to the extent that they fit within existing laws.

How Users Increase Crypto Value

Facebook to introduce cryptocurrency backed by Mastercard and Visa

There are also a few methods how users increase cryptocurrency value

  • Buy low, sell high using the classic investment strategy, users can increase the value of crypto by buying and holding coins. The buying increases demand and hence crypto value increases.
  • Mining the act of mining Bitcoins or altcoins can be profitable. It also impacts the supply of cryptocurrencies.
  • Increasing utility as more institutions invest in crypto and accept it as a form of payment, its utility increases. As a user, you can contribute to this process. This will increase the value of cryptocurrencies over the long term.
  • Media coverage crypto prices fluctuate according to media coverage. Users can impact this through their social media accounts.

Also Check: How Does Bitcoin Work On Cash App

Possible Consequences On The Global Oil Market

For years, crude oil has been quoted in dollars, making a historical connection between this asset and the US currency. This led to the notion of the petrodollar, representing any US dollar paid to oil-exporting countries in exchange for oil.

Oil-backed cryptocurrencies could substitute the petrodollar, reducing the influence of the US in the oil trade. Digital coins could provide a way around existing financial sanctions that the US use to control the oil market and, by extension, the countries that dont accept their global politics.

A decentralised system on the blockchain could also benefit small oil and gas companies that struggle to enter the global market. Moreover, it could lead to the appearance of secondary markets for corporate debt and equity issuance. Smaller countries could benefit more from their oil reserves and gain financial independence from the US.

However, backing the currency with physical reserves triggers risks due to price fluctuations. Oil and gas reserves are hard to quantify not just in Venezuela, but in all other countries that export oil.

Another problem that could slow down cryptocurrency adoption in oil trade comes from the cultural gaps between exporter countries. The success of each national oil-backed cryptocurrency, after all, would depend on the countrys credibility.

Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.

What Is Cryptocurrency

Cryptocurrency is a type of currency thats digital and decentralized. Cryptocurrencies can be used to buy and sell things, and their potential to store and grow value has also caught the eye of many investors.

There are thousands of different cryptocurrencies available today. The most popular and the original is Bitcoin, which was created in 2009. Other common cryptocurrencies include Ethereum, XRP, and Bitcoin Cash. Each of these currencies serves a different purpose, with some optimized for use in place of cash, and others designed for private, direct transactions.

Cryptocurrencies are wholly digital, so theres no physical coin or bill connected to the crypto you own. Instead, owners hold cryptocurrency in a digital wallet, and buy or sell through an online exchange. Your wallet may be online or stored offline on a hardware device similar to a USB drive.

Cryptocurrency transactions are recorded on a decentralized ledger. This ledger is called a blockchain. Every time crypto is bought or sold, the transaction is added to the blockchain a public database of the transactions, which is available to other crypto holders. Anyone can join and participate in the blockchain, but data on individual transactions and the people involved with them are secured using cryptography . For each transaction added to the blockchain, theres a digital validation process to verify it and prevent fraud.

Read Also: How To Keep Track Of Crypto Investments

How Can I Buy Bitcoin

These days, getting your hands on some bitcoin is as easy as downloading a smartphone app. Bitcoin can be purchased on a wide variety of platforms, including popular stock trading app Robinhood, and dedicated exchanges like Coinbase and Gemini.

Despite its $50,000 price tag, you can begin investing in crypto with much less. Unlike the dollar, which can be divided into 100 pennies, a bitcoin is divisible into 100 million units, called satoshis. You can purchase $10 worth of bitcoin just as easily as you can purchase an entire coin.

It’s not just bitcoin that is available on crypto exchanges. Other currencies, such as Ether and Litecoin are also popular, but neither come close to approaching the nearly $1 trillion market cap that bitcoin commands thanks to its meteoric rise in price over the past year.

How Is Cryptocurrency Different From Us Dollars

Why People are Buying Gold

There are important differences between cryptocurrency and traditional currency.

  • Cryptocurrency accounts are not backed by a government. Cryptocurrency accounts are not insured by a government like U.S. dollars deposited into a bank account. If you store cryptocurrency with a third-party company, and the company goes out of business or is hacked, the government has no obligation to step in and help get your money back.
  • Cryptocurrency values change constantly. The value of a cryptocurrency can vary rapidly, even changing by the hour. It depends on many factors, including supply and demand. An investment thats worth thousands of dollars today might be worth only hundreds tomorrow. And, if the value goes down, theres no guarantee it will go up again.

Also Check: How To Convert Cryptocurrency Into Cash

What Is Bitcoin

At its most basic level, bitcoin is a decentralized digital currency. Invented in 2009 by Satoshi Nakamoto a pseudonym for an unknown person or group of people bitcoin’s appeal has long been its decentralized platform. That means that it’s not under the purview of any national government, and can be resistant to the effects inflation has on traditional currency.

What Is A Gold

The biggest advantage that digital versions of gold hold over their physical counterparts is that they can be divided into any small unit or amount and transferred to another party.

Gold-backed cryptocurrencies have, however, historically struggled with systemic issues, such as:

  • low liquidity
  • ascertaining the proof of reserves
  • a dependence on central parties for collateral safekeeping and auditing, which practically defeats their purpose as cryptocurrencies, as one of the necessary properties of cryptocurrencies is decentralization.
  • Paxos Gold
  • Perth Mint Gold Token
  • Digix Global

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What Is Bitcoin Mining

Mining is the process that maintains the bitcoin network and also how new coins are brought into existence.

All transactions are publicly broadcast on the network and miners bundle large collections of transactions together into blocks by completing a cryptographic calculation thats extremely hard to generate but very easy to verify. The first miner to solve the next block broadcasts it to the network and if proven correct is added to the blockchain. That miner is then rewarded with an amount of newly created bitcoin.

Inherent in the bitcoin software is a hard limit of 21 million coins. There will never be more than that in existence. The total number of coins will be in circulation by 2140. Roughly every four years the software makes it twice as hard to mine bitcoin by reducing the size of the rewards.

When bitcoin was first launched it was possible to almost instantaneously mine a coin using even a basic computer. Now it requires rooms full of powerful equipment, often high-end graphics cards that are adept at crunching through the calculations, which when combined with a volatile bitcoin price can sometimes make mining more expensive than it is worth.

Cryptocurrency Fraud And Cryptocurrency Scams

Cryptocurrency takes off in Yellow Springs, gives back to community

Unfortunately, cryptocurrency crime is on the rise. Cryptocurrency scams include:

Fake websites: Bogus sites which feature fake testimonials and crypto jargon promising massive, guaranteed returns, provided you keep investing.

Virtual Ponzi schemes: Cryptocurrency criminals promote non-existent opportunities to invest in digital currencies and create the illusion of huge returns by paying off old investors with new investors money. One scam operation, BitClub Network, raised more than $700 million before its perpetrators were indicted in December 2019.

“Celebrity” endorsements: Scammers pose online as billionaires or well-known names who promise to multiply your investment in a virtual currency but instead steal what you send. They may also use messaging apps or chat rooms to start rumours that a famous businessperson is backing a specific cryptocurrency. Once they have encouraged investors to buy and driven up the price, the scammers sell their stake, and the currency reduces in value.

Romance scams: The FBI warns of a trend in online dating scams, where tricksters persuade people they meet on dating apps or social media to invest or trade in virtual currencies. The FBIs Internet Crime Complaint Centre fielded more than 1,800 reports of crypto-focused romance scams in the first seven months of 2021, with losses reaching $133 million.

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