In recent years, virtual currencies have become increasingly popular. Their appeal is based on the prospect of huge gains. In South Africa and Nigeria, crypto use is on the rise. Due to relative volatility, this instrument requires a special approach. Trading can result in dramatic losses, as well as spectacular returns.
The latest spike in Bitcoin value occurred in 2017. Back then, the price skyrocketed from $1,000 to roughly $19,000. What followed was a sharp drop back to just under $10,000. This is a vivid example of erratic pricing. Here is an overview of crypto coins in circulation, and their effects on financial markets worldwide.
What Cryptocurrencies Are All About
These media of exchange are classified as virtual or digital. The prefix crypto- refers to cryptography. This technology is used for security and verification of transactions. In addition, it allows the generation of new coins. Security relies on the fact that deciphering such encoding requires a key. Thus, while creation is complicated, verification is simple.
All virtual coins exist as entries in the blockchain that is an unchangeable database. Edits are prohibited with the exception of extreme circumstances. This record is pseudo-anonymous and public. Forgery is challenging as blockchain is verified by multiple nodes. The nature of the system also means easy tracking of transactions.
Reasons for Popularity
Digital coins are an attractive alternative to conventional currencies. According to the latest cryptocurrency statistics that are available, Bitcoin still beats Ripple, Litecoin, and Ethereum. It is popular in developed and developing countries alike.
In states like Venezuela, national monetary systems are mismanaged. Reckless policies of the government have resulted in skyrocketing inflation. Ups and downs of Bitcoin pale in comparison with such domestic currencies.
Meanwhile, residents of the EU or the United States view crypto as an alternative to fiat currencies (which are issued and controlled by central banks). Bitcoin and altcoins may be used to circumvent high taxes and tough capital controls. This makes them attractive to consumers and businesses. As a result, some governments have taken measures to counteract the illicit use of crypto.
To trade cryptocurrency, one does not have to own it. Leading Forex trading providers like Alpari offer CFDs (Contracts for Difference) on Bitcoin and its alternatives. These allow traders to profit from price dynamics only. Given its high volatility, this financial instrument can bring sizable gains.
Reaction of Institutions
Generally, central banks and other major institutions have expressed little enthusiasm for crypto. Digital currencies are supported by some organizations, but the volatility of the instruments puts big players off. Another source of concern is tax evasion and capital control issues. Here is how the largest regulators have reacted so far.
Jerome Powell, Chairman of The U.S. Federal Reserve, points to persistent technical issues. In his opinion, for crypto to be incorporated into mainstream society, there must be stricter regulations and risk management. Mark Carney, Governor of The Bank of England, said that cryptocurrencies are an element of a financial “revolution.” The central bank is thus among the few state proponents.
Vitor Constancio, Ex-Vice President of European Central Bank, called Bitcoin a tulip. This comparison is clearly a reference to the economic bubble that burst in the Netherlands in the 17th century.
The Bank of Japan rejects the notion altogether. The People’s Bank of China is less skeptical. Moreover, it suggests that conditions for embracing crypto are now “ripe.” However, the central bank must have full control. This is why authorities are actively cracking down on digital coins in China.
In 2018, Venezuela launched its official cryptocurrency called the Petro. Its value relies on crude oil. According to some sources, this has attracted billions of dollars into the economy. Skeptics question the figures, though. The U.S. Government has outlawed transactions in the Petro. Its future is still uncertain.
Key Advantages of Crypto
On the one hand, digital currencies allow seamless transactions. They make inflation control easier. Bitcoin and altcoins also serve as diversification tools. Many investors add them to their portfolios in order to hedge risks. As the market is non-correlated, cryptocurrencies are similar to gold and other precious metals. This explains the appeal of ETFs and ETNs (exchange-traded instruments) connected to crypto.
Key Disadvantages of Crypto
The biggest concern for investors is the fear of a market crash. This is expected to have a powerful negative impact on other financial markets. This hypothetical scenario is compared to the crisis of 2008 when mortgage-backed securities sparked an international downturn.
The Bottom Line
Today, the total market capitalization of all digital coins is still moderate. It is incomparable to corporate giants like Apple or Microsoft. This means any potential adverse consequences are limited. The risk may not be viewed as systemic yet. Thus, as a tool for speculation or inflation control, crypto coins maintain their appeal.
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