The crypto-currencies increasingly fascinate investors who follow the impetuous prices of virtual currencies. Moreover, the individual entrepreneurs also begin to turn massively to ICOs, trying to get as much information on this trendy and revolutionary subject.
From the current perspective, cryptocurrencies seem to have a bright future ahead of them. But is this the case? The looming stories about the Bitcoin crash impose many doubts. We offer you an overview of the cryptocurrency landscape, aiming to answer the questions: Why are bitcoin prices so erratic? Are cryptocurrencies about to become the currency of the future? Or are they doomed to the biggest financial crash in history?
Why are bitcoin prices so erratic?
How can we explain variations in bitcoin prices to such an extent? Backed by no material good, cryptocurrency, unlike other investments such as stocks or bonds, brings nothing to those who hold it. No dividends or interest receivable.
The value of bitcoin doesn’t depend on global economic performances. In this respect, cryptocurrency behavior is similar to traditional currencies such as the yen or the euro. But the prices of fiat money have never varied so much and so fast. That’s why making fundamental analysis could justify this very particular volatility.
The rise in bitcoin partially comes from the increase in the possibilities of purchases made with this currency. For instance, Microsoft has allowed, since 2014, payments in bitcoins for its American client. Tesla just made a similar shift. The ease of bitcoins’ exchange for other currencies or cryptocurrencies also plays an important role.
While some countries, like Egypt, ban cryptocurrency trade and exchange, others develop their own stablecoins and work on the cryptocurrency regulations. The first exchange online platform between bitcoin and the Japanese yen opened in 2010. The crypto derivatives market is also on the rise. But these factors only explain some 3.5% of the total fluctuation in bitcoin prices.
The volatility of bitcoin, like other cryptocurrencies, is also due to the blockchain technology used. This indeed works on a principle of openness, consensus, and decentralized design, with a libertarian coloring, created to operate without an intermediary. And it is precisely the interventions of central banks that usually make it possible to regulate fiat currency prices in the event of a fall or overheat. Here, there is no such mechanism in place.
Bitcoin’s general adoption despite its speculative nature
Bitcoin’s volatility is clearly an obstacle to its use as a means of payment. Small businesses have a dilemma: how can I accept being paid in cryptocurrency today if I am not sure of its value tomorrow?
Nevertheless, the recent announcement by Visa of the issuance of a card enabling bitcoin holders to purchase in this way shows the interest of the financial industry.
Asset management giant Blackrock also announced on January 20 that bitcoin-based derivatives were now among the assets in which some of its clients could invest.
Finally, the bitcoin surge’s most significant effect is perhaps the interest it has created in private actors such as Facebook. Its Diem project goes hand in hand with public actors’ interests, such as central banks. Some of them are now considering creating digital currencies directly accessible to companies or even to individuals without a bank’s intermediary. The Chinese central bank, therefore, has a digital yuan pilot project underway. In Europe, a consultation on a digital euro has started.
Ironically, it is now entirely possible that the mysterious Nakamoto’s main legacy, initially meant to be completely alternative, is about to pave the way for very large-scale projects under central banks and government control. And paradoxically, it seems it’s one of the conditions for cryptocurrency survival in general.