Unlike the dollar, crypto is neither sponsored by a government whose elected officials are accountable to their constituents nor overseen by a federal reserve. These aspects are lauded by supporters. Theoretically, a decentralized currency is difficult to counterfeit and, in turn, resistant to inflation. However, the fact that anyone can invent a cryptocurrency invalidates such claims of inflation resistance.
A recent crash raises questions about whether cryptocurrency is inflation-proof, as proponents claim. Some are still wondering, what exactly is cryptocurrency?
To answer what cryptocurrency is, it’s useful to understand what cryptocurrency is not. For instance, cryptocurrencies are not securities. A security evidences the holder’s ownership in a company (a stock) or claim to a company’s debt (a bond).
In short, these assets are linked to something of value. To illustrate the concept of value, let’s abandon Wall Street terminology and revert to an old-time market. Imagine you produce fleece circa 700 BC. Your family has needs, such as nutrition, which fleece does not fulfill. The market is a venue for you to trade with a grain producer. In this scenario, the advantage of the marketplace is clear to both participants. The fleece producer eats and the grain producer stays warm.
The past few months have been dark times for the crypto industry. Between April and June, Bitcoin’s value more than halved, from just over $45,000 to around $20,000; other coins have fallen even more. The Terra-UST ecosystem, which paired a crypto coin with one designed to be pegged to the dollar, collapsed in May, wiping out $60 billion worth of value and leading to cascading failures among crypto lenders.Established companies like Coinbase, a popular crypto exchange, have announced layoffs.
Most observers of cryptocurrency markets will agree that crypto volatility is in a different league altogether. There are no indices to measure crypto price volatility, but you just need to glance through historical price charts to see that skyrocketing peaks and depressive troughs occur at a quicker and more extreme pace in crypto prices compared to prices of assets in mainstream markets. In 2016, the price of bitcoin rose by 125% and in 2017 the price rose again, this time by more than 2,000%. Following the 2017 peak that saw it hit new all-time highs, bitcoin’s price receded once more. In 2021, bitcoin continued to set new all-time highs, more than tripling the peak price bitcoin achieved during the 2017 bull run.
Unlike the dollar, crypto is neither sponsored by a government whose elected officials are accountable to their constituents nor overseen by a federal reserve. These aspects are lauded by supporters. Theoretically, a decentralized currency is difficult to counterfeit and, in turn, resistant to inflation. However, the fact that anyone can invent a cryptocurrency invalidates such claims of inflation resistance.
A recent crash raises questions about whether cryptocurrency is inflation-proof, as proponents claim. Some are still wondering, what exactly is cryptocurrency?
To answer what cryptocurrency is, it’s useful to understand what cryptocurrency is not. For instance, cryptocurrencies are not securities. A security evidences the holder’s ownership in a company (a stock) or claim to a company’s debt (a bond).
In short, these assets are linked to something of value. To illustrate the concept of value, let’s abandon Wall Street terminology and revert to an old-time market. Imagine you produce fleece circa 700 BC. Your family has needs, such as nutrition, which fleece does not fulfill. The market is a venue for you to trade with a grain producer. In this scenario, the advantage of the marketplace is clear to both participants. The fleece producer eats and the grain producer stays warm.
The past few months have been dark times for the crypto industry. Between April and June, Bitcoin’s value more than halved, from just over $45,000 to around $20,000; other coins have fallen even more. The Terra-UST ecosystem, which paired a crypto coin with one designed to be pegged to the dollar, collapsed in May, wiping out $60 billion worth of value and leading to cascading failures among crypto lenders.Established companies like Coinbase, a popular crypto exchange, have announced layoffs.
Most observers of cryptocurrency markets will agree that crypto volatility is in a different league altogether. There are no indices to measure crypto price volatility, but you just need to glance through historical price charts to see that skyrocketing peaks and depressive troughs occur at a quicker and more extreme pace in crypto prices compared to prices of assets in mainstream markets. In 2016, the price of bitcoin rose by 125% and in 2017 the price rose again, this time by more than 2,000%. Following the 2017 peak that saw it hit new all-time highs, bitcoin’s price receded once more. In 2021, bitcoin continued to set new all-time highs, more than tripling the peak price bitcoin achieved during the 2017 bull run.
