Impact of Cryptocurrency on Financial Markets

Cryptocurrencies have grown in popularity because of the decentralization ideas they represent and the possibility for significant returns. Still, their volatility remains strong, and these cryptocurrency assets involve a higher risk of loss than many conventional assets. For example, in 2017, Bitcoin values soared from roughly $1,000 to more than $19,000 before falling to around $3,000. 1

The price of Bitcoin then surged again until the end of 2020, hitting new highs of over $60,000 before plummeting below $30,000 in the summer of 2021.

Cryptocurrency Fundamentals

Cryptocurrency is digital or virtual money that may use to make a transaction. The prefix “crypto” refers to the fact that cryptocurrencies employ cryptography to safeguard and verify transactions and produce new currency units (coins). Cryptography makes it simple to encode anything simple to decode with a key but difficult to interpret without one, which means that coins may be complex to manufacture, but transactions can be simple to verify.

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Cryptocurrencies are, at their core, entries in an immutable and pseudo-anonymous database known as a “blockchain” that no one can modify. The blockchain provides a public record that is verified by a large number of nodes, making money fraud very difficult or impossible. It also enables tracing particular transactions between anonymous user accounts or wallets simple.

Global Reach

Cryptocurrencies are a digital, user-friendly alternative to fiat currency. Consumers in the United States or the European Union may see cryptocurrencies as innovative, yet many nations have mishandled indigenous currencies. Venezuela’s dictatorial administration, for example, has become known for its galloping inflation, which has resulted in deteriorating living circumstances for millions of inhabitants who lack access to foreign currency.

Other governments use stringent capital controls to regulate the movement of money and levy significant taxes. Cryptocurrencies, whether legal or not, might still also used to dodge capital controls and taxes, which has increased consumer and business demand. As a result, several nations have begun to clamp down on the illicit use of cryptocurrencies for tax avoidance or illegal purchases or sales in other countries.

Government Reactions

Across central banks and financial institutions, the official reaction to cryptocurrencies has been tepid at best. While some organizations have been supportive, many central banks have remained wary of the market’s severe volatility. Tax evasion and capital restrictions have also sparked public alarm.

• Federal Reserve of the United States

According to US Federal Reserve Chairman Jerome Powell, technical difficulties exist, and governance and risk management will be critical before cryptocurrencies become mainstream.

• The European Central Bank (ECB)

Former European Central Bank Vice President Vitor Constancio compared Bitcoin to the 17th-century Dutch tulip bubble, and many other governors have voiced a similar concern.

• People’s Bank of China (PBOC)

The People’s Bank of China feels that the circumstances are “ripe” for adopting cryptocurrencies. Still, the central bank wants complete control, and officials are clamping down on the country’s cryptocurrency ecosystem.

Bank of Japan does not believe cryptocurrencies have a market.

Former Bank of England Governor Mark Carney described cryptocurrencies as part of a “financial revolution,” making the central bank one of the few official supporters of the technology.

• Reserve Bank of India (RBI)

Cryptocurrencies were founded largely to get beyond the banking system’s control. According to RBI deputy governor T Rabi Sankar, these should be grounds for concern.

The Effect on Global Investments

Cryptocurrencies provide several advantages in frictionless transactions and inflation control, but many investors are adding these currencies to their varied portfolios. The market’s noncorrelated character, in particular, makes cryptocurrencies a possible risk hedge akin to precious commodities such as gold. For this reason, several cryptocurrency exchange-traded funds (ETFs and ETNs) have emerged.

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On the other side, other analysts are concerned that a cryptocurrency fall may negatively influence the whole market, similar to how mortgage-backed securities triggered a worldwide financial catastrophe. It should be noted that the overall market valuation of all cryptocurrencies, which is now between one and two trillion dollars, is still less than that of several huge public businesses, such as Meta (previously Facebook) or Amazon. However, cryptocurrencies as an asset class are a fresh and dynamic proposition that might go either way. Finally, many investors see cryptocurrencies as a vehicle for speculation or a hedge against inflation, but the market’s size does not pose systemic risk as of 2021.

Disclaimer

Trading cryptocurrencies has a high-risk level and is not suited for all investors. You should carefully analyse your investing goals, level of expertise, and risk appetite before opting to trade cryptocurrencies, tokens, or any other digital asset. NFTically does not advocate that you purchase, sell, or hold any cryptocurrency. Before making any investment choices, do your due investigation and talk with your financial adviser.

Conclusion

After growing in value by 825% in the previous 11 months, cryptocurrency, or Crypto, has overtaken the globe and has become a big talking topic internationally.

Bitcoin (BTC), the most popular cryptocurrency, has more than quadrupled in value since the start of 2021, reaching $20,000 in December 2020 from $7,000 in April 2020. Bitcoin is now valued at approximately $45,000 after reaching $63,000. Many financial experts predict that it will be worth $100,000 by 2022.

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