Cryptocurrency is volatile, yes. But is it just a trend or is it here to stay?

Anyone who has watched Bitcoin’s erratic price swings since its inception might be dizzy.

When introduced in 2009, a unit of the pioneering cryptocurrency was valued at…zero cents. In about two years, the price rose to $1 (RM4.2) and a few months later its value soared to around $30 (RM125), according to data from SoFi, a student loan refinance company. . But then it plunged to US$5 (RM20).

In 2013, SoFi reported that Bitcoin price peaked at $1,100 (RM4,596). It took off from there, peaking in 2021 at over US$60,000 (RM250,710), but with plenty of stomach swings. In mid-December, it was hovering between $48,000 (RM200,568) and $46,000 (RM192,211).

Watching this rollercoaster ride has left economists and pundits aligned on opposite sides regarding the future of not just Bitcoin, but the entire cryptocurrency industry.

For the uninitiated: digital currency is a form of currency that is created and tracked in cyberspace using blockchain technology, which could be described as a digital ledger. Unlike “fiat” currency such as dollars which are backed by the US government, crypto is largely independent of controls such as the Federal Reserve Banks. The digital ledger can be viewed by all of its users, making it an exceptionally transparent form of currency. But there are also huge unknowns and questions about future crypto regulation, a status that almost always leads to volatility.

Economist Hugh Johnson, one of the Capital Region’s most prominent financial advisers, listed cryptocurrency as a risk factor to watch in his annual market forecast for 2022. The combination of volatility and lack of regulation poses a threat to market stability, he said. .

“It’s difficult, at best, to make the (cypto) case have fundamental appeal beyond possibly being a hedge against inflation or financial disarray,” Johnson said. “If it doesn’t go beyond that…if there is no fundamental reason to buy Bitcoin, it becomes price speculation only.”

Johnson’s colleague, Sean Leonard, chief investment officer at financial planning firm Graypoint, said that as a highly volatile asset, the more crypto-related the average American’s “portfolios” are, “the greater the risk to household spending and economic health is important if cryptocurrencies decline significantly.”

Leonard noted that crypto’s volatility has also made businesses reluctant to accept it as payment — and some high-profile frauds have done little to cement crypto’s place in the economy.

For Johnson and Leonard, the most significant threat posed by crypto assets could be an attack on the Federal Reserve’s control over the money supply. If crypto assets were to increase as a percentage of liquid assets and trade freely, it could cause the Fed to lose control and impair its ability to influence economic activity by setting interest rates. (However, libertarian-minded backers of Bitcoin and other forms of cryptography consider this kind of disruption of economic control systems a feature, not a bug.)

Additionally, the coding community can vote to increase the supply of certain cryptocurrencies. That’s power the Federal Reserve won’t allow to be delegated, the advisers said. Considering that the majority of investors and citizens have faith in the global banking system, cryptocurrencies don’t necessarily serve a “real economic need either,” Leonard said.

Bitcoin is supposed to be limited with a cap of 21 million “coins” that will be produced.

Richard Plotka, who heads the Information Technology and Web Sciences program at Rensselaer Polytechnic Institute in Troy, is much more optimistic about the acceptance of crypto by the financial industry. But the idea that crypto can be another form of fiat currency — legally government-offered currency that isn’t backed by a physical commodity like gold — needs to gain wider acceptance before that can happen. produce, he said.

While Plotka, who wants to create a research center devoted to the developing crypto market at RPI, recognizes the “wild west” element of this world at the moment while noticing constant evolution.

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In his view, crypto will change the economy – but not overnight.

“I think it will eventually stabilize, especially once the government or governments start supporting it,” he said.

Plotka said the current crypto system is unpredictable because not all issues have been fully resolved, and just about anyone can have a say in what happens to the value of a digital currency.

He has no doubt that the rise of crypto will be “disruptive” to banks and other currencies. Once the system’s most concerning bugs are ironed out, he anticipates that intermediary services – similar to those that serve more analog financial activities – will facilitate blockchain transactions and make them accessible and easily transparent for less knowledgeable users.

Several banks and institutions have already started trying to break into the sometimes confusing crypto market. Mastercard, for example, has partnered with three cryptocurrency providers in the Asia-Pacific region to introduce crypto payment cards that convert digital currency into traditional currency. In Central America, El Salvador has pledged to build a city funded by Bitcoin-backed bonds.

And in a sure sign that crypto is here to stay – or at least be taxed – the US government is implementing reporting requirements on cryptocurrency transactions.

Plotka sees cryptocurrency becoming the “gold of the future,” where other currencies are measured against Bitcoin.

“It’s the perfect e-money for everyone,” he said. “It’s just who gets there first…and that’s what this war is all about.” –Times Union, Albany, NY/Tribune News Service

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