“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”
Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, 2008.
From the trenches of Reddit to the forefront of Twitter, cryptocurrency has dominated conversation on-and-off for close to a decade. To properly comprehend the currency's apparent glamour, it is necessary to separate fact from fiction and understand how it is priced, what makes it so volatile, and why certain governments and central banks see crypto as a direct challenge to their dominance over the economy.
Pricing Cryptocurrency
Consider cryptocurrency to be a subset of digital currency. For example, if one were to construct a digital currency issued by a country's Central Bank, it would be governed by existing regulations and referred to as a Central Bank Digital Currency, or CBDC (this currently exists only in conceptual form with proposals made by governments in England, Sweden and Uruguay). This is not a digital currency. A cryptocurrency, such as Bitcoin or Ethereum, is a type of digital currency whose value is solely determined by cryptography, which is used to protect and verify transactions.
So what makes prices so volatile?
Volatility in cryptocurrency values is frequent, according to history. Bitcoin's price volatility reached approximately 8% in the three months between October 2017 and January 2018. In the week ending May 28th, 2021 Bitcoin prices fluctuated from $40,702 to $31,248.
It is difficult to isolate a single cause of price volatility. A far more true description would be a combination of factors such as the current geopolitical situation, volatility in the perception of value against fiat money, uncertainties in regulatory processes that differ around the globe, and so on: all of which interact with one another.
For example: according to the Internal Revenue Service (IRS) of the United States government, all virtual currencies are treated as ‘property’ and tax principles applicable to transactions concerning properties are extended to virtual currencies.
While this has a good impact on the legitimacy of currencies such as Bitcoin and Etherum, it adds complexity for users to record the market value of the currency every time they want to use it as a method of payment. Concerns over the IRS' plans to regulate bitcoin, which are certain to hinder adoption, add to the market's volatility.
China & Crypto
Vice Premier Liu He issued a statement late Friday, May 21, 2021, in China, saying that it is vital to “crack down on Bitcoin mining and trading conduct, and decisively prohibit the transmission of individual risks to the social field.”
With a similar statement from US Federal Reserve Chairman Jerome Powell, who said that cryptocurrency poses risks to financial stability, and India's HDFC bank (which manages assets worth $220 billion), calling crypto a fad, the general position of both central banks and private lenders on crypto is becoming clear.
Following the announcement, numerous exchanges, including Huobi Mall and BTC.TOP, announced the suspension of their China operations. With a previous ban on bitcoin exchanges in Beijing in 2017, China's reputation as a credible cryptocurrency trading centre sank even more.
While there is no explicit restriction on persons owning cryptocurrencies, approximately 480,000 people liquidated their investments totaling $5.92 billion as a result of the remark. Regardless of how far the globe progresses with cryptocurrencies, this reflects a shift in attitudes among the general Chinese populace and enterprises, as well as a readiness to comply with government rules.
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