A cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange that uses strong cryptography (secret codes) to secure financial transactions, control the creation of additional units, and verify the transfer of assets. Cryptocurrencies are a kind of digital currency, virtual currency or alternative currency. Cryptocurrencies use decentralized control as opposed to centralized electronic money and central banking systems. The decentralized control of each cryptocurrency works through distributed ledger technology, typically a blockchain that serves as a public financial transaction database.
- What’s the difference between the value of cryptocurrency and legal tender?
The biggest difference is that legal tender, or fiat currency, is endorsed by its central government and has legitimacy. Its value is essentially derived from the recognition of the central government, while both parties in the transaction trust this value.
Not backed by a government or bank, the value of cryptocurrencies is decentralized, global, and depends on the participation of its community (crypto users, miners securing the network and the developers). Underlying this notion is an algorithm that controls the supply.
What fiat and crypto currencies have in common is that both are used to store and transfer value, and both can be used as a medium for purchasing goods and services. Each currency’s value is governed by economic factors such as supply and demand, they can be traded on exchanges, and both rely on the quality of the system surrounding it to give it value.
- Why do cryptocurrency prices fluctuate frequently?
The cryptocurrency market is still considered to be in an early stage, with limited liquidity and not much of a track record on which to base prices. Additionally, high profile news stories such as exchanges going bankrupt, rumoured ties to drug transactions, and security breaches all add to its volatility.
Even so, thousands of new players enter the market every day. In early 2018, the cryptocurrency exchange reported an increase of 100,000 new users per day. Many have significantly profited or suffered great losses in the rise and fall of cryptocurrency prices, therefore further increase the volatility.
Thirdly, centralized exchanges control the flow of most cryptocurrencies and price manipulation is not un common in emerging markets. By manually manipulating the price of cryptocurrencies, exchanges have a big incentive to increase their revenues. Also, centralized exchanges are vulnerable to a single point of failure, which means that if hacked, cryptocurrency prices will be greatly affected.
Judging by the recent articles by 3 commas, the bottom line is this new market is inherently fast changing, which increases volatility in cryptocurrency prices.
- What is the biggest determinant of cryptocurrency prices?
As with legal tender, the basic economic principle of supply and demand is the most important determinant of cryptocurrencies prices. If the supply of a cryptocurrency is high and demand from traders and users is low, the currency will fall. Conversely, if the supply of a cryptocurrency is limited and demand is high, then the currency will rise.
As stated above, the media or public sentiment also has an impact on the price of cryptocurrencies. If there is negative public news about a certain cryptocurrency or platform, that currency’s price will usually fall, with the effects rippling out across the market. However, if the currency receives high-profile support and positive media coverage, more market participants will jump in and the price will almost certainly increase.
Other factors that have significant impacts on the prices include the range of uses of the cryptocurrency, global political situations, the difficulties of mining, perceived value, security breaches, and more.
- How accurate are the cryptocurrency price predictions for 2018?
As with traditional markets, no one can guarantee the accuracy of predicting cryptocurrency prices. Among the people who are trying to predict prices in 2018, opinions are deeply divided.
Some people predict that Bitcoin will break through the $1 million mark, including John McAfee of McAfee Associates and Jim Cramer of CNBC.
Others are being more moderate, but still made fairly high price forecasts, including former Morgan Stanley chief US strategist and current Fundstrat managing partner Tom Lee, who predicts proof of work vs proof of stake with a price of $25,000 at the end of 2018 and $125,000 in 2022.
The other end of the scale holds predictions of a complete market collapse. Bullhound, a partner at Boutique investment bank, predicted a 90% chance of a crash within this year, while Kenneth Rogoff, a Harvard professor and former international monetary fund managing director, predicted bitcoin would shrink to $100. And GoldMoney CEO Roy Sebag said bitcoin will be worth zero in the future.
Clearly, these cryptocurrency price predictions can’t be trusted completely, but there are some factors that will certainly impact the overall price in the future, including:
- The standard and nature of regulatory measures guiding the cryptocurrency markets
- The rate of adoption in the upcoming year and beyond
- The level of growth of the cryptocurrency futures market
- Tax treatment of cryptocurrencies
- Technology advancements and securing against breaches
- The ability to solve real-world problems using cryptocurrencies and underlying technologies
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