The value of cryptocurrencies has taken a significant hit over the last several months. For instance, the exchange rate for the United States dollar relative to bitcoin dropped from about $70,000 at the beginning of November 2021 to below $20,000 in late June, and despite several ups and downs, it reached $19,733 on September 15.
Historically speaking, Bitcoin, which is by far the most popular type of cryptocurrency, has been a success story for those who purchased it. Five years ago, the conversion rate between Bitcoin and the dollar was less than $3,000. However, many Bitcoin proponents have been left dissatisfied in two different aspects. This cryptocurrency has not been successful in becoming a mainstream method of payment, such as for betting on the NFL London Game Predictions, and it has shown to be an ineffective way of protecting buying power during times of economic unpredictability and inflation.
This comes as a surprise. There will only ever be 21 million Bitcoins available for purchase. Because more than 19 million units, or 90 percent, have previously been released (also referred to as “mined”), the majority of people anticipated that the cap would have resulted in a consistent increase in the price expressed in terms of dollars.
Where will we be in the future?
In order to make accurate forecasts about the future of cryptocurrencies, it may be helpful to examine what has occurred in the past and elaborate on a few crucial issues. To begin, the realm of blockchain is made up of digital currencies and the derivatives of those currencies. Bitcoin, for instance, is an example of a cryptocurrency, whereas stablecoins like Tether and TerraUSD are examples of crypto derivatives. These are “derived” from cryptocurrencies and/or tethered to a centralized and publicly known currency such as the dollar. For example, the dollar is the “peg” currency.
To put it another way, a financial investor gives the firm money, and in exchange, the corporation gives the investor a derivative. The dollars are first converted into cryptocurrency, which the firm then uses to provide loans to borrowers all across the world. At the same time, the corporation guarantees the financial investment that they would, on demand, be able to swap the derivatives for a certain quantity of a particular cryptocurrency, which may or may not be tied to the dollar or backed by dollars.
The effect of this is that if you have acquired Bitcoins or any other cryptocurrency, your gains and losses will be determined by the exchange rate of the cryptocurrency held in your portfolio. However, if you have purchased a derivative, you can find out that it is not actually backed by an appropriate number of cryptocurrencies or that the assurance that it can be converted into dollars is, to put it mildly, a little shaky. It can shoot up or become worthless.
This is what has taken place over the course of the last several months with a variety of cryptocurrency derivatives. Companies that issue such products are highly active on the market, which contributes to the volatile nature of the underlying assets. This is particularly true if the companies promise outstanding returns, which drives up demand for cryptocurrencies and crypto derivatives. In challenging economic situations, investors are frightened away from derivatives contracts if the assets are not adequately collateralized.
A second essential aspect to take into account is that cryptocurrencies are now seen more as a speculative instrument as well as a store of wealth than as a method of payment for everyday transactions. This is an important distinction to make. For instance, more than 60% of the total bitcoins in circulation are kept in accounts (also known as “wallets”) with more than one hundred bitcoins each, and these bitcoins are rarely exchanged on the market apart from to adjust portfolios: as of the end of July 2022, only about 250000 bitcoins were traded each day, and it is likely that only a tiny portion of these trades was related to actual business transactions.
Following are three preliminary conclusions: (1) the long-term approach of the typical holder suggests that the cryptocurrency industry is not an easy kill and will survive dramatic volatility; (2) The volatile nature of it has been driven by derivatives, and the activity of said derivatives has been magnified by the relatively small amount of cryptocurrencies traded on the market; and (3) the crash in the cryptocurrency market in 2022 has hit the world of derivatives, possibly eliminating a significant source of volatility.
