A rollercoaster of events:
In the past few months, the cryptocurrency market has been a rollercoaster of events. Bitcoin, after breaching the 60,000 USD mark mid-April and trading at an all time high of nearly 65 thousand, has now fallen to below 40,000 which marks a fall of more than 30% in value in the past 1 month. This highly volatile nature of Bitcoin and the cryptocurrency market in general makes the public question about what it has in store for the future. And in order to try to answer that, it is important for us to look into what it contributes to the world.
What is cryptocurrency?
Cryptocurrency, as the name suggests, is a currency backed by cryptography. It leverages the blockchain technology to store the history of every transaction that happens from it being mined to being bought or sold. The purpose of currency is to serve as a medium of exchange. Taking a quick trip into the history of currency, it came into existence as a receipt of stored value where the value was marked against any commodity such as grain and metals in the past and more dominantly gold in the present times. Cryptocurrency does serve that purpose too and while doing that, it also has the added advantage that there is no third party involved when it changes hands which means that payments in cryptocurrency do not have to go through banks due to its decentralized nature.
This decentralization however, means that it is not regulated and hence the exchange rate solely depends on the market forces of supply and demand hence making the market highly volatile. Most governments around the world have policies of pegging the exchange rate of their currencies against the US dollar which helps the traders around the world to have more certainty with regard to their import and export payments. However, in the case of cryptocurrency, the absence of regulation makes it a potential risk to use it as a medium of payment.
Moving on to another aspect of the currency market, many people like to speculate the future values of currency and enter into positions to make profit from their speculations. Such as if an investor speculates that the value of USD will rise in the future, they might invest in that currency to buy it now and then sell it later at a profit. The same is true for the cryptocurrency markets. Events such as the recent claim from Tesla to accept Bitcoin as a mode of payment created a lot of demand for it and sent the value of Bitcoin to record highs. However, the more recent crackdown by China on the Cryptocurrency which imposed bans on banks and payment firms from providing services related to cryptocurrency transactions caused a reduction in the demand of Bitcoin and eventually led to the fall in price.
It seems like using cryptocurrencies as assets for investment purposes is a better idea than using it as a mode of payments due to its volatility. There are varied thoughts in the market regarding the future of cryptocurrencies. Some investors who see long-term potential in bitcoin or other cryptocurrencies are willing to accept the volatility of it now. However, critics consider it a highly speculative investment in its current form and are of the viewpoint that it needs more regulations and has to develop more use cases for it to be of high importance in the future.