Are Cryptocurrencies and Conventional Currencies on a Collision Course?

A couple of years ago, talk about cryptocurrencies was limited to a small group of trading and investing adventurers who were keen on exploring a whole new way to think about currency. Since then, crypto has gone from being a niche curiosity to a subject of mainstream interest and worldwide demand. Currently, digital assets like crypto passed $3 trillion in market cap, with 40 million Americans investing in, trading or using cryptocurrencies. Why are people falling in love with cryptos? How do they differ from conventional currencies? And is there a possibility for cryptos to become more like conventional currencies in the future? Let’s dig in.

What made cryptos so popular to begin with?

Not everyone who is interested in cryptos is drawn by the same things. Some people see them as nothing more than investment opportunities. And because they’re relatively new and “sexy” valuations have skyrocketed in some instances. In some ways cryptos of today are like what tulips were in the 17th century. If you don’t get the reference, check Tulip Craze in your favorite search engine. 

Some people are drawn to crypto because of the ease and anonymity of using it to pay for things. You would probably be surprised to know that purchasing something with a credit card actually ends up being a pretty complicated process. The same transaction using cryptocurrencies is much simpler, because the sophisticated technology underlying the crypto, or blockchain, simply updates to reflect the transaction made. Crypto exchanges are publicly traceable on the blockchain. What makes them unique and anonymous is that wallets and addresses are private.  Bad guys try to hide their wallets and addresses sometimes with success, sometimes not.

Cryptos are also decentralized. Because they’re not managed by a central authority like the U.S. Federal Reserve and Mint, they are less dependent on traditional financial systems. Some hypothesize that cryptos are more insulated against shocks to the global economy than conventional currencies or financial instruments – something a lot of people are paying attention to since the 2008 financial crisis which shook faith in large financial institutions. 

Could cryptos ever be used like conventional currencies in everyday life?

In the short-term, the things that make crypto interesting to so many people also prevent it from being used like conventional currencies. Their volatility makes them tricky to use as a medium of exchange, since people are unlikely to want to use a currency that could be worth a lot less the day after tomorrow (for example). 

In addition, governments are generally not exactly jumping up and down to make cryptos legal tender, although the current administration recently enacted an executive order to ensure the responsible development of crypto and other digital assets. its intention to look into a national cryptocurrency here in the U.S.. What an official U.S. Cryptocurrency might look like is hard to know. Accommodating cryptos would require major changes to financial systems and all the associated costs. 

One potential approach would be stablecoins. Stablecoins like Tether keep a fixed exchange rate between the (crypto) coin and conventional currency, in Tether’s case the US dollar. Because Tether is pegged to USD, the creators of the crypto must act like a central bank, swapping dollars and Tether. Because Tether is pegged to the dollar, it has more credibility than most other cryptos, and more suitable for everyday transactions. Full disclosure: It is not entirely clear how Tether is backed, but for now it appears it still has more credibility than many cryptos.

The downside to stablecoins’ stability is their limited growth potential. Any legal tender crypto would be a digitized version of whatever currency the country already had. This means the central bank would be involved in coin regulation, and that the coin would be a part of the financial system, robbing it of the big valuation spikes that have attracted so many to crypto.

Our advice? We think crypto is here to stay. For the trader who does their research and understands the risks and opportunities, it represents a legitimate investment with growing acceptance around the planet. As always, however, it pays to be sensible about what you expect to earn and how much you can afford to lose. For those who are using QuantFu’s automated trading strategies, opportunities can be captured and losses controlled automatically so you can concentrate on your next great trading idea. 



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