Opinion: Let’s talk about cryptocurrencies?

Let's talk about cryptocurrencies?

The beginning of the so-called cryptocurrency era dates back to the creation of Bitcoin, in 2008, which aimed to implement a decentralized global banking system. This was made possible by blockchain technology, in a simple way, a system that makes it possible to track the sending and receiving of information over the Internet in bitcoins in April 2021, according to the page Coin MarketCap.

But Bitcoin is open source, which encouraged the creation of other alternative cryptocurrencies ( altcoins ). Ethereum is an example, and its main difference from Bitcoin is to allow its users to create their own criptomoedas by personalizing the tokens on the platform Ethereum. Considering their market capitalization, Bitcoin and Ethereum are the most liquid cryptocurrencies, meaning that they are easier to sell and buy. Bitcoin and Ethereum represent about 50% and 14% of the market capitalization

The increasing popularity of cryptocurrencies led to an increase in the variance of market prices, which enabled speculation behavior. The market prices of Bitcoin and Ethereum have grown rapidly and disproportionately compared to other currencies, stocks, or precious metals. This led to a narrative of the presence of bubbles in the prices of bitcoin and Ethereum, which could lead to collapses or even considerable devaluations for both cryptocurrencies, for example. Bitcoin has high variations in prices, but these variations are being reduced over time 1.

The risk-return ratio (the greater the risk of the asset, the greater its return) of cryptocurrencies is distinct compared to other assets such as currencies 2, stocks, and precious metals. The return of cryptocurrencies has low exposure to equities and currencies, which may be an indication of the influence of factors specific to digital currency markets 2.

Basically, Bitcoin cannot be considered a safe asset, a claim based on the episode of covid-19 3. But there are asset-based cryptocurrencies, such as Tether, which can be considered safe against Bitcoin in very fluctuating market movements. Tether is the first and largest asset-based cryptocurrency (called stable coin ). Stablecoins are cryptocurrencies that are pegged to other stable assets such as gold or traditional currencies such as Euro, Dollar, etc. In theory, a stable coin would become as stable as the assets to which it is pegged. However, this does not mean that the most promising cryptocurrencies are stable coins.

One point is to define whether cryptocurrencies can be considered currencies. Currency is a special commodity that is accepted in the market as a universal equivalent to other commodities. To be a currency, it must fulfill the following properties: 1) medium of exchange, 2) store of value, and 3) unit of account. These are descriptions of the characteristics to be a coin.

The medium of exchange means using currency to buy goods and services. The store of value feature allows you to own money to stop consuming in the present in order to acquire goods in the future. The third property means that prices are set in Bitcoins for example. That is, the individual goes to a bakery and pays for the French bread with the number of bitcoins informed by the clerk. According to Yermack (2013), Bitcoin does not suitably satisfy the reserve of value properties and as a unit of account due to its large variation in prices. The author considers that Bitcoin and other cryptocurrencies are not currencies, but high-risk speculative assets.

Generally speaking, cryptocurrencies cannot be considered currencies by the traditional definition of currency. There is still a lot of variation in the prices of cryptocurrencies, but this has been reduced over time. The risk-return ratio for currencies is not similar to cryptocurrencies

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