It’s hard to dispute the blockchain revolution, given major international financial institutions, such as JPMorgan and HSBC, plunging massive amounts of capital into R&D of the technology. The price of major cryptocurrencies have skyrocketed over the past month (June 2017) alone. With funding on the rise and market adoption on the horizon–see Japan–it is hard to estimate an upper-limit on the value of these tokens. However, the relationship between the crypto markets and traditional markets can provide insight into the future valuation of these tokens.
Fiat Currency vs. Cryptocurrency
Cryptocurrency was designed to be everything fiat currency could not be. An anonymous, digital currency was created to address the deficiencies that ultimately lead to several economic crises. In essence, Satoshi created bitcoin to hedge popular fiat currencies backed by the most powerful economies. This is exhibited by the often inverse relationship between crypto and fiat.
It’s clear that when people lose confidence in fiat currency, they often turn to cryptocurrency. The reverse is true, as well. We are currently seeing this happen in China. The government is fiercely attempting to regulate bitcoin. On the other hand, consumers are desperately trying to regain control of their own finances by shifting to bitcoin. Because the cryptocurrency can easily move across borders, it’s a great way to keep money out of the hands of the government.
There are several factors that may cause citizens to lose confidence in their fiat currency. Whether it be a shift in economic policy, or an economic downturn, when there is a loss in the value of currency, holders look for other ways to maintain their stored value. This results in massive amount of capital shifting from one currency to the other. At high-volumes, the currency purchased more heavily will raise in price, while the currency sold more often devalues.
Stabilization of Markets
There’s an inverse relationship between one currency’s valuation and another’s devaluation. As bitcoin continues to rise and other more volatile fiat currencies diminish, the cryptocurrency will become more and more stable. The number of users in a market helps stabilize the unpredictability of a given currency. Additionally, it increases its price. Cryptocurrencies are certainly the way of the future, and will continue to work in-tandem with fiat currencies. Stay tuned for more!
(Part two in a series of how blockchain could impact global financial institutions. Click here for part 1.)