JANUARY 16, 2020 / 18:12 UTC
LONDON (Fintech Zoom) – Cryptocurrency volatility is a product of its youth. Any asset class that has a relatively low market cap (compared to, say, publicly traded stocks) will have a volatility problem. Think of it this way: a small boat on the high seas will get tossed around much more violently than a large ship. Even though they may be subjected to the same forces, the large ship will be much more stable.
High volatility also presents a better opportunity for greater returns, albeit at a greater risk.
There exists an economic law known as Gresham’s Law: “bad money drives out good money”. Back in colonial times, colonists would use tobacco leaves as a medium of exchange. Some tobacco leaves were of better quality than others, and the colonists would tend to hold on (HODL?) to the good-quality tobacco leaves and use the bad tobacco leaves to pay others. Eventually, all the good-quality tobacco leaves went out of circulation.
The current international monetary system is based on fiat currencies, most notably the US dollar. At this point, holding US dollars is akin to subjecting yourself to a tax on savings, as every year a couple of percentage points of the value of your money gets eaten away by the fact that the Federal Reserve prints more dollars to monetize Uncle Sam’s ever-growing debt, increasing the supply of dollars beyond the increase in demand. While not all fiat currencies are controlled by central banks that follow such a loose fiscal policy, the US dollar remains to be the reserve currency of the world, meaning that some or most of the value of most other fiat currencies are backed by the US dollar reserves held by the national treasuries.
Even if the Federal Reserve somehow decided to stop printing money, can you really trust them not to start doing it again after someone else comes to power?
Gold is often touted as the solution to this, but, unfortunately, gold is much less practical. Gold is a hefty physical commodity that you need to either store yourself or trust someone else to store it for you. In the age of information, a sound physical asset medium of exchange will be less efficient than a sound information-based medium of exchange, and thus will always be outcompeted by it.
As more people get acquainted with cryptocurrencies and as the traditional banking system becomes more decadent, Gresham’s Law will once again play itself out. There is going to be an outflow of capital into cryptocurrencies, which can never be hyperinflated at a politician’s whim, and where your money can never be frozen, or a transfer held up by a bank.
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