How do cryptocurrency prices compare to fiat currencies?
Neither is backed by a commodity like gold or anything with an underlying value.
The biggest difference between cryptocurrency values and fiat money is that fiat currencies are backed by central governments and declared as legal tender. Its value is basically derived from the fact that the central governmenthas stated that it has value and two parties in a transaction put their trust in that value.
Most countries today operate in a fiat currency system, where central banks and monetary reserves control the supply of money and, as such, indirectly control inflation.
Cryptocurrencies, on the other hand, are not controlled by a central government or authority, and most regions do not accept them as legal tender. Cryptocurrencies will also generally have a fixed supply and, therefore, the devaluation of cryptocurrencies through inflation is mostly nonexistent.
Other than that, both fiat and cryptocurrency values are supported by similar characteristics. Both methods can be used as a medium of exchange to buy products and services, and both methods have a relative store of value.
Why do we see so much fluctuation in cryptocurrency prices?
It’s still a nascent market.
The cryptocurrency market is still considered very new and, beyond hearing the term “cryptocurrency,” most people are still very much unfamiliar with the industry.
Nascent markets have a number of qualities that make them inherently volatile.
Limited liquidity exists within the market if you compare it to more established markets like traditional economies, including the foreign exchange market. To put it into perspective, the total value of all the money in the world is more than $90 trillion, while the total cryptocurrency market cap is hovering around $250 billion — a 36,000 percent difference.
Daily cryptocurrency trading volumes are around the $14 billion mark, while daily forex trades are closer to $5 trillion. The spread — the difference between the buy and sell price — on foreign currency trades will be a few pennies at the most, while spreads on cryptocurrency trades can be as high as a few dollars.
All this points to a very thin market that naturally moves very quickly and thus increases the volatility of cryptocurrency prices.
A large number of new adopters are also joining the market every single day. At the beginning of 2018, cryptocurrency exchanges reported that they were adding 100,000 new users every day. Many of the members will have significant vested interest in the price of cryptocurrencies going either up or down, which adds to the disruptive nature of the market and further increases volatility.
Finally, price manipulation can be rife in nascent markets. Central exchanges control most of the flow of cryptocurrencies, giving them a lot of incentive to grow their revenue by artificially manipulating crypto prices. One way they can do this is by manipulating the price feeds displayed on exchanges, prompting traders to either buy or sell.
The effect of this type of manipulation is compounded if you throw in thousands of new market participants who can be easily taken advantage of. In addition, price manipulations can be hard to prove and control in unregulated markets.
Central exchanges also provide a single point of failure. They manage and store large sums of crypto, which means if they get hacked, it can have a significant effect on the price of cryptocurrencies.
How accurate are cryptocurrency price predictions?
Like with traditional markets, there are no guarantees when it comes to future price predictions for the cryptocurrency market.
Those who have attempted price predictions for 2018 — and beyond — border on the extreme from both sides of the scale.
Others are sticking to more modest, but still relevantly high price predictions, including ex-JP Morgan chief U.S. equity strategist and current managing partner at Fundstrat, Tom Lee, who predicted a price of $25,000 by the end of 2018 and $125,000 by 2022.
On the other side of the scale, you have partial to complete market collapse predictions. Boutique investment bank GP Bullhound predicts a 90 percent market crash within the year, while Harvard professor and ex-IMF chief Kenneth Rogoff predicted that Bitcoin will shrink to $100. Roy Sebag, CEO of GoldMoney Inc., said Bitcoin will be worth $0 in the future.
It is quite clear that cryptocurrency price predictions should be taken with a grain of salt, but there are factors to look out for that will almost certainly have a bearing on the future price of Bitcoin and the wider cryptocurrency market. This includes:
- The level and nature of regulations imposed in dominating cryptocurrency markets
- The level of cryptocurrency adoption in the coming year and beyond
- The level of growth in the cryptocurrency futures market
- The utility of tokens and the ability of the underlying technology to solve real-world problems