Why Cryptocurrency is so Volatile – From an Economic Perspective
The primary focus of this article is to answer the question: When will the cryptocurrency market begin to stabilize?
From the beginning of most of my thoughts on this to the end:
Competition and property rights are the primary economic factors that separate the U.S.
dollar from cryptocurrency. Competition is the fuel in the engine room of all industries.
In a market where competition’s stiffened, the engine slows, decreasing the growth rate of that market. In a market where competition is fierce, the engine speeds up, increasing the growth rate of that market. This is because suppliers are competing for the business of consumers.
Consumer demand is limited, forcing suppliers to either improve the quality or reduce the price of their good or service to match or better the like offered by competitors, their intention of doing so being to maximize profit by supplying a percentage of that consumer demand.
Property rights ensure a consumer that he has complete ownership over the good or service he’s purchased from the supplier.
In general, when a market lacks competition, there is often one supplier.
That supplier will do everything in their power to ensure the market has high barriers of entry, or in other words, that they maintain their monopoly. China and Russia are only the first to publicly recognize the potential threat to their monopoly on currency, doing so in the form of an ICO ban, or a potential “bitcoin ban.” Within the U.S.
currency market, USD currently has no competitor. Therefore, there is no need for the Fed to develop and innovate the USD for the benefit of its users. This monetary monopoly is one of the many sources of government power, without the power to print money, a large form of taxation (via inflation) would be gone.
Conversely, in the world of cryptocurrency, competition is rampant.
Should you invest or not?
There are ambitious projects and new ideas around every corner. Most of them are shit, but some of them come out of nowhere and are suddenly worth billions, like IOTA or QTUM. They have developers, hungry to compete against other developers to win over consumer demand, so people buy into their currency because it’s a good idea, or because it fits their need.
Underlying this is the drive for utility maximization on the part of both the consumers and the suppliers.
In the long run, this drive is steered in the right direction via the specific needs demanded directly by the people using it, and those needs are communicated to the suppliers in terms of profitability.
Within the U.S. currency market, consumers have limited property rights to their dollars. Every dollar earned, saved, or spent is known to an external party: the IRS.
A percentage of all dollars earned are taken by the IRS to be spent on goods and services that potentially don’t fall within each U.S.
citizen’s budget constraint. The spending of these dollars is limited to certain goods and services, as defined by U.S. law. To top it off, more dollars can be printed at any time, at any rate, reducing the value of the dollars that consumers hold, often without their knowledge.
Conversely, in cryptocurrency the information on the specifications of the currency is public knowledge. The consumer may have to read a bit, but the information is available. More importantly, the consumer has a choice whether to pick this or that crypto.
Depending on a consumer’s choice, the crypto companies might not take a certain percentage of the public wallet every year in exchange for goods and services not valued by the individual consumer, and/or they might not inflate their currency at an unspecified rate.
You might be asking “what does this have to do with volatility?” Well, consider the following premises: (1) the dollar (USD) has a monopoly on currency in the United States; (2) the U.S.
alone has a cumulative net worth of $86.8 Trillion; and (3) that net worth is backed up by hypothetical USDs. Bearing these facts in mind, it is logical to conclude that cryptocurrency’s $140 Billion market cap has a long way to go before it is a competitor to the dollar.
However, this is not the full spectrum. There is roughly another $190 Trillion of net worth in the world.
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.14t/270t=.00052. That's right, about half of one tenth of one percent of the world’s net worth is in cryptocurrency. Imagine a whale of Bill Gates’ value, $70B, pumping all his money into crypto, “to the mooning”, and compare that same whale pumping all their money into the USD, 50% of crypto’s value, compared to .08% of USD.
The effect of the price of the USD would be minimal compared to the effect on the price of all cryptocurrencies.
The main source of volatility is simply lack of market capitalization. Until it reaches a high enough capitalization, cryptocurrency won’t be stable.
When that capitalization will be met, one can only speculate. Based on the Gates phenomenon I described, I’d put the number at around $5 trillion; but that’s completely out of my ass, so to speak.
Competition and property rights are the key elements that will allow for the future market capitalization to increase, and thus lead to price stability. These are key due to the secondary effects of innovation and development in the market, stemming from competition; as well as the consumers’ individual freedom to make decisions based on their specific budget constraints, a secondary effect of secured property rights.
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Since currency is the primary means of facilitation in a market, the development and evolution of currency itself is entirely necessary for efficiency in its application. In addition, a currency is not meant to be used to scare people away from buying/selling specific goods or services, or to force them into buying/selling specific goods or services.
If so, that currency was never truly theirs to begin with, and therefore their property rights to the currency are, in some regard, inherently diminished.