- The question is why will central banks allow Bitcoin when it cannot be used in monetary policy?
- Hyper-volatility aside, there doesn’t seem to be a wide use case to justify high crypto prices
- But billionaires like Musk and Dorsey might not be wrong on the future of cryptocurrencies
The year 2021 was all about big names like S&P Dow Jones taking a plunge in cryptos. It was like a rush for an asset class that could produce unbelievable returns over a short period. As we ride into 2022, let’s find out if cryptocurrencies can sink one day. Can they plunge to zero value?
Will cryptos like Bitcoin crash to zero?
To understand why, we must first think about the utility, in any manner whatsoever, of blockchain-based digital currencies.
As a medium of exchange, they seem to hold little value. Simply because central banks around the world control their respective fiat currency for a valid reason. The thing is by exercising control over the supply of fiat currency by ways like hiking or cutting policy interest rates, central banks easily manage liquidity in their respective economies.
The Fed for example can undertake quantitative easing and sell bonds – denominated in USD – and lift the economy out of a slump during periods like the ongoing pandemic. Neither of this can be done if any economy chooses to have blockchain-based digital currencies, the supply of can have no checks and balances, and where lending and borrowing is done over decentralized finance platforms.
Also read: How to invest in cryptocurrencies?
Are Bitcoin and altcoins store of value?
As a store of value, Bitcoin is no way similar to gold. Gold has been here for ages, and it was for a reason that people speculated on its value -- gold is tangible, and the way it has survived as a safe haven for so long justifies its dissimilarity to any short-lived phenomena like tulips or dot-com companies.
Data provided by CoinMarketCap.com
Why are cryptos rising?
Apart from rising institutional adoption, one of the reasons behind the unabated crypto surge might be people’s lack of understanding about the blockchain technology. Yes, blockchain’s distributed ledger can be used to make transactions quicker, but decentralization of currency comes with a web of challenges.
The thing here is people love the concept of no regulatory authority in the currency system, which they think is something like democracy, like power in the hands of people. But regulation of currency ensure protection and stability for very citizens in love with the ‘decentralization of currency’ argument.
May be, cryptos are here to stay
Jack Dorsey claims that Bitcoin can be the ‘native currency’ of the internet, and maybe, he is right. If not a legal tender, Bitcoin and other cryptos can have utility as digital tokens. Ethereum’s blockchain uses the Ether token as a native currency for payment of fees by users. Maybe, this is one way cryptos will sustain in the long-run. Meme currencies may become a reward token within social media apps like Reddit.
Nothing can be said as of now. After all, biggies like Elon Musk, Jack Dorsey and Michael Saylor claim that blockchain-based digital currencies have value. The widescale adoption also indicate people’s positive mindset.
This is a wait-and-watch game.