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The two -edged cryptocurrency sword: a look at the relationship between crypto, fiat and prices volatility
In recent years, cryptocurrents such as Bitcoin (BTC) and Ethereum (ETH) have gained significant attention to their potential to disrupt traditional financial systems. However, an aspect that has not received enough control is the complex interaction between these digital currencies, Fiat coins and prices volatility. In this article, we will deepen the relationships between crypto, Fiat and prices volatility, exploring both the benefits and the disadvantages of each one.
What are Fiat coins?
Fiat coins, also known as paper coins, are issued by central banks or governments to represent the official currency of a country. They do not have an intrinsic value, but they are supported by the Government guarantee, which makes them widely accepted as a form of payment. Fiat coins include US dollars (USD), Euro (EUR) and Japanese Yen (JPY).
The relationship between Crypto and Fiat
Cryptocurrencies operate on a decentralized network, allowing individuals to purchase, sell and trading digital assets without the need for intermediaries such as banks or governments. However, this also means that cryptocurrencies are not supported by any physical merchandise or Fiat currency.
As a result, their value is largely determined by the supply and demand on the market, rather than by any inherent economic value. When interest rates increase in a Fiat economy, it can lead to higher prices for goods such as gold, which has been seen historically as a valuable store. Similarly, when the US federal reserve increases the interest rates, the dollar value towards other coins can decrease.
This means that the price of cryptocurrencies such as Bitcoin and Ethereum is closely related to the performance of traditional assets such as gold and oil. As a result, investors often consider them to be covered against inflation or economic uncertainty. However, this can also create a significant volatility of prices, because sudden changes in the market feeling can cause prices to fluctuate quickly.
Price volatility: a two -edged sword
The volatility of cryptocurrency prices is often compared to the traditional volatility of the stock market. While stocks have been historically more volatile due to factors such as market speculation and economic uncertainty, cryptocurrencies are also subject to extreme price changes.
There are several reasons why crypto prices -can be so volatile:
- Lack of regulation : The cryptocurrency market is still largely unregulated, which means that there is no single authority to supervise space.
- Limited liquidity
: Cryptocurrency markets often do not have liquidity compared to traditional financial markets, which makes it difficult for investors to buy or sell rapidly and at a fair price.
- Speculation : Many investors are attracted by cryptocurrencies due to their high profitability potential, which can lead to speculation and over-market.
However, while price volatility is one of the disadvantages of investments in cryptocurrencies, it also presents an opportunity for traders to make fast profits or to buy low and sell a high level.
POW: Blockchain supported by energy
One of the most significant benefits of cryptocurrencies such as Bitcoin and Ethereum is their decentralized architecture, which is based on a computer network (POW) to ensure transactions. Pow involves complex algorithms that validate transactions and control the creation of new coins or chips.
The energy consumption required to supply this infrastructure can be significant, especially in countries with limited renewable energy resources. This has caused some experts to argue that the development of cryptocurrencies such as Bitcoin could aggravate climate change if not sustainably managed.