Decentralized currencies are taking the financial world by storm. Investors are moving money into cryptocurrencies by the billions.
Since the value of these decentralized currencies are determined by supply and demand, the burgeoning demand for cryptocurrencies are driving their prices skyward like a stock-market boom.
This tremendous run up in prices has made fortunes, but some unlucky investors have borne the brunt of steep corrections.
These huge price swings make decentralized currencies attractive to speculators. Seeing a niche in cryptocurrency trading, exchanges are creating products allowing for derivatives trading of cryptocurrencies like Bitcoin.
These derivatives also offer a form of hedging against price fluctuations. Decentralized currencies are quickly becoming mainstream.
Maybe Its Speculation Maybe Its Reality
Despite the speculative mania surrounding cryptocurrencies, the rise in decentralized currencies is being driven in part by the need for security.
For example, Venezuelans have been converting their currency, the Bolivar, into decentralized currencies such as Bitcoin, explains Jon Buck in an article on The Coin Telegraph.
The Venezuelan economy has been in freefall for years. A collapse in oil prices roiled the Venezuelan economy because it is based so heavily on oil exports.
Many also blame the government for mismanaging Venezuela's resources, turning the fall in oil prices into a national catastrophe. This has led to political unrest. The end result has been a complete loss in the value of the Bolivar. Hyperinflation has set in as a result, wiping out the values of just about anything tied to the Bolivar.
Searching for a way to exchange their Bolivars for a currency that increases in value, Venezuelans have turned to cryptocurrencies. They are not alone. Hordes of investors are buying in from all over the world. Some are looking to make a quick buck on the mania.
Others are hedging against currency devaluations because of a growing mistrust of fiat currencies and fears that their home currency might face the fate of the Bolivar.
Fiat money is currency that a government declares as legal tender but lacks the backing of a physical commodity, such as gold. Fiat currencies are common nowadays. The Bolivar is a fiat currency and so is the dollar. Understanding how fiat currency works is crucial for all modern people as it affects all monetary transactions, including those involving a Texas title loan.
Fiat Currency and Then Some
Fiat currency is based solely on the faith and credit of the economy. So long as the economy remains strong, fiat currencies offer governments significant advantages in flexibility and management of the economy through central banks; however, critics have grown increasingly concerned about fiat currency's tendency toward inflation and have accused governments of manipulating currency values through central banks.
Because a fiat currency allows central banks to control the money supply without keeping gold reserves, they can exercise great control over the nation's credit supply, liquidity, and interest rates.
The actions of central banks affect every credit transaction, including title loans online no inspection. Many investors look at decentralized currencies as a hedge, allowing them to store value in case their economy falters and their fiat currency loses value.
Rural and isolated populations are driving the demand for cryptocurrencies as well. These areas lack the banking infrastructure of large towns and cities, according to DCE Brief, Isolated populations have found a superior method of exchange in cryptocurrencies.
With cryptocurrencies, all that is required for a business transaction is a simple mobile phone. They can also trade across international lines without the problems of currency fluctuations. These fluctuations can easily distort the values of trades.
Many rural communities look at cryptocurrencies as a savior that can stop the trend of cities being economically advantaged while rural areas lack the financial infrastructure to thrive.
Because everything is now digital, the financial infrastructure can easily encompass the most remote places.
DCE Brief also explains that the rise in decentralized currencies offers the opportunity to incorporate rural populations into the broader economy. This, in turn, reduces the need for government assistance, further benefiting economic growth.
Decentralized currencies allow these communities to manufacture and trade essential items locally while also making it practical to order specialty items from other regions or abroad. Under this model, populations of isolated communities can prosper.
This is great news for folks who can't stand the city life, but despite the promise many see in decentralized currencies, much about them remains a mystery. The creators of Bitcoin itself are unknown.
What will happen to Bitcoin in the long-term is a hotly debated topic. Governments continue to struggle in creating policy around decentralized currencies. The rise of decentralized currency, similar to the rise of Texas car title loans, has astounded many. Its ultimate role in the world economy remains an open question.