Who owns the future: the electronic euro or cryptocurrency?
For the last six months, according to Coinmarketrate.com, the prices of cryptocurrencies, especially Bitcoin, have risen sharply. The price rose from just under $30,000 at the beginning of the year, helped by the tweets of entrepreneur Elon Musk, to a previous high of almost $65,000 in mid-April, and just as quickly returned to less than $30,000 in June.
Governments and central banks are very critical of the development of non-state cryptocurrencies, while commercial banks are beginning to expand their services around cryptocurrencies. Therefore, the European Central Bank (ECB) is working on plans to create its own digital currency – the electronic euro (e-euro). What are the main differences between the concepts? And what means of payment will depositors and investors rely on in the future?
Value as a medium of exchange
Currencies such as the euro are a means of payment that government agencies or central banks are tasked with preserving their value. The situation is different with cryptocurrencies: strictly speaking, Bitcoin&Co is not a means of payment with an exchange rate, but an asset whose value fluctuates. The value of an asset is measured in accordance with the price that is formed in the market and which market participants attribute to it. Prices are determined by supply and demand.
This means that external factors can influence the valuation of crypto assets. Examples from the supply side are the computing power of the blockchain and high energy consumption. The increase in marginal costs makes Bitcoin more expensive. In this respect, it would be comparable to the ever-increasing costs of mining gold in mines, or for oil exploration. That is why they often talk about protection against inflation.
As for demand, it is obvious that the price is also determined by speculation (and not just the use of cryptocurrency as a means of payment). This is the only way to explain the sharp price fluctuations and the big impact of messages from the Tesla boss through the Twitter short message service.
But the main feature of the crypto market remains volatility.
At the end of 2020, crypto investors could not even count on the special kind of Christmas gift they received: Bitcoin reached a new record high at a price of more than $23,000, and quite a few investors took advantage of the opportunity to make a profit.
Today, we know that it would be better to wait a little longer, because in less than six months, the price of Bitcoin has risen to even higher levels, and has broken the next record-more than $63,500. Now, the price of BTC even fell below the $40,000 mark, and then rose again. It is not surprising that such high price fluctuations scare off many investors.
Volatility is one of the most important indicators of investment risk. High volatility usually means highly fluctuating and, therefore, presumably unsafe forms of investment. On the other hand, the volatility of the cryptocurrency market also opens up great opportunities, namely the possibility of obtaining high profits.
The significantly higher volatility of cryptocurrencies compared to traditional capital investments has several reasons, which are ultimately based on the features of the cryptocurrency markets, and also make investments in digital assets so attractive.
Anyone who looks at the fluctuations in the cryptocurrency markets quickly understands that price jumps of ten percent or more per day are by no means unusual for Bitcoin and other cryptocurrencies. However, this applies to both price increases and price losses: volatility increases risk, but also increases opportunities.
A loss of almost 50% in a few days, as Bitcoin had to experience not so long ago, at first sounds like a serious failure. However, an investor who could count on a tenfold increase in his investment shortly before, that is, a price increase of 1000 percent, is also relatively calm about halving the cost.
In particular, long-term investors will find an opportunity to invest in cryptocurrency, which is associated with high currency risks and many other risks, but at the same time can offer the potential for a significant increase in investment. This helps to understand the reasons for high fluctuations.
Round-the-clock trading without rules
A feature of the cryptocurrency markets that cannot be neglected is that there are hundreds of crypto platforms, wallets, such as WallBTC, and exchangers around the world (online) that allow you to exchange and trade digital currencies around the clock, seven days a week. These trading platforms are often not subject to any government regulation, so there are no rules for setting prices and there is no way to suspend trading. This means that during periods of low trading activity, for example, on a Sunday or a public holiday, there may be a significant price distortion even with relatively low sales.
Another important aspect of cryptocurrency trading platforms is that it is very easy for investors in the cryptocurrency markets to make investments using borrowed funds, that is, to take large positions with relatively low capital investments and, thus, significantly increase the potential for profits and losses.
However, if many investors invest in the market through positions with leverage, the intensity of price changes increases. If an investor uses leverage to raise prices, he also receives the appropriate leverage when prices fall. Thus, a relatively small decrease in the price can cause significant losses and lead to a forced sale of the position, which can then create additional pressure from sellers.
The opposite model: electronic euro
The ECB, on the contrary, is planning an option with an electronic euro, which is actually a means of payment. Thus, the digital euro will be a direct requirement for the central bank and will be identical in value to the” analog ” euro. It cannot provide protection against inflation.
Just as central banks see that their monetary monopoly is threatened by private cryptocurrencies, and act decisively against their electronic currencies (CBDC), commercial banks fear that with the release of a new electronic euro, they are simply doomed to disappear. Theoretically, the central bank could issue and accept electronic euros directly to users without intermediaries.
Perhaps the ECB does not want to go so far: market observers assume that the ECB board of directors, headed by Christine Lagarde, will adhere to an indirect model in which commercial banks manage the electronic euro, and use it with maximum efficiency for each user. With this comprehensive solution, the ECB will be able to avoid a new conflict with the industry, which is already under pressure.
But this is unlikely, since with the release of CBDC, commercial banks become a vestige on the body of the financial system, especially digital. After all, in fact, it is very easy and even profitable for commercial banks to coexist and work with the crypto industry.
Well, if we talk about the prospects, then the assurance that security and trust will be crucial is just words.
In the end, the question of using these currencies will come down to the criteria: and there is only one option. Anyone who basically trusts the ECB as an institution will happily rely on the electronic euro. As a result, the ECB will have to issue the electronic euro directly, as we have already said. The Central Bank’s digital currency is not just money on the network, but a tool for total control. Well, you must agree, if the electronic euro is only slightly different from the digital payment methods that are already available today, consumers hardly have any reasons to switch. So it is necessary to abolish the alternatives.
The initiatives of the ECB and other central banks to introduce the central bank’s digital money (CBDC), of course, are also an attempt to finally consolidate in order to deliver a final, decisive blow to non-state cryptocurrencies. In the digital economy and payment models, they have a place in the dustbin of history.