While inflation is never far from the thoughts of many economists, government policymakers, and individuals concerned with keeping their budget under control, for crypto enthusiasts, the relationship is a little bit more ambiguous.
This is not to say that those investing in cryptocurrencies will never have to worry about inflationary forces in the global economy – in fact, quite the opposite is true. Rather, it is that there is still quite a lot that we don’t fully understand about the relationship between the two.
For cryptocurrency enthusiasts looking to grow their investment portfolios, however, this is not a desirable position to be in. Given the ubiquity of inflationary pressures in the global economy, it is inevitable that at some point – just like investors in every other sector – you think about it when drawing up and executing an investment strategy.
With this in mind, in this short article, we will give an overview of what inflation actually is and how it impacts both the economy as a whole and individual investors, as well as its potential impact on the cryptocurrency space. It is hoped that by having a better handle on what it is and how to react to it, you can protect your crypto portfolio and put yourself in a better position to take advantage of any future investment opportunities.
At its most basic, ‘inflation’ is the term that economists use to describe decreases in the value of a currency relative to the value of any goods or services you might purchase with that currency. In this sense, inflation is most often used to refer to a loss of purchasing power over time in a given economy – most often expressed as a percentage.
While a certain amount of inflation is inevitable in any healthy economy, if it rises too high or too quickly, this typically gives economists cause for concern. This is because high rates of inflation signal some underlying dysfunction in the economy – typically where basic consumer goods are priced too high relative to average wages.
However, we must also note that inflation can be viewed both negatively, as above, and positively. This will typically depend on the perspective from which it is viewed.
For example, individuals with tangible assets such as property or certain commodities may view inflation as a force that increases the value of their assets.
Although the precise roots of inflationary pressures will always differ depending on the context, there are generally a number of different causes that are understood as increasing rates of inflation. Underlying all of these is an increase in the supply of money – i.e., currency – which lowers its value.
Money supply is typically increased by:
The other factors that economists look at when figuring out how money loses purchasing power are demand-pull inflation, cost-push inflation, and built-in inflation:
But what is the impact of these forces on the world of cryptocurrencies?
Although cryptocurrencies have been around for a little over a decade, there is still quite a lot that we don’t know when it comes to understanding their relationship with inflation.
Most immediately, we have not seen how the crypto markets have reacted, as during the last decade, the global economy as a whole has experienced relatively little inflation. In this sense, no traders, analysts or enthusiasts have ever traded or invested in cryptocurrencies during an era of notable consumer price increases.
When rate rises were announced by certain central banks in an attempt to curb the flow of money in early 2022, both Bitcoin (BTC) and Ethereum (ETH) prices experienced a brief rally. This came off the back of a prolonged downward spell for cryptocurrency prices.
However, these gains were short-lived. Prices did not continue to rise or to even hold at these rates. This caused many crypto price-watchers to wonder whether the relationship between cryptocurrencies and inflation was more complex than we might initially have thought.
In light of all these unknowns, many market-watchers have taken the position that cryptocurrencies should be thought of more like big-tech stocks when it comes to inflation.
This means that during periods of high inflation, investors will tend to shift their money away from tech stocks towards more traditional or so-called ‘safe-haven’ investments. In previous years, high-growth and tech stocks have tended to lag when inflation rises – though they have not necessarily tanked in value.
However, it could be argued that the comparison to tech stocks is limited given that cryptocurrencies are their own unique asset class. In fact, this has been all but confirmed by the likes of the IRS and the SEC in America, which have classified cryptocurrencies as either commodities or securities.
In this sense, while certain cryptocurrencies may function more like a stock, others will hold value more like a commodity. So, how does this understanding impact the way that we should view cryptocurrencies during inflationary periods?
Regardless of whether we view cryptocurrencies more like a commodity or a security, what we do know is that during periods of inflation – particularly prolonged periods – central banks and governments will nearly always raise interest rates in response.
By raising interest rates, central banks and other government powers can control the flow of money into the economy, which, it is generally believed, will have the effect of increasing its value as there is simply less of it around.
The effect of this is that borrowing rates will decrease and investors will get more cautious with how any available funds are invested. For this reason, we tend to see a shift away from riskier investments during periods of inflation.
On the one hand, this might see certain investors move from cryptocurrencies – as a much younger asset class – towards more stable asset classes.
While this might not necessarily signal a widespread sell-off in the crypto community, it may push investors to focus on more established, stable cryptocurrencies.
Ultimately, however, there is still much that we don’t know about how this relationship will evolve, and it is likely that it will change as the technology underpinning cryptocurrencies develops and they assume a bigger role in the global economy.
Although many individuals investing in cryptocurrencies simply purchase them on a crypto exchange, this is not the only way to acquire coins such as Bitcoin or Ethereum.
The other way that individuals acquire units of cryptocurrency is through a process known as ‘mining’ – which is how some of the biggest cryptocurrency fortunes have been amassed.
Cryptocurrency mining has frequently appeared in the headlines for the significant energy expenditure it requires. After all, the real-world, tangible cost of generating electricity in order to mine new cryptocurrencies is part of what makes them so valuable.
It should also be stated that mining is an essential part of the cryptocurrency ecosystem. This is because mining generates new coins that are put into circulation and that are then bought, sold or used to make various types of transactions.
But what exactly is cryptocurrency mining, and how does it work?
A simple way to think about cryptocurrency mining is that it is a way of creating new digital coins or units of cryptocurrency.
To create these coins, computers solve incredibly complicated cryptographical puzzles and validate transactions on a blockchain network so that they can be added to the open, distributed ledger. Typically, only verified miners can update transactions on the blockchain, which helps to prevent double-spending and reduce the risk of fraudulent transactions.
As decentralized digital currencies lack a central authority, mining is an essential part of validating transactions on the blockchain. Mining therefore acts as a way of incentivizing participation in these validation processes by offering miners newly minted coins as a reward. This also helps to increase the security and integrity of the blockchain network as a whole.
Typically, crypto miners will use their computers to solve complex mathematical equations. Once these are solved, transactions are authorized. This process of authorization involves adding the data about that transaction to the public ledger – i.e., the blockchain – which is secured by these encryptions.
In return for this, the miner will earn a unit of cryptocurrency. This acts as a way of both incentivizing participation in this process and also helping to cover the energy costs that the miner incurred in doing it. Solving these cryptographical puzzles can be quite energy intensive as it requires a significant amount of computer power.
As the first cryptocurrency, Bitcoin was the first currency to have a mining system in place. Many of the earliest miners of Bitcoin were able to generate vast sums of currency when Bitcoin was in more plentiful supply.
However, the basic ‘mining’ system underpinning Bitcoin has been largely replicated by many of the major cryptocurrencies. This includes the likes of Ethereum, Litecoin, Tether and Monero, all of which have a similar system in place.
Bitcoin and Ethereum are the most popularly mined cryptocurrencies, largely due to the fact that their total market cap is the highest. Bitcoin and Ethereum are also the highest-value cryptocurrencies, which helps to incentivize mining on their respective networks.
Cryptocurrency mining can broadly be split into two distinct types: Proof of Work and Proof of Stake.
Proof of Work mining is one way of publishing the latest block (which includes transaction data) on the blockchain. The work is undertaken by miners whose computers perform complex computations and solve equations to change a particular input into a required output. The first miner to produce the output will share it with the network, which then double-checks and verifies to see if it’s functioning properly. If it is, the miner is rewarded.
Proof of Stake mining is slightly different. This allows would-be miners to put up existing units of their cryptocurrency as collateral for the opportunity to validate a block. Multiple validators will be needed to verify a block and they will be selected from a pool of candidates who have put up crypto as collateral. Validators will be rewarded with coins for their efforts.
Major currencies such as Ethereum are due to shift to a Proof of Stake mining system, which will make the process both more efficient and less energy intensive. This will help to increase the transaction speed and lower any associated transaction fees.
The most obvious benefit of mining cryptocurrency is that it provides a revenue stream for miners. When cryptocurrencies such as Bitcoin were more plentiful, this could be quite substantial. However, as more coins have gone into circulation through mining, the volumes you can generate diminish.
It has also become a lot more expensive to mine cryptocurrencies. This is because you need much more powerful hardware to do it these days, and also because the energy costs have increased. As such, it can be very difficult to get started mining these days, with the majority of mining done through server farms rather than by individuals.
Mining cryptocurrency also has a significant environmental impact, both due to the hardware requirements and the electricity cost.
However, it is believed that once the major cryptocurrencies switch to Proof of Stake mining, this will significantly decrease the energy requirements in the long term.
If recent trends in the world of cryptocurrency are anything to go by, the world of decentralized finance (DeFi) is booming.
Although much of its growth might be attributed to a more general interest in the technological and commercial opportunities presented by DeFi and its related technologies, there is one factor that has helped to catalyze the growth of the industry: yield farming.
For would-be investors, yield farming presents an almost irresistible opportunity to generate capital growth using your cryptocurrency portfolio with little extra effort required on your part. But what exactly is yield farming, and why has it helped to generate explosive growth in the world of DeFi?
At its most basic, yield farming is a way of earning interest on any units of cryptocurrency you own, just like you would earn interest on funds you have in a savings account. In much the same way, yield farming involves locking up (i.e., depositing) your cryptocurrency for a set period of time in exchange for interest or other rewards. This process is called ‘staking’ and is one of the main reasons why DeFi projects have generated such interest in recent months and years.
For investors wanting to use their crypto portfolio to generate an income, the value proposition underlying yield farming is simple: you take cryptocurrency that would otherwise be sitting in storage in a cold or soft wallet and lend it out to generate returns.
The attraction of yield farming was increased by certain projects offering lucrative returns, which were sometimes in the triple digits.
Yield farming works by allowing an investor with a given amount of cryptocurrency to deposit it into a lending protocol through a decentralized app (or dApp).
These dApps offer incentives to users for providing liquidity. This process is facilitated and managed by smart contracts, which are essentially lines of code on the blockchain of that currency.
As with any form of investment, yield farming is not risk-free. Some of the most notable risks associated with it include:
If you want to start yield farming, you will have to use a lending protocol in order to become a lender or liquidity provider. Popular lending protocols include Compound (COMP) and Aave (AAVE), which can be used to take out loans against crypto assets. Interest is provided to the lender through these protocols. This acts as the reward for staking.
You can also become a liquidity provider for a decentralized exchange such as PancakeSwap or Uniswap. Here, the platform matches liquidity providers with those in need of liquidity, with both the provider and the platform earning a portion of any fees charged and collected.
Yield farming can be undertaken with various different cryptocurrencies, though the most popular coins tend to receive the highest demand. This includes the likes of Ethereum, Litecoin, Monero, Tether, Ripple, Bitcoin and Binance Coin – many of which are covered on VIPCoin Casino!
Although you can potentially earn some rewards by yield farming, whether or not it is worth it ultimately depends on your own personal risk profile.
If you are willing to put up with a moderate degree of risk and have done your due diligence to ensure that the projects you are investing in are legit, then you can earn some decent rewards. However, for many novice investors in the cryptocurrency space, your risk profile might be much lower.
The world of DeFi and dApps has opened up many new and exciting investment opportunities for cryptocurrency enthusiasts, of which yield farming is just one. If you do your homework and only invest in projects you understand and trust, yield farming might be a good option for you!
As most crypto enthusiasts know, the Ethereum native token Ether, or ETH, is one of the most popular cryptocurrencies on the market. But can Ethereum surpass Bitcoin? Will it ever become the most valuable, or most widely used, digital currency of all? As of August 2022, ETH was the second most commonly traded cryptocurrency after Bitcoin, and also the second most valuable.
The Ethereum token has experienced tremendous growth in recent years, having increased in price from about £8 in April 2016 to over £1,365 in August 2022. What’s more, crypto experts are predicting that Ethereum could grow in value by as much as 400% during 2022. Coinpedia has suggested that the price of ETH could even rise to close to $13,000 in 2022 if the upcoming transition to Ethereum 2.0 is successful.
When it comes to a straight comparison, however, Ethereum is still a long way behind Bitcoin. As of August 1, 2022, Bitcoin was worth around $23,184, while ETH was only worth around $1,661. However, with both Ethereum and Bitcoin being extremely volatile, there are really no guarantees about where either coin could go in the future.
Ethereum is a highly volatile asset, and as such, its value can rise and fall dramatically over a relatively short period of time. This is, of course, the case with Bitcoin and all other cryptocurrencies, which is why the golden rule is to never invest more than you can afford to lose. Investors in both Ethereum and Bitcoin are now pretty confident that the coins are unlikely to suddenly become worthless overnight, but sudden and unpredictable drops in value are not unusual.
Having said that, looking at the annualized rate, the ROI on Ethereum is nearly 300%, which means that early investors in the token have almost quadrupled their investment every year since the summer of 2014. This sounds impressive, but Bitcoin has had an average return of 1,576% and a total return of 18,912%, if you look at its growth from 2010 to 2021.
It is important to note that these numbers, while significant, say very little about what individual investors may have made, or lost, over the years. There are plenty of Bitcoin millionaires out there, and also people who have lost huge amounts of money, in real terms, by investing in Bitcoin at the wrong time. The same is true of Ethereum. Wise (and lucky) investors, however, have made large amounts of money with both coins.
Ethereum is planning on a transition to ‘Ethereum 2.0’, which is a less energy-intensive version that aims to make the coin more sustainable and potentially more appealing, especially when it comes to everyday use. The impact that this will have on actual prices, though, is unclear, and wise crypto experts will always tend to qualify any predictions they make with the caveat that it is simply not possible to accurately predict the price movements of crypto assets such as Ethereum.
Having said that, there are experts who are speculating that the price of Ethereum will hit $4,000 again soon, and that it could potentially rise to over $8,000 or even over $12,000 in the foreseeable future, if the transition to Ethereum 2.0 works out.
As most crypto investors are aware, Ethereum is far more than just a crypto token. It was also the first blockchain to use smart contracts, which are essentially coded instructions on the blockchain that can be used to execute financial transactions.
Over time, the Ethereum blockchain has gained many new users, and it has become increasingly expensive to complete transactions on Ethereum. The transition to Ethereum 2.0 is one of a number of responses to this, aiming to improve efficiency through new developments to the Ethereum infrastructure.
At the same time, new Ethereum alternatives with similar capabilities are emerging, and this can also change the demand for ETH in both positive and negative ways. Variables that impact the price of Ethereum include the amount of utilization of the Ethereum network, the cost of transactions, the impact that new upgrades to the ecosystem might have, and, of course, the demand for Ethereum within the crypto marketplace.
The main threat to Ethereum probably comes from the explosion of new altcoins hitting the market every day. Ether may have been one of the first, but now there are literally thousands of digital currencies on the market.
2022 is also set to be the year of ‘Web3’, which essentially refers to an open-access version of the internet built on blockchain technology. This will allow for more transparency in financial transactions, among other things. Ethereum and other blockchains such as Solana and Cardano are working to develop the infrastructure on which the future of Web3 can be built, and it’s fair to say that the competition will be strong.
Some commentators have suggested that the price of Bitcoin could reach $100,000 by the end of 2022 and maybe rise as high as $1m by 2030, but as with all these predictions, there really are too many variables in the mix, and long-range forecasts involve a huge amount of speculation.
While crypto was purposely built as an alternative monetary system that operated independently, it has increasingly become tied to the mainstream economy, with a significant price dip in June 2022 largely attributed to factors such as surging inflation worldwide, an unstable stock market and rising interest rates. With the world economy looking shaky as we progress through the year, there’s no telling how much this will be reflected in the price of Bitcoin and other cryptocurrencies.
There are certainly crypto experts, enthusiasts and investors out there who believe that Ethereum could surpass Bitcoin one day, but if you’re looking for a confident forecast as to how and when this will happen, then you’re likely to be disappointed. Even the experts are unwilling to make any solid predictions in a market that remains as volatile now as it always was.
Monero is a privacy-based digital coin that was created in April 2014 as a fork of another cryptocurrency, Bytecoin. Bytecoin was notable in that it was the first digital currency that was written using the CryptoNote technology, which is now the backbone of most of the privacy-based cryptocurrencies on the market, including Monero.
The currency was the brainchild of seven developers, including Riccardo Spagni, who decided that while the Bytecoin technology was good, the coin itself was problematic. The developers forked the Bytecoin blockchain and named their new currency Bitmonero. This was then shortened to just Monero, which literally means ‘coin’ in Esperanto.
Monero is different from Bitcoin and many other cryptocurrencies. The Monero token continues to use the CryptoNote technology and is therefore a true privacy-based currency, offering users a high degree of anonymity. The privacy of all CryptoNote coins is ensured by grouping public keys together to create a complex scheme of digital signatures known as ‘ring signatures’. These are different from the EDSA signatures used by many other blockchains.
Ring signatures combine the public keys of multiple individuals, along with one real signature and a number of other signatures known as mixins. By combining several keys in a single transaction, it makes it impossible to tell exactly where the transaction came from, ensuring even more privacy and anonymity than is offered by most other cryptocurrencies.
The Monero ledger does not record the actual addresses of the sender and recipient involved in any transaction, and the single-use address that is created for the transaction is recorded but cannot be directly linked to the actual address of either party in the transaction. Therefore, the ledger doesn’t allow anyone to track down the individuals involved in any Monero transaction.
Monero also has a specific way of handling transactions by splitting the amount of any single transaction into multiple smaller amounts, and then treating each of these smaller amounts as a separate and distinct transaction, each of which is given a unique single-use address. Each of these split amounts is mixed in with other transactions through the use of ring signatures, making it extremely difficult to identify any details of any specific transactions.
One further advantage of Monero over many other crypto assets such as Bitcoin is fungibility. This means that two units of a currency can be mutually substituted with no difference between them. There is no serial number, as you would find with fiat money, or unique way to identify each coin, as with some digital coins. With Bitcoin, for example, the transaction history of a coin is recorded on the blockchain, and this can lead to the identification of specific units that have been part of specific transactions. This cannot be done with coins such as Monero.
You can buy and sell Monero on a variety of crypto exchanges and brokerages worldwide, including Coinbase, Coinmama, Kraken and Crypto.com. As it is not one of the highly popular, top 10 cryptocurrencies, Monero’s availability and liquidity will vary depending on the exchange or brokerage you use. You can, in theory, buy Monero with a credit or debit card, with fiat currency or with other types of crypto coins. In practice, the payment methods available at the crypto exchange you use will dictate the payment methods you can use.
Due to the privacy features of Monero, it can be easy to steal and hard to trace or recover, so storage of your Monero is something to think about. Your coins are only as secure as the wallet you use to store them, so ensure that you use a secure wallet and follow all best practices to keep your crypto assets as safe as possible.
Monero, like most cryptocurrencies, is not recognized as legal tender, but this does not in any way mean that it is illegal, simply that it is not backed by a national government or central bank, like fiat currency is. However, the extreme privacy features that Monero has built into its transactions does mean that it can be easily used for illicit activities and may also be used in crypto scams.
While it is generally as safe to buy, sell and trade Monero as it is any other cryptocurrency, just be aware that if you are asked to make a Monero transaction in circumstances that you deem to be suspicious, it could potentially be part of some kind of scam or fraudulent activity. While the currency’s privacy features appeal for a wide range of reasons, the fact that transactions are pretty much untraceable does mean that it is possible to be vulnerable when using the currency for transactions to other users who you do not know.
If you are interested in trading Monero, you’ll want to keep up to date on Monero news, which you can do online in the cryptocurrency forums, via the newsfeeds at various crypto exchanges, and by following Monero on Twitter and other social media sites. While the top cryptocurrencies list is constantly changing, Monero is frequently among the top 30 most popular cryptocurrencies on the market, so finding news and updates on the coin is not usually too hard. You can also, of course, monitor daily changes in the price of Monero easily online via your preferred crypto exchange.
When it comes to the future, Monero is very similar to most other cryptocurrencies, in that it is almost impossible to predict future trends and prices due to the volatile nature of the coin and the entire crypto marketplace. Does Monero have a future? Most experts seem to agree that the coin will be around for many years to come, and some are speculating that the coin could well increase in value substantially over time.
As most crypto investors are aware, Bitcoin and other cryptocurrencies are known for being an alternative to fiat currencies, and until recently were not considered legal tender in any country. This can be confusing for those who don’t know much about the crypto space, sometimes creating the impression that cryptocurrencies are not legal – but this is not, of course, the case.
Not being accepted as ‘legal tender’ simply means that crypto coins are not classed as the official currency of any particular country. They are not backed by a national government or central bank or controlled by the financial authorities or regulatory bodies of any particular country. This was the case for all cryptocurrencies until recently, and was, in the opinion of many investors, one of the positive things about them.
In September 2021, however, El Salvador officially adopted Bitcoin as legal tender and fully recognized it as a form of currency within the country. This means that in El Salvador, Bitcoin is now considered an official currency and is an accepted means of paying for a range of goods and services.
The reasons behind the decision are at least partially economic. The El Salvador government made the decision with the hope that by being the first country to fully adopt Bitcoin and make it legal tender, the country’s economy would benefit. President Nayib Bukele said at the time of making the announcement that he believed that the move would encourage crypto investors to spend more of their cryptocurrency in El Salvador.
When it comes to the issue of fully legalizing Bitcoin, El Salvador is perhaps an unlikely candidate. It is a tiny country with a small economy, being the smallest country in the whole of Central America, but its move has certainly made an impression on some of the larger countries in the region, as well as other countries around the world.
While there was much excitement about El Salvador adopting Bitcoin, the experiment has not gone as well as was hoped. Bitcoin adoption across the nation has been slow to say the least, and it hasn’t helped that the price of Bitcoin has fallen by around 55% since President Bukele announced his plan. The government’s crypto holdings have therefore been cut in half, and the expected influx of crypto investors keen to spend their virtual currency in El Salvador has not really materialized.
Crucially, the country is now in the position of needing an influx of cash to meet its very expensive debt payments, which run at an interest rate of around 5% a year, and now amount to more than $1bn. This seems to be a goal that is out of reach right now, as the country’s economic growth has declined, while its deficit remains high, and its debt-to-GDP ratio is set to hit almost 87%. Economists are uncertain about whether El Salvador will be able to repay its debt, and many are looking on the attempt to adopt Bitcoin as a failed experiment.
The El Salvador Bitcoin experiment has now caused a loss, on paper, of around $50m for President Bukele’s government, and the entire situation, when all associated costs are included, has set the government back around $374m. While these may seem like big numbers, they are still only a small percentage of the country’s national budget. There has, however, been a knock-on effect, with many international lenders reluctant to lend more to a country that is now seen to be somewhat at the mercy of the price movements of Bitcoin, which is, and always has been, an extremely volatile and unpredictable asset.
It’s fair to say the Bitcoin experiment in El Salvador has not been a raging success, but it’s not over yet. The president has a lot riding on it and still seems willing to continue trying to make it work, and Bitcoin’s volatility could, of course, start to work for the country, just as easily as it worked against it, with some experts predicting another surge in the value of the cryptocurrency.
In fully embracing Bitcoin, El Salvador has taken a bold step and given itself some problems, one of which is that Bitcoin, in spite of its name, is not a coin or even a banknote. It is a digital key, and technically it doesn’t physically exist in the real world. We may all be familiar with the gold coin that is universally recognized as the symbol for Bitcoin, but it is just that: a symbol.
Therefore, it is necessary to make all payments in Bitcoin via an electronic transaction. That in itself is not a problem. After all, we pay by electronic transaction every time we pay by credit or debit card, but the technology to do so has been around for quite some time. There is a Bitcoin processing system in place in El Salvador, and it has a point-of-sale device similar to a credit card processing machine. However, visitors to the country have reported that these devices are not always available or in full working order, making it impossible to pay with Bitcoin in some venues.
In spite of the El Salvador results currently being less than ideal, not everyone has been put off the idea of making Bitcoin an official national currency. In April 2022, the Central African Republic became the second country to adopt Bitcoin as legal tender, and other countries have also expressed an interest in doing so. Countries looking at the possibility include Paraguay, Panama and Mexico.
However, in spite of the popularity of Bitcoin and other cryptocurrencies, it seems unlikely that major players on the financial world stage, such as the US or the UK, will consider making Bitcoin legal tender anytime soon. While many major businesses in such countries are willing to accept crypto transactions, the established banking systems aren’t looking like they will be ready to embrace such a major shake-up in the foreseeable future.
There are many different people who get involved in cryptocurrencies. Some view it as a sound investment in the future of the internet. They see it through a similar lens as those who invested in early tech companies such as Google and Amazon – companies that were perhaps underestimated at their genesis but for which early investors were rewarded generously. No one wants to feel like they missed an excellent opportunity to get on the ground floor of something. Therefore, crypto seems like a low-risk, high-reward investment opportunity, especially when one starts by investing in some smaller alternative coins, also referred to as altcoins, which can cost as little as US$0.01.
Admittedly, investing has some risks, and those who see the crypto landscape as unmapped and wild are drawn to these uncertainties. These people might invest in the more expensive coins, hoping that demand will continue to increase. Because many coins have market caps that keep them adherent to supply-demand models, this approach is widespread, especially regarding coins such as Tether, Bitcoin and Ether.
However, sometimes these long bets backfire. The blockchain is not insured by external players, the same way that a banking institution might offer security to its clients. Therefore, if the currency crashes overnight, you lose access to your wallet or hardware key, or if the currency was just experiencing a bubble, there are few courses of action available to recoup some of your funds. Artificial inflation of prices is one aspect of crypto investing that still needs to be counteracted almost every time a new currency is added to the marketplace.
It took Bitcoin years to reach the US$1 threshold and many more to get its current valuation of approximately US$21,000 per coin. Regardless of whether you find crypto trading low or high risk, many find the potential rewards of investing in the next Bitcoin too tempting to ignore.
The Fear and Greed Index was developed because of the unique volatility of the crypto market – many of the traditional metrics that are used to analyze stocks and investments do not apply. Therefore, new systems must be invented to provide insights into how the market behaves. One of these models is the Crypto Fear and Greed Index.
The Crypto Fear and Greed Index is a model that monitors, unsurprisingly, the fear and greed of investors. Fear is a term used to define a hesitant market, where investors are being cautious about the coins they invest in and how much they want to spend. In theory, when there is a high amount of fear, this is an ideal time for new investors who want to avoid an inflated market to invest and buy coins at a lower cost.
Alternatively, if the market is growing rapidly and there is an influx of new money and investors, the metric identifies this as greed. Greed demonstrates the desire of people to own more and more cryptocurrency, believing that it will only go up in value. However, the cryptocurrency market is not immune to false inflation. Therefore, it is a safe assumption that when the metric identifies a high level of greed, there is going to be a market correction.
This greed metric can be watched in real-time, often exploding when, for example, a company broadcasts its partnership with a cryptocurrency, or a financial celebrity, who has a trusted following, announces that they will be investing. In these examples, the currency will multiply significantly overnight and then fall dramatically in the next week.
The Crypto Fear and Greed Index serves an essential purpose as it identifies but does not overvalue the emotions of investors. It achieves this by utilizing several metrics to collect and analyze data. First, it only observes the fluctuations of Bitcoin. As the most established and largest fish in the sea, it makes sense to focus on BTC and not smaller coins, which might muddy the waters if they spike and then sputter out.
Secondly, it attributes different weights to the following factors:
When comparing to other data points, to graph the information, the Fear and Greed Index references the values of 30 days prior and 90 days prior. This allows for more extensive trendlines to appear while graphing the raw data.
This information provides much helpful insight into how a market might be about to react to cryptocurrencies. For example, suppose there is a sudden spike on Twitter of hashtags involving BTC. In that case, it might be an indication that the market is about to be saturated with new interest, which results in new investors. Suddenly, a stagnant market can become greedy.
Another example of how data can be interpreted is if BTC grows in market dominance. There is only so much available space in the crypto market, so if BTC is increasing in popularity, it can be interpreted that people are hesitant to buy altcoins. Overall, this might demonstrate that the market is becoming more fearful because people would rather spend more on ‘safer’ options than be greedy and purchase higher quantities of other currencies.
When the Fear and Greed Index analyzes all of this data, it calculates a number between one and 100, with one symbolizing the most fear and 100 representing the most greed. Ideally, it is best in the middle, showing that investors are eager but still pragmatic.
If you are interested in getting started in crypto investing and trading, then the Fear and Greed Index is a wonderful place to begin understanding the wild and exhilarating world of the blockchain.