![]() If the derivatives products are poorly collateralized, investors are scared away in bad times. Companies issuing such products are very active on the market and contribute to making the underlying assets volatile, especially if they promise stellar returns, which boost the demand for cryptocurrencies and crypto derivatives. This is what happened during the past few months with several crypto derivatives. If so, the derivative turns out to be all but worthless. If you have bought a derivative, however, you may find out that it is not really backed by an adequate quantity of cryptocurrencies or that the dollar-convertibility guarantee is porous, to say the least. The upshot is that if you have bought Bitcoins or other cryptocurrencies, you win/lose following the exchange rate of the cryptocurrency in your portfolio. At the same time, the company promises the financial investor to exchange the derivatives on demand for a fixed amount of a given cryptocurrency, possibly pegged to the dollar, or backed by dollars. The company converts the dollars into cryptocurrencies and lends them to global borrowers. Put simply, a financial investor hands out dollars to a company and receives a derivative in return. These are “derived” from cryptocurrencies and/or pegged to a widely recognized and centralized currency, like the dollar. For example, Bitcoin is a cryptocurrency while stablecoins Tether and TerraUSD are crypto derivatives. First, the world of blockchain consists of cryptocurrencies and crypto derivatives. To predict future scenarios for cryptocurrencies, it may be useful to consider what happened in the past and clarify a few key points. Since more than 19 million units, or 90 percent, have already been issued (“mined”), most people expected that the cap would have caused a constant rise in its dollar-denominated price. Bitcoin’s supply is limited to 21 million units. This cryptocurrency has failed to become a widespread means of payment and has turned out to be a poor defense of purchasing power in periods of uncertainty and inflation. Yet, many bitcoin advocates have been disappointed in two respects. Historically, Bitcoin – by far the most popular form of cryptocurrency – has been a success story for those who bought it: the exchange rate versus the dollar was below $3,000 five years ago. ![]() dollar/Bitcoin exchange rate fell from almost $70,000 in early November 2021 to below $20,000 in late June and, despite ups and downs, dipped to $19,733 on September 15. Ignore, ban or regulate? Governments will likely choose the third optionĬryptocurrencies have suffered a hard beating over recent months.It is not gaining popularity as a means of payment for ordinary transactions.Cryptocurrency is perceived as a speculative investment and a store of wealth.
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