Recently, cryptocurrency markets have seen their fair share of volatility. TerraUSD’s implosion set off a selloff that has left some major coins with losses approaching 50% year to date. Investors worry about their investments while top global officials offer harsh criticism of volatile digital assets; for instance, Christine Lagarde from the European Central Bank suggested they are worthless and must be regulated to prevent people speculating with their life savings on them.
Are cryptocurrencies worthless? Not necessarily – in fact they remain at an early stage in development – similar to any technology with risks but potential rewards aplenty.
To properly assess whether a cryptocurrency is an ideal investment, it’s essential to understand their source of value. Supply and demand, which serves as an economic principle stating that increased interest will drive prices up; similarly for cryptocurrency investments where their worth depends on demand relative to supply.
Another way of understanding the value of cryptocurrency is the quantity theory of money, which states that any object with features associated with money (such as being divisible into small units and used for transactions) will have value. Cryptocurrencies certainly meet this standard – they’re easily divisible into smaller units while many are supported by efforts undertaken to maintain and expand their networks – this makes them similar in some respects to commodity money as opposed to fiat currency.
Other factors that influence cryptocurrency values include its governance structure and energy consumption. Investors tend to favor stable governance structures that don’t undergo sudden shifts over time; conversely, changes made to improve functionality could reduce value if implemented too slowly.
Final considerations that could impact cryptocurrency values is their exposure to other markets. When markets decline, cryptocurrency values may decrease when investors shift money away from cryptocurrencies they perceive as safer or more likely to yield high returns – for instance, during an economic downturn investors might switch towards investments they view as offering greater protection or higher returns – in this respect cryptocurrencies that use energy intensive mining may suffer particularly badly.
Cryptocurrency prices can be highly unpredictable, which is ideal for experienced investors with the skills to execute trades quickly and assess market fundamentals, but can be perilous territory for newcomers who lack such insight.
Cryptocurrency returns are often closely correlated to stock market returns; investing in both at the same time could end up yielding lower returns than diversifying your investments across stocks and bonds. Many investors therefore choose not to invest in cryptocurrency at all and focus solely on traditional investments instead.