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Does Crypto’s Price Volatility Make it an Unreliable Currency?

By July 22, 2021March 22nd, 20224 minute read

Note: This blog is written by an external blogger. The views and opinions expressed within this post belong solely to the author.

During the first half of 2021, the Cryptocurrency sector was ecstatic when bitcoin reached a new all-time high of $65,000 per unit, surpassing its previous record. Those holding bitcoin celebrated the prospects of profiting from their investment. Crypto fans were thrilled with an affirmation for believing in bitcoin’s capacity to rebound from its previous bear run, and the industry was on an all-time high.

However, a deeper examination of the Crypto market’s development over the past few years shows an underlying issue which, if left unresolved, might prevent Cryptocurrency from accomplishing one of its most primary tasks.

The Crypto Market and it’s Volatility

There are several ways to characterize the Crypto market. It is dynamic, engaging, and innovative. It may undoubtedly be regarded as volatile, however. From the early stages when the most valuable Cryptocurrencies were worth pennies to bitcoin’s recent high, the market has experienced ups and downs.

The wild price swings have left everyone speculating about which Cryptocurrencies will go down in value and which ones will be worth millions in the future. It has prompted endless debates, price monitoring sessions, and a group of investors waiting for the next bull run.

This volatility is driven by various reasons, including the increasing inflow of users into the Crypto market, new advancements in Crypto adoption, and the industry’s general evolution. For example, after the COVID-19 outbreak, the Crypto market took a hit in terms of price, while a surge was witnessed when major corporations like Tesla and Paypal stepped into the market.

Why is this a matter of concern?

The Crypto-market volatility does not seem to be a shortcoming on the surface, and it doesn’t always represent a problem. The issue is that its volatility severely restricts its use. This, along with the habit of continuous price monitoring, establishes Cryptocurrency as a new investment market to track. Cryptocurrency can be considered not simply as a tool for investment but a currency itself, which can be traded for commodities and services just like paper money.

Bitcoin’s (yellow) volatility compared to some traditional markets.  Source: Hackernoon

Cryptocurrencies are yet to attain a good level of price stability. This is one of the essential features for a currency to flourish. In fact, this has been one of the most consistent criticisms of Cryptocurrencies as a medium of exchange.

For instance, a customer may choose to spend a particular quantity of bitcoin to acquire a $50 item. Within an hour, the bitcoin they have maybe insufficient to purchase the goods or maybe in excess. This is inconvenient for consumers; it goes without saying. This one issue may be the stumbling block to bitcoin being the viable alternative to fiat currency that it aspires to be. In such a scenario, the consumer would prefer dollars with a stable purchasing power over bitcoin.

Is There a Solution?

With the current situation, it is debatable whether the majority of Crypto tokens can be a reliable currency for the masses to use. The simple solution to this would be the widespread adoption of Cryptocurrencies. As more consumers, merchants, and businesses start using the technology as a currency and not an investment, stability can be achieved. It must always be kept in mind that the value of fiat currencies is also volatile; however, the volatility is negligible in comparison to what we see with virtual currencies.

What are Stablecoins?

A stablecoin is a Cryptocurrency-based competitor that has emerged to address the problem mentioned above. In simple words, it is a Cryptocurrency that is linked to a traditional fiat currency or backed by precious metals and other commodities to preserve its value. Today, stablecoins have been backed by reserves of fiat currencies, gold, and even Cryptocurrency itself. Although some iterations have failed and the intended peg was lost, newer iterations have been reasonably successful in terms of stability.

Source: cbinsights

At present, Stablecoins are our only solution to the problem. As the stablecoin ecosystem expands between enterprise players and established blockchain ecosystem players, users will retain the freedom and flexibility to seamlessly transit between fiat and Crypto and, more importantly, be granted the necessary stability to avoid Cryptocurrency’s current volatility crisis.

Author: Rony Roy

Rony Roy is an electrical engineer who turned tech author in the Cryptocurrency space. He got block-chained in 2012 and fell in love with tech and its use-cases and has been writing his way through problems since 2016.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
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