SUNDAY THOUGHTS - Be Thankful For Volatility
When I desperately try to convince my conservative friends and family members of crypto-currencies, they often argue against me because of the crypto-market’s volatility.
Currencies cannot establish themselves so naturally, if the value of them varies greatly every day. But once again, these people think too shortly!
Of course, very few will currently use Bitcoin or Ether as a standardized payment, mainly because most of us think that these investments' value will be much more valuable in the future. However, in my opinion, the volatility is the superpower of this sector, which makes progress in this industry possible.
In today's SUNDAY THOUGHTS episode, I would like to discuss why one of the most criticized aspects of the sector is actually the greatest strength of the crypto industry.
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Losers are sorted out
It is often claimed that we live in a free-market economy, with capitalism being blamed for many of the world's ills. Let it be it poverty, environmental pollution, or war. In the end, capitalism is the root of all evil.
But is this true at all?
In my opinion, it is not right to call capitalism the culprit for many ills in the world. Because the question we have to ask ourselves is whether the current economic system is capitalist at all?
Under capitalism, supply and demand determine economic conditions. Members of the market, who cannot meet a particular demand, or simply do not function, are sorted out. This has the advantage that grievances can be detected very early and can be sorted out naturally. In my opinion, this is the fairest way to run a market because nobody can decide about somebody's existence. It is a subliminal democracy where consumers "vote" for something in the form of buying behavior. If a product no longer works or is no longer profitable, it will disappear from the market, like a foreign body that harms the human body and is therefore eliminated.
As simple as this may sound, we are far away from this reality.
Especially during the Corona Pandemic, this became evident again. Regardless of the pandemic, companies that were running poorly were kept alive artificially by the government. Not only was tax money used, but even new money was printed - money was created out of thin air.
Moreover, the bad thing is that additional money on the market devalues the savings of many people. Because when there is more money on the market, the value of each individual banknote naturally decreases. An oversupply is inevitably accompanied by devaluation. This is the case with every product, even with money!
However, we now face the problem that the oversupply of money and badly managed companies' continued existence is due to various governments and institutions. They really imagine that they can decide what is right for the economy, regardless of whether it harms the market and the people. In short, the market is manipulated, and this hurts all of us.
Of course, this may not seem to be the case at first glance, as the market sometimes goes down or up by 0.1%. If the market decreases by 3%, everyone talks about a crash. But if the crypto market increases by 6% in one day, this is not even worth more great news for most people. But why is this good for the crypto sector?
The apparent silence in the traditional markets is artificial. However, sooner or later, a human error or an unforeseen event occurs, and the fragile market collapses. Who suffers the most damage? The average citizen of each country.
However, the volatility in the crypto market is a reality. Companies and protocols can win big here or lose everything. However, no blockchain, protocol, or company is kept in the market artificially. Users no longer trust these constructs, and future companies can learn from past mistakes.
In the traditional economic system, however, there are still institutions, such as Deutsche Bank, which would have long been dead without government aid. Nevertheless, it continues to exist and causes further damage with its unprofitable business.
This is not the case in the crypto market. Mt.Gox, for example, lost about 850,000 bitcoins, which caused one of the first big Bitcoin crashes.
Today the effects of this are hardly noticeable. Bitcoin is approaching the old all-time high again, and the sector is larger and more diverse than ever before. The market has been redeemed by Mt.Gox and can no longer do any harm.
There are fewer disasters ahead as the sector is regularly cleared of abuses. At first sight, prices are so volatile that a layman would not even see any progress. However, if you look at how well the crypto industry has developed over the last ten years, you will clearly see a strong positive trend.
Not despite the volatility, but because of the volatility!
The market adapts to the needs of consumers. Not the other way around. When you look back to 2017, you can see how immensely and rapidly the crypto sector has developed. It was less than a year ago when Decentralized Finance (DeFi) was not known to most people. This has now changed, and DeFi is an integral part of the crypto industry. The demand for decentralized financial products and easy access to the financial system has increased in many parts of the world. Within a short time, the hype developed into a wave of new DeFi protocols that aim at nothing less than decentralizing the old and centralized financial system. DeFi may be one or two years old, but protocols like Maker, Compound, YFI, Kyber, and many more have changed the market forever.
In short, the crypto market can react much faster to people's needs.
The traditional, state-controlled market economy is limited in its actions. There are countless regulations and obligations, and it takes years before the market responds to an insatiable need. In my home country, Germany, we have been lagging behind digitization for years. Discussions and plans on these issues existed before I was born, but these things are still a problem. This is because every government that has been in power in Germany has always had different priorities and perspectives. Every four years, the plans changed, and in 2020, Germany, one of the world's wealthiest countries, is 33rd in the list of countries with the fastest internet. So the centrally regulated market was not really able to respond to consumer’s needs. Some DeFi protocols have come and failed in the crypto sector, but DeFi is already an elementary part of it after this short time.
At the end of last summer, the "DeFi bubble" burst in between, but probably nobody would think of calling this movement a failure. So we will have to wait and see where the sector will be in the coming years.
The volatility of the crypto market is one reason why this industry has been able to develop so well and so quickly. Losers or constructs that harm the whole movement are sorted out. Not so in the traditional market, where unprofitable companies remain in the market, and central institutions decide on many investors' well-being. This is neither fair, effective, nor has it anything to do with a free market economy! By the way, it is nonsense that companies that are demonstrably harmful to humanity, such as armament or oil companies, continue to exist just because they provide jobs for the population. Politics, however, shuns significant changes because of the fear of failure. But failure is what makes great progress possible, which is why this kind of volatility exists in the crypto sector.
However, everyone in the space should be grateful for our volatility!
All information presented above is meant for informational purposes only and should not be treated as financial, legal, or tax advice. This article's content solely reflects the opinion of the writer, who is not a financial advisor.
Do your own research before you purchase cryptocurrencies. Any cryptocurrency can go down in value. Holding cryptocurrencies is risky.