When it comes to the economics of cryptocurrencies, many issues have raised controversy. On a high level, crypto evangelists argue that cryptos are actually beneficial to the economy. On the other hand, central banks, environmentalists, and other critics claim that cryptos adversely affect the economy. Obviously, it is hard to settle this debate. Nonetheless, we will look at the top contentious issues with a view of understanding the arguments for each side.
Indicators of value
How do we know that Bitcoin is valuable? And how do we know that Ethereum is more valuable than Ripple? Well, there are several economic indicators that investors use to estimate the value of financial assets, such as cryptocurrencies.
#1: Price
When you are deciding which crypto to go for, the price of the coin is what will most likely strike you first. You may hear arguments such as “Bitcoin is expensive; buy Ether instead.” But really, the price of a coin does not tell much about its value because prices are relative. Take this example: if you have $100 and spend it all on buying Bitcoin, you will get roughly the same amount when you sell the Bitcoins. This is exactly what would happen if you used your $100 on Ripple, Binance Coin, Tron, or whatever else. So you see, a coin’s price is just a number. You’d be better off looking at its volatility against its base currency.
#2: Market capitalization
Market capitalization: Market capitalization is the value of a crypto coin multiplied by the total number of coins in circulation. It is argued that market cap matters more than the price of a coin. This is because a higher market cap means that the total value in that ecosystem is high, and that is typically construed as posing less risk. You could compare this with the Us Dollar versus the Euro – there are more dollars in circulation, although the Euro beats it at price. That’s food for thought.
#3. Trading volume
Trading volume is the number of coins that exchange hands within a 24-hour period on a given exchange. Each transaction involves a seller moving funds from their wallet to the buyer’s wallet. Each successful transaction is recorded and contributes to the total volume on that exchange. Volume is a good indicator of the strength of the underlying market. If you observe high volumes and increasing prices, it might be a good time to buy the coin as the value will likely increase. On the converse, if you observe high volumes and declining prices, people are probably dumping their coins, and in the short run, the currency will lose value.
Where Do Cryptos Get Their Value?
Good question. Understanding how cryptos become valuable is crucial in determining how they can impact the economy and whether such impact would be positive or not. There are several explanations of how cryptocurrencies get their value. The following are some of the most plausible ones.
#1. The larger the community involvement, the more valuable the crypto. Although there are some exceptions, this is largely true. For example, Bitcoin has the largest user community and is the most valuable (in terms of market cap).
#2. The utility theory: This argument says that if you can use a currency to perform any useful function, then the currency is valuable. According to one research, this is debatable because about half of the known cryptos have no meaningful usage. For this reason, crypto critics have argued that cryptocurrencies create value out of thin air.
#3. Perception: The value of a cryptocurrency is closely linked to what people think about it. Perception is also the root of speculation. For instance, Bitcoin’s price surged during the past two halvings because speculators had this general feeling that the currency is becoming more scarce and, thus, more valuable.
Cryptocurrencies have the characteristics of money, including divisibility, scarcity, transferability, interchangeability, and durability. We should have explained where money gets its value first. But that is out of scope for this topic.
The Phenomenon of Double Spending
Double spending occurs when value is created but spent in the same process. Cryptocurrencies exhibit double-spending primarily in the following ways:
Costly mining: Most cryptos (these are the ones that rely on proof-of-work) are generated through mining. In this process, expensive equipment is used to perform complex calculations to verify transactions. The high rates of power consumption by this equipment have also not gone down so well with environmentalists. The bottom line is that operating cryptocurrencies is itself a costly affair, which begs the question: are cryptos really economical?
Delayed settlement: The majority of cryptocurrencies do not offer an instant settlement. Bitcoin, for instance, takes an average of 10 minutes to reflect on the recipient’s wallet. Well, economics teaches us that time is money. If you follow the capital markets, you must have heard of how costly a momentary stock market shutdown can be. Thus, one would be right in questioning whether the time wasted in delayed settlements is not an economic loss.
Volatility
Volatility is one of the core characteristics of cryptocurrencies. But this is not exclusive to crypto – traditional capital markets experience the same phenomenon. The root cause of volatility is fear – the fear that an asset may suddenly lose its value. So, let’s look at what causes this fear.
Bad news – Negative news about a cryptocurrency always causes a scare among holders of the currency.
Security breaches – When an exchange is compromised, investors tend to rush to dispose of their coins in fear that they might be stolen. This usually results in a sudden drop in prices since many are selling but few are willing to buy.
Uncertainty about the future of cryptos – Once in a while, crypto investors ask themselves whether cryptocurrencies have any intrinsic value. Upon realizing that the answer is no, fear kicks in.
Risks from large currency holders – For most cryptos, those who acquired them during the early days hold large amounts of the asset. The fear that these folks may one day flood the market with their coins always lingers.
Interestingly, there is a tool that investors use to measure fear (read volatility). The Volatility Index (VIX), also known as Fear Gauge or Fear Index, is used to estimate the extent to which an asset is volatile. VIX was invented for the S&P 500 Index but has been adapted for use with cryptocurrencies.
How Cryptocurrencies Have Helped the World Economy
Despite the hullabaloo on whether cryptos are good or bad for the economy, they have certainly impacted economies positively in the following ways:
Cryptocurrencies have created a whole industry for themselves. Many people have become rich through trading cryptos. Similarly, many people are employed by exchanges, consultancy firms, and so on, all thanks to the existence of crypto.
The underbanked now have better financial opportunities.
The reduction of transaction costs means people can do more with their money.
It has opened more opportunities for entrepreneurs, such as those who were experiencing difficulties trading with global partners.
Final Thoughts
Cryptocurrencies have interesting yet controversial economic principles. Some believe they are economically counterproductive, and then there are those who believe they have created new economic opportunities. Both sides are right to some extent. However, it would be grossly unfair to turn a blind eye to the obvious economic opportunities that can only be attributed to cryptocurrencies.
A lot of people believe that trading cryptocurrencies can bring a lot of profits, huge profits, especially when comparing it to things like forex. From the outside, when you look at things like social media, you can see people posting pictures of their supposed results, some of them are ridiculous making thousands per day. While it is possible, the majority of these screenshots will be fake or on demo accounts. There are those that can make a lot, and we mean a lot, but those cases are a lot rarer than they may look like or from what you are being told.
The problem with predicting the markets in the crypto world is that they can very easily be influenced by the larger holders. In fact, there have been plenty of times where the price has been stopped at the top or bottom by larger players placing millions and millions there in order to stop and influence the price. While a single person cannot influence it, a group of them can, which means that it is slightly harder to predict as a decision can be made at any time and the whales put their money in. The news can also have a huge effect, a major business taking it up or a country banning it can cause the price to jump and to really jump, thousands of dollars at a time, which can, unfortunately, catch a lot of people out.
It can be tempting to simply follow what other people are doing when it comes to trading bitcoin. There are a lot of people out there making a lot of money of fit, so there is no harm in just following them right? Well no, first they will certainly be trading with a strategy, secondly, you do not know what that strategy is and so blindly following trades is never a good idea in that situation. Also, you will not be getting the trades at the exact same time, so by the time you take the trade the optimum time may have already passed. So this is why you need a strategy, a strategy that outlines what you will be trading, when you will be trading and how you will be protecting your account. You should always trade with one and you should only put on trades that are properly in line with the strategy that you are using.
As mentioned above, you should not be blindly following other people’s trades, as tempting as it may seem. You need to remember that they have been doing this a long time, they have a strategy that they are following, they may even have information from sources that you do not know about, so blindly following their trade will basically mean that you are allowing them to 
Risk Management is key when it comes to any form of trading and it is certainly the case for bitcoin too. You need to use it, things like a proper 
It can be very tempting to trade more when things are going well, especially when it is bitcoin due to the massive profit potential that it offers, but you need to be wary of this, you do not know what to overtrade. Overtrading is basically when you place more trades than you should. Overtrading can decrease your account’s margin, and when the margin gets too low, it will only take a small movement the wrong way for your account to blow and for your broker to close all of your trades in the negative. Only trade what you need to, do not get greedy, if you are being profitable, accept that, do not try to push too hard for more.
When you are trading bitcoin, it is very important that you keep an eye on the news that is going on around you. Bitcoin can be heavily influenced by the news, if a country decides to ban its use it can have a very strong and very quick drop, if a major company decides to start accepting it, it can have a huge spike upwards. You do not want to miss out on the opportunities that the news can present, but maybe more importantly, you do not want to get caught out by a huge drop, which even with stop losses in place, can cause an account to blow if the price jumps passed the stop loss. If you are going to trade bitcoin or any other form of cryptocurrency, then it is very important that you keep an eye on the news and know what is going on in the crypto world.
It is very easy to let emotion take over, especially when there is money involved. This is no different for crypto and bitcoin trading. There is a lot of money to be made, the markets can move up and down a lot which can play havoc with your emotions, in fact, it can cause a lot of stress and anxiety. Things like anxiety can make you not want to trade at all, maybe this has come from a loss or consecutive losses. Then there are things like greed and overconfidence, these can make you start to place more trades, or larger trades, each of which will be putting your account under more and more pressure. If you feel that any form of emotion is starting to build up and that it has the potential to affect the trades that you are making, then you need to take a step back. Take a break, go out for a bit, clear your mind and then come back with a fresh view of the markets. Whatever you do, do not 
There are a lot of risks when it comes to trading crypto, a lot more than there are with things like forex and due to this you need to manage them properly, not doing so will only lead to losses and potential loss of your account. Risk management is paramount when it comes to trading crypto, more so than it is for any other asset that we have traded before. You need to ensure that you are using things like stop losses with every single trade, you need to ensure that your 
One thing that you certainly need to take note of when trading with cryptocurrencies is the vast difference in what a lot size is, when we trade more than one cryptocurrency, we need to be aware that they will act differently. A 0.
Depending on what you are trading, you will often need a lot more capital in your account in order to trade crypto properly, things like Bitcoin can have huge movements, these huge movements can be both up and down, so if you get hit with a downward movement, you will either need to close out our trade or to have enough money to hold it, which can at times be very expensive and require a very large account. Other coins have similar things happening to them too, so if you are looking to successfully trade cryptocurrencies then you should certainly start with a higher balance.
