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You lead and I'll watch you walk away.
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January 16, 2018, 03:54:57 PM |
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Bitcoin is a currency that’s controlled by supply and demand like a commodity. This makes the exchange rate of bitcoin incredibly fragile. Bitcoins exchange rate is pegged to the US dollar unlike all other currencies (including the dollar) which are pegged to, minted by and controlled by a national government.
If you understand what controls the value of fiat then you will understand that bitcoin has no such protections. The value of the dollar decreases when there are more dollars in circulation, and increases when there are less of them. One of the main controls of the value of the dollar is the interest rate. What we call "the interest rate" is basically the rate central banks charge to lend money to banks overnight. This is set by central banks or governments, and ends up determining how much money banks will charge for lending money generally. The interest rate controls the value of the dollar, by controlling how many dollars are in circulation, by making people more willing or less willing to borrow money. If the Government wants to decrease the value of the dollar, for example to stimulate exports (since foreigners will get more dollars for their currency with a weaker dollar), it can lower interest rates and even simply increase the amount of money held by the central bank (quantitative easing), almost at the stroke of a key. This is a simplification of one aspect a government uses to control the value of a currency.
Bitcoin has no such controls. I’ve heard fools repeat the idiotic notion that bitcoins fixed quantity (21 million) controls inflation. That in turn means bitcoin is deflationary. That’s an insane concept because inflation and deflation are constructs of a vibrant national economy and do not apply to commodities (remember bitcoin is a currency that acts like a commodity). Deflation is when consumer prices fall over time. This may seem like a great thing for shoppers, except that the cause of widespread deflation is a long-term drop in demand. It means that a recession is probably underway. That brings job losses, declining wages and a big hit to your stock portfolio. As a recession worsens, so does deflation. Businesses lower prices in a desperate attempt to get people to buy their products. NONE of this applies to bitcoin because it’s not fiat (money controlled or minted by a government).
So what is bitcoin price controlled by then? The simple answer is consumer confidence but that’s not entirely true either. As with most commodities, bitcoin is manipulated legitimately by day trading and illegitimately (illegally) by insider trading. Market manipulation runs rampant in the bitcoin world. The only thing controlling the bitcoin price is consumer confidence, trading and market manipulation. That means the bitcoin exchange rate will bounce up and down like a rubber ball forever and you can never trust where it will land.
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