Stock Prices Are Very Erratic And Here Are The Reasons Cryptocurrencies Cannot Be Different
Cryptocurrency trading seems an easy concept to many people. Traders buy a token, wait for its value to increase, then sell it and buy other tokens. Just buy low, sell high, and don’t pay much attention to anything else.
If anyone ever described the stock market like that, they would likely be deemed insane or profoundly ignorant. After all, there’s much more to the stock market. There are many variables and situations that can arise and change the value of any stock
The thing is, it’s the same with cryptocurrency trading. One could even go as far as saying that cryptocurrency trading is almost the same as stock trading.
What currency really means
Part of the problem is one of comprehension. Most people just don’t know what cryptocurrency, or currency in general, means. We live in a world where fiat currency is seen as a measure of wealth and little else.
It’s easier to understand what currency signifies if we go back to when fiat made its debut. Back then, you were able to trade your bank notes for precious metals at the bank. Every bank note or bill you had was based on an actual value.
This changed decades ago. These days, only central banks handle precious metals, and regular banks handle bills only. If you tried to trade your bills for precious metals at a bank you’d be laughed at.
But the thing is, the relationship still stands. You can no longer trade your bills for gold, but the bills still do mean something. The value of your bills is directly related to two things: Trust in your economy and your country’s savings in gold and foreign currency.
Yes, when you own money, you own a portion of your country’s stashed riches. There might not be a gold standard anymore, but we still stick to something close to it.
This is, also, why printing new money causes inflation. The more currency there is out there, the smaller the chunks of your country’s perceived riches each currency unit means.
How this ties to blockchain and cryptocurrencies
All propercryptocurrencies today work on blockchains. Thus, it’s easy to think both things are the same. Blockchain technology is what’s used to create crypto.
Therefore, the aim of a blockchain is to have crypto, and that’s it. Cryptocurrencies are just virtual money people like to somehow hoard, creating bubbles. In the end, some spook projects are a scam- they aren’t really worth much more than tulips.
Except that’s all wrong, of course.
Blockchain is more than an engine to run crypto on. In fact, blockchain technology is used for many more things. In the end, blockchain’s base design is that of a ledger, and whether it runs currency on it or not is irrelevant for the technology.
Now, cryptocurrencies exist because of a blockchain’s design. In order to keep ledgers up to date and ensure the integrity of its data, it must be kept in many places at the same time. More importantly, the process of updating this data, validating it, and keeping it all safe requires lots of processing power.
Cryptocurrencies are the most common way to obtain this processing power. Whether by mining or staking, users give the blockchain processing power in exchange for crypto. Crypto is, therefore, a representation of the value of your computer’s work for the blockchain.
How is this related to the stock market?
Understanding this, it should be easier to see the parallels between cryptocurrencies and the stock market.
Blockchains don’t exist just to handle cryptocurrencies, instead they exist for a myriad other things. Cryptocurrencies are, more often than not, a way to pay people back for their processing power. This processing power, also, is used for far more than just authenticating crypto transactions.
As stated before, all blockchains have a purpose. Said purpose has a value. For example, a blockchain created to handle medical data will be worth as much as the data it handles and the services it renders.
A blockchain created to run distributed apps is worth as much as all the apps running on it.
Since miners and stakers are paid in crypto for their work running the blockchain, this leads to one thing: Crypto tokens are representations of a blockchain’s value. Every token represents a piece of a blockchain’s perceived value. No more, and no less.
You know what also works like this? The stock market.
In the stock market, people buy shares of companies. These shares represent a piece of the company. The value of these shares goes up or down based on the perceived value of the company that issued the shares.
They’re a lot alike, aren’t they?