Will cryptocurrencies ever affect fiat currency exchange rates?
Fiat money is currency established as money. This is usually done by the national governments and is regulated and backed by the said government. It has no intrinsic value, thus the announcing and backing government makes and maintains its value. This can also happen due to the fact that different parties agree on its value. In the days of old these types of currencies were backed by some kind of a physical asset which was usually gold. This was called the gold standard.
Gold Standard
The gold standard is a financial system where the currency of a country or paper money’s value was directly tied to a certain amount of gold. This came to be when the countries agreed to back their currencies with a fixed amount of gold. This system was widely utilized during the 19th and early parts of the 20th century. However, after the world wars as the United States started gathering the vast majority of the gold supply in the world their currency, the United States Dollar, became something of a global standard itself. This meant that lots of countries started buying up United States securities to keep their money safe. The gold standard was largely abandoned in 1933. The currencies severed the full linkage to the gold in 1971 after the United States abandoned it as a regulator of their currency. This was done due to the fact that ties to gold were preventing the government from expanding on their money supply and thus restricting the stimulation of the economy. President Richard Nixon was the first one to announce in 1971 that the US would no longer convert dollars to gold in fixed rates thus stopping the gold standard once and for all.
Generally, it is widely accepted that the fiat money will last forever. However, during the last 2 decades, a fundamentally different type of currency is taking the world by storm. The rise of cryptocurrencies has given a jump-start to the overall popularity of the digital currency all across the world with countries like the US, China, Japan, etc. getting involved in creating localized digital currencies like United States Dollar Tether, Digital Yuan, and a multitude of other currencies. This is to a huge extent attributed to the success of Bitcoin, a decentralized digital currency, or cryptocurrency, without a central bank or even a single official administration that backs it. The price of such currency is purely dependent on the people agreeing on it. The supply and demand are as natural as it gets with the traders from all across the world creating a bitcoin network that has no need for any intermediaries. In fact, it has become so popular that a lot of people are primarily generating their income based on trading these currencies alone.
This is true for the foreign exchange market (Forex, FX) traders as well. Although forex brokers are not necessarily connected to blockchain technology in any way, there is quite a lot of potential for its inclusion in the already complicated tech world of foreign exchange. Many representatives from forex companies, most notably from Axiory have mentioned that the addition of blockchain does not really seem a necessity at this moment, but could offer great improvements in the future. The real discussion now is what the new technology could be used for. But for many that question already has an answer: data storage. FX brokers have heaps of financial data about their customers and keeping it safe is one of their biggest responsibilities. If the blockchain can prove to be an unbreakable wall in the future, it’s expected that the foreign exchange market will leap at it immediately. When it comes to using the blockchain for transactions however, that is highly unlikely.
It is worth noting that the geopolitical events are affecting the FX market much more than the cryptocurrencies thus FX brokerages do not actually offer cryptocurrency exchanges. The main idea behind this “merger” so to say was to have the options available for all traders willing to diversify. No forex brokerage can honestly say that they offer crypto trading services. What they really offer are CFDs, which are basically contracts of a price being traded on the markets, rather than the actual coins. The exchange market for both is awfully similar. It is easy to notice as soon as one steps into the trading business. Technically speaking the bid and ask prices in FX trading are working in the same way as the cryptocurrencies, however, the fiat money is much more complicated due to the fact that it is rooted deeply into the government-backed institutions and thus is heavily controlled by the different financial regulators like central banks for example.
As we have already discussed a lot of international currencies are directly quoted to the US dollar, making them much more dependable than the cryptocurrencies that are up to the market. The cryptocurrency market is hugely volatile and the prices tend to fluctuate a lot. For example, in March 2020 the price for bitcoin has dropped to $4000 or even $3700 on some exchanges just because a famous annual event NCAA tournament in the United States was canceled. This cancellation came into light because of the novel coronavirus pandemic, which puts such public events on the dangerous side of the spectrum. However, even at this time some of the digital currencies that are rooted in the fiat money like United States Dollar Tether have found a surge in price even going beyond $5 billion in total market capitalization.
Can Cryptocurrency Takeover?
In general, the cryptocurrency has taken over huge chunks of the market but this does not mean that industries are dropping the fiat money as a whole. What we are likely to see in the future is the merging of two markets where both of the payment methods are acceptable in different places.
Back in 2017, there was a huge BTC rally. This was mostly attributed to the consumer interest in the currency. Millions of people started actively buying, mining, and selling their assets in bitcoin thus resulting in the prices soaring to huge numbers. In general, while centralized currencies are tied to this or that physical asset and regulated by the government to not make such huge jumps, the decentralized bitcoin is valued as much as people think that they are. Meaning that once the demand increased the price has jumped to as much as $30,000 per bitcoin. This was a huge eye-opener to lots of people and institutions around the world realizing just how much potential and impact the cryptocurrency market can have.
Due to the bitcoin rally, lots of industries started actively supporting these types of payments. However, this jump in prices has resulted in becoming more careful with the implementation as well. Steam, which is a digital store for PC gaming quite commonly considered to be Amazon of video games, was the first to implement bitcoin payments in April 2016. However, in December 2017, they had to stop accepting bitcoin due to the fact that it became customer-unfriendly with the extra fees being applied for transactions.
The governments are also disinclined to accept cryptocurrencies due to the fact that they have direct control over their fiat currencies, which has a huge impact on their country’s economies. Some of the governments may have made steps towards implementing crypto payments into their financial environments, however, one should not be fooled by this. Even though China is developing the digital Yuan it does not mean that they want unregulated cryptocurrencies running rampant in their countries. As it cracked down heavily on the bitcoin trading by blocking the bitcoin sites as a whole.
The Impact
Obviously the more popular cryptocurrencies become the more impact they will have on our day-to-day lives. This means that if an average Joe or Janette has any interest in transferring their fiat money into cryptocurrency either to keep it safe or even trade with them the money outflow will impact the currency value as well as fiat value. Overall, the money does not just get burned though. The cryptocurrencies and fiat currencies are creating a gigantic circle of money where a lot of people are transferring funds to and back all the time. What some of the countries and governments are doing though is to relax their regulations making them the safe havens for decentralized digital currencies like bitcoin. Japan is a good example of this as the country has one of the most relaxed laws in connection with cryptocurrencies. It is on the forefront of the blockchain and fintech development as of now even classified as a bitcoin nation by some.