Criptoadivisas

Las últimas noticias del mercado cripto, las tecnologías de blockchain y fintech. Descubra oportunidades rentables de inversión con nuestras guías de criptodivisas, artículos educativos sobre los tokens virtuales con mejores resultados, minería de Bitcoin y yield farming (agricultura de rendimiento), para descubrir qué activos de criptodivisas presentan las mayores oportunidades de inversión y por qué.
Is inflation good or bad for cryptocurrencies?

While inflation has existed as long as money itself, cryptocurrencies are a rather new concept. Understanding both and navigating through their relationship can help investors understand and benefit from the dynamic cryptocurrency scene. Let’s start with inflation, which broadly refers to rising consumer prices within an economy over time. Depending on the context, inflation can be both good and bad. Below are some key takes on the benefits of inflation. Why is inflation good? Inflation can be beneficial for driving spending. Inflation is the reason that the price of a car will be more expensive tomorrow than it is today. You might put off buying that car, and if everyone does this and nobody spends money, companies stop reaping profits and wages ultimately fall. Inflation drives spending, which in turn drives production, raising profits and leading to higher wages. These higher wages then prompt further spending. Keeping this prosperous cycle running is partly why a moderate level of inflation is considered imperative by the central banks.  Inflation eases the burden on debtors. Here’s a simple example: a government that borrows $10 from another entity has to pay back $8 in real terms a year later, as a result of inflation. On the contrary, if deflation was the norm, the government might have to pay back $12 in real terms a year later. Suddenly, borrowing seems a lot less attractive. Debt is a major source of economic growth. If inflation was not present lessening the debt burden, borrowing would likely decrease and have the effect of slowing growth. With that being said, most people may not question the rate of inflation before purchasing a burger or taking out a loan. The view that inflation can be a good thing as a result of lessening the debt burden has received plentiful criticism, especially from the precious metals and cryptocurrency communities. Why is inflation bad? Inflation might encourage people to engage in riskier investments ‘ Given that inflation erodes the value of idle cash, people are strongly encouraged to put their money into assets. Sometimes, this prompts people to go and purchase assets beyond their risk tolerance; it might be prudent for a hedge fund to allocate a small percentage of its portfolio to a new cryptocurrency, but it might be a riskier idea for the average retail investor. From the dot-com bubble to the recent cryptocurrency market crash, many such risky investments have turned red. Inflation-targeting can lead to runaway inflation. Inflation is self-fulfilling. Imagine a worker at a grocery store, who sees the prices of everything around him rising, and because of this, asks his boss for a raise. The boss agrees, but realising that his labour costs are skyrocketing, he raises the prices of his groceries to remain profitable. In essence, price increases just lead to further price increases. Imagine going to the store tomorrow and seeing that apples just doubled in price over the course of a day. If producers keep hiking prices faster and faster, price stability in an economy collapses and people panic - economists refer to this as the wage-price spiral. What inflation can be considered as good? Moderate inflation is generally considered good. Disasters like the wage-price spiral and debt crises can occur in hyperinflationary environments. That’s why central banks usually aim for a moderate  2% inflation. Interestingly, however, Harvard economics professor, Benjamin Friedman, called that 2% target “a professional embarrassment”, citing a lack of serious empirical research underlying that value. When inflation deviates significantly from 2%, central banks will either loosen or tighten monetary policy. And today, it is such monetary policy that most influences cryptocurrency prices. Is inflation good or bad for cryptocurrency? Inflation is generally good for cryptocurrencies when it is hovering around central banks’ 2% targets During these periods, monetary policy is loose; interest rates remain low, and riskier asset classes like cryptocurrencies benefit. Conversely, when inflation starts exceeding the 2% target, cryptocurrency prices tend to drag. Runaway inflation prompts tightening monetary policy. When interest rates rise, markets rally towards safer assets – especially established commodities like gold or silver. For example, in the earlier stages of the COVID-19 pandemic, gold prices surged. Though cryptocurrencies were initially intended to function as hedges against inflation, that’s not really the case today. However, it might be in the future. Perceptions toward cryptocurrencies change with time Recently, cryptocurrencies have behaved much like technology stocks. Low inflation kept interest rates low, under which cryptos thrived. High inflation prompted hiking, and the price of cryptocurrencies fell across the board. This wasn’t always the case, though. There was a time when Bitcoin, for example, had no clear correlation with the rate of inflation, economic policy, or the performance of stocks. A similar trend is emerging once again and the correlation between different cryptocurrencies to technology stocks and central bank policy is fading.  Despite interest rates rising, Bitcoin has remained more steady in value relative to technology stocks than it was in the past. This is because perceptions towards Bitcoin are evolving; once considered a security, Bitcoin is now interpreted as more of a commodity, as people come to appreciate its established scarcity. Perspectives toward other cryptocurrencies will evolve, and there’s no “one-size-fits-all” approach when linking inflation rates to cryptocurrency price movements. Nuance matters: How large will future interest rate hikes be? How are crypto protocol changes expected to play out? Which cryptocurrencies are we talking about? Indeed, it is such nuance combined with being up to speed on expected policy actions that can help investors navigate through the cryptocurrency space. Want to protect yourself from inflation in a historically stable asset? Learn more This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis

Ram Arunmozhi Varman
Ram Arunmozhi Varman

27/10/2022

What does the upcoming ‘Merge’ mean for Ethereum?

Since its inception in 2015, Ethereum has earned an overwhelmingly positive reputation as a blockchain for everything crypto-related, thanks to its robust infrastructure and longevity within the industry. Ethereum's native token, Ether (ETH), sits second in terms of market capitalisation with a valuation of over $170 billion and over $50 billion in assets secured across its expansive Decentralised Finance (DeFi) space. Now, Ethereum is making the next step in its evolution with ‘The Merge’ - a transition from a proof-of-work (POW) blockchain to proof-of-stake (POS). What is ‘The Merge’? ‘The Merge’ will see Ethereum move to a proof-of-stake model, making Ethereum mining obsolete and opening the door for a drastic decline in energy usage across the crypto industry. It also introduces yields for Ethereum holders via ‘ETH2.0’ staking. Ethereum currently uses an energy-intensive proof-of-work model, which means miners have to use specialised equipment to ‘mine’ blocks on the network. Mining blocks involve using graphics cards and specialised equipment to solve a complex cryptographic puzzle. Currently, these new blocks have to be mined to complete transactions and verify them on the blockchain, meaning that the function is imperative for the blockchain to operate smoothly. Through the transition to a proof-of-stake model, ‘The Merge’ will remove the need to mine Ethereum - which is both time and energy-intensive - to validate transactions and bring more scalability and efficiency to the network. Today, the Ethereum blockchain continues to be secured using the proof-of-work model whilst a separate network dedicated to scalability runs alongside using proof-of-stake. The Merge will bring the two together and create a new ‘Mainnet’ running on proof-of-stake - dubbed the Beacon Chain - that can run smart contracts whilst maintaining the full history and the current state of the Ethereum blockchain. How will 'The Merge' change Ethereum? Firstly, the move to a POS model via the Beacon Chain is speculated to reduce the energy usage from Ethereum by an estimated 99%. Many in the industry see the overcoming of this ‘excess energy’ stumbling block as the biggest upcoming change to the Ethereum blockchain. It challenges the hardline narrative that cryptocurrencies use too much energy when using a POW model, which has led to an outcry from regulators and crypto-outsiders looking to clamp down and curb its energy usage. The move to a PoS model could see energy usage on the Ethereum blockchain fall by an estimated 99% The Ethereum Foundation also claims that The Merge could solve Ethereum's scalability issues, which have hamstrung the blockchain’s attempts to build a more decentralised world. Currently, the Ethereum blockchain completes about thirty transactions per second. After the Merge, it’s expected that the number of transactions completed could rise tenfold and beyond. Additionally, the Merge is set to bring a deflationary model to the blockchain. Ethereum currently uses EIP-1559 to burn a programmed amount of ETH during each transaction made on the blockchain, meaning that the more transactions are completed, the more ETH is burnt daily. The change to a POS model also introduces lower emissions (the amount produced) of Ethereum, meaning that the amount of Ethereum produced per day could soon be outweighed by the amount burnt - making it a ‘net deflationary’ asset. On top of the burn mechanism and the deflationary model, more ETH will also be taken out of circulation with the introduction of Ethereum staking, which will use its native token - Ether (ETH) - to validate transactions on the blockchain. Currently, over 12.5 million Ethereum - which is close to 10% of the current circulating supply - from 70k depositors has already been committed to the staking contract, with more expected to be added when ‘The Merge’ is implemented. Will 'The Merge' reduce gas fees? Despite the blockchain’s move to a more sustainable, eco-friendly approach, the Merge won’t affect the periodically high transaction fees on Ethereum. The Merge only changes the consensus layer from POW to POS, which is expected to reduce the blockchain's energy usage by over 99% and grant better security for Ethereum. This means that the Merge makes no difference to users, as gas fees are determined by supply and demand on the blockchain. To put it simply, the transaction fee acts as a type of ‘energy’ on the blockchain, meaning that when there is a high demand on the network, fees are naturally higher as more ‘energy’ is being used to complete the transaction. When will 'The Merge' happen? The Merge is due to be implemented during the third quarter of 2022 according to the Ethereum Foundation. Vitalik Buterin, the founder of Ethereum, has recently revealed that if there are no problems with the testing before the launch, the merge “will happen in August”.Buterin added that “there’s always a risk of problems and delays”, proposing that both September and October are possible launch dates too. Tim Beiko, a member of the Ethereum Foundation, also revealed that The Merge is on track for a mid-September launch in a recent development meeting. Will ‘The Merge’ affect DeFi and NFTs? With the rise in popularity of DeFi platforms and the recent explosion of non-fungible tokens (NFTs) driving users in their masses to Ethereum, the blockchain has struggled to maintain a consistent level of stability in recent months. Users have been plagued by high transaction fees and slower speeds, which has seen some users move to alternative blockchains like Avalanche and Solana seeking a cheaper and faster alternative. Through the Merge, the blockchain will eventually become more scalable, and over time, be able to handle more network stress with better efficiency. Also, the amount of gas required to complete a transaction may reduce over time as more transactions can be completed faster - perhaps leading to a gradual reduction in fees for users. Both the scalability and higher throughput of transactions could also make purchasing and minting NFTs cheaper for users, alongside making often-costly interactions with DeFi platforms less expensive over time. The upcoming ‘Merge’ marks a milestone development in Ethereum’s rich blockchain history, and now looks set to assist the Ethereum Foundation in its mission of dampening existing fears over the blockchain's energy consumption and its ability to scale to match user demand. Sean Dickens is a cryptocurrency writer and analyst that brings rich experience in content creation and reporting within the industry, having worked freelance for an array of global clients and reporting on the latest news atCoin Rivet. Sean has also featured on NFT and Decentralised Finance panels as both a moderator and speaker to provide detailed insights and analysis on cryptocurrencies. This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.

Sean Dickens
Sean Dickens

18/07/2022

The risks behind centralised yields

Following the continued fallout from the collapse of the Terra ecosystem, a new threat has emerged that could affect over $11 billion in assets and add further misery to recent negative price action. Celsius Network, an institutional lending and borrowing service operating under the ‘Centralised Finance' (CeFi) umbrella, has recently halted deposits and withdrawals from its platform. This is due to a supposed insolvency crisis that revolves around honouring redemptions and withdrawals for assets held on its platform - a crisis that means users cannot access assets deposited to their Celsius accounts. A popular crypto lending service, Celsius has attracted over $11bn in assets under management (AUM) to its platform since its 2018 launch due to offering attractive yields on cryptocurrency assets and an easier way to start earning. Now, due to its recent issues, questions are being raised about how Celsius uses the assets deposited to its platform to reward its investors. Most CeFi platforms offer their yields by either depositing funds into Decentralised Finance (DeFi) platforms that provide lending and borrowing - the most popular being Aave or Compound - to earn yields on more popular assets like Bitcoin (BTC) and Ethereum (ETH). By depositing user funds into these services, yields are earned on their deposited assets and returned to investors on the platform in either the base asset or Celsius' native asset, CEL. There’s even an additional option offered on DeFi platforms to borrow more using the original assets as collateral. Celsius can also earn by providing asset liquidity to institutional providers, who then use this liquidity to bolster the supplies of exchanges and platforms that trade cryptocurrencies. Despite the obvious benefits of providing users with yields on their latent assets, a real danger emerges when the crypto market suddenly declines sharply due to macroeconomic factors and an influx of FUD (fear and doubt). A precarious position The troubles started for Celsius following recent market sell-offs, which lead to Celsius being in the precarious position of facing large-scale liquidations on these platforms if the price of Bitcoin reaches a certain marker. Serving over 1.7 million customers, Celsius Network moved swiftly to immediately pause all withdrawals on June 13th due to “extreme market conditions” - with no reinstatement date for users to withdraw funds mentioned since the announcement. Celsius has since worked with regulators and restructuring firms to avoid a complete collapse amid credible rumours of insolvency. Having taken “important steps to preserve and protect assets” and explore its options, the crypto lender still has an estimated $82 million in outstanding debt owed to a DeFi platform- with its estimated losses currently sitting at $660 million. Further issues arise when you consider that the assets lost to any liquidations that take place may be lost and not returned to users by Celsius. It also raised the question of both accountability and transparency within the CeFi space, with many asking how this could have happened in the era of mass blockchain analysis. Despite offering high yields, Celsius and other competitors in the space haven’t always been clear and transparent with how their yields are provided. The default messaging outlines that the assets may be used externally but never clearly specifies where the assets are deployed to earn yields. Whilst the average investor may not be too worried about where the yields are coming from, when deposits and withdrawals are halted and their positions are at risk of liquidation, investors are likely to seek clarity on how their assets are being used. The old saying “not your keys, not your crypto” is often touted when referring to CeFi platforms, and as evidenced with Celsius and similar platforms, it rings true when customers cannot access, withdraw or even add collateral to their positions to avoid costly liquidations due to their centralised nature. What Kinesis does differently With the risks of using CeFi platforms and their associated yields evident, a different kind of yield - one based solely on network effect and platform usage - stands out as a clear frontrunner. Yields on Kinesis, a monetary system offering fully-backed digital gold and silver as cryptocurrencies, are earned solely through platform usage - more precisely, the transaction fees generated daily by the over 150,000 users using Kinesis to trade, buy, sell and spend their metals. Unlike risky DeFi platforms, yields are offered without your assets being used in risky strategies - meaning users retain ownership of their assets at all times. These yields also don’t require any locked or fixed period deposits of your assets and can be tracked at any time - leaving investors free to come and go as they please. Yields on Kinesis are earned by holding either Kinesis Gold (KAU) or Kinesis Silver (KAG) - blockchain-based assets backed on a 1:1 basis by physical bullion. Working similarly to stablecoins, they can provide a historically-proven ‘safe-haven’ type asset when markets react negatively whilst enabling ownership of a fully-backed, yield-bearing asset. One of the most well-known and documented ‘hedges’ against inflation and market uncertainty, gold ownership enables investors to diversify their portfolios with a less volatile asset whilst earning non-debt-based yields on their holdings. By avoiding less-transparent yields that are unsustainable and platforms that use your assets in increasingly dangerous ways, yield-earners on Kinesis don’t face any hidden surprises and provide the security and investor protection the market sorely needs. This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.

Sean Dickens
Sean Dickens

06/07/2022

Do Cryptocurrencies Pay Dividends?

A dividend is a share of profit paid by the company to its investors and shareholders. Currently, the interest rate that you get from banks is negligible, and stocks usually pay between 4-6%. Some coins with a higher market cap pay up to 10% and crypto stable coins pay up to 20%, while on some cryptocurrencies some people have earned up to 100% per year. Usually, when people think about dividends they think of those that traditionally come from stock market investments. Crypto dividends appeared in 2018, with the introduction of decentralised finance. This gave people the ability to do yield farming, staking, liquidity providing, lending, and earn interest on their investment. Crypto dividends and different earning methods experienced a huge surge of demand and despite high volatility, they became the best way of earning interest. Just a few days ago, a tech and infrastructure company called BTCS Inc. announced that they will be the first Nasdaq-listed company to pay dividends to their shareholders in Bitcoin. Right after the announcement, their stock price increased by 44%. What are crypto dividends? Crypto dividends are rewards that are earned for holding or performing a specific action with different assets. The amount of dividend granted is frequently based upon the amount of cryptocurrency the investor holds or, if they receive dividends for performing a specific action, this could be through staking or claiming a reward on their platform. The interest rate is usually represented in annual percentage yield (or APY) and represents the returns over a period of a year. How to earn crypto dividends When it comes to the stock market, investors are paid from the profit that a company generates. In the cryptocurrency markets, there are many different principles of how and when dividends are paid. The most popular ways of earning dividends in the blockchain space are by staking, yield farming, lending, and airdrops. Staking is used in proof of stake protocols to verify transactions on the blockchain network. The number of coins you stake usually correlates with the number of transactions you verify and you receive rewards based on that. Yield farming is when you provide liquidity on a trading pair and you gain interest based on the usage of this trading pair. Usually, the returns on yield farming are higher but there is a risk of losing your investment if there is a drastic change in price. This is called impermanent loss. Crypto lending or borrowing is where you lend your cryptocurrency asset for a rate of interest that is repaid after a certain time. Usually, people offer their ETH or BTC as collateral to take stable coins or fiat which they can use to buy more crypto, gold, or even real estate. Crypto airdrops are distributions of specific coins or tokens to a community, usually in response to performing some action required by the company that offers the airdrop. The biggest airdrop was performed by Decred and the users that are still holding their tokens are estimated to have around $500,000. Another way to earn a passive income is through investing in stable coins, for example, by earning a return - or yield. Most often, your return is paid in the currency that you invested in, as is the case on the Kinesis Money platform which pays out in physical gold and silver, for storing precious metals in its ecosystem.   As with investing, it is important to consider the extent of the risk posed, as well as things like safety or “lock-in” terms. With stablecoins like Kinesis' KAU and KAG, there is the added benefit of securing value over time with the currencies backed by physical precious metals, in addition to no “lock-in” terms, that gives utility and liquidity to users’ investments. Crypto dividends methods and coins Depending on your preference, you should choose a combination of options that will combine high returns for the risk you are willing to take. Here are some of the best options for earning interest on your crypto. Ethereum 2.0 is currently the asset that is staked the most with almost 160 billion. The largest platform for staking ETH 2.0 is Lido finance with an interest rate of 4.8%. Even though the risk and reward ratio is great, you won’t be able to use your Ethereum until ETH 2.0 is released — and the date for that is still unknown. Curve finance or CRV is the largest liquidity pool built on the Ethereum chain. Currently, there are 23.3 billion assets locked on the platform. The curve became famous for its market-making algorithm which allows users to exchange stablecoins that are pegged to fiat. The interest rate for fiat is pretty high, around 20%, and since prices won’t change a lot, it decreases the chances of impermanent loss. Maker DAO or MKR is a decentralised lending and borrowing platform. It is currently second (by size) with 19 billion assets locked. On Maker DAO, usually, people provide ETH or some other cryptocurrency as collateral and loan DAI as a stablecoin. If the price of collateral goes down, you either need to provide more of it or you need to accept a 13% loss. There are many ways and platforms where you can earn dividends on your assets. Make sure to do your own research, especially if you are looking to earn interest on some smaller coins. Trading vs dividends Many people think that they need to do daily or swing trading to get earnings in the crypto markets but, as we’ve discussed, there are other ways of getting passive income. Daily traders try to identify good entry and exit points and execute the trades from a few minutes to a few hours. Swing traders are doing the same thing, but usually, the trades last from a few days up to a few months. Since the frequency of the trades in swing trading is lower they are usually aiming for a bigger return per trade. In today's markets, crypto dividends can be high, and just by holding or staking assets, investors can outperform most traders. Also, volatility is decreasing over time which lowers the potential for traders to identify good entry and exit points and get the same returns as they were able to do in the past. Due to this, most people will fare better by staking and earning passive income than trading. Future of crypto dividends Decentralised finance is still a new and fast-evolving field in the blockchain space. We had many different tries and different approaches to earning interest on your crypto. Many of them failed, many of them are still in the experimental phase and evolving as well. The most recent boom was Olympus DAO and its forks that are giving over 1000x per year if the price remains the same. We are still early and decentralised finance is one of the most bullish segments in the blockchain industry. To find out more about cryptocurrency investment, see our blog Learn More This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.

Doug Turner
Doug Turner

13/01/2022

The Ultimate Step-by-step Guide to Yield Farming.

Yield farming, also known as liquidity farming, is a cryptocurrency investment strategy that enables investors to “lend” their crypto to other investors to generate more crypto. In other words, it is a way of earning interest on your cryptocurrency, similar to how interest is paid out on money held in a savings account. As with investing money in a traditional bank, yield farming involves locking up your cryptocurrency for a certain period of time (in a so-called liquidity pool) in order to generate returns (equivalent to the interest rate in traditional banking). In the world of cryptocurrency, the process of investing your cryptocurrency in a liquidity pool is called “staking”. How does yield farming work? The first step in yield farming involves an investor (also known as a liquidity provider) staking some of their existing coins by depositing them into a lending pool or DeFi protocol (DeFi stands for decentralized finance). An example of a protocol of this type is Uniswap - a decentralized finance protocol that is used to exchange cryptocurrencies. From there, other investors can then borrow coins from the pool. Usually, the coins are used for speculation or arbitrage. Speculation means investors try to profit off of short-term changes to the price of a given cryptocurrency. Arbitrage trading is the act of buying a cryptocurrency on one exchange (market) and selling it for a higher price on another. Yield farming is a common way to kickstart a new decentralized blockchain. By distributing tokens with liquidity incentives, liquidity providers are encouraged to “farm” the new token by providing liquidity to the protocol. Benefits of yield farming For speculators, the benefits of yield farming can be considerable, as the process provides easy access to crypto, just like a bank loan provides rapid access to funds. Savvy traders can make returns off of their borrowings that allow them to profit considerably from crypto market swings, with earnings to spare even after borrowing fees have been paid over. For liquidity providers or lenders, the benefits are clear too. Investors who lock up their coins on a yield-farming protocol can earn both interest (passive income) and more cryptocurrency coins — often the real value to the deal. If the price of those additional coins appreciates, the investor's returns rise as well. What coins are involved? Most cryptocurrencies can be used in yield farming. Yet the altcoins deposited are commonly Ethereum-based or stablecoins pegged to the USD – though this isn’t a general requirement. Some of the most common stablecoins used in DeFi yield farming are DAI, USDT, USDC and BUSD. The reason stablecoins are often used in yield farming is that, if farmed intelligently, these coins can become high-yielding currencies that claim to have no risk of depreciating against the U.S. dollar, locking in their real-world value. There are also newer tokens that advanced farmers are looking to in order to profit from new strategies and ways to earn returns. These include YFI (Yearn Finance, an open-source, decentralized finance lending protocol based on the Ethereum blockchain) and SNX, the native token of the Synthetix platform, a permissionless derivatives protocol. With SNX, users can tap into any of the protocol’s incentivized liquidity provisioning programs, giving participants multiple opportunities to earn an attractive yield with exposure to a wide range of different assets. What is total value locked (TVL)? For investors looking to understand more about the overall health of the DeFi yield farming scene, total value locked (TVL) may be a helpful metric. TVL measures how much crypto is locked in DeFi lending and other types of money marketplaces. In essence, TVL measures the overall liquidity in liquidity pools. For this reason, it’s a useful index to measure the health of the DeFi and yield farming markets as a whole. It’s also a good way to compare the market share of different DeFi protocols. By checking TVL metrics, you can get an instant sense of which platforms have the highest amount of Ethereum or other crypto assets locked in DeFi. It’s worth noting that you can measure TVL in ETH, USD, or BTC. Each will give you a different outlook for the state of the DeFi money markets. Our conclusion on Yield Farming Yield farming can be a very effective way of generating more returns from cryptocurrency holdings if done correctly and skillfully. However, most yield farming strategies are extremely complicated so it is advisable to be cautious. To explore further options in cryptocurrency trading and investment, Kinesis offers a wide range of fiat and cryptocurrency pairs available on the Kinesis Exchange.

Doug Turner
Doug Turner

01/12/2021

Major, Minor and Exotic Currency Pairs – How are they Shaping the Future of Money?

To understand the importance of currency exchange and the cryptocurrency revolution as it currently stands, we must begin with a deep dive into the origins of currency. What is a Currency? Money has been said to serve three basic functions: a unit of account, a medium of exchange, and a store of value. A currency, more specifically, is money in any form when utilised in circulation, as a medium of exchange. This means that it can be used in financial transactions, including the buying of goods and services. Looking beyond the world currencies we recognise today, notable examples are the metal coins and polymer banknotes that we handle frequently in our everyday transactions - or are hidden, to the best of our knowledge, down the back of the sofa. Before the existence of money, commodities considered to hold intrinsic value were deemed as money. Interestingly, ancient China elected to trade with the cowry shell in the 11th century, whereas the Aztec empire pronounced the copper tajadero (or chopping knife) as their preferred currency. In the modern world, the United Nations (UN) now recognises 180 world currencies as legal tender, which circulate on the foreign exchange market (Forex), leveraging a daily turnover of at least $5 trillion dollars. Consequently, Forex is a major source of revenue and speculation for central banks, institutions and investors, as they seek to observe the projected success or failure of global currencies. By adding cryptocurrency to the mix with El Salvador’s consolidation of Bitcoin as legal tender, it is important to understand the future of currencies, and more so, cryptocurrencies. What are the Major World Currencies? The major world currencies can be defined by the height and frequency of their trading volume. Those with the highest average trade volume are widely accepted as the major world currencies. According to the foreign exchange market (Forex), the US dollar has the highest trading volume of all currencies and is involved in over 80% of all foreign exchange transactions. In 2020, the Euro and Japanese Yen ranked behind the dollar in their foreign transaction volume, contributing to at least 33% (JPY) and 23% (EUR) of Forex transactions. The foreign exchange market indicated the world’s major currencies are the: US dollar (USD)Euro (EUR)British Pound (GBP)Japanese Yen (JPY)Swiss Franc (CHF)Canadian Dollar (CAD)Australian and New Zealand Dollar (AUD), (NZD) What are Major Currency Pairs? While there are at least 8 major currencies in the world, there are only 7 major currency pairings that are traded on the foreign exchange market. This is because a major currency must involve the dollar as the base, or counter currency, in the trade - and of course, the dollar cannot be traded with itself (USD/USD). There is some debate about which pairings should be considered as major currency pairs since the concept can be understood both from an economic (trading volume) and speculative standpoint. As it currently stands, the major pairs are displayed on the table below: What are Minors and Exotics? Minor trading pairs occur when a major currency is traded with another, such as the Swiss Franc and the Euro.Without the appearance of the US dollar, the currency pair in question is defined as a minor currency pair. Popular examples of Forex minor currency pairs are displayed in the table below: An exotic currency pair is a term used to describe the trading of a developing economy’s currency - as either the base/counter currency - with another major currency. Often when trading with exotic currencies, traders must be diligent and experienced in the field and account for destabilising factors that affect currency value. In the case of exotic currencies, these factors can be the political or economic agenda of the country that increase volatility and trigger extreme movements or wild swings within the exotic trading pairs. Why is the US Dollar so important? The prevalence of the US dollar in the foreign exchange market can be attributed to a pivotal point in history: The Bretton Woods Agreement of 1944. The intention was to create an efficient foreign exchange system that would promote economic growth on an international scale, and utilise economic competition to safeguard against the extreme devaluation of currencies. Despite the eventual fall of the Bretton Woods system in 1971, the value of the US dollar continues to prevail. As of the agreement, participating countries concurred that their respective currency would be pegged to the fluctuating value of the dollar. However, at the time of the system, the currency valuation of the US dollar had a basis in allocated gold, due to the abundant stores of the American reserves. Now, this is no longer the case. In 1971, when the US gold supply was considered insufficient to cover the number of dollars in circulation, president Nixon famously devalued the USD when he suspended the ability for citizens to convert their dollars into gold. With gold quite literally out of the trading equation, countries that participated in the agreement suddenly had more autonomy over their currency exchange agreements, making them free-floating. The Future of Currency When considering the volatility of exotic currencies, it is significant to witness nations such as El Salvador shaking up the financial market by making Bitcoin legal tender. As an emerging market economy (EME), reliance on Bitcoin, and further broadening country-wide use of cryptocurrency, has produced a considerable response from Salvadorians. As the first country to utilise virtual currency as legal tender, many have opposed the introduction of Bitcoin due to fears surrounding its instability. This anxiety was coincidentally proven to be true on the first day Bitcoin was introduced as legal tender when the cryptocurrency fell by 20% of its value. It seems that currency, or more widely money, must act as a medium of exchange in addition to a store of value. Currencies exchanged on the Forex market are known as fiat currencies and, even in the case of the US dollar, have depreciated in value over time. El Salvador is just one example of a country adopting alternatives to fiat currency. More widely, emerging economies are desperately seeking new currencies that are not susceptible to the depleting effect of inflation. In light of this, we should question whether Bitcoin and other cryptocurrencies more generally, are the right option for emerging markets? The recent crash seen for Bitcoin in the past week suggests otherwise, with its inherent volatility now taking its toll. Could the implementation of gold as currency once again, perhaps, be the solution for countries looking to elevate the stability and prosperity of their economy? What if this gold was digitalised, made portable through a mobile phone and underpinned by the efficient, peer-to-peer, blockchain technology, much the same as Bitcoin operates on? Kinesis has already rolled out public-private partnership projects in Indonesia, to create a stable foundation for emerging economies, bringing forward a system that enables the spending, trading and storing of gold as currency. By making KAU - Kinesis’ native gold-backed currency - legal tender, could developing nations establish a new monetary path that introduces, anew, the enduring value of gold seen in the Bretton Woods era? It seems that only time will tell. Find out more about the Kinesis offering today Learn More

Latifa Alkhanjary
Latifa Alkhanjary

19/11/2021