There have been huge developments in cryptocurrencies in the past decade and it has definitely changed the way that people look at money. The introduction of cryptocurrencies into the financial market has also made way for the emergence of the advancements and development of more financial services, subsequently allowing businesses centered around crypto to slowly move into traditional finance and banking.
There are a lot of sources out there, but cryptocurrency exchange platforms like Bitcoinera can help you learn more about cryptocurrencies and the effect they bring to the global financial market.
Here are some of the happenings in the ever-changing cryptocurrency market:
Alternative Banking Services
With a bit of patience and the right course of action, investors can gain interest from their cryptocurrency holdings. The interest they can gain is usually quite a bit more than what your typical bank would offer on their cash deposits. Cryptocurrency holders can also borrow money and use their crypto as collateral for the loan that they are going to be taking out. This makes loaning easier since crypto loans, in general, do not really have any credit checks because of their digital nature.
But how do they differ from our traditional banking services?
When taken at face value, they all might look very similar. An example of this is the BlockFi interest account, a product in which one can deposit either cash or cryptocurrency to earn monthly interest, just like a bank account would. The key difference here is that there is a much higher interest rate for the BlockFi account.
However, the higher interest rate comes with risk. Since cryptocurrencies are unregulated, deposits cannot be guaranteed by any regulatory authorities. It is also worth noting that there are a lot of factors that could affect the flow of withdrawals and transfers, like plain old technical difficulties, cybercrimes, or extreme market conditions. There are indeed warnings about these risks but regulators worry that the risks are not emphasized enough and that consumers would still need more robust protections in place.
What is the reason for the high yields?
For traditional banks, they lend out their customer’s deposits so that they can pay their clients part of the earnings in the form of interest. Crypto accounts work on the same principle: they gather the deposits in order to offer loans and distribute the interest to depositors. However, with traditional banks, they are required to have reserves as a fail-safe in the case that loans go bad and customers can continue to withdraw funds. Crypto banks do not have these kinds of contingency plans and the institutions they lend their holdings to can take risky bets.
Stablecoins
Cryptocurrencies’ volatile nature makes it impractical for payments or loans. This is where stablecoins shine. Stablecoins are cryptocurrencies that are tied to stable assets like fiat currencies or gold. According to cryptocurrency publications, the number of stable coins in circulation grew from $29 billion at the start of this year to $117 billion as of September.
Central banks manage the supply and demand to keep the stablecoin’s values stable and to ensure that there are enough reserves. Stablecoin issuers function in the same way. However, there is actually no guarantee that they can match the values to the dollar that they claim. Some authorities believe that a surge of sudden withdrawals can cause those assets to collapse and put the consumers, financial companies, and maybe even the broader economy under risk.
Others have suggested central bank digital currencies, which are capable of rendering stablecoins irrelevant. But what are central bank digital currencies?
There are central banks that are currently examining the potential of government-issued cryptocurrencies. Theoretically, it would be the ideal combination of the convenience factor of cryptocurrencies and the stability of the currencies issued by central banks.
The main argument here is that you wouldn’t be needing stablecoins or cryptocurrencies if you had a digital currency that is produced by the government, which can be a more predictable source for a cryptocurrency.
On the other hand, stablecoin issuers believe that it would take the government a long time before they can catch up to the innovations in the market. In the meanwhile though, stablecoins will still be the more preferred option.
But if you believe that cryptocurrencies are indeed the way of the future, then you might want to consider investing in them once you have your financial goals sorted out. If you want to learn more then you can visit this beginner-friendly crypto trading platform that can provide you with the toll to help you get started.
