Cryptocurrency Trading Volume Plunges As Interest Wanes Following Bitcoin IPO
The recent IPO of Coinbase helped push bitcoin to a record high. Meanwhile, Dogecoin, a popular alternative currency, has soared above $0.40, after trading for less than a penny a few weeks ago. This frenzy wiped out crypto trading on Robinhood on Friday. Meanwhile, the US Treasury is considering charging financial institutions with money laundering. High-frequency trading algorithms may be responsible for much of the fake volume.
Interest in cryptocurrencies is waning
Investors have been fleeing the crypto space following a few months of price declines. Bitcoin recently hit a three-month low and closely mirrored the stock market’s decline. Crypto bulls have called bitcoin an “isolated asset” that’s not correlated with stocks or bonds, but analysts have observed similarities between the two. The founder of dogecoin, Jackson Palmer, recently wrote an essay on Twitter about the risks of crypto, pointing out that it preys on the vulnerable.
The risk of investing in cryptocurrency has diminished over the past year, and while prices are still higher than they were at the beginning of 2017, the overall trend is still upward. Investors should take note that cryptocurrencies have very low liquidity and are subject to price fluctuations. Because of this, the volatility in crypto assets makes them unattractive as a store of value and a medium of exchange. The secrecy of crypto also fosters illegal activity. Many central banks have pushed back against the use of cryptocurrency and will soon move to their own digital currencies or stablecoins.
In addition to a low liquidity and volatility, cryptocurrencies are prone to hacking. Regulators have focused on this aspect of cryptography in recent years, and as a result, there has been a significant increase in the number of scams involving cryptocurrencies. Even though many people jumped on the bandwagon in the mistaken belief that cryptocurrency would replace traditional currency, this was not the case.
While the number of investors has steadily increased over time, recent growth has been explosive. Meanwhile, the average investor and government regulators must navigate these contradictions. In the next five years, crypto could be completely unrecognizable, as a way to pad portfolios. So, the key to predicting a booming future for cryptocurrencies is to understand what lies ahead. The crypto market is still an exciting place to invest, but it needs to be managed prudently.
Many people believe that the popularity of bitcoin has inflated the price of cryptocurrencies, and that they are worth more than the original amount of money. However, many experts disagree, and many people believe that it will only increase in the future. The question remains: Will it be sustainable over time? If not, why will they be so popular? It may simply be that the rise in crypto prices has become too much of a speculative bubble.
High-frequency trading algorithms may account for much of the fake volume
High-frequency trading algorithms are computer programs that make large numbers of trades in a short period of time. These algorithms can also be used to entice traders to join platforms. The more traders, the more profit they make. The fake volume on cryptocurrency exchanges may be caused by these high-frequency trading algorithms. Some traders, however, choose to use decentralized exchanges, which are harder to fake.
The rise of social media platforms has also spurred interest in sentiment analysis. Traders analyze a wide range of assets, including cryptocurrencies. Cryptocurrency volume is important for investors, because it shows how many coins have changed over time. But the real value lies in the volume of a coin baked across all exchanges. And while it’s important to check the volume of a particular cryptocurrency, it may be misleading.
However, there is another explanation for this high-frequency behavior. While cryptocurrency trading is similar to online sports betting, the market is global and non-balance sheet. Moreover, many cryptocurrency traders make decisions based on a small amount of information, and the outcomes are highly volatile. High-frequency algorithms, for example, can be hacked with the help of social media platforms.
Using autoencoder-augmented LSTM structures, Fang et al. (2021) predicted the mid-price of eight cryptocurrency pairs based on live data from limit order books. Their algorithm achieved 78% accuracy. These findings bolster Sirignano and Cont’s (2019) view, and propose a new method known as a “walkthrough” which allows the deep learning model to improve its performance.
El Salvador’s economy depends heavily on remittances
The transnational remittances economy is a powerful force in the contemporary economy of El Salvador. The nation-state enjoys a unique comparative advantage in the global economic system, exporting cheap labor to the United States and the Global North. This transnational economic space is perverse and traps the poor in an endless cycle of economic instability. It also facilitates the access of elites to remittances via a Keynesian oligarchy that controls the demand structure of the economy.
The Salvadoran central bank recently published annual remittance statistics. Remittances peaked in 2009, with the start of the world financial crisis, but subsequently recovered. Today, remittances compensate the ever-growing balance of payments deficit. However, the lack of financial institutions and exchange rates are limiting the country’s growth prospects. For this reason, Bitcoin could become an important option for easing the country’s economic situation.
The traditional agrarian sector has historically served as the engine for uneven growth in El Salvador, leading to a mono-agrarian export model. However, this model lost relevance in recent years. In 1978, traditional agrarian exports accounted for 60 percent of the foreign exchange earnings; in 2015, they accounted for just five percent. Meanwhile, remittances increased from 10 percent to 66 percent. In addition, the maquila industry continues to dominate the economy.
While most central banks are looking into creating digital currencies, the Bank of England recently announced plans to issue a new digital money. This currency would exist alongside cash and bank deposits. Mobile payments app Strike is working to introduce Bitcoin in El Salvador. Rohan Grey, a digital currency expert with the Digital Currency Global Initiative, said Mr Bukele was merely trying to exploit the image of bitcoin.
Remittances also have a direct effect on the consumption level of receiving households. According to household surveys, about eighty to ninety percent of the remittances go toward everyday expenses. The inflow of migrant money reduces labor supply in receiving households, increasing net consumption. This money also encourages entrepreneurial activities in the informal sector, which produces many of the products necessary for daily expenses.
China prepares to launch its own state-backed digital currency
As Bitcoin and other cryptocurrencies continue to gain popularity in the West, many countries are taking steps to reform their government-backed money systems. China is no different, having started testing the eCNY in four cities last year and recently expanded those trials to other major cities. Ultimately, central banks hope that this new currency will make financial transactions faster and better, and provide an avenue for people to use digital currencies in disadvantaged areas.
While most developed countries dither, China is making fast progress toward central bank digital currencies. A representative of the People’s Bank of China’s research bureau recently spoke about the project, titled Digital Currency Electronic Payment. The bank has also released some money in the form of pilot projects, totaling $200 million or $40 million. While it’s still early in the process, this project signals that China intends to adopt the technology and be more autonomous in its foreign dealings.
The Chinese government has three goals with the new virtual currency: to gain more insight into money flows, to prevent illicit activities, and to take back control over payments. This new digital currency is expected to reshape the international payments landscape, and will eliminate the need for middlemen. Meanwhile, Beijing plans to distribute digital yuan to visiting athletes and foreigners. Despite all the controversy, the Chinese government’s intention to launch a state-backed digital currency is still a major concern for the global financial system.
While China is leading the way in digital cash, many other countries are following suit. Norway, Switzerland, and even Cambodia are exploring digital currencies. The digital cash market presents an attractive grand strategy opportunity for countries. However, it will also be difficult to develop an effective digital currency without a clear plan and proper planning. For now, however, China has only begun to explore this opportunity. This is not the end of the world for digital currency, though.
While eCNY has the potential to make the renminbi more competitive with the U.S. dollar, the Chinese government has stated that a number of other changes need to be made before it can become a viable digital currency. Nevertheless, China has set ambitious goals for its new currency. If the new digital currency does work, it will create an entirely new global monetary system.