1. Reasons for the Volatile Nature of Bitcoin:
– Speculation: A significant portion of Bitcoin trading is driven by speculation. Traders buy and sell based on price predictions rather than inherent value, which can lead to sharp price swings.
-Market Sentiment: News events, regulatory changes, or developments in the cryptocurrency space can quickly influence market sentiment, causing rapid buying or selling.
-Liquidity: Compared to traditional financial markets, the Bitcoin market is relatively smaller, making it more susceptible to large trades that can cause significant price movement.
-Technological Changes: Upgrades or forks in the Bitcoin software can lead to uncertainty and volatility as users and investors react to changes.
-Security Concerns: Hacks, breaches, or security issues surrounding exchanges can lead to sudden drops in trust and prices.
-Regulation: News of regulatory actions (like bans or restrictions) can lead to panic selling, while positive regulatory developments can spur rapid increases in price.
-Limited Supply: Bitcoin has a capped supply of 21 million coins. When demand increases, the limited supply can lead to sharp price increase.
2. Advantages and Disadvantages of Fiat Currency:
Advantages:
-Stability: Fiat currencies, typically backed by governments, are generally less volatile than cryptocurrencies, making them more reliable for day-to-day transactions.
-Legal Tender: Fiat currency is recognized as legal tender, making it mandatory for acceptance in debts and transactions within a given jurisdiction.
-Regulation: Governments can implement monetary policy to manage the economy, controlling inflation and responding to economic crises.
-Consumer Protections: Established financial systems provide certain protection to users, such as deposit insurance and fraud protection.
Disadvantages:
-Inflation Risk: Fiat currencies can lose value over time due to inflation, eroding the purchasing power of savings.
-Dependence on Government: The value and stability of fiat currency depend heavily on government policies and economic conditions.
-Transaction Costs: Transfers, especially international, can involve significant fees and delays.
– Less Privacy: Fiat transactions can be tracked and monitored, leading to privacy concerns for some individuals.
3. Influence of Inflation on a Person’s Savings Account:
-Erosion of Purchasing Power: Inflation decreases the value of money over time. If the interest rate earned on savings is lower than the inflation rate, the real value of saved money declines, meaning individuals can buy less with the same amount in the future.
-Incentive to Spend: High inflation might encourage individuals to spend their money rather than save it, as waiting might result in greater loss of purchasing power.
-Adjustments to Savings Accounts: Some banks may offer higher interest rates on savings accounts during times of high inflation, but these rates often still do not keep pace with inflation, leading to dissatisfaction among savers.
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