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Busting Myths Around BLOCKCHAIN Ecosystem & Cryptocurrencies

The idea of Blockchain came into existence around 1991. But it was only around 2008 when the whitepaper from Satoshi Nakamoto on “Bitcoin: A Peer to Peer Electronic Cash System” was given credit. After this, the platform on which a bitcoin could be utilized started becoming popular. As the decentralized and digitalized currency seemed promising as an alternative, the framework on which it functions came into limelight, and hence people started taking Blockchain Ecosystem earnestly. The blueprint of blockchain initially focused on financial services only. But after observing and examining its potential, the architecture started being employed in several other industries as well.

Inter-Connection between Cryptocurrencies, Stablecoins, and CBDC’s:

For someone who knows the inside-out of the financial industry may observe the connecting points between Cryptocurrencies, Stablecoins, and Central Bank Digital Currencies (CBDC). As a layman, he/she may view these terms as different iPhones coming into the market or the updates for the software making it more efficient. In the initial interval since blockchain’s entrance, several hurdles came across in the forms of scams, phishing, etc leading to the increment of volatility in the structure. Just like in the scenario of the entrance of the World Wide Web, with empirical evidence, the overall structure got modified. As cryptocurrencies started being prominently utilized around 2014, various frauds also occurred in that interval. Due to numerous cases of volatility being compromised, Multinational Corporations and other stakeholders lost a big proportion of money. To compensate and fix the issue, stablecoins came into the picture. One key factor among others appealed to stakeholders because of its similarity with traditional currency. That objective is acting as a store of value and a medium of exchange and a unit of account as well.

A stablecoin at the core is a cryptocurrency that maintains a stable value concerning the target price like the US Dollar. Mostly, stablecoins combine algorithmic techniques along with the management of supply. Doing so makes the market incentivized by making commerce the coin for $1 or less. A stablecoin unlike other cryptocurrencies can minimize the exchange rate of volatility but isn’t entirely open and permission-less. Technically speaking, stablecoins are fabricated over Ethereum Blockchain Protocol. The reason for it is to swiftly modify the compatibility of the freshly issued asset along with the pre-existing infrastructure. The most recent modification with regards to stablecoins is in corporate governance. Specifically, crypto-exchanges, clearinghouses, and many more to come can be categorized under Electronic Shares on a Distributed Ledger. In a nutshell, the recent version of stablecoins may establish an architectural layer for crypto assets. Theoretically and practically as well, stablecoin could become the norm for usage as it can permit liquidity to exchanges. To make the blockchain ecosystem enter the mainstream financial institutions, CBDC would have to imbibe such newer digital currencies and invest in them to regain the people’s trust. Observing and using such technologies in daily activities will make them (individuals utilizing the technology) want to use blockchain, cryptocurrencies, and stablecoins, consciously, or unconsciously.

Cryptocurrencies perceived as Speculative Bubbles:

Interconnection between cryptocurrencies stable coins and CBDCs image

The most recent bubble in the technology industry was the dotcom bubble also referred to as the internet bubble. A bubble or one may also call an illusion, starts with an assumption that firms in which venture capitalists invest may deliver profits in the future. But due to several factors like non-genuine technology, discarding financial accountability, focusing more on brand building, etc, the bubble or the illusion busted. At the core, a speculative bubble can be examined and deduced of consisting economical and behavioral factors. A bubble is defined as a scenario where the circulation or the broadcasting of some information propels the investor’s eagerness psychologically from one individual to another. Economists and people in the Financial Services Industry as well have scrutinized prior bubbles busted. Some common factors/biases include:

  1. Purchasing an overvalued commodity even after knowing it beforehand.
  2. Building expectations based on preceding prices.
  3. Thoughtful disparity.
  4. Herd behavior.
  5. Overconfidence.
  6. Fear of missing out.
  7. Exaggerated optimism.

According to Hyman Minsky, an American economist, there consist of 5 phases in a life-cycle of a bubble, namely: Displacement, Boom, Euphoria, Profit-Taking, and Panic phase. In the displacement phase, investors commence intriguing about a fresh idea’s prototype. In the boom phase, a slight increase in the price is observed. The third phase or the euphoria phase experiences a tricky scenario where a commodity is purchased at an overvalued price knowing about it beforehand, just to sell it to an amateur at a higher rate. In the profit-taking phase, financial institutions, institutional investors, and several others start identifying a forthcoming crash and selling assets for a profit before the bubble bursts (specifically those who’re able to detect the unavoidable crash). In the last stage, the price of the asset/commodity starts collapsing gradually.

The internet bubble happened around the mid-1990s to 2002. The initiation took place with the launch of the Mosaic browser. The displacement phase took off in 1993, as people were getting new ideas to do business online, and fresh regulations to back them up. Credit to that, more companies began opening up, and hence, more investors started investing in firms being operated through World Wide Web. This made the entrance of the boom phase. With investors becoming overly optimistic and confident, the euphoria stage entered the picture. The simple reason being, the NASDAQ index indicated a value of around 500 in the initial 1990s, while it reached 5048 in March 2000. As a large percentage of Dot-com firms believed in the motto, “get big fast”, the profit-taking phase started around 2000. Various pieces of research imply that as the blockchain ecosystem is in its growth phase, stablecoins, cryptocurrencies, and alike digital currencies would be of big aid in the long term.

Functional Approach against boasting of Regulatory Uncertainty:

Individuals or firms mostly tend to go against the Rules and Regulations because of uncertainty in the policy designed and implemented, loopholes not getting rectified, political or personal vendetta, etc. As the overall Blockchain Ecosystem’s policies and regulations are still underway, some portion of the population has started boasting about the regulatory uncertainty out of fear or constructive criticism. There’s a saying in the sales and marketing field, “one should know the appropriate time, place, medium of communication, and the psyche of the consumer to convince them to purchase or think of buying a product/service”. Similarly, thorough research needs to take place before implementing a policy, which has a nature of modifying constantly depending upon numerous variables. A premature regulatory or postmature regulatory would have certain drawbacks and not offer a desirable result. On one side, the blockchain architecture and applications run through its update quickly, while policy drafting and implementation on the ground is a time-taking process.

Political, Personal, and Economical Hurdles:

There are quite a handful of people who prefer to view everything from a pessimistic perspective. Few economists might be renowned globally for their contributions in the area of economics, but don’t know much about the latest technology, and still want to offer their point-of-view just for their namesake. One illustration of it is an individual named Nouriel Roubini. The individual may know a lot about economics, but not much about the inside-out of technology. His decision can impact hundreds of thousands of lives (socially, technologically, and economically) which might not be a good idea. An individual or a group of individuals who have expertise in both the financial industry and technology industry should be allowed to make pivotal decisions and not create fear among the population across the world just for their personal or political gains.

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