I have a degree in economics and I worked as an economist studying inflation. Inflation is the change in the overall price level of goods and services. These goods and services are bought with money so in a sense inflation is a change in the value of money.
After many years of education and study, I can say that I definitely don't have the answer to the question of whether cryptocurrencies will go up or down. I think anybody who says that they know something for sure is misguided.
I will say that it is a good rule to accept that you could lose your entire investment and it is also a good rule to educate yourself on anything that you want to invest in.
There are several things I think of when I want to understand the value of cryptocurrencies. I look at what value it has as a currency, the technology behind it, and its economic outlook.
I first look at what value it has as a currency. Who will accept it for payment? How many people will accept it for payment? How easy is it to transact it, save, borrow, and loan it. Is it useful? Does it have some intrinsic value?
Next, I look at the economic environment for the currency. Will the user base for the currency grow? Is the currency going to reach critical mass as far as adoption goes? What does the supply of the currency look like? What does the demand for the currency look like? What are most people using this currency for? Are people mostly using it as an investment vehicle or is it actually going to be used as a currency for buying goods and services?
Lastly, I look at the technological side. Will competing cryptocurrencies make this cryptocurrency obsolete? What are the underlying rules that govern the currency? How does the technology work? Does the currency integrate smart contracts and other distributed ledger technologies (DLTs)? How is it mined and how is the currency issued or distributed to its users?
I might have separated my analysis into multiple sections, but the truth all of these sections are related. Some of the things that I put in each section can easily be moved to other sections. Whole sections could be combined and or other sections created. I listed these three sections for simplicity.
It can feel like we are in the wild wild west when it comes to currency, but if you study the history of banking and place the cryptocurrencies into that context it will give you a better understanding of cryptocurrencies and currencies in general. Go back into the history of banking in the U.S. and it will give you some insight into what is happening now.
There was a time when states and individual banks were issuing their own separate currencies and these currencies weren't back by the federal government. There was no FDIC or the federal reserve bank. There weren't any regulations on how much supply could exist or rules on reserve requirements.
If you study the evolution of some of these institutions you will get an idea of what problems these institutions were designed to solve and you can ask yourself if cryptocurrencies are subject to some of these problems? You can ask yourself if the cryptocurrencies themselves are the solution to these old problems and whether cryptocurrencies are going to make these institutions obsolete.
I don't know what the long-term health of the cryptocurrency markets will look like, but I do believe the technology that underlies the cryptocurrencies (blockchain) will change the world. It is possible that many of the cryptocurrencies out there will end up being a proof of concept and an intermediate step towards something greater. One thing that is for sure is that these are exciting times for an economist like me.
These are the kinds of questions and thoughts that I have when I try to understand cryptocurrencies. If you have any thoughts on these subjects please share them.
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