Digital currencies are trending, and they are complex. That’s due in part to the existence of “competing cryptocurrencies, considerable price volatility, and the coming involvement of central banks,” explains Blu Putnam in the latest episode of The Economists.
Just as bitcoin and ethereum seem to be attracting the greatest attention and spawning the most conversations, they’re also the cryptocurrencies grabbing the most market share. But that story is also shifting as bitcoin’s share has fallen from about 70% at the beginning of 2021 to just under 50% in four months. Meanwhile, ether is gaining steam, reaching about 15% of market share.
Recognizing key differences between the two is a good place to start to understand how each works and where they fit into the market. “Created in 2009, bitcoin is the original cryptocurrency, and investors seem to treat it as a sort of digital gold due to its extremely limited supply,” says Erik Norland. No more than 21 million bitcoins can ever be created; so far, about 18.5 million exist.
Meanwhile, ether is viewed more like an industrial metal due to the fact that it has more commercial applications than bitcoin. It also doesn’t have a lifetime supply limit. Each year, up to 18 million new coins can be created.
Though both digital assets have seen volatility lately, the difference between the two in their supply process suggests that volatility levels may not always be the same. “When you have tight control of supply, that often leads to more price volatility,” says Putnam. “When demand shifts, and supply cannot respond, then the demand shift may be reflected in larger price swings compared to commodities.”
Transaction costs may also factor into price volatility. Anytime the cost in transacting bitcoin has spiked – which has happened three times – the price of bitcoin has subsequently dropped more than 80% each time. As of May 2021, bitcoin transaction costs were again on the rise.
So what’s next when it comes to trading and price volatility? More complexity, says Putnam, “given all the choices of venues, from a variety of crypto exchanges, exchange traded funds (or ETFs), and futures on cryptocurrencies in both large institutional and small bite sizes.”
Watch Putnam and Norland’s full discussion of the market for digital currencies above.
The Economists is a video series covering the industries and events shaping global economics with a special focus on post-pandemic economic realities. Episodes are released monthly.
OpenMarkets is an online magazine and blog focused on global markets and economic trends. It combines feature articles, news briefs and videos with contributions from leaders in business, finance and economics in an interactive forum designed to foster conversation around the issues and ideas shaping our industry.
All examples are hypothetical interpretations of situations and are used for explanation purposes only. The views expressed in OpenMarkets articles reflect solely those of their respective authors and not necessarily those of CME Group or its affiliated institutions. OpenMarkets and the information herein should not be considered investment advice or the results of actual market experience. Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and swaps each are leveraged investments and, because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for either a futures or swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles and only a portion of those funds should be devoted to any one trade because traders cannot expect to profit on every trade. BrokerTec Americas LLC (“BAL”) is a registered broker-dealer with the U.S. Securities and Exchange Commission, is a member of the Financial Industry Regulatory Authority, Inc. (www.FINRA.org), and is a member of the Securities Investor Protection Corporation (www.SIPC.org). BAL does not provide services to private or retail customers.. In the United Kingdom, BrokerTec Europe Limited is authorised and regulated by the Financial Conduct Authority. CME Amsterdam B.V. is regulated in the Netherlands by the Dutch Authority for the Financial Markets (AFM) (www.AFM.nl). CME Investment Firm B.V. is also incorporated in the Netherlands and regulated by the Dutch Authority for the Financial Markets (AFM), as well as the Central Bank of the Netherlands (DNB).
