Shivers and shocks: the volatility of crypto currencies

Nu.nl
Erasmus School of Economics

The bitcoin is known as a volatile currency, where sometimes large losses and profits are made. How does it differ from traditional forms of money? Casper de Vries, Professor of Monetary Economics at Erasmus School of Economics, answers this question.

Explanation of the most recent fluctuation

Last week, the exchange rate of bitcoin fell by 9,000 dollars from 50,000 to 41,000 dollars. For many who are familiar with the currency, this will come as no surprise. However, the question often remains as to why a specific value change occurs. According to De Vries, the latest fluctuation was due to the publication of a Fed report: 'This showed that the Fed wants to raise interest rates a bit faster. We in Europe have also profited enormously from the low interest rates. You can borrow money at low interest rates and invest it. Some people put it in bitcoin. If the decision is then made to do something about the low interest rates, you notice this in the share prices. With virtual coins, the impact is faster than with traditional stock markets because there is no underlying value. With bitcoin, the value depends on what is paid for it'.

Expected rate

The Fed is not alone in its intention to raise interest rates on loans, this is a trend which can be found in many parts of the world. De Vries: 'The period of free money lending is somewhat over. Things are going well in America thanks to the stimulus packages of President Joe Biden and the economy is also doing well in Europe. This makes it less necessary for central banks to assist governments by making borrowing accessible'. It is expected that crypto currencies will continue to respond faster than traditional currencies.

Professor

Casper de Vries, Professor of Monetary Economics

More information

You can read the article from nu.nl, 11 January 2022, here.

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