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Understanding how the currency value variation mechanism works

Understanding how the currency value variation mechanism works

Understanding how the currency value variation mechanism works. The price varying mechanism in cryptocurrencies is a subject that creates doubts in people’s minds. Understanding this subject and the context in which we are performing should not be exclusive to financial experts or professionals in the field.

On the contrary, the concepts and impact of cryptocurrencies in people’s daily lives is a topic that deserves to be studied further and by every interested party.

This article brings you relevant information to understand the main notions of currencies, which factors influence their valuation and devaluation, which are the most prominent currencies in the market, as well as the environment in which the virtual currencies are placed in.

Curious to learn more?

In this articles you will learn about:

  1. Factors that influence the appreciation and devaluation of currencies
  2. Currencies with the highest appreciation in the financial world market
  3. Relationship between cryptocurrencies and fiat coins

Factors that influence the appreciation and devaluation of currencies

The valuation and devaluation of a currency is tied to several factors. These include aspects directly related to the market, supply and demand , and political movements and decisions. It is important to highlight that the influence varies according to the type of currency and economic situation of each country. We have listed the main factors that impact traditional currencies such as the Dollar, the Real and the Euro.

International BUSINESS

The first factor that deserves special attention with regards to the fluctuation of currencies’ values  is international business and the set of imports and exports carried out within a given country.

International business is one way in which countries exchange money by increasing or reducing the quantity of currencies in their market. Thus, if a country imports more and exports less, there is more output of its currency, which ends up generating a shortage of currency that automatically reflects in its appreciation.

On the other hand, if the country exports more than it imports, there is a very large inflow of the currency. Thus causing its price to decrease relative to the currency of the country with which the transactions were made.

This is one of the key elements of influence in the valuation of a currency in an economic market, but it is not the only one.

Government intervention

Governments and their stance regarding the economy and the market is another relevant factor when it comes to the valuation and devaluation of currencies.

The first issue involving government decisions and their influence on the quotation of a currency concerns the definition of the central rate of interest by central banks. This definition controls the supply of the currency in a country.

If we think specifically about the appreciation of our currency, the Real, the country adopts the so-called dirty flotation regime. In this type of regime the Central Bank has the legitimate power to intervene in the foreign exchange market in order to prevent a very high variation in the Dollar’s price.

This right of intervention exists so that the government can maintain inflation, since a very high valuation of the Dollar tends to create inflation due to the increase in the price of imported goods. Another factor is the role of the Central Bank to ensure the balance of the National Financial System.

Thus, it is natural that all these movements generate currency appreciation since state intervention is still very high and ends up, in many cases, hindering the economic development of a country. On the other hand, it is seen as a safety factor for the country.

Political decisions involving the economy and the interest rate always influence the market and the fluctuation of the currency. And this applies not only to currencies like the Real and the Dollar, but also to Cryptocurrencies, which will be discussed later on.

Real interest rates and interest

Real interest is the interest earned after discounting inflation in a country. The difference between the interest rates practiced in two countries affects the price of their currencies.

This happens because the basic interest rate is an instrument used by central banks to control the amount of money that is circulating, inflation and the level of economic activity.

Hence, rates are higher when the goal is to reduce the amount of currency in circulation and contain inflation. On the contrary, rates are reduced as the objective is to increase the number of coins in circulation and stimulate the economy by  creating cheaper credit.

In the case of Brazil in relation to the United States, for example, if the difference between the interest rates practiced in the two countries is large, the Dollar depreciates. That means that real interest is higher, drawing attention to our currency.

Inflation

The concept of inflation is very simple. It represents the devaluation that a currency suffers over a certain period of time. As exchange rates are related to the appreciation and devaluation of currencies, the relationship between inflation and the exchange rate is direct.

When inflation is out of control it is a sign of currency instability, which increases a country’s economic risk.

However, in the long term, it is observed that the increase and decrease of inflation is a natural movement that occurs in all economies. Therefore, the tendency over time is that there are oscillations in this area.

Factors that influence the valuation of cryptocurrency

The virtual currencies have some characteristics that confer certain peculiarities to them, with regards to  valuation and devaluation.

The first factor (which resembles traditional currencies) is political risk. Political movements in the sense of barring or regulating the cryptocurrencies eventually lead to their variation. Either in a negative or a positive manner.

Since these are decentralized currencies it does not undergo any type of state intervention. However it is only natural that attempts to regulate it will have a negative impact on the market.

Another factor directly involved in the appreciation of currencies is supply and demand. This is a rule that applies to the whole economic market. In this sense, the greater the demand for a particular currency, the greater its appreciation.

On the other hand, when the demand is not so high, the tendency is for the currency to fall in value.

The dissemination of news and the interest of large companies in virtual currencies also plays an important role in raising their prices. Since the greater the sharing of information about this market, the greater the number of people interested in their acquisition.

Currencies with the highest appreciation in the world financial market

If we think of the world scenario as a whole and consider different types of currencies, Bitcoin is the representative that occupies a prominent place on the most prized coin podium in the world.

Eight years ago, the currency was worth less than a penny and hardly anyone knew of its existence. However, nowadays its quotation exceeds US 3.839,00 which makes it the most valued currency in the world.

Valuation history points to a move that has never been seen in any other currency in the world. This is what makes Bitcoin an object of increasing interest due to people who wish to acquire the coins as a way to diversify their capital and participate in this promising market.

But beyond that, when talking about the financial market and valuation. It is impossible not to mention currencies like the Dollar and the Euro, which are a world reference.

Foreign currency applications such as these generate the interest of many people. However it is important to be aware that the acquisition of these currencies should be evaluated in conjunction with the factors of market fluctuation.

Relationship between Cryptocurrencies and Fiat Currencies

Fiat currencies are official currencies used in a country which are printed, issued and regulated by a government in conjunction with a Central Bank.

Cryptocurrencies, on the other hand, are totally decentralized coins of existence, validated by so-called miners and can be transacted anywhere in the world without the interference of states and central banks.

A very common question that permeates the economic market is the possibility of cryptocurrencies eventually replacing traditional currencies. Although it is too early for such an allegation, it is common to find experts who promote this idea, mainly because of the freedom and ease involved in cryptocurrency transactions.

For those who are in doubt between the acquisition and the capital contribution between the two currencies. The tendency in the market for the next year is of growth and appreciation in favour of cryptocurrencies against the fiat coins.

Remember, this is just an opinion. Do your own research if you wish to join this market.

This is a reflection of a change of behavior and of the increasing acceptance of the people to the versatility, security and practicality that virtual currencies offer.

As you may have noticed, in relation to currency appreciation, it is important to be aware that fluctuation is still a very strong feature of virtual currencies, with respect to fiat currencies, due to various factors.

However, technology and innovation are all pointing to the right path for anyone who wants to know more and be part of a new global economic generation.

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  1. I am crypto currency trader

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