Cryptocurrencies have been a relatively new entry into the financial world. Many people wrote them off in the early years as just a fad or currency that’s not backed by anything. The irony of that last portion is the American dollar is not backed by anything either.
Initially, United States currency was backed by the “full faith and credit” of the United States Government. This change happened back in August 1971 when President Richard Nixon formally ended the convertibility of dollars to gold and subsequently ended the Bretton-Woods System. With this change, the dollar went from hard currency to a fiat one, similar to the cryptocurrencies of today.
As with all fiat currencies, cryptocurrencies are subject to fluctuations in the market that can affect their value. A good example of this was when the Mt. Gox Exchange in Japan was hacked in 2014. Cryptocurrency prices wildly fluctuated on the news as cryptocurrency users were affected and their faith in the security of crypto storage and transactions was shaken.
One proposal for cryptocurrencies to help stabilize prices is to tie the currency’s value to a formula which consists of three factors. One factor ties in a nation’s GDP valuation, preferably a G8 or G20 nation. The second factor uses an average of the top 10 to 50 cryptocurrencies around the world.
The last factor considers the growth of renewable energy industries such as recycling. Essential, the first two factors are lifted from the IMF (International Monetary Fund) using the G8 / G20 models as a base for the formula. The last factor keeps an eye on the future with renewable energy increasing every year to combat climate change. This may help keep price volatility of cryptocurrencies at bay while “legitimizing” crypto as a viable worldwide currency.