Stabilizing Currency and Markets using Currency Pairs
Forex is a portmanteau or linguistic blend of foreign exchange. In short, forex is merely the exchange or trade of two Government issued currencies. This practice of exchange may date as far back as ancient Egypt and was further propelled by the birth and expansion of the Medici Bank which facilitated currency exchange across Europe in the late 15th and 16th century: a much-needed service as international markets continued to broaden.
The contemporary forex market started to shape with the onset of the gold standard in 1875 which tethered the value of individual Government issued currency to gold allowing standardization of global exchange. Less than a century later, towards the end of the second World War, the problem of using precious metals as a tool to reduce massive fluctuation in exchange rates became apparent. Tethering currency to gold meant that money could only be minted once gold reserves were increased. With the advancement of mining capability and the discovery of gold mines, forex markets became less stable as some countries were able to mint currency more rapidly than others causing depreciation or appreciation. Not only did this cause problems with global forex markets, but individual Governments also ran into issues as well.
Following the 1929 stock market crash and the commencement of the great depression, the United States Government ran into roadblocks in reviving the economy due to the gold standard. Perhaps the first significant catalyst of the end of the gold standard came with the signing of executive order 6102 followed by the Gold Reserve Act of 1934: both enacted and signed by President Franklin Roosevelt. Near the end of World War II, leaders of Allied Nations recognized the need to move away from the Gold Standard and decided to devise a method to fix exchange rates and make the United States Dollar (USD)the primary reserve: this system is known as the Bretton Woods System. The Bretton Woods System laid the groundwork for ending the international gold standard, and President Nixon put the final nail in Gold’s coffin on August 15th, 1971.
With the United States Dollar being the world reserve, it is the prominent currency used for international trade: assets, equity, commodities, and forex. The exchange of two entities requires the comparison of value between one entity over the other: this is known as a currency pair. In theory, a currency pair could be any two entities used to exchange value; however, this term is mostly associated with forex and cryptocurrency trading. The history of the USD as it relates to forex is discussed for contextual purposes. Now that the USD is the world reserve currency, it is dominant when compared to other currencies. Currency dominance in a currency pair is even more relevant for cryptocurrency trade markets.
It would be hard to imagine a cryptocurrency exchange that does not offer the trade of its listed assets against Bitcoin (BTC), especially since Bitcoin is vastly perceived as the dominant of all cryptocurrencies. So dominant that many Bitcoin enthusiasts only consider it as the true cryptocurrency and label all other assets alternate coins or altcoins. Cryptocurrencies such as ethereum may also be used as a dominant coin in a currency pair. What makes a cryptocurrency more dominant than other is their respective market capitalization (market cap): the larger the market cap, the more dominance the currency has. The most dominant cryptocurrency is the currency that holds the most significant percentage of the market cap of all cryptocurrencies.
The link below is a live feed of crypto-dominance.
Currently, Bitcoin makes up over 50% of the total crypto market cap. Bitcoin has always maintained its dominance, but that could change. This begs the question though, in the USD/BTC pair, what has more dominance?
Since fiat is used to purchase bitcoin, it is the dominant pair; however, the USD and the Japanese Yen are believed to have the most substantial impact on Bitcoin’s value. To answer, USD dominates Bitcoin’s value over any other government-issued currency. Although the world reserve currency is the dominant of the USD-Bitcoin pair, price volatility has been a hindrance in Bitcoin’s adoption.
Much like the decision to end the gold standard to stabilize global exchange rates, cryptographers are working to reduce cryptocurrency’s reliance on the USD or any fiat for that matter. A stablecoin is a cryptocurrency that is tethered to a more stable asset such as a cryptocurrency, gold or fiat currencies. The stablecoin with the most data and currently most adopted is Tether (USDT). USDT is a cryptocurrency that is tethered to the value of the United States Dollar and uses it as a standard for exchange. A single Tether is backed by a single United States Dollar. The hope is that cryptocurrency traders can trade with the value of the USD without having to continuously exchange fiat with a bank which could result in liquidity issues, make crypto trading more accessible. The company Tether holds a reserve of USD in case individuals would like to exchange the USDT back into USD. It has yet to be determined if Tether or any stablecoin is the magic bullet for resolving market instability.
Many crypto-enthusiast believe that Bitcoin or some other cryptocurrency will serve as the next global reserve currency, replacing the United States Dollar. Crypto’s digital nature allows for self-governing rules and supply to be programmed into its blockchain giving it a substantial advantage over gold or fiat.
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