Inflation is the general rise in the price level of goods and services in an economy over a specific period of time. This decreases the purchasing power of the local currency. Each country has its own method for measuring the level of inflation, which usually occurs monthly. For example, the United States uses the Consumer Price Index (CPI) as a measuring stick for inflation. All G20 nations use CPI to calculate the rate of inflation.
Shortly, professional economists and financial experts agree that inflation is harmful to the overall health of each country’s local economy. However, the major disagreement between economists is the cause of inflation. For the past several decades, the financial community has engaged in an ongoing debate concerning the root cause of inflation. There are two schools of thought regarding inflation. Let’s review the details.
Arguably, John Maynard Keynes is regarded as the most influential economist of the modern financial era. Throughout his illustrious career, Keynes introduced several economic theories and econometric models which governments and businesses used to forecast future economic growth. In terms of inflation, Keynes developed two different theories on why the price level of goods and services would increase over time.
Demand-Pull Inflation – Keynes believed that inflation occurs when the total demand for goods and services in an economy exceeds the total supply of goods and services. Keynes argued that this phenomenon was caused by a rapid increase in a country’s level of employment. High employment will increase the number of wages within the economy. As wages increase, the demand for goods and services will also increase. Ultimately, the increased demand for goods and services will force prices to rise, thus creating inflation.
Cost-Push Inflation – Keynes developed an alternate theory of inflation. It was known as cost-push inflation. This type of inflation was caused by a substantial increase in the cost of an important good or service. Keynes defined an “important” good or service as one in which no suitable alternative is available. Under this scenario, the cost to produce other goods and services would increase due to a substantial decrease in the total supply of important goods or services.
A perfect example of cost-push inflation occurred during the oil crisis of the early-1970s. Oil is considered an important good because it is frequently used in the production of other goods. As the price of oil increased, it forced the price of other goods and services to rise in unison with oil. The global economy experienced historic levels of inflation throughout the entire decade of the 1970s. Keynes’ theory of cost-push inflation became widely accepted as a legitimate basis for rising prices within the international community of economists and business leaders.
Milton Friedman is one of the most vivid economists of the XX century. Friedman’s major contribution to the study of economics was a school of thought known as monetarism, which was first introduced in 1956. Monetarism gained national attention in a book, titled A Monetary History of the United States. This book quickly became regarded as one of the most important pieces of literature within the macroeconomic community.
Monetarism is an economic theory that focuses on central banking and the supply of money. Essentially, Friedman argues that excessive expansion of the money supply is inherently inflationary. Although he viewed central banks as a necessary component of a country’s monetary system, Friedman was often critical of their attempt to influence the growth rate of the economy by constantly adjusting the money supply. Friedman believed that central banks should play a very limited role in monetary policy. Friedman argued that central bank meddling usually produced a negative effect on economic growth.
Friedman claimed that monetary authorities should concentrate exclusively on maintaining price stability. So, he proposed that central banks create a fixed growth rate of the money supply. This became the core concept of monetarism. Those who agreed with Friedman’s idea of a fixed money supply became known as monetarists. The popularity of monetarism exploded within the professional economic community throughout the 1960s and 1970s. Many Keynesian economists abandoned their belief in John Maynard Keynes in favor of monetarism.
The period from the 1960s to 1970s was excellent in terms of global price stability, low inflation, steady economic growth, low unemployment along very limited participation of central banks. Despite the oil crisis in the early 1970s, the global economy remained relatively stable for the better part of 20 years. This explains why many Keynesian economists switched their allegiance to monetarism.
In the late 1970s and early 1980s, monetarism lost some of its luster as several G20 nations experienced high levels of inflation. Monetarists believe that central banks should maintain a fixed growth rate of each country’s money supply. However, when this policy failed to produce the desired results, global monetary authorities unveiled an aggressive policy to sharply reduce the money supply. Central banks believed that shrinking the aggregate supply of money would force an increase in interest rates, reducing the demand for money at the consumer level. As the demand for money decreased, inflation rates would decline along with a reduction in the velocity of money.
During this period, Paul Volcker was the chairman of the Federal Reserve in the United States. Volcker enacted a policy of aggressively reducing the US money supply to reduce the high rate of inflation. Several G20 nations followed Volcker’s lead by reducing their own country’s money supply. Volcker’s policy proved to be incredibly successful, as global inflation was substantially reduced. Of course, Volcker’s plan to sharply reduce the money supply was in stark contrast to the monetarist view of maintaining a steady supply of money. And since it was so successful, many economists began to question Friedman’s theory of monetarism. Although monetarism failed to produce the desired results in the late-1970s, this economic theory is still an important piece of economic history.
The monetarist view of inflation has been largely disregarded during the past 20 years, particularly since 2008. As you know, monetarism states that inflation is caused by an excessive increase in the money supply. Of course, central banks are responsible for controlling the supply of money. Following the global financial crisis in 2008, central banks dramatically increased the money supply to stimulate the economy.
Money supply growth was very stable before 2008. For example, the average annual growth rate of the United States money supply was 3.05% from 2000 through 2007. Immediately following the financial crisis in 2008, the growth rate of the money supply exploded. During the past 12 years, the average annual growth rate has been 19.8%. These numbers represent an enormous increase in the supply of money. Other G20 countries experienced similar increases in their money supply.
Based on Milton Friedman’s monetarism theory, the rate of inflation should have blasted to the upside in response to the dramatic increase in the money supply. However, the global rate of inflation has remained very low for the past several years. Consequently, many economists have questioned the validity of monetarism during the past decade. As we mentioned earlier, even though monetarism failed to produce the desired results, Friedman’s theory is still an important piece of economic history.
Brief Summary of Inflation
- Inflation is the general rise in the price level of goods and services in an economy.
- When the general price level rises, each currency unit buys fewer goods and services.
- Each country has its own method for measuring the level of inflation.
- All G20 nations use the consumer price index (CPI) to calculate the rate of inflation.
- Economists agree that inflation is harmful to the overall health of an economy.
- Many economists disagree on what causes inflation.
- Essentially, there are two schools of thought regarding inflation.
- Keynesian view is based on demand-pull inflation and cost-push inflation.
- Monetarist view is based on the money supply.
- During the past few decades, the Keynesian view has been more accurate.
Everything You Need to Know About Binance USD
Binance USD (BUSD) is a fiat-backed stablecoin designed to address issues of accessibility, flexibility, and speed on the blockchain. A cryptocurrency exchange leader, BUSD, is currently the second-largest stablecoin on the blockchain by market cap.
This flexible cryptocurrency is stable, regulated, and can be swapped on multiple blockchains. Investors can use BUSD on the Ethereum chain, Binance Chain, and Binance Smart Chains.
Binance USD (BUSD) was created to be a safe investment for cryptocurrency investors looking to invest in a low-volatility stake. This cryptocurrency is pegged at the value of the US Dollar. The New York State Department of Financial Services regulates Paxos, the creators of this currency.
USD is a fiat-backed stablecoin backed by Paxos instead of a government. As a result, Paxos holds the equivalent of the total amount of BUSD in US dollars in its financial reserves. BUSD is a stablecoin that keeps pace with the price of the United States dollar.
When the price of the dollar rises or falls, the price of BUSD fluctuates as well. Paxos issues monthly audits to verify collateralization.
1. BUSD is regulated
2. Fiat-backed stablecoin backed by a reserve
3. 1:1 ratio price fluctuates with US Dollar
4. Operates on multiple blockchains
Paxos and Binance created Binance USD.
Binance USD (BUSD) was launched in September 2019 as a partnership between Paxos and Binance.
They first issued BUSD on the Ethereum blockchain as ERC-20 tokens. Binance USD is one of only three cryptocurrency tokens currently approved by Wall Street regulators. The New York-based financial company Paxos issues BUSD tokens.
Paxos collateralize BUSD tokens by holding equivalent dollar amounts in regulated US bank accounts. Paxos is also responsible for creating and burning BUSD tokens.
Paxos and Binance designed BUSD to be a low-volatility investment for crypto traders seeking highly liquid investments. Investors can easily convert their BUSD investment into fiat-backed currency during times of volatility.
Cryptocurrency experts recommend taking security measures like using two-factor authorization (2FA) to manage online Binance USD accounts and wallets. Serious investors use Binance USD wallet software to store, protect, and manage investments. They do this by using public and private keys to store value.
We do not provide investment advice. Cryptocurrency traders looking to invest in Binance USD should do their research on the history and performance of BUSD and choose the best options that fit their investing style and budget.
It’s important for investors to consider how much they can afford to lose on investments with downturns before committing to any investment. The creators of Binance USD designed BUSD as a low-volatility asset for crypto traders seeking high liquidity. This stablecoin’s goal is to remain stable and as close to the value of one dollar as possible. While its performance appears stable, this can change at any time.
What are Candlesticks and How to Read Them
A candlestick is a type of price chart used in technical analysis to forecast the future price direction of stocks, commodities, and cryptocurrencies. Each candlestick is a graphical representation of a price movement for a specific period. Four different price points are displayed on each candlestick. They include open, high, low, and close.
Candlesticks are one of the oldest forms of technical analysis. According to historical records, candlestick charting can be traced back to Japanese rice merchants during the 18th century. Most financial historians agree that Munehisa Homma was responsible for popularizing candlestick charting.
Candlestick formations are based on a strict set of rules which are universally accepted among all traders and investors. Let’s review a few of the most basic candlestick formations and patterns.
A solid red candlestick is displayed if the opening price is above the closing price (Chart #7).
A hollow candlestick is displayed if the closing price is above the opening price (Chart #8).
Bullish Candlestick Patterns
Big White Candle – The market opens near the low and closes near the high (Chart #9).
Doji – The opening and closing price is virtually identical (Chart #10).
Hammer – A candlestick that consists of a small body near the daily high with a long lower tail (Chart #11).
Bearish Candlestick Patterns
Big Red Candle – The market opens near the high and closes near the low (Chart #12).
Inverted Hammer – A red or white candlestick within an upside-down hammer position (Chart #13).
Shooting Star – A red or white candlestick with a small body, a long upper shadow combined with little or no upper tail (Chart #14).
Brief Summary of Candlesticks
- A candlestick is a type of price chart used in technical analysis.
- Each candlestick represents price movement for a specific period of time.
- Four different price points are displayed on each candlestick.
- The price points include open, high, low, and close.
- Candlesticks are one of the oldest forms of technical analysis.
- Candlestick charting was first used by Japanese rice merchants during the 18th century.
- Munehisa Homma was responsible for popularizing candlestick charting.
- Candlestick formations are based on a strict set of rules.
- These rules are universally accepted among all traders and investors.
What Is an IEO?
An Initial Exchange Offering (IEO) is a type of token sale administered by a cryptocurrency exchange. The entire process is controlled and managed by the exchange on behalf of the crypto company. Both parties have a vested interest in the success of the IEO. Neither party receives a payout unless investors purchase the token through the participating exchange. Therefore, it’s not uncommon for the exchange and the token issuer to join forces to help with marketing, promotions, and advertising.
Before launching the IEO, the crypto exchange and token issuer sign an agreement outlining the payout structure. Typically, the token issuing company is required to pay a listing fee along with a percentage of tokens sold through the crypto exchange. The majority of IEO agreements stipulate that the new token must be listed on the exchange for a predetermined amount of time following the initial sale of the token.
Investors who participate in the IEO are required to open an account with the participating crypto exchange. Instead of sending money to the token issuer through a smart contract, the investor deposits funds into his/her crypto account. Funds are dispersed by the crypto exchange to the crypto company.
IEO Versus ICO
As you may recall from our ICO discussion, the first ICO was launched in 2013. However, the ICO explosion did not occur until 2017, followed by its peak in 2018. Without question, the chief complaint within the crypto community concerning ICOs was a large number of failures and outright scams. In fact, the failure rate approached 90% in 2018.
As we have discussed several times, the cryptocurrency community is incredibly innovative. This community is filled with some of the brightest minds in global finance. Not surprisingly, a small group of young men and women were quick to replace problematic ICOs with IEOs in early 2019. The first major crypto exchanges to join the IEO wave occurred in January 2019. IEO activity continues to flourish in 2020.
The main difference between IEO and ICO is the level of success. In a typical ICO, the crypto company received funding immediately upon issuance of the token. Investors had very little recourse once the tokens were dispersed. They were trapped in a vulnerable position. Sadly, many unscrupulous start-up firms basically disappeared upon receipt of the funds commonly known as a ‘rug pull’.
IEOs solve this problem by preventing the token issuer from receiving funds immediately upon the distribution of the tokens. As we discussed earlier, both parties work together to ensure the success of the project, which increases the likelihood of a rising token price.
Although IEOs have only been in existence for two years, the popularity of this new fund-raising method has increased substantially. The success rate of projects launched on IEO is much higher compared to ICOs. Most likely, this trend will continue.
IEO Regulatory Environment
As you may recall from our ICO discussion, crypto companies struggled to clear all of the regulatory hurdles to satisfy financial regulators. Unfortunately, IEO participants, are experiencing the same type of regulatory problems that plagued the ICO marketplace. This by and large means that regulators dissuade people from taking part in IEOs.
A positive to this is that IEOs are largely unregulated and don’t have to satisfy bureaucracy that can stifle innovative projects.
Financial regulators, particularly in the United States, claim that an initial exchange offering is similar to an initial coin offering, even though the token issuer is not directly involved in the sale of the token. An ongoing problem with regulation is whether or not any particular token counts as security and needs regulation, or whether they are utility tokens. Exchanges will typically avoid listing securities on an IEO as it means they have to submit to regulation.
To avoid the strict regulation requirements around securities, crypto exchanges may even opt not to offer tokens in countries like the United States where there is ambiguity about regulation. As long as the IEO is not soliciting in a particular country, registration is not required.
Due to the overwhelming success of IEOs, many of the world’s largest crypto exchanges are becoming heavily involved in IEOs by offering tokens on behalf of start-up companies. Most likely, this trend will continue.
Brief Summary of IEO
- An initial Exchange Offering is a token sale administered by a crypto exchange.
- The entire process is overseen by the crypto exchange.
- Neither party receives a payout unless investors purchase the token.
- The exchange and token issuer will often collaborate with marketing and advertising.
- Both parties sign an agreement outlining the payout structure of the IEO.
- The new token will be listed on the exchange for a predetermined time period.
- Participating IEO investors are required to open an account with the exchange.
- Investors pay for the token by depositing funds into their crypto account.
- IEOs have proven to be safer than ICOs.
- Many crypto exchanges are not participating in heavily regulated countries.
- IEOs have become very popular in the crypto universe.
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