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What is government cryptocurrency? Will it trend in 2022?

The Australian government is considering launching a Central Bank Digital Currency (CBDC) and imposing new regulations on cryptocurrencies, even though most investors are still in the dark over this rapidly changing area.

Source: Bloomberg

What is government cryptocurrency?

The term Central Bank Digital Currency (CBDC), also known as government backed cryptocurrency, refers to the virtual form of a fiat currency. A CBDC is a digital token of a country's official currency and as such, is issued and regulated by the nation's monetary authority or central bank. With little difference to its old-fashioned peer, it is backed by the full faith and credit of the issuing government.

The main reason that CBDCs have attracted attention from governments worldwide is that the digital form of currency can simplify the implementation of monetary and fiscal policy while promoting financial inclusion by bringing the unbanked into the financial system. Moreover, these digital currencies can also minimize the effort and processes for some government functions, such as distributing government-issued benefits and collecting taxes.

The Australian government is considering the prominent merit of retail CBDCs and from the user’s perspective it can eliminate the intermediary risks and costs as a digital currency can be directly transferred from the central bank to individuals. Hence, citizens will be free from the concern that the banking institutions might become illiquid and sink depositor funds.

Will CBDC become a main trend in crypto?

Technically, CBDCs should still be categorized as currency rather than crypto. It is not meant to replace hard cash but coexists as an additional form of currency, serving similar functions like payment and storing of value. What sets it apart from real cryptocurrency such as Bitcoin is that it is still a centralized form of currency, meaning the central bank still controls data and oversees the transaction process.

Also notable is that CBDCs are not meant to be interchangeable with the national currency of a country or region, making them more locally specialized rather than an investment asset for global interest.

Cryptocurrency in 2022, what to expect next?

After a volatile 2021 with many all-time-high moments, the value of digital currency has been scaled back significantly since the end of November.

The price of Bitcoin dropped 31.23% in January, while the most-popular altcoin Ethereum, lost nearly 50% of its peak value by the end of January. The crash throughout the cryptocurrency sector at the beginning of 2022 was primarily driven by the sharp shift in the market, in a bid to escape risk assets as the inflation and tightening monetary concerns mounted.

Bitcoin daily chart

Bitcoin daily chart Source: IG

Ether weekly chart

Ether weekly chart Source: IG

However, after suffering one of its worst starts to the year, cryptocurrency has been coming back strongly since February and has carried that momentum into March.

Bitcoin dipped to a low of $37,000 in early March, but a rapid recovery sent the price above $48,000 two weeks later. During this time, Ethereum traded in a wide range of $2,445 to $3,472.

During the past two months, the price of Bitcoin has risen over 25% while Ethereum jumped more than 30%. Most cryptocurrencies are on the way to reverse their losses from the December and January crush while outperforming U.S. stocks in March 2022.

Looking ahead, it is still not safe to say that crptos have shrugged off the haze from the dip earlier this year, given the outlook for inflation while the economy remains cloudy. However, as cryptocurrencies become more widely adopted (total market capitalization and volume chart), it is foreseeable that they will become stronger and as a result, could be viewed as a more reliable option for investment.

Major cryptocurrency price change up to April 4th, 2022

Source: CoinMarketCap
Total crypto market capitalisation and volume Source: TradingView

Follow Hebe Chen on Twitter @BifeiChen

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