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Bitcoin: The Economic Case for a Global, Virtual Currency Operating in an Unexplored Legal Framework

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Bitcoin: The Economic Case for a Global, Virtual Currency Operating in an Unexplored Legal Framework

Depreciation of virtual money bitcoin. Exchange rate depreciation. Red arrow and golden Bitcoin ladder on paper forex chart background. Concept of dep

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Currency depreciation definition

What is currency depreciation?

Currency depreciation is the decline of a currency’s value relative to another currency. It specifically refers to currencies in a floating exchange rate – a system in which a currency’s value is set by the forex market, based on supply and demand.

The opposite of currency depreciation is currency appreciation, where a currency becomes stronger. Forex traders can take advantage of both appreciation and depreciation, by taking a long or short position depending on their market predictions.

Examples of currency depreciation

Currencies are always traded in pairs, with the value of one being quoted against the other. The first listed currency – the base currency – is always worth one, while the second currency’s value – the quote currency – is given in relation to this.

For example, if GBP/USD was trading at 1.2700, this means that you would pay $1.27 for £1.00.

If the price of GBP/USD rises from 1.2700 to 1.5000, the dollar would be said to have depreciated in value, and the pound would have appreciated in value – as you would now need more dollars to buy the same number of pounds. This might also be referred to as the pound becoming stronger and the dollar becoming weaker.

Some real-life examples of currency depreciation include the impact of the 2016 Brexit referendum on the value of the British pound – which experienced significant volatility, and at times depreciated rapidly against the dollar. A more dramatic historical example happened in Asia in 1997, when the collapse of the Thai baht affected most Southeast Asian currencies and caused their value to decline sharply.

What causes a currency to depreciate?

Currency depreciation can occur for a variety of reasons. Broadly these include changes in inflation rates, political instability and other economic factors. More specifically, some of the leading causes of currency depreciation are:

  • Lower export revenues
  • A surge in imports
  • Reduced monetary policy interest rates
  • Central bank intervention
  • Traders and speculators selling currencies on the market

Implications of currency depreciation for traders

Currency depreciation enables forex traders to profit, or causes them to lose, as the currency values fluctuate.

Let’s say a trader has opted to short EUR/USD, believing that the euro is going to depreciate against the dollar. If the price of the euro did fall, the position would incur a profit. But if the euro increased in value instead, they would suffer a loss.

If the trader had taken a long position instead, they would do so in the hope that the euro appreciated against the dollar. If the euro increased in price, they could close their position for a profit. But, if the euro depreciated against the dollar, the trader’s long position would make a loss, as they would have to close their trade at a less favourable exchange rate.

Abstract

Abstract Bitcoin is a virtual currency created by programmers, which is produced at a predetermined and knowable rate to simulate a limited resource. Its value is derived from the trust of its users and is protected by its limited nature and the cryptography by which the currency is secured and authenticated. Bitcoin has been, and continues to be, used by some for the purchase of illegal substances and in furtherance of crimes. Because Bitcoin is not issued by a central bank or government, its use entails risks, both legal and otherwise, that have not previously been explored. Nonetheless, Bitcoin possesses significant economic upside over traditional currencies and methods of transaction online. As a result, governments should further study Bitcoin and regulate businesses that exchange in Bitcoin, but without attempting to stop or slow the growth of the currency itself and without attacking otherwise law-abiding citizens who transact in Bitcoins.

Journal Information

Indiana Journal of Global Legal Studies is creating a new and important body of scholarship, as well as an analytical framework that will enhance understanding of the nature of law and society in the current global era. It is a joint publication of Indiana University Press and the Indiana University Maurer School of Law. Print subscription orders should be directed to the journal at the Maurer School of Law, 211 South Indiana Avenue, Bloomington, Indiana 47405; 812-855-8717; ijgls@indiana.edu. Orders for online subscriptions should be directed to JSTOR at http://www.jstor.org/r/iupress.

Publisher Information

Indiana University Press was founded in 1950 and is today recognized internationally as a leading academic publisher specializing in the humanities and social sciences. As an academic press, our mandate is to serve the world of scholarship and culture as a professional, not-for-profit publisher. We publish books and journals that will matter 20 or even a hundred years from now – titles that make a difference today and will live on into the future through their reverberations in the minds of teachers and writers. IU Press’s major subject areas include African, African American, Asian, cultural, Jewish and Holocaust, Middle East, Russian and East European, and women’s and gender studies; anthropology, film, history, bioethics, music, paleontology, philanthropy, philosophy, and religion. The Press also features an extensive regional publishing program under its Quarry Books imprint. It is one of the largest public university presses, as measured by titles and income level.

Bitcoin: The Economic Case for a Global, Virtual Currency Operating in an Unexplored Legal Framework

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