The Future of Cryptocurrency and its Role in the Global Economy

Cryptocurrency, the face of which started as Bitcoin, is a concept we have all heard of, but only a few of us know its role in shaping our global economy. Since the introduction of Bitcoin in 2009, different digital currencies have been introduced, with a market value reaching around $2.65 trillion. Digital currencies have surged more than eight times since March last year despite COVID-19 disrupting the global economy.  

The cryptocurrency business has become far more than a financial innovation. It’s more of a cultural and technological form of progress since it’s more than accessible to all parts of the world and thus has the potential to enhance the global economy. Different types of cryptocurrencies, like Bitcoin, Dogecoin, and other stablecoins, offer people with mobile phones a shot at financial inclusion. Where one school of thought believes cryptocurrencies are inherently excellent for the economy, another believes that cryptocurrency can be a dicey asset for the mainstream economy.  In this blog, we aim to talk about both of these beliefs, answer common doubts around cryptocurrency, whether you should invest in it, and its overall impact in different sectors to make an informed decision on investing in cryptocurrency.

This Blog Highlights:

• Whether or not you should invest in Cryptocurrency?
• Impact of Cryptocurrency on Inflation, Recession, Geographical Impact, and Macroeconomics.
• Role of Cryptocurrency in the Global Economy
• The Future of Cryptocurrency

Should you Invest in Cryptocurrency or Not?

As skeptical as this question sounds, there are pros and cons of adopting to cryptocurrency. Governments believe it to indulge in the country’s economy and hence would not risk it to become one of the mainstream economical options. However, investing in cryptocurrency and digital economies could be an excellent long-term investment since its value tends to increase through the years. 

Andrew Rosen, CFP, President of Diversified LLC, once seconded on the drawbacks of adopting cryptocurrency. He mentioned, “While I think that the underlying technology of blockchain has innovation and practicality until it is decoupled from the gamble of currency without any regulation, it’s an absolute risk to go for it.”

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However, many investors may want to take the risk still. As mentioned earlier in the article, these investors may not see it as a short-term payoff. But that’s not to say the suitable investment would mean tremendous profit. Let’s weigh the pros and cons of cryptocurrency for you.

Pros of Investing in Cryptocurrency 

1. Easier transfer of funds: They omit the need of a third-party for making transfer of funds, like banks or credit card companies. The power here lies within you, as you deal with private keys that are exclusive to each individual. Because of the same reason, the transactions are much faster.
2. Security and Privacy: A system with no intermediates reduces risk of hacking into the system, increases security and avoids changes of failure. 
3. Smooth exchanges in currency: For the same reason, there is a smooth exchange in currency and payments.
4. Decentralized mode of currency: Decentralized mode of currency, does not have a centre that holds all of the money, or is accountable for all the transactions. This mode lets more progress and makes the process of transfers cheaper.
5. Protects you from inflation: Along with everything, they help in making a country inflation free.

Cons of Investing in Cryptocurrency

1. Risk of data loss and Illegal transactions: While transferring or making transactions through cryptocurrency, there is a huge risk of data loss and illegal transactions.
2. No refunds or cancellations: There are no possibilities for refund or cancellations while making payments through cryptocurrency, making it imperative for you to be extremely careful while dealing with cryptocurrencies.
3. High consumption of energy: The use and mining of popular cryptocurrencies require a large amount of energy. The huge energy costs and unpredictability that revolve around cryptocurrencies have made it impossible for firms to deal with cryptocurrencies
4. Buying NFTs with other tokens: You can buy NFTs with other tokens, and hence the value of one token can’t be incorporated into another one. 
5. Power lies in a few hands: The power of dealing with cryptocurrencies usually lies in a few hands, making it important to know everything before investing in them, also why prices of these currencies are so volatile.

Since there are both pros and cons of adopting to cryptocurrency, you need to figure the best suited for your investment. Understand the underlying risks of investing in cryptocurrencies or consult a professional before moving forward. Since each individual’s situation is unique, you might not be able to make a decision without a proper understanding of the same.

Also, Read – A Beginner’s Guide to Blockchain Technology

Global Impact of Cryptocurrency

1. Inflation

Cryptocurrencies have traditionally been considered to be fencing against inflation. Lately, people have chosen to include themselves with a backup of stablecoins. Whether cryptocurrencies support the condition of rising inflation or failing monetary policies is still a debatable issue. However, staggering global inflation rates spur curiosity about the need for cryptocurrencies. 

The benefits of cryptocurrency over fiat and their utility are especially significant in countries suffering 50% or more devaluation against the U.S. dollar in the last ten years). People in countries like Turkey and England are more than five times as likely to say they use crypto compared with those who experienced less than 50% inflation.

In an interesting article from Forbes, they questioned, “Does Bitcoin beat Inflation?” they read that bitcoin, or by extension, cryptocurrency has a short-term inverse relationship with inflation. It can’t be said to beat inflation in the short team but it is possible in the longer term. 

2. Recession

The downward pressure in the cryptocurrency markets may correlate with the slipping of traditional markets and geopolitical factors. The financial climate has changed considerably. Investors raise interest rates and thus ensure a tighter financial market. The rising interest rates make it more interesting to invest in bonds, for example. 

Risk-aversion strategies are toning down cryptocurrency investments when the stock markets suffer a correction. It is often stated that the winter is approaching for cryptocurrency, which implies something similar to a bear market cycle in the stock market but regarding the prices of digital assets on the crypto markets. The winter goes along with some painful effects. 

The cryptocurrency market capitalization correlated with the traditional markets indicates institutionalization, which is okay. Instead, it indicates adoption and acceptance as the first steps toward broader acceptance of cryptocurrencies and their underlying technological foundation. 

Indeed, prominent thought leaders argue that the cryptocurrency market develops in cycles and that those cycles can appear chaotic from an external point of view. But, in reality, there is an underlying logic in which prices, industry developments, and innovation are connected in a positive feedback loop.

Also, Read – Top 5 Digital Transformation Strategies During Economic Recession and Uncertainty

3. Geographical Impact

The overall response across central banks of various countries is quite interesting. While some countries highly support crypto, others are incredibly cautious about considering crypto. In a recent FOMC meeting on September 22, 2021, the Chairman stated that FED is evaluating whether it should be a part of the mainstream society and create a central bank digital currency (CBDC). It has taken a scan-and-learn stance. Around the same time, the PBOC declared all crypto-related transactions illegal in another incident. As a result, financial institutions cannot be involved in cryptocurrencies; it has taken an aggressive stance against them. 

4. Macroeconomics 

Different industries and sectors of the world should expect the following aspects of the macroeconomic impact of using cryptocurrency.

• Financial Stability

Any abrupt decrease in monetary value might result in a loss of investor confidence and have broad market effects afterward. In emerging markets, crypto adoption has led to an unsound local policy or inefficient payment system. Because of the same, there is an undying risk of circumventing capital control measures.

• Equity

Crypto may be attractive to those who perceive themselves as oppressed by the current financial system. Consumer protection triggers mixed emotions in people of color. The intent behind this may be to protect the people from exploitation. 

• Safety

Crypto has many advantages over physical money while moving large amounts of value across different borders. These passages manage various measures, as most transactions would be traceable. However, the government’s ability to investigate crypto-related crimes is limited in countries where crypto is unregulated.

• Innovation

Cryptocurrency innovation creates a multiplier effect of new concepts like the NFTs and the metaverse. If people gain crypto in the metaverse, it could create net wealth. If these proceed outside the metaverse and are substantial, this could have an enhanced demand effect resulting in economic growth.

Role of Cryptocurrency in the Global Economy

Like all the other currencies the world uses, cryptocurrency has advantages and disadvantages. One of the significant drawbacks of money is its extreme usage with criminals. With the growth of cryptocurrency outpacing the growth of illegal usage, illicit activity’s share of cryptocurrency transaction volume is meager, as transactions involving wrongful addresses represented just 0.15% of cryptocurrency transaction volume in 2021. 

Another drawback is that cryptocurrencies are unsuitable for the environment. Based on the BTCs Proof of Work consensus mechanism, it hurts the environment and economics of the world. Moreover,  most cryptocurrencies cope with volatility. Some currencies may quickly lose their value with the changing demographics. Economists, who look at money through a traditional lens, may argue that cryptocurrencies are thus unsuitable for payment and that users run more significant risks. 

Economists may also argue that the value of cryptocurrencies is not guaranteed because of the lack of commercial or central bank involvement. For example, an economist may hold that a central bank digital currency (CBDC) can be a good solution because governance remains in the hands of the central bank. The cryptocurrency markets can be highly volatile and chaotic, but an underlying logic exists. Statistics also show that volatility and drawdowns have remained relatively consistent over time.

The Future of Cryptocurrency

Although blockchain and cryptocurrencies are fundamentally meant as trustless technologies, trust remains key where humans interact. As a result, the broader economic impacts the cryptocurrency market and may generate profound effects by itself. 

The impact of such crypto-native events with systemic impact mirroring traditional finance domino effects and the consequential falls of Celsius and Three Arrows Capital all indicate that the crypto-economy is not immune to failures. Indeed, while conventional finance has institutions that are too big to fail, the crypto sector does not.

Looking in retrospect is always easy, but the Terra project was fundamentally flawed and unsustainable over time. Nevertheless, its downfall had a systemic impact as many projects, venture capital, and standing companies were exposed and heavily impacted. It indicates that investing in cryptocurrencies is all about thinking about risks and potential rewards. 

The fall and domino effect across the board indicate the lack of maturity of the very sector itself. Since innovation and prices are inherently connected, and the early-stage development of the crypto-economy offers lots of untapped potentials, the said economy may continue to see events that temporarily undermine growth. 

In the End!

In all, cryptocurrency can disrupt our lives as the internet did in the past decade. It was initially thought that mobile phones were the only devices that would be used to connect to the internet and compensate for the physical gap between people by letting them communicate across miles. On the contrary, new devices were invented using the internet to revolutionize our daily operations. As industry experts, we predict that the underlying technology for cryptocurrency is yet to evolve to its maximum potential and will change the financial system like nothing before. 

• With different regulations on cryptocurrency actively being adopted and reinforced, it becomes necessary to prioritize taking action as soon as possible.
• Policymakers need to create an international classification framework with nuanced regulations.
• Crypto and stablecoins should be included in monetary and financial statistics.
• Governments should coordinate with other governments to mitigate regulatory arbitrage and consider economic projections when designing regulations. In addition, businesses should proactively partner with regulators when creating business models.

Some also believe that cryptocurrency will be the end of the entire physical global economy and hurt the developing economies in the world. Irrespective of these beliefs, cryptocurrency and its adoption will lead to some merit in the future. Developing countries, corporates, and even small businesses must be more adaptable to let crypto in their business model and make more profits in its naïve era. For more consultations on cryptocurrency, get in touch with our team of proficient business transformation consultants today.