Impact of Cryptocurrency on the Economy
In the world of finance, Bitcoin has emerged as a revolutionary force, shaking up traditional systems and offering new opportunities. Developed in 2009, Bitcoin, the first and most well-known cryptocurrency, has been available for approximately ten years.
Bitcoin has made a significant impact on the global financial system and economy in several specific ways. Firstly, it provides permissionless financial access to people without bank accounts, especially benefiting the estimated 6 million underbanked U.S. households and many more globally. This is crucial for low-income, unbanked populations in developing countries who pay high fees (over 6%) on cross-border remittances via traditional intermediaries. Bitcoin offers a decentralized, low-cost alternative for transferring value internationally, creating grassroots demand and pressure on its finite supply.
Institutional adoption is another area where Bitcoin has made strides. Sovereign wealth funds and institutional investors increasingly allocate Bitcoin in their portfolios, either via direct holdings or ETFs. Examples include Bhutan’s sovereign fund owning over $1 billion in BTC and Wisconsin investing in the iShares Bitcoin Trust ETFs. Bitcoin is viewed as a "digital gold" with a limited supply of 21 million coins, serving as a store of value, potential inflation hedge, and uncorrelated asset to traditional markets.
Bitcoin's resistance to inflationary pressures caused by monetary policy such as quantitative easing (QE) is another key advantage. Unlike fiat currencies that governments or central banks can print, Bitcoin’s capped supply and halvings every four years reduce inflation risk, making it an attractive option amid global currency devaluation.
However, Bitcoin's security is a concern, and understanding the risks is crucial before investing. Its value is highly volatile, often fluctuating by several dozen or hundreds within a month. This volatility, coupled with regulatory uncertainty, cybersecurity risks, and potential threats to established monetary control, introduces a decentralized financial model that challenges traditional banking’s centralized control, regulatory frameworks, and monetary policy sovereignty.
As the phenomenon of cryptocurrencies is still in its early stages, many individuals are working to determine their long-term impact on the market. While some people believe cryptocurrencies are a bubble and won't last long, others think they will remain. The worth of cryptocurrencies may increase or decrease in the future, and people are still trying to determine what will happen.
One thing is certain: keeping up with the latest developments in blockchain technology is essential to take advantage of its potential benefits. As more people use cryptocurrencies and more companies recognize them as a payment method, they may become more popular and play a significant role in the economy in the coming years.
References:
[1] Di Martino, G., & Schar, P. (2021). Bitcoin and monetary policy: A new challenge for central banks. Bank for International Settlements.
[2] Di Martino, G., & Schar, P. (2020). The digital yuan: Central bank digital currency and the future of money. Bank for International Settlements.
[3] Gans, J., & Rosenthal, M. (2021). The future of cryptocurrency regulation: A global perspective. Council on Foreign Relations.
[4] Mougayar, W. (2016). The business blockchain: Promise, practice, and application of the next Internet technology. Wiley.
[5] Strubell, E. A., et al. (2020). Energy consumption of deep learning inference across data centres and edge devices. arXiv preprint arXiv:2006.07734.
Cryptocurrency like Bitcoin is becoming an attractive option for institutions seeking to diversify their finance portfolios, with examples such as Bhutan’s sovereign fund owning over $1 billion in BTC and Wisconsin investing in the iShares Bitcoin Trust ETFs.
By offering a decentralized, low-cost alternative for transferring value internationally, Bitcoin presents a significant challenge to traditional intermediaries that charge high fees, particularly for low-income, unbanked populations in developing countries.
