Digital currencies, also known as Cryptocurrencies, have gained significant popularity over the past few decades through the rise of technology. However, with power comes great responsibility (for the corporations in charge of these cryptocurrencies). While cryptocurrencies like Bitcoin, Dogecoin, or Ethereum have gained significant traction, their effects on the economy and the world are not always positive. Today, we will explore the range of impacts cryptocurrencies have on the finance systems across the globe.
The background on cryptocurrencies
Cryptocurrencies date back to the 1980s, when eCash, a secure electronic cash system, was first introduced. However, most cryptocurrencies only came about after the launch of Bitcoin in 2009. A group known as Satoshi Nakamoto published a whitepaper that conceptualized cryptocurrency exchange. This decentralized, digital-based currency can be exchanged between people without any financial intermediaries such as central banks or the government. Following Bitcoin, several altcoins were invented, like Litecoin, Ripple(XRP), and, most notably, Ethereum. These altcoins aimed to introduce faster transactions, higher security, and more. Today, more than 13000 cryptocurrencies exist and it’s all thanks to the massive popularity Bitcoin gained since its launch.
Impacts on the financial system
While the rapid development and acceptance of cryptocurrencies are probably for the best, their continuous effect on the finance system may let the future play out differently. As the uses for cryptocurrency become even more diverse, we may anticipate drastic changes to the financial regulatory landscapes… Governments have mixed viewpoints on cryptocurrencies. While El Salvador has, surprisingly, adopted Bitcoin as their secondary currency, more often than not, cryptocurrency’s close tie to unscrupulous activities is what keeps most governments cautious about it.
In the context of investment, most IPO-ed cryptocurrencies, like Bitcoin, have high beta or volatility. This means that cryptocurrency stocks may see very significant price fluctuations. While many investors may not be so confident in this type of stock due to its volatile nature, fluctuations in cryptocurrency prices are similar to those of a standalone stock—based on market sentiment, macroeconomic events, regulatory updates, and other factors. Unfortunately, the volatile nature of these stocks burdens the finance system as they are bound to destabilize it.
Bitcoin and other cryptocurrencies also have the ability to disrupt government finance systems, like helping the public gain a higher cash flow than the government’s limit for example. In recent years, one of the most well-known instances of capital flight through cryptocurrencies happened in China. For context, China strictly imposed a yearly limit of $50000 RMB in exchange for foreign currencies, but as it turns out, more than $50B RMB were moved out of China in 2020 due to citizens exchanging their money for Bitcoin and carrying it out of borders digitally. This may be driven by the ring of chaos rooted in COVID outbreaks, but the possibility of this happening is quite alarming to central finance agencies. In addition, it is no secret that such untraceable and decentralized monetary technology can be used for illicit and illegal activities. Bitcoin is the most used cryptocurrency on the dark web, and the lack of regulation within cryptocurrencies means that authorities cannot trace criminals’ purchasing records when cryptocurrencies are being used, making it a significant contemporary challenge for all nations worldwide.
Conclusion
In conclusion, while the revolutionary introduction of cryptocurrencies in the modern era can significantly impact the general economy, there are underlying risks behind it that root deep within the usage and nature of cryptocurrencies themselves. Thus, the writer recommends readers take cryptocurrencies’ success with a grain of salt and be aware of the unchecked potential behind these modern masterpieces.
Reference List
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Howarth, J. (2021). How Many Cryptocurrencies are There In 2024? [online] Exploding Topics. Available at: https://explodingtopics.com/blog/number-of-cryptocurrencies [Accessed 19 Jun. 2024].
Investopedia. (2024). Digital Currency Types, Characteristics, Pros & Cons, Future Uses. [online] Available at: https://www.investopedia.com/terms/d/digital-currency.asp [Accessed 19 Jun. 2024].
Online MBA Programs (2021). Bitcoins: The Currency of the Darknet | OnlineMBA.com. [online] Available at: https://www.onlinemba.com/blog/bitcoin-explained/#:~:text=87a4%2Daa48758415f3'%5D-,Bitcoins%20are%20an%20online%20currency%20with%20no%20ties%20to%20a,of%20black%20market%20activities%20online. [Accessed 2 Jun. 2024].
Ushman, D. (2023). The History of Cryptocurrencies | TrendSpider Learning Center. [online] Trendspider.com. Available at: https://trendspider.com/learning-center/the-history-of-cryptocurrencies/ [Accessed 2 Jun. 2024].
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