Cryptocurrency, a digital currency, has emerged as a viable alternative to traditional fiat currencies in recent years. The most well-known cryptocurrency is Bitcoin, which was created in 2009 by an unknown individual or group. Since then, hundreds of other cryptocurrencies have been created, each with unique features and potential applications.
Rise of Cryptocurrency
In the traditional financial system, when transferring foreign currency from India to an intermediary in the USA, the sender must first pay INR to an intermediary who checks specific details, charges a fee, and then sends USD to the recipient.
The traditional financial system fails when currency is manipulated, as money loses its actual value, and investors do not get returns on their investments, which can demotivate them. On the other hand, cryptocurrency, such as Bitcoin, can be considered a hedge during a constant rise in inflation.
Before the COVID-19 pandemic, high inflation levels affected the stability of fiat currency. After COVID-19, the adoption of blockchain technology considerably increased. During hyperinflation, people seek a cushion to protect their wealth and purchasing power.
Investors are betting on cryptocurrency to become a mainstream asset. Since March 2020, the digital currency has surged eight times. The COVID-19 pandemic disrupted economies worldwide, leading to strict lockdowns and devastating consequences on the world economy, including a significant fall in asset prices. The growing fears created an extreme environment for the acceptance of cryptocurrencies.
The rise of cryptocurrency has been driven by several factors, including its decentralized nature, its potential for anonymity, and its potential for fast and low-cost transactions. Unlike traditional currencies, which governments and financial institutions regulate, cryptocurrencies are created and managed using complex algorithms and distributed ledger technology known as a blockchain.
Impact on Global Investments
Cryptocurrencies are often held as assets due to their low correlation with traditional market instruments, making them an effective tool for aggressive diversification. It helps to hedge portfolios against potential risks and is a major reason for the increased popularity of crypto transactions across various exchange-traded products.
Some experts warn that a crash in cryptocurrency could have a broader impact on the overall market, similar to how Mortgage Backed Securities contributed to the 2008 crisis, leading to a global financial crisis.
As of November 21, 2021, the total market capitalization of cryptocurrencies is $2.65 trillion, with around 14,000 cryptos trading globally. Bitcoin dominates the market with 42.2 percent, followed by Ethereum at 19.6 percent. Cryptocurrencies are expected to be treated as a speculation vehicle or a hedge against inflation.
Economic Impact of Cryptocurrency
One of the most significant impacts of cryptocurrency on the global economy has been its disruption of traditional financial systems. Cryptocurrencies are not subject to the same regulations and oversight as traditional currencies, making them attractive to individuals and businesses looking to avoid government restrictions or financial intermediaries.
Cryptocurrencies also offer greater transparency and security, as transactions are recorded on a public ledger that cannot be altered or manipulated.
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However, the unregulated nature of cryptocurrencies has also led to concerns about their potential for facilitating illicit activities such as money laundering, terrorism financing, and tax evasion. Some governments have taken steps to regulate or ban cryptocurrencies, while others have embraced them as a potential source of innovation and economic growth.
Another significant economic impact of cryptocurrency has been its potential to promote financial inclusion. In many countries, traditional financial systems are limited to those with access to banking services or credit cards.
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On the other hand, it can be accessed by anyone with an internet connection and a smartphone. This has the potential to create a more inclusive financial system that allows individuals and businesses in developing countries to participate in the global economy.
Rise of Cryptocurrency have also created new opportunities for investment and entrepreneurship. Many individuals and companies have invested in cryptocurrencies as a way to diversify their portfolios and take advantage of their potential for rapid growth. Cryptocurrencies have also spawned a new industry of blockchain-based startups and applications, with potential applications in areas such as supply chain management, healthcare, and voting systems.
Central bank digital cash will complement cryptos
In addition to disrupting traditional financial systems, cryptocurrencies have created new challenges and risks for governments and financial institutions. The decentralized nature of cryptocurrencies makes it difficult for governments to regulate or monitor transactions, potentially leading to increased opportunities for criminal activity. Additionally, the volatility of cryptocurrency prices can pose risks for investors and businesses, leading some to call for increased regulation or oversight.
Despite these challenges, many governments and financial institutions have begun to embrace cryptocurrencies as a potential source of innovation and economic growth. In order to modernize their financial systems and compete with existing cryptocurrencies, some countries have even launched their national cryptocurrencies, known as central bank digital currencies (CBDCs).
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Cryptocurrencies Can Help In Building Greener Future
Every benefit to humanity has a corresponding cost to the environment. In its early stages, Blockchain technology has been accused of consuming significant amounts of energy and contributing to increased carbon emissions. This is because the information is stored in blocks of data in an electronic format, which requires computing power and a cool place for data storage.
Bitcoin mining consumes a lot of computing power and has environmental consequences. However, this is not unlike the introduction of the internet in 2002. The process is undergoing a substantial change, and the momentum over the last decade has been unexpected.
Efforts are being made to transition towards clean, green, and more sustainable options to reduce carbon emissions. Over time, economies of scale will change the underlying technology and provide better opportunities for sustainability.
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The global economic impact of cryptocurrency is still being realized, and its future remains uncertain. While cryptocurrencies offer many potential benefits, including greater financial inclusion and increased transparency, they pose significant risks and challenges.
Cryptocurrencies have already had a significant impact on the way we think about and interact with money and finance. Their potential for innovation and disruption will likely continue to shape the global economy in the future.