It all started with Bitcoin, first introduced as a white paper in 2009 as Peer-to-Peer Electronic Cash System. Since then, various types of digital currencies have been added, with the market cap reaching $ 2.65 trillion. Niche group of investors profited from the mysterious blockchain technology since the cryptocurrency was least common to individual investors over the globe. In 2014, companies such as Overstock accepted Bitcoin as one of the payment methods against online purchases. The same is followed by famous companies such as Master Card, Pavilion Hotels, AXA Insurance, Starbucks, Visa, and PayPal. Very recently, in March 2021, JP Morgan came out with a cryptocurrency exposure basket containing 11 unequally weighted reference stocks. Further, in May 2021, Goldman Sachs endorsed it as a new asset class. Many investors see cryptocurrency as an inflation hedge.
However, on an individual front, cryptocurrency may have the potential to disrupt our lives similarly as the Internet and mobile phones did over the years. The objective of mobile phones was to allow people to stay communicated over a gap of kilometers. The Internet came with the aim of sharing knowledge through a commonly accessible platform. Later both became a part of our lives and changed every aspect, from alarm clocks to silent music for sleep. On the economic front, the cryptocurrency may potentially disrupt economies with its capacity to kill central banks. We can consider the example of the bitcoin network here. Firstly, Bitcoin cannot be double-spent since it is unique and secured via cryptography. Thus, you can spend the same bitcoin twice. Secondly, algorithms back the trust of bitcoin though it is decentralized. It means that unless nodes approve the transaction, the transaction cannot be included in the public distributed ledger of Bitcoin. Thirdly, it does not need an intermediary to produce and distribute the currency.
Many central banks over the globe are adopting the elements of cryptocurrency to come up with CBDCs (Central Bank Digital Currencies). Thus, cryptocurrencies may have the potential to change how the economy runs.
Why are cryptos becoming more popular?
In the case of a regular transfer of foreign currency from India to an intermediary in the USA, the sender from India has first to pay INR to an intermediary. Then the intermediary checks specific details, charges a fee, and sends the USD to the recipient. In the case of digital currency, it has no borders. Mr. A could have directly sent the currency to Mr. B without any intermediary.
In the case of the traditional financial system, the system fails if the currency is manipulated. The money will not hold actual value, and investors won’t get a return on their investments—naturally demotivating.
During a constant rise in inflation, cryptocurrency (for example, Bitcoin) can be considered a hedge. In the pre-COVID scenario, high inflation levels affected the stability of the fiat currency. Post COVID-19, the adoption of blockchain technology has considerably increased. In a state of hyperinflation, people look for a big cushion to protect the impact of wealth and purchasing power.
Investors are betting on cryptocurrency to let it become the mainstream asset. Since March 2020, the digital currency has surged eight times. In 2020, the Covid-19 pandemic disrupted economies across the world, forcing them to impose strict lockdowns for a considerable period. It also had devastating consequences on the world economy, with a significant fall in asset prices. The growing fears created an extreme environment for the acceptance of cryptocurrencies.
With the limited supply of cryptocurrencies like Bitcoin, the value of Bitcoin surged. Investors love volatility rather than a one-sided market. With enough volatility, the fame for cryptocurrencies increased manifold.
How countries are responding to cryptos?
The overall response across central banks of various countries is lukewarm. While some countries are highly supportive of cryptos, other central banks are cautious due to the extreme levels of volatility. Controls on capital and taxation issues have increased concerns and responses. However, many major banks are looking forward to developing CBDC to match the modernized financial system and speed up payments.
In the recent FOMC meeting held on September 22, 2021, the Chairman stated that FED is evaluating whether it should be part of the mainstream society and create a central bank digital currency (CBDC). It has taken a scan and learn stance.
In September 2021, the PBOC declared all crypto-related transactions as illegal. Hence, financial institutions cannot involve themselves in cryptocurrencies. It has taken an aggressive stance against the cryptos.
The ECB aims to complement the existing financial system with digital currency rather than replace it. Next, the Italian payments giant is said to be contributing to the ECB for its expected CBDC. Thus, it has taken a defensive stance.
BOJ has started experiments in April 2021 to evaluate the technical feasibility of developing a CBDC of its own. The experiment’s first phase is expected to be completed by March 2022.
The Bank of England has created a CBDC task force to coordinate the UK-based CBDC. Further, it has established engagement groups to gather information on the non-technological aspects.
How will global investments be impacted?
Due to the lowest level of correlation between the traditional market instruments and cryptocurrencies, these are held as assets and are treated as an effective tool for aggressive diversification. It hedges the portfolios against potential risks. It is the main reason for the rise in crypto transactions across various exchange-traded products.
However, few experts believe that a crash in cryptocurrency will have a broader impact on the overall market, similar to how MBS (Mortgage Backed Securities) contributed to the 2008 crisis leading to a global financial crisis. The total market capitalization of cryptocurrencies is $ 2.65 trillion as of November 21, 2021, with around 14000 cryptos trading over the globe. On the same date, bitcoin’s dominance is 42.2 percent, followed by Ethereum at 19.6 percent. At the outset, cryptocurrencies are expected to be treated either as a speculation vehicle or as a hedging-support against inflation.
How can cryptocurrencies benefit the economic world?
There is no intermediary required for the exchange of cryptocurrencies. It leads to increases in the speed of transactions. Since there are no intermediaries, transaction costs are lower. Lower transaction cost implies efficiency in exchange and an increase in the volume of transactions. There is less need for a physical structure where people will come and transact. Fixed costs are lower due to non-requirement of wages, rent expenses, or utility bills. There are even traders with no minimum deposit requirement criterion.
Further, there are no geographical barriers to cryptocurrencies. Thus, there is no centralized agency to monitor the transactions. This facilitates easy and quick trade for corporations.
One bitcoin is trading at $59,150 as of November 2021. Most people won’t be able to buy even a single bitcoin! Hence, you can purchase cryptocurrency fractions, which further amplifies the volume and feasibility of transactions. A person in India can start from as low as Rs. 100. Cryptocurrencies can become common currencies between economies, facilitating more trade.
A peer-to-peer network backs the blockchain system of cryptocurrency. Thus, the transactions are decentralized, unlike the traditional financial system. The user of cryptocurrencies believes that they should have complete control over their money instead of a banker. Also, multinational entities usually take loans in domestic as well as foreign currencies. Adding the option of Cryptocurrencies can diversify the exposure. Thus, cryptocurrencies can provide access to a diversified loan portfolio.
Moreover, the sender and recipient information is kept confidential in the blockchains. There are numerous security layers around the information which increases the mining activity.
Entrepreneurs can receive payments in more currencies. It helps them get better financial coverage and a liberated financial connection. The Cryptocurrency network is backed by distributed ledger technology. It is automated and digitized too. Thus, it eliminates the risk of fraud and corruption, the biggest dent in the traditional financial system. Neither companies nor individuals can manipulate it.
Cryptocurrencies to enable global financial inclusion:
Especially in developing countries, cryptocurrencies help buy the resources and provide financial services due to their quick access facility. It, therefore, accelerates the economic and social development of the global economy.
The system is decentralized, i.e., not in the control of one single person or authority. Thus, neither corporations nor individuals can exploit it, unlike the traditional financial system. This, in turn, reduces the probability of fraud.
Cryptocurrencies are much helpful for developing economies since they can increase their economic and social status. Entrepreneurs get more control, and thus, access to capital becomes much easier due to the advent of blockchain technologies. Everything contributes to the rise in economic activities.
The crypto-based economy is moving towards open source, global access to all regardless of nationality or socioeconomic status. The global financial inclusion due to cryptocurrencies can provide access to critical financial products to over 1.7 billion people over the globe who have remained unbanked or underbanked. It is estimated that the annual GDP will boost by $ 3.7 trillion for emerging economies.
Blockchain projects are also deployed in electricity data management and commodity trading. Blockchain technology helps to increase the real-time speed and efficiency along with transparency. Thus, blockchain will increase the rate of transmission. Without any need for an intermediary, blockchain can record and settle energy trading transactions. Since all parties are using the same platform, there is no need for reconciliation.
How blockchain & cryptocurrencies can help build a greener future?
Every benefit to humankind comes with a cost to the environment. The information is stored in blocks of data in an electronic format. The data is tabulated to allow easy filtering of information. Due to the early stage of blockchain technology, there are a series of allegations regarding the significant consumption of energy and increased carbon emissions.
The bitcoin mining activity indeed consumes a lot of computing power, and these systems need a cool place for storing the data. Thus, there are environmental consequences due to an increase in bitcoin mining activity. However, the situation was similar to the introduction of the internet back in 2002. The entire process is undergoing a substantial change. The momentum over the last decade was unexpected. Everything is in the midst of a transition towards clean, green, and more sustainable options to reduce carbon emissions. Over time, economies of scale will change the base technology and provide better opportunities.
Taking a look at the present system of financial networks, it engulfs more energy than what the bitcoin network consumes. The significant energy consumption of the traditional financial system is attributed to the growing number of ATMs, operations of bank branches, maintenance and up-gradation of data centers for banking transactions, and the entire global banking system.
On the other side of the story, we have cryptos that use renewable energy sources. The energy used by miners would anyway go waste if unused. As per the University of Cambridge, mining pools use 78% of renewable energy. The excess capacity generated from renewable sources is used efficiently by crypto miners.
Also, there is a possible transition from PoW (Proof of Work) to PoS (Proof of Stake). With the launch of Ethereum 2.0, the process shifted from proof of work to proof of stake. It is noted for significantly lower consumption of energy. PoW powers the Bitcoin network that demands a high energy level to mint new coins and validates the transactions.
On the other hand, PoS allows miners only to validate the number of coins they hold. It allows the reduction of hardware requirements which further reduces energy consumption. As a result, the Ethereum network consumes 100 TWh lower than the Bitcoin network.
To help the corporations reduce their carbon footprints, a growing class of green assets, namely Carbon Utility Tokens (CUT), have emerged. The sale of these tokens contributes to carbon neutrality. Investments are made in carbon capture and carbon offsetting programs. With the increased visibility of cryptocurrencies in the balance sheet of companies, CUT helps corporates reduce the carbon footprints against each coin. Thus, blockchain technology has the potential to move towards a greener future.
Change is the law of nature. If people do not change with the advent of technology, nature will put them on the back foot. Cryptocurrency is the future of the banking world. It has a tremendous capacity to transform the businesses that do not have access to banks. Hence, upgrade yourself, buy cryptocurrencies, study them, invest in them, trade them but don’t stay passive while the entire mob is reaping the benefits of the cryptocurrency