What is the economic impact of cryptocurrencies?
Cryptocurrencies
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What is the economicimpact of cryptocurrencies?
Cryptocurrencies are digital assets managedwith cryptographic algorithms. There are different types of cryptocurrencies. Bitcoin(BTC) is perhaps the most well-known cryptocurrency, but thousands ofothers have emerged over time. Naturally, these also include stable coins,cryptocurrencies whose value is pegged, for example, a fiat currency,debentures or commodities such as gold.
Whencryptocurrency prices are correcting and the Fear and Greed Index bounces back,it is important to take a breath and understand that the broader impact of cryptocurrenciesextends beyond daily price fluctuations. Cryptocurrency use cases and theirunderlying blockchain technologies are evolving at an exponential pace.
Thetremendous economic impact of cryptocurrencies on the global economycuts through areas of national borders and was impossible not so long ago. Likeany tool or technology, cryptocurrencies also have advantages anddisadvantages. The positive effects of cryptocurrency are profound. One of thebiggest advantages is arguably accessibility.
Withcryptocurrencies, one can make or receive payments without the intervention ofthird parties such as banks. The status quo of the current financial system hasarguably failed many individuals globally. Indeed, over 1.7 billion people donot have bank accounts. Because of their reach, cryptocurrencies can promotefinancial inclusion globally.
Forunderserved and unbanked populations — one billion of whom have mobile phones —the use of cryptocurrencies offers a shot at financial inclusion. Therefore itcan be argued that cryptocurrencies are inherently good for the economy. Thealternatives matter, too. Some may choose to only involve themselves withwell-backed stablecoins.
And, whethercryptocurrencies are valid ways to flee from rising inflation depends on if oneconsiders them true alternatives to (failing) monetary policy. A BTC maximalistmay argue that allowing for a non-fixed money supply, post-1971 and certainlypost-2008, has proven to not match the needs of a real economy.
Staggeringinflation rates globally arguably spur the curiosity about and need forcryptocurrencies. Another disadvantage is that most cryptocurrencies cope with:volatility. As a result, some currencies may quickly lose their value.Economists, who tend to look at "money" through a traditionallens, may argue that cryptocurrencies are thus unsuitable as a means of paymentand that users run greater risks.
Economistsmay also argue that the value of cryptocurrencies is not guaranteedbecause of the lack of commercial or central bank involvement. An economist mayhold that a central bank digital currency (CBDC) can be a good solution becausegovernance remains in the hands of the central bank. When the stock marketssuffer a correction, risk-aversion strategies are also toning downcryptocurrency investments.
It is oftenstated that crypto winter is approaching, understood as something similar to abear market cycle in the stock market but then regarding the prices of digitalassets on the crypto markets. The winter goes along with some painful(individual) effects. For instance, some crypto-related companies have beencutting their costs through layoffs.
The cryptocurrencymarket capitalization being correlated with the traditional marketsindicates institutionalization, but that is not necessarily bad. It indicatesadoption and acceptance as the first steps toward broader acceptance ofcryptocurrencies and their underlying technological foundation. Althoughblockchain and cryptocurrencies are fundamentally meant as 'trustless'technologies, trust remains key there where humans interact with one another.
Thecryptocurrency market is not only impacted by the broader economy, but it mayalso generate profound effects by itself. Indeed, the Terra case shows that anyentity — were it a single company, a venture capital firm or a project issuingan algorithmic stablecoin — can potentially set into motion or contribute to a "boom"or "bust" of the cryptocurrency markets. Yet, many working inthe sector have a "trustless" conviction that strong projectswill keep up during temporary corrections and that the cryptocurrency winterwill clean up the path for a cycle of unlimited, novel disruptive innovation.
The cryptocurrency market is not only impacted by the broader economy, but it may also generate profound effects by itself. Indeed, the Terra case shows that any entity — were it a single company, a venture capital firm or a project issuing an algorithmic stablecoin — can potentially set into motion or contribute to a "boom" or "bust" in the cryptocurrency markets.