Academic Discipline: Business Administration/Finance
Assignment Subject: Is Cryptocurrency the future of money?
Academic Level: Undergraduate-4th Year
Referencing Style: APA
Word Count: 1,024
Is Cryptocurrency the Future of Money?
Mankind is on the verge of a financial transformation that will completely change the way individuals and institutions manage money transactions. For most people, all financial transactions are done online. This trend has been exacerbated because of COVID-19 in the past couple of years. Gone are the days when people used to line up in front of an ATM to withdraw cash, visit bank branches to collect account statements or apply for a mortgage, or shop in a department store (Wojno, 2022). But there’s a bigger trend that’s disrupting the fintech industry. Cryptocurrencies are changing the future of money and challenging the supremacy of the largest banks in the world and other financial institutions that currently manage monetary transactions.
Many people have heard and read about cryptocurrencies, but few know how they actually work. “Cryptocurrency is a digital token that’s secured and transferred cryptographically using blockchain technology” (Wojno, 2022, p. 1). In simpler terms, cryptocurrencies are digital currencies that are encrypted to verify transactions. There are thousands of cryptocurrencies in existence, of which Bitcoin is the most popular. Researchers estimate that the combined value of cryptocurrencies is more than $2 trillion USD (Wojno, 2022). What makes cryptocurrencies unique is the fact that they are not controlled by banks and governmental authorities. Because cryptocurrencies are not regulated by sovereign institutions, they can be easily used for illegal activities such as buying arms and other banned goods, money laundering, and drug trafficking. Despite these controversies, we have seen a rapid rise of the use of cryptocurrencies. In fact, cryptocurrencies have the potential to significantly disrupt the world economy.
Adoption of Bitcoin as Legal Tender
Bitcoin was developed by Satoshi Nakamoto in 2008 (Breidbach & Tana, 2018). His main motive in creating Bitcoin was to challenge the hegemony of big banks. The concept of Bitcoin is innovative because it promotes decentralization of technology (Al-Mansour, 2020). Instead of storing transactions on a single server, Bitcoin’s database is spread over a wide network of computers. This database is known as “Blockchain” (Al-Mansour, 2020).
In September 2021, El Salvador became the first country in the world to declare the use of Bitcoin as a legal tender, thus allowing people to use Bitcoin for payments (Prasad, 2021). Numerous discussions have also taken place to make Bitcoin the medium of monetary transactions in countries like Afghanistan, where the system of conventional money has gone kaput. A recent survey showed that 27% of residents in the United States of America support the adoption of Bitcoin as a legal tender (Fries, 2021). Furthermore, the survey revealed that younger people tend to use Bitcoin and other cryptocurrencies more than older people. A report published by a major crypto payment provider stated that more than 50% of cryptocurrency owners are below the age of 45 (Fries, 2021). This means that young and tech-savvy individuals prefer to use cryptocurrencies for monetary transactions. Fries (2021) also believes that older people are suspicious of cryptocurrencies because they don’t understand the technology and concept behind these digital currencies.
Bitcoin is an extremely volatile asset as it experiences extreme price fluctuations. Early investors and adopters of Bitcoin have made a fortune just by owning and believing in this risky asset. In October 2021, cryptocurrencies entered mainstream finance as a Bitcoin exchange-traded fund (ETF) was launched in the American stock market. The ETF will allow investors in the United States of America to speculate on the price of Bitcoin without actually owning the asset (Prasad, 2021).
Cryptocurrency vs Fiat Currency
The primary advantage of cryptocurrencies over fiat currency is that it enables users to conduct financial transactions without relying on an intermediary such as a bank or a credit card provider (Prasad, 2021). The Blockchain technology that makes this possible is truly ground-breaking. Transactional data is noted on digital public ledgers. Anyone with access to the internet can view the transactional information. It is this transparency and unambiguity that makes cryptocurrency transactions secure and tamper-proof. However, the prices of cryptocurrencies are extremely unstable, thus making them undependable for day-to-day monetary transactions. Bitcoin and Ethereum, the two biggest cryptocurrencies, have very high transaction fees. Sometimes, the transaction fees are so high that they have a higher value than the transaction itself.
Another disadvantage of Bitcoin and cryptocurrency in general is that the process by which they are validated requires substantial computing power and huge amounts of energy. This means that cryptocurrency mining has negative environmental consequences. Because of these reasons, even though it is highly unlikely that Bitcoin will be used for facilitating transactions, Bitcoin has become a ‘store of value’. Many people believe that Bitcoin investments are secure because it is a scarce commodity. The central banks can print as much fiat currency as they want to, but Bitcoin is limited to a total issuance of 21 million tokens (Prasad, 2021).
Bitcoin has numerous flaws but blockchain technology itself is evolving. Some new cryptocurrencies such as Solana have the potential to become mediums of exchange (Prasad, 2021). Blockchain technology is surely treading on the right path and that day is not far when blockchain will increase the accessibility of low-cost digital payments. There are many people in small developing countries who do not have access to digital payments because they don’t have a bank account or a credit card (Prasad, 2021). These people will hugely benefit from blockchain technology.
The Bank of America has touted Solana as the Visa of the digital world (Bellusci, 2022). This is because Solana is focused on faster and low-cost transactions and scalability. Another practical application of cryptocurrencies is for international payments. Currently, the process of international payments is very slow and cumbersome. There are numerous impediments because of which international payments take up a lot of time. With blockchain technology, the process of international payments “can be made quicker, cheaper, and easier to track” (Prasad, 2021, p. 2). These changes will make life easy for exporters, importers, businesses, and consumers. To sum up, blockchain technology and cryptocurrencies offer a novel way of democratizing finance, thus allowing easier access to a wide variety of financial products and services (Prasad, 2021).
Al-Mansour, B. Y. (2020). Cryptocurrency Market: Behavioral Finance Perspective. Journal of Asian Finance, Economics and Business, 7(12), 159-168. doi: 10.13106/jafeb.2020.vol7.no12.159
Bellusci, M. (2022, January 12). Solana could become the Visa of digital-asset world: Bank of America. Retrieved from CoinDesk: https://www.coindesk.com/business/2022/01/12/solana-could-become-the-visa-of-digital-asset-world-bank-of-america/
Breidbach, C. F., & Tana, S. (2021). Betting on Bitcoin: How social collectives shape cryptocurrency markets. Journal of Business Research, 311-320. https://doi.org/10.1016/j.jbusres.2020.09.017
Fries, T. (2021, September 30). El Salvador has adopted Bitcoin as official legal tender – but will other countries follow? Retrieved from World Economic Forum: https://www.weforum.org/agenda/2021/09/el-salvador-officially-adopts-bitcoin-as-legal-tender-but-will-other-countries-follow/
Prasad, E. (2021, October 22). The future of crypto is bright, but governments must help manage the risks. Retrieved from Time: https://time.com/6108232/bitcoin-cryptocurrency-future-blockchain-regulation/
Wojno, M. (2022, January 18). The future of money; where blockchain and cryptocurrency will take us next. Retrieved from ZDNET: https://www.zdnet.com/finance/blockchain/the-future-of-money-where-blockchain-and-cryptocurrency-will-take-us-next/