What’s all the buzz about Cryptocurrency? Is it boosting economy?

Summary

• From an internet fad to becoming a promising investment option, cryptocurrencies have come a long way.
• Cryptocurrencies like Bitcoin offer an edge over fiat money as they do not require third-party regulation due to them being digitized and automized.
• However, due to their volatile nature, cryptocurrencies may never be able to serve as a good store of value and could be a risky medium of exchange.

The journey of cryptocurrencies has progressed from being an obscure trend to becoming an extraordinary means of investment. The initial doubts surrounding cryptocurrencies have long been snuffed out with the arrival of new entrants like Litecoin, Ethereum, Tron and the internet’s latest favourite “Dogecoin”.

Cryptocurrencies have snapped out of their reputation as an internet fad to make a considerable mark on financial markets as well as on the economy. The global neutrality attached to cryptocurrencies make them a lucrative method of investment for many investors.

The growing popularity of cryptocurrencies has stemmed from their distinguishing factors like absence of decentralization, lesser risk compared to other currencies and the digital functionality of the currency.

Understanding Cryptocurrencies

Cryptocurrency transactions are validated by a network of computers rather than through a central regulatory body. The mechanism of a cryptocurrency transaction resembles the process of making an online payment through an address and a password.

Bitcoin, the first and the most popular cryptocurrency, continues to dominate the industry by holding a 2/3^rd share of the market. These cryptocurrencies have highly volatile prices which are dependent on demand. However, these price fluctuations in no way comment about how well cryptocurrencies can replace actual currencies.

Cryptocurrencies are different from electronic exchange of money as they do not come under a third-party regulatory authority. These authorities also charge a fee for letting users carry out these transactions, employ workers besides maintaining electronic networks and other infrastructures. Thus, cryptocurrencies have considerably changed the game as they do not require these additional costs and charges.

Economic impact

Cryptocurrency could considerably change the way how transactions are carried out. An international money transfer through traditional methods involves many intermediary charges and fees. However, with cryptocurrencies like Bitcoin, it is possible to trade the currency across borders with the tap of a finger.

Cryptocurrencies take place on a global platform which is not backed by government-fiat currencies. This can act as an advantage in conducting more efficient transactions.

Additionally, cryptocurrencies offer higher transparency as there are no intermediary institutions like banks in the case of fiat currencies. All cryptocurrency transactions are monitored and tracked. Thus, it is difficult to misplace it or rig the transaction process. This bestows a higher level of trust on these cryptocurrencies, letting people from developing countries also take part in them. The automized and digitized process allows for greater clarity amongst the users.

The exposure offered by cryptocurrencies can go a long way for the developing countries. Small nations that may not have large financial backing can resort to these digital currencies instead of depending on high-risk methods of obtaining capital.

Can Cryptocurrencies replace fiat money?

The question arising here is whether cryptocurrency trading is a fitting replacement for traditional money transactions. It is highly unlikely that this would happen anytime soon; however, gaining a perspective about the potency of cryptocurrencies as a means of common transaction can be insightful.

In many aspects mentioned above, cryptocurrencies can offer an edge over traditional fiat currencies. However, it is imperative to take note of certain risks and shortcomings attached to this new method of conducting transactions.

Money performs functions like serving as a unit of account, as a medium of exchange and acting as a store of value. Realistically, cryptocurrency may never be able to fulfil these functions completely. Even if governments were to accept Bitcoin as a form of payment, the high volatility attached to it would render them dysfunctional as a store of value.

Apart from that, there are many technical issues related to currencies like Bitcoin. The number of computational services required to facilitate cryptocurrency transactions are significant, not to mention the power required to facilitate these transactions would be costly too.

Thus, these digital currencies may never serve the purpose of traditional money, at least in the near futture. It is possible, however, that by the time these cryptocurrencies are used as an acceptable form of payment, they might have undergone a multitude of regulatory changes.