Twitter co-founder Jack Dorsey recently said that “Bitcoin will be world’s ‘Single Currency’ in 10 years”. This is accompanied by the recent rise in buying and popularity of cryptocurrencies like Bitcoin and Ripple, and in people making big bets against them. The question we have to ask now is where they can really dominate our financial system and replace the traditional currency to create a global currency, as many people are predicting.
The basic idea behind a cryptocurrency is that it is not valued against any physical asset like gold or currency like a dollar. Instead, it is built and managed through a complex process of cryptography. Bitcoin began in 2009 after the financial crisis of 2008 and wasn’t recognized widely until 2013 when it peaked at a value of $266. It had a market value of over $2 billion at its peak. After this, people were fascinated by the idea of quick money and saw this as a potential investment. However, shortly after, the currency fell by more than 50% which posed important questions on the reliability of cryptocurrency – Bitcoin in particular.
Cryptocurrency has some benefits compared to traditional currencies due to which it might be considered a potential financial system for various countries. Such a system would be a huge step for merging economies together by providing a single currency system. It will also give people who have little knowledge and access to financial tools an opportunity to take part in investment through cryptocurrencies. Currently, there is one or a few places to manage such currencies. Nonetheless, once these type of currencies are deregulated, investment and transactions will become fast and reliable which will eventually lead to a more transparent financial system. Furthermore, countries with unstable financial systems such as Zimbabwe and Venezuela – which have witnessed a decline in investment and growth due to hyperinflation and devaluation of their currency in recent years – stand to benefit from the stability offered by financial systems that use cryptocurrencies.
Some experts have predicted that Bitcoin will be soon placed on Nasdaq and NYSE(New York Stock Exchange) so that it can be bought and traded more freely. Some even forecast that all that cryptocurrency needs is a verified exchange traded fund (ETF). An ETF would definitely make it easier for people to invest in Bitcoin, but there still needs to be enough demand for investing in cryptocurrency.
On the other hand, we must see the other aspects of the picture.
Cryptocurrency is highly volatile and unstable; a currency which can be worth $15000 on one day may be a worthless digital scrap on the next, making it a risky investment and difficult for anyone to predict its value. Dealing in cryptocurrencies also lacks the confidence and insurance that people feel when trading in traditional currencies which are backed by national governments. Cryptocurrencies are not regulated or insured by any organization, making them an unreliable asset for people.
Additionally, some economists classify the cryptocurrency trend as another market bubble which is based on people’s irrational behavior. This happens in many markets where people’s speculation and hype leads to overpricing of assets. This gives rise to ‘bubbles’ in the market and usually happens when buyers speculate the price of an asset to be more than what it is worth and this trend spreads throughout the market. This phenomenon is sometimes called “irrational exuberance”. In such situations, people often forget the fundamental nature of markets. People think that prices rise for a reason, but they rise only because of the speculation-induced demand, which is predicted to collapse eventually – as it has every time. This has been observed in many markets in history as it happened with the dot com bubble and the housing market bubble in 2008.
All in all, we can say that the future of cryptocurrency is still uncertain and there is a long way to go before we can witness such financial system replacing the traditional currencies, but it is still a possibility considering the rapid digitalization of financial systems.
Written by- Anurag Gupta