Cryptocurrency and the Potential for an Alternative Currency
In 2008, Satoshi Nakamoto shared in a mailing list a paper outlining the principles of Bitcoin. This new decentralized cash-exchange system could exist in the absence of a concept that had been central to banks since their creation: trust in the third party who carried out the transaction. Thanks to blockchain technology, a public ledger secured by a peer-to-peer verification network, users of the system could realize transactions whilst remaining anonymous. Nakamoto’s at first seemingly obscure idea gained momentum over the years and is now at the forefront of a group of alternative currencies called cryptocurrencies. Recently, young and at times satirical cryptocurrencies like Dogecoin and Shiba Inu made headlines for creating overnight “crypto millionaires”. As public awareness grew, criticism of the highly speculative nature of cryptocurrency also gained in importance. More criticism also came from cryptocurrency’s affiliations to cybercrime and money laundering. However, the cases of Bitcoin, Ethereum, and Litecoin, the principal representatives of the market, remain of intrigue especially because of their potential as a hedge asset against inflation.
On May 4th, 2016, a crypto aficionado could buy a Bitcoin for around $396.08 USD. On January 25th, 2022, the price was around $36, 964.20 USD. Yet, back in early November 2021, it had hit an all-time high of $67, 582.60 USD. A 2019 study conducted in China in the Journal of Management Science and Engineering reaffirmed the high-risk nature of Bitcoin and came to the conclusion that it could not be considered a haven for commodities and gold but that it could be used to hedge against stocks and bonds. Despite its volatile nature, many Bitcoin users still see it as the flagship of a new era of decentralized finance. The rise in demand for hedge assets is understandable when looking at current public debt levels, notably in the United States where the National Debt topped $30 trillion in February 2022. With high levels of inflationary pressure, fear of political and social unrest is growing among policymakers and investors in the United States, notably Ray Dalio founder of Bridgewater Associates, the largest hedge fund in the world. In his new book, Dalio explores the cycle of the rise and fall of economic empires. The book which is titled Principles for Dealing with the Changing World Order speaks to the current climate of uncertainty regarding the future of monetary economics.
What lies ahead for economic policymakers regarding cryptocurrencies is abstract. Several paths could be taken. One way would be to follow China’s crackdown on cryptocurrency. After the country faced a capital outflow crisis, it made illegal all activities related to non-state regulated cryptocurrency in 2021. In August 2020, $50 billion USD had been moved abroad from China in the past 12 months. Another way would be to outright adopt it like the country El Salvador did. Despite recommendations from the International Monetary Fund, the Latin American country chose to continue with Bitcoin as one of its main currencies stating that the choice of legal tender was an issue of sovereignty and that the adoption of cryptocurrency had allowed for increased financial inclusion. The issue of taxation is also on the discussion table for the regulation of new currencies. In the U.S., cryptocurrencies are considered to be property rather than currency under taxation law, whereas most other countries treat it as a fiat currency.
In conclusion, a lot remains unknown about the future of cryptocurrency. Although the times definitely seem to be changing, History is better appreciated in hindsight. Therefore, whether states choose to integrate, ban, or strictly regulate cryptocurrencies, they are here to stay.
Edited by Nadira Anzum
Featured Image "Cryptocurrency Mining, Bitcoin mining stock photo" by Crypto360 is licensed under CC BY 2.0