how cryptocurrencies are affecting the worlds economy – Cryptocurrencies are digital currencies used to exchange goods or services. They were created as a result of the 2008 financial crisis for internet transactions; However, currently, not only electronic companies have accepted cryptocurrencies as forms of payment, but some companies such as Starbucks, Burger King Germany, Reeds Jewelers, and Virgin Galactic, among others, also do so for their benefits.
These digital currencies impact the world economy. Therefore, this document explores the relationship between both concepts by providing examples in which cryptocurrencies have represented an alternative for the economy. Likewise, its most significant disadvantage, volatility, is analyzed to have a broader picture of what cryptocurrencies mean.
How do cryptocurrencies work?
Cryptocurrencies are an efficient and safe way to carry out operations since they are based on the principles of cryptography that, through a chain of blocks, allows the maintenance of a perpetual record of the transactions carried out.
This chain of blocks is a public registry where all the operations of these digital currencies are. However, even though this book allows any user to track all the transactions made by all the computers on the network, the information of the people involved is protected.
Similarly, the security of these coins not only due to encryption but also to verification since the rest of the users validate that the transaction can carried out correctly.
Advantages of cryptocurrencies
Cryptocurrencies have seen as a possible alternative to the current monetary system mainly becauselogy, and multiple advantages have considered a determining factor in transforming how strange carried out worldwide.
One of the main advantages of cryptocurrencies is that they do not require an administrator; they do not depend on governments, banks, or any institution to function.
And why it essential for the economy to decentralized? Firstly, it allows independence from recessions and economic crises, thus obtaining the highest market price to date. Together, depending on banks and governments is costly for the society for two main reasons: the first is that in banks, these transaction systems are expensive, so having cryptocurrencies reduces commissions and eliminates interest in the operations carried out. Second, the government cannot distort the accounts by printing more mone,y thus causing inflation.
In this sense, cryptocurrencies avoid the leading cause of inflation in traditional currencies because their issuance reduced over time and never exceeds 21 million.
Another advantage of this digital currency is that it allows people to “save their capital” and keep it intact, in addition to being flexible operations that provide significant liquidity.
Because of the above, these digital currencies have quickly become popular and “could shake the foundations of the world economy.” To exemplify, their acceptance has been such that, as a mitigation of the economic consequences brought about by Brexit (the separation of the United Kingdom from the European Union), some citizens of the United Kingdom bet on these virtual currencies to keep the value of their currency intact. Capital. The same thing happened with the citizens of China in mid-2017 since their market had affected, and the yuan’s value fell drastically.
Disadvantages of cryptocurrencies
Digital currencies based on speculation, so they should not understood as a form of investment but rather as a bet. Even though the value of these coins is very volatile, for those who bought at the beginning, it has been 9,000,000% profitable. The following images show the volatility of the most important digital currency, Bitcoin.
Cryptocurrencies, as we can see, have significant instability, especially in the last year. Although its price has recovered in recent months, the deterioration in the price of oil and the consequences of the arrival of the coronavirus caused the value of this digital currency to fall by more than 20% at the beginning of the year due to the panic caused among the population. Consequently, as many people put this electronic currency up for sale, its value depreciated for a few months.
This instability arises because this currency depends on its price in the market; It is based on demand, just like an auction: if many people want to buy what you sell, the price will go up. Otherwise, it will go down.
Conclusion
To conclude, it stated that cryptocurrencies an alternative, safe and efficient way to exchange goods or services that positively affect the world economy due to their decentralization, excellent liquidity and flexibility. However, you have to know this market before entering it to take advantage of the benefits of this electronic currency.
Likewise, we must be aware that security is always relative; Although virtual currencies are very secure, nothing is 100 per cent free of vulnerabilities.
Likewise, it essential to highlight that, as we have already mentioned, the value of these virtual currencies volatile and that, as with traditional currencies, there external factors that we cannot control, so one day, you can earning a lot, while the other gets hurt.
The author
Maritza Rosales Hernández is a student of Engineering and Computer Science major at the Tecnológico de Monterrey. This article is the product of her final project on “Personal and Business Finance”.
Adviser
Jorge Adrian Meyran Woo. Director of the Academic Program of the Degree in Financial Administration. Academic Department of Accounting and Finance, School of Business, Campus Querétaro.
References
- Böhme, R., Christin, N., Edelman, B., & Moore, T. (2015). Bitcoin: Economics, Technology, and Governance. The Journal of Economic Perspectives, 29(2), 213–238.
https://www.jstor.org/stable/24292130?seq=1 - Iwamura, M., Kitamura, Y., Matsumoto, T., & Saito, K. (2010). Can We Soothe the Price of a Cryptocurrency?: Empathetic the Design of Bitcoin and Its Potential to Compete with Central Bank Money. SSRN Electronic Journal, 60(1), 41–60.
https://doi.org/10.2139/ssrn.2519367 - Candelario, B. (2015). Bitcoin Information About Its Regulation In The Americas And Future Growth. University of Miami Inter-American Law Review, 47(1), 95–128.
https://www.jstor.org/stable/26788278?seq=1&cid=pdf-reference - Luther, W. J. (2015). Bitcoin and the Future of Digital Payments. SSRN Electronic Journal, 20(3), 397–404. https://doi.org/10.2139/ssrn.2631314
