It is the rapid expansion and a wide range of benefits of cryptocurrencies that you will hear about now has brought in a change in the economy of several countries. However, very little is known about the associated economic risks of using cryptocurrencies.
A couple of years ago, there were a lot of debates and discussions regarding the status of cryptocurrencies. However, at that time the primary the objective of these debates revolved around the main question which was whether or not to prohibit these digital currencies completely or to restrict its use rigidly.
However, over the years the regulators of most of the countries in the world are now more amicable about it and have even realized the benefits of it. Few are even more optimistic than the others looking at the potential of the new blockchain technology that it uses for recording all financial transactions using these digital currencies.
All these changes in beliefs, opinions, and concepts are majorly due to the futility of the bans imposed on these digital currencies before.
The market of cryptocurrency
The market of cryptocurrencies seems to be growing continually and exponentially. As of now, their number has reached very close to 1,000. Add to that and seeing the potential of these digital currencies, the central banks of different countries have already started working on new projects to create local cryptocurrencies.
Few countries are even in favor of the proposal to create a common cryptocurrency that will be accepted internationally. If this happens then it will surely put an end to the currency wars and several other speculations that are going all over the world now. This will in turn help countries all over the world to avoid the common distortions in international trade and commerce.
The concept of e-gold
According to the 2016 study by the Bank of Canada, the effects of the development and rise of the digital currency were equated with a new gold standard. Surprisingly enough, what seems to be a simple digital currency now is considered much similar to gold in several different ways.
- First, it is the scarcity factor of this digital asset due to its limited supply that has made as good as gold.
- Second, the elimination of risks of its value dilution is also another reason to compare it with gold.
If you consider the bitcoin, for instance, it has a set limit of about 21 million. This limit signifies that with the current algorithms of emission there will be no more bitcoins mined once it reaches the 21 million mark. According to the algorithm of emission, this figure is halved every four years. You must note at this point that the protocols for most of all the other types of cryptocurrencies are usually similar.
Another similarity of cryptocurrencies with gold is in the process of mining these digital currencies itself. Usually, a lot of resources, both tangible and intangible, are spent on mining any product. This may not have any physical value once the product is mined. The value is created only when these products reach the tipping point after the people uses it as a means for making payments and savings.
With so much similarity to gold, it may seem that these digital currencies are advantageous at first glance. However, on a deeper probe, you will come to know the risks that these digital assets carry with it when it is used as money. These risks are typical and varied as compared to the gold standard.
Moreover, these risks are typically associated with the deflationary nature of an economy that relies heavily on a finite asset. There are several reasons for it.
- If any product that is considered as a significant measure of value and also at the same time constantly grows in price due to the significant finiteness of it then it makes the product not a worthwhile means for the economic agents to use and spend it.
- It is also because these products then become the “miserly knight” mode and therefore switches from consumption to savings.
Eventually, when such products are used, it can surely bring an economy to a standstill. This is, in fact, the first shortcoming of the cryptocurrencies that are related to and the result of the inability of the government of that specific country to control the supply of money.
There is another drawback when these digital assets are used as a mode of payment or savings. It is the inability to generate more demand for this means of payment that is essentially issued in a decentralized manner through an open and distributed network. That means it will undermine the functions of money as a useful means of savings.
Dissimilarities with gold
Cryptocurrencies however have a few dissimilarities with gold as well. You will find these when you read the reviews and articles on it just like you will be able to spot the difference between debt consolidation and debt settlement rating when you go through it.
That means there are lots of risks involved in it and even more importantly the regulators are finding it very difficult to estimate these risks as well and put a control measure to it.
- Unlike gold these digital assets imply arbitrage costs to almost zero. That means at the time of the gold standard, there may be a different rate of interests prevailing in a country and therefore it will result in a tight peg when it comes to using these assets as a local currency in comparison to gold.
- Another the significant dissimilarity of the digital currencies with gold is that on the costs of transporting. As far as gold is concerned this cost of transportation is very high and therefore gold cannot flow freely across the borders.
- On the other hand, governments are also unable to exercise any independent interest rate policies to these digital currencies.
That means there are lots of risks involved in it and even more importantly, the regulators are finding it very difficult to estimate these risks as well and put a control measure to it.
All these calls for a more favorable financial term and that is e-money that can be transferred to any part of the world safely and securely in a fraction of a second costing virtually nothing for it as well.
Marina Thomas is a marketing and communication expert. She also serves as a content developer with many years of experience. She helps clients in long-term wealth plans. She has previously covered an extensive range of topics in her posts, including Money Saving, Budgeting, Cryptocurrency, Business debt consolidation, Business, and Start-ups.