Since Bitcoin was invented in 2009 several private cryptocurrencies have been introduced in the market. By far, Bitcoin has been the most successful one. The amount of media attention that Bitcoin has garnered, caused its market value to reach a whopping 20 billion USD by March 2017. Recently and more significantly, several Central banks have started to explore the benefits of adopting cryptocurrencies and blockchain technologies for large-value payments and retail.
While policymakers are concerned about the challenges and opportunities that cryptocurrencies bring along with technological advances there is still very little guidance provided by economic theories concerning the proper usage of these technologies and optimal designs of the systems.
What is the present stand?
The economic literature regarding cryptocurrencies is slim. There are very few economic models that have been developed to study the new mode of technological payment. These models use various frameworks to determine different research questions and afterward focus on various aspects of cryptocurrencies.
Currency plays the role of a middleman between the economy and the people and in this article, we will see how the economic factors stimulate cryptocurrencies.
What would it take to be a currency?
There are few prerequisites that cryptocurrencies need to fulfill for being accepted as a currency.
- Confidence in the currency
For cryptocurrency to be a currency it has to be a robust kind so that individuals can instill confidence.
- Global acceptance
Since cryptocurrency is a relatively new asset it is still scarce. It requires popularity among users who are the backbone of the economy.
- Stability in exchange
The volatile nature of cryptocurrencies is one of the reasons why it is not yet widely accepted as a currency although it is likely to stabilize with time.
How the economy works for fiat currencies is different from how it works for cryptocurrencies. For instance, if a person is gaining 1000 USD in fiat currencies then another person is losing the same amount. The story is opposite with cryptocurrencies where if a person earns 1000 USD then 100 people lose 10 USD each that is how a decentralized economy works.
How good or bad is it?
It can be inferred from the status of cryptocurrency that it is indeed democratizing the economy on an international level. With no limitations, you can get a fair deal but good comes along with bad as well.
As much as cryptocurrencies have ignited the system of zero management cost transactions it has also given the power to illegal markets like the dark web. Even though cyber-attacks are not readily possible in decentralized systems cryptocurrencies can be used for illegal services and Cybercrimes.
Presently, cryptocurrencies are still naive for the economy. It is only a matter of time that we can predict what will happen in the future. With several cryptocurrency cycles expanding on a universal level, exploration by financial institutions and individuals is surfacing as well.
The high stock flow rate has also made its market value increase. To verify its retention power and appropriateness in the economy, the Stock Flow Model needs more extensive data to earn passive income.
How economical would crypto investment be?
Every transaction that occurs on blockchain technology is entwined with Unspent Transaction Output (UTXO). It helps in analyzing the distribution of transactions over the years.
It is understood that people who hold their assets for a substantial period, get high returns and that small-time investments are not profitable. The volatile nature of cryptocurrencies makes it essential to follow the HOLDS waves that deliver higher profits from investments.
To conclude the economics of cryptocurrency, it has to be first agreed that financial transactions affect the economy. What is required is to make investments transparent, people to manage and monitor their funds themselves, create and secure records and democratize the economy. Cryptocurrencies check out all the above points and would help to build a stronger global economy in the future although with certain exceptions.