The Coronavirus pandemic has caused a fundamental shift in the way we live and work. From introducing remote work as the new normal to encouraging social distancing, the pandemic has brought about numerous changes that are likely permanent.
One of these is the widespread adoption of digital and contactless payments. Thanks to the need to self-isolate, consumers are looking for solutions that allow them to handle their money digitally. They are also looking for alternatives to physical money. This is where cryptocurrency and digital money come in.
According to Eswar S. Prasad, the author of “The Future of Money,” the use of cash could eventually come to an end. Prasad believes that central bank digital currencies, cryptocurrency, stablecoins, and other types of digital payment systems are likely to dominate financial transactions in the coming years.
The adoption of these technologies could cause the use of cash to die out. Prasad also believes that it is unlikely that one particular technology will dominate the market. Instead, we can expect a combination of methods to become mainstream. Cryptocurrency and central bank digital currencies will probably be the most popular options here.
Read on as we discuss the benefits and challenges associated with cryptocurrency.
The Advantages of Cryptocurrency as the Future of Money
Some of the ways that the use of cryptocurrency could benefit the future of money include:
1. It’s Secure
Trust matters a great deal when it comes to money. In the case of cryptocurrency like Bitcoin, this cryptocurrency is distributed in a decentralized manner. All Bitcoin transactions are checked by miners who help prevent fraud and make sure no one double spends.
Miners are paid to verify every bitcoin transaction and maintain the blockchain’s integrity. The type of workflow is a major reason the blockchain has never been hacked. It is also what gives Bitcoin and other cryptocurrencies their value. They cannot be manipulated by companies or people, which reduces the risk of corruption and fraud.
2. It Offers New Avenues of Investment for Entrepreneurs
Cryptocurrency can also positively influence the future of money because it can allow entrepreneurs to receive funds in multiple currencies and from other countries. This can help small businesses get more financial coverage and partner with investors and organizations on a global scale. It holds great promise for financial systems and encourages more diverse investment opportunities. It can also facilitate international trade more smoothly.
3. It Improves Access to Credit
Cryptocurrencies are powered by the internet and rely on digital data transfer. This means that anyone with a viable internet connection can use cryptocurrency. This holds great promise in terms of accessing credit. A major chunk of the global population has access to the internet and uses a mobile phone. However, they may not be able to access traditional financial systems as easily.
The Disadvantages of Cryptocurrency as the Future of Money
While there are numerous benefits of cryptocurrency, we cannot deny there are also several challenges that can interfere with its widespread adoption. Let’s take a look at what these are and how they can impact the future of cryptocurrency.
1. It’s Volatile
One of the main apprehensions people have about cryptocurrency is its volatility. Currencies need to be a good medium of exchange. This can be difficult if their value tends to vary a lot. In May 2021, we saw the price of Bitcoin fall by 30% and then recover by 12% on the same day. These types of price movements can make it difficult to use cryptocurrency as a means for buying goods or services.
It is important to offer some kind of stability on this front so we can utilize cryptocurrency for financial transactions.
2. It Has Adverse Environmental Consequences
Mining newly-minted cryptocurrency is a complicated process. It requires miners to use a lot of computing power and solve complex computational math problems. This requires a lot of electricity consumption. As per one report, the amount of power required to validate one Bitcoin transaction is equal to the amount of electricity used by an average US household for a month.
If Bitcoin becomes mainstream, this could create significant environmental problems. On the flip side, other cryptocurrencies such as Ethereum could help avoid these problems. Ethereum uses different mechanisms and is more environment-friendly.
3. It Could Lead to Income and Wealth Inequality
As per Eswar Prasad, there is also a possibility that the use of digital currencies could widen the income and wealth gap. Rich individuals may be able to benefit from these currencies more. In comparison, low and middle-income individuals lack the financial literacy required to leverage new investment opportunities.
Besides this, Prasad also points out that smaller economies could feel the effects of digital currencies in a negative manner. Their central banks and local currency could be less relevant. This would transfer a major portion of financial and economic power to large economies.
It is important to understand how the future of money could impact smaller economies as well as the financial systems and society as a whole to avoid this.
Wrapping It Up
As far as the future of cryptocurrency is concerned, this technology holds a lot of potential in digitizing payments. It can’t be hacked, it has very low transaction fees, and it’s versatile. On the flip side, it can be a tricky medium of exchange on account of its volatility. Cryptocurrencies like Bitcoin also require a significant amount of electricity and can lead to adverse environmental outcomes. There is debate on cryptocurrency improving access to credit versus increasing the income and wealth inequality gap, as well.
At present, cryptocurrency may function more as a speculative asset. However, if we address the challenges associated with it, it could play a significant role in shaping the future of money.
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