Can Cryptocurrency replace traditional money?

The pandemic has increased the usage of cryptocurrency to a wide extent, and there is no doubt that cryptocurrencies can replace cash. The fact that people have begun using cryptocurrencies while ordering personal stuff has also increased the interest in its usage. Bitcoin seemed to be the unquestioned leader of the cryptocurrency market towards its beginning. While it still accounts for a major portion of the industry’s market capitalization, Ethereum and Ripple are some other currencies to have picked up. Different other cryptocurrencies have also been trying to pave their way to a major trading process, and cash is losing ground at several places. Some nations have already eliminated large banknotes worth $100. One thing that needs to be kept in mind is that the stability of crypto is related to the dollar since many of these exchanges are backed by it.

LET’S UNDERSTAND THE POSSIBLE ADVANTAGES OF CRYPTOCURRENCIES REPLACING CASH.

  • According to the supporters of cryptocurrencies, the first advantage is that their availability is limited. The total number of bitcoins that can be mined has been limited to 21 million, out of which 18.5 million have already been circulated. That leaves to mine less than 3 million coins. So it will become impossible for the central authorities to issue the currency in more quantities to devalue its core value.
  • It is also believed that cryptocurrencies could be the better basis of universal basic income than the regular fiat currencies because of it’s unregulated status.
  • The additional advantage is that the currency becomes less vulnerable to the crises of hyperinflation.
  • Contrary to its characteristics, cryptocurrencies are often called trustless since the database on which the transactions happen cannot be recorded or edited by the central authority unlike money held in banks. There is a probability for banks to theoretically expropriate the money from its users and mention its non-existence.
  • These advantages can seem theoretical since hyperinflation has not occurred in practicality for a good number of years. Secondly, while there have been examples of financial institutions defrauding their customers, it will not be as simple or subtle to seize the customer’s money and say it never existed. The practical advantage of cryptocurrencies is their anonymity and that it could eliminate the involvement of intermediaries in everyday transactions. It cuts the cost of business and helps customers to quite an extent.

CONCERNS THAT COULD ARISE IF CRYPTOCURRENCIES REPLACE CASH

  • According to the economic theory of money, it has three major functions – a medium of exchange, a store of value, and a unit of account. In the case of cryptocurrencies, they are an excellent medium of exchange for transactions that need to be anonymous. On the flip side, it is prohibitively expensive for the other two functions.
  • The transaction fee of the undisputed leader of cryptocurrency Bitcoin has increased from 28 cents to $13.41 from January 2020 to October 2020.
  • Despite the price of cryptocurrency increasing over time, its use of being a store of value is limited by the volatility it experiences. However, advocates in the favour of cryptocurrencies often argue it to be a good store of value since the price is still expected to rise in the future. On the flip side, governments also aim to have a stable currency for their economy rather than a highly volatile one. This itself limits the effectiveness of cryptocurrency as a unit of account. For example, calculating the value of an asset in bitcoin makes little or no sense since its real value changes by an average of 2.22% per day.
  • If cryptocurrencies ought to outpace the fiat money, the latter will lose its value without any recourse. Additionally, a complex new infrastructure would have to be built for the people to adopt the usage of cryptocurrencies. Certain economies cannot afford to replace crypto with cash since the majority of their population is not educated enough, and does not have personal bank accounts as well. Needless to say, it will be difficult for them to learn the usage of apps for trading crypto. Financial institutions will have to go through major changes in their operation for better adaptability of cryptocurrencies.

Regardless of the increase in the popularity of cryptocurrencies during the past year and how individual investors feel about the prospect of replacing cryptocurrencies with cash, it is a distant possibility. The majority of the world’s population is habituated to carrying cash and keeping it safe. Even though we can expect better adaptability of cryptocurrency in the days to come, the possibility of it replacing traditional money is scarce.

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