Cryptocurrencies have pros and cons, like any tool or technology. The positive impacts of cryptocurrency are profound. One of the most significant advantages is arguably accessibility. With cryptocurrencies, one can pay or get paid without the intervention of third parties such as banks. The status quo of the current financial system has failed many individuals globally. Indeed, more than 1.7 billion people need bank accounts.
Due to their accessibility, cryptocurrencies may spur financial inclusion globally. For underserved and unbanked populations — one billion of whom have mobile phones — the use of cryptocurrencies offers a shot at financial inclusion. Therefore it can be argued that cryptocurrencies are inherently good for the economy.
Macroeconomic Outcomes for Crypto
The industry should consider the below economic outcomes when designing regulations for cryptocurrency:
Financial stability
Central authorities are concerned with financial stability, as they cannot set adjustable monetary policies with crypto. Any abrupt decrease in value might result in a loss of investor confidence and have broad market effects. In some emerging markets, crypto adoption has accelerated due to unsound local policies or inefficient payment systems. Because of this, there is a risk of circumventing capital control measures.
Equity
Crypto may be more attractive to those who perceive themselves as oppressed by the current financial system. In the U.S., Black Americans’ higher exposure to cryptocurrencies has left some more vulnerable to the recent economic downturn. One civil society CEO commented, “Consumer protection triggers mixed emotions for people of color. The intent may be to protect people from exploitation, but those instincts are paternalistic. Instead, we should ask how people of color benefit from decentralization?”
Safety
Crypto has an advantage over cash when moving large amounts of value across borders. If, however, these passages are managed using KYC/ AML measures, most transactions would be traceable. CipherTrace analysts found that less than 1% of transactions with crypto are nefarious. Yet, 98% of ransomware uses crypto. The government’s ability to investigate crypto-related crimes is limited in countries where crypto is unregulated.
Innovation
Innovation in the crypto space is happening rapidly, creating a multiplier effect of new concepts like NFTs and the metaverse. If citizens gain crypto in the metaverse, it could create net wealth. If these substantial proceeds were to be carried outside the metaverse, this could have an aggregate demand effect that results in economic growth.
The importance of macro-critical environmental sustainability
The consensus mechanism for crypto is energy intensive. While crypto alone cannot tackle climate change, some believe that the industry has the potential to provide incentives for sustainability and grid decarbonization, which the World Economic Forum’s Crypto Sustainability Coalition is exploring.
How does crypto protect from inflation?
Cryptocurrencies like BTC have traditionally been considered hedges against inflation. The capped supply of BTC and its decentralized nature have been believed to contribute to the increasing value of readily available BTC and those yet to be mined over time.
Falling cryptocurrency prices and high inflation rates may make some wonder whether BTC delivers the high expectations of 𝐟𝐢𝐧𝐚𝐧𝐜𝐢𝐚𝐥 𝐢𝐧𝐜𝐥𝐮𝐬𝐢𝐨𝐧 and hedging against inflation.
Will cryptocurrency survive an economic recession?
Despite the temporary crypto winter, cryptocurrency prices, industry developments, and innovation are arguably enhancing one another through a positive feedback loop.
The downward pressure in the cryptocurrency markets may correlate with the slipping of traditional markets and geopolitical factors. Cryptocurrency investors go through difficult times. The financial climate has changed considerably. High inflation, for example, is causing central banks to adjust their policies: They raise interest rates and thus ensure a tighter financial market. The rising interest rates make it more interesting to invest in bonds, for example.
Risk-aversion strategies are toning down cryptocurrency investments when the stock markets suffer a correction. It is often stated that crypto winter is approaching, understood as something similar to a bear market cycle in the stock market but regarding the prices of digital assets on the crypto markets. The winter goes along with some painful (individual) effects. For instance, some crypto-related companies have been cutting their costs through layoffs.
The cryptocurrency market capitalization correlated with the traditional markets indicates institutionalization, which is okay. It indicates adoption and acceptance as the first steps toward broader acceptance of cryptocurrencies and their underlying technological foundation.
How do cryptocurrency investments impact the broader crypto economy?
Although the cryptocurrency market appears to grow in a positive feedback loop, that does not mean that (un)expected events may not impact the trajectory of the ecosystem as a whole.
Although blockchain and cryptocurrencies are fundamentally meant as ‘trustless’ technologies, trust remains key where humans interact. The cryptocurrency market is not only impacted by the broader economy but may also generate profound effects by itself. Indeed, the Terra case shows that any entity — whether a single company, a venture capital firm, or a project issuing an algorithmic stablecoin — can potentially set into motion or contribute to a “boom” or “bust” of the cryptocurrency markets.
It indicates that investing in cryptocurrencies is all about thinking about risks and potential rewards. The fall and domino effect across the board indicate the lack of maturity of the very sector itself.
Since innovation and prices are inherently connected, and the early-stage development of the crypto-economy offers lots of untapped potentials, the said economy may continue to see events that temporarily undermine growth.
Source
https://cointelegraph.com/explained/what-is-the-economic-impact-of-cryptocurrencies
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