Adam Barrs is a guest writer for the Warwick Economics Summit Blog. He is currently studying towards a BSc Economics and Finance at the University of Wolverhampton.
In the aftermath of the Great Recession, an innovation in the way we conduct transactions was born. Blockchain. The idea being that by distributing a ledger of financial records and decentralizing the flow of money, people would have more control over their financial wellbeing, as opposed to liquidity problems in banks providing the potential for loss of wealth. Blockchain provided users with enhanced security, protection from identity theft and a faster method of making payment.
Fast forward to 2020, and the instrument that demonstrated this new technology, Bitcoin, has recently exceeded $34,000. Market capitalisations are now in excess of $640bn, more than any publicly traded financial institution in the world. To put this in context, were Bitcoin ranked on the stock market, it would be the 9th most capitalized company globally.
While cryptocurrencies have enjoyed increased exposure in the media in the last few years, it is safe to say that they remain relatively unknown among the general populace, albeit this is poised to change. While payment methods on devices such as smart watches and mobile phones have become the norm for many people, cryptocurrencies have employed similar mechanisms for years, with one key difference; cryptocurrencies are debited instantly, not in 3 days while the bank takes time to clear the transaction. While economies of scale allow banks to enjoy lower transaction costs, they are simply unable to compete with how cheap the transfer of funds is using cryptocurrencies. This may help to explain why Ripple (XRP), has attracted attention from the World Economic Forum (WEF) as a digital currency that may be used for settlements by central banks.
But why does this matter to the average person? The WEF also acknowledged that introducing digital currencies such as stablecoins (coins effectively operating in a pegged exchange rate) into the economy, could incentivise those living in struggling economies to ditch their domestic currency and opt for the safer bet of a stablecoin, destabilising their financial systems further. This would not be a first in Nicolás Maduro’s Venezuela, where hyperinflation has been problematic in recent years, many Venezuelans have sought refuge in cryptocurrency. This trend has been noticed by companies, who are now happy to accept payment in cryptocurrency given the Bolivar’s worthlessness. It would be far-fetched to imagine the sheer necessity experienced by Venezuela ever happening in an economically developed country, however, this has not stopped some retailers from accepting payment in digital assets. In 2014, Microsoft dabbled with allowing US users to pay for items on the Xbox store in Bitcoin, following PayPal, Dell and others. To this day, CEX in the UK, a preowned game and computer store accepts payment in Bitcoin. However, even the need for companies to accept Bitcoin has become redundant with some providers providing prepaid cards that can be topped up with a cryptocurrency of your choice and, using Visa or Mastercard, allow payments to be made directly using cryptocurrency, whether the store accepts it or not.
Again, it appears the average person is not ready to make the switch from their trusted pounds, dollars or euros as their preferred method of payment. However, as a source of borrowing, cryptocurrency may have added another feather to it’s cap. Microfinancing in developing countries has been available for a decade through Lendwithcare; a way of helping the poorest to set up their own businesses through peer-to-peer platforms. This year, the crypto world experienced a boom in decentralized finance. By allowing individuals to make their funds available for borrowing through smart-finance, peer-to-peer lending becomes more accessible. With Western financial institutions likely to be more reluctant to lend during the ongoing Coronavirus pandemic, this could prove to be a worthwhile gambit for a savvy individual.
All this being said, adopting the use of cryptocurrencies is not without risk. It has been well documented how volatile the values of cryptocurrencies are, with Warren Buffett going so far as to call it “rat poison squared”. Additionally, many high-profile exchanges have suffered hacks, the dark web uses cryptocurrency and there are still a large number of scams circulating. Concerns also remain regarding the potential for over regulation by law-makers. With the movement towards ethical investing, the energy cost of “mining” cryptocurrency is another factor to consider for the climate conscious.
While cryptocurrencies have come a long way in the last 12 years, both in their development and in the expanding awareness they enjoy, there is still a long journey before we see average people paying for their homes using Ethereum or Dogecoin.