Imagine spending your money without banks, intermediaries, or governments getting in the way. No taxes on your transaction, no collection of information, no banking fees and a speedy transaction – these are just some of the ways cryptocurrencies will change the face of finance.
Cryptocurrency is a digital currency that can be used to buy goods and services, but it uses an online ledger with strong cryptography to secure online transactions. It works using a technology called blockchain, a distributed ledger technology where transactions are recorded with an immutable cryptographic signature called a hash. Each block contains a cryptographic hash of the previous block, a timestamp and transaction data.
What does the future hold – crests or troughs?
A silver lining amid the chaos of the COVID-19 pandemic is that it has accelerated the recognition of cryptocurrencies.
In 2020, several reputable financial institutions recognized the potential of cryptos. JP Morgan started banking Coinbase and Gemini; Visa and MasterCard provided services to crypto companies; PayPal launched a new service that enables users to buy, sell and hold cryptocurrencies; Fidelity started a new Bitcoin index fund.
The total market capitalization of cryptocurrencies is set to skyrocket in the coming years.
The trading, e-commerce and retail segments are expected to hold a major market share when it comes to cryptocurrencies. The penetration of digital currencies in digital payments is expected to affect cross-border transfers, and completely change the money transfer process.
Whether it is national or international, cryptocurrency transfers are completed instantly and can be tracked and securely stored in the blockchain, reducing the chance of fraud.
I believe this will make digital payment services the next great upheaval in global e-commerce growth.
Digital currency preferred over fiat currency
Digital currencies could become the preferred choice for many consumers.
Cryptocurrencies allow users more autonomy over their own money than fiat currencies do. Users can control how they spend their money without dealing with an intermediary, like a bank or government. Unless you voluntarily publish your Bitcoin transactions, your purchases are never associated with your identity, much like cash-only purchases, and cannot be easily traced back to you.
There are no banking fees associated with using cryptocurrencies, and transaction costs are minimal as there are no intermediaries involved.
And it is convenient. Crypto users only need internet access to transact from anywhere in the world.
Despite the phenomenal growth of digital currency, its future is still questionable. Although the number of merchants adopting cryptocurrencies has increased, they are still very much in the minority.
For cryptocurrencies to expand globally, they must first gain widespread acceptance amongst consumers. However, their relative complexity compared to conventional currencies deters most people.
Value fluctuation and volatility are cryptocurrencies’ main challenges. Moreover, some countries still do not consider it a legitimate form of currency due to the lack of transparency, which raises the chance of tax evasion and money laundering.
The emergence of Bitcoin has added a spark to the heated debate about the future of cryptocurrencies.
Its success has inspired the creation of other digital currencies, and its market capitalization could skyrocket in the coming years.
However, it may be best to treat your “investment” in cryptos in the same way you would treat any other highly speculative venture with tremendous growth potential and parallel risk. As it has no intrinsic value, it makes it susceptible to huge price swings. Bitcoin, for example, plummeted from $260 to about $130 within six hours back in April 2013.
Furthermore, it may never appeal to those who prefer a physical form of wealth like currency notes and precious metals.
Any government intervention may lead to bursting it like a bubble. Its future success (or fall thereof) will depend on the ability to deal with such challenges.
By Dr. Pooja Lekhi
Dr. Pooja Lekhi is professor at University Canada West teaching finance courses like Financial Management, Global Finance Institutions-Risk Management Approach. She holds a PhD in management discipline with a specialization in finance and an MBA with a finance specialization. She has more than seven years of in-depth experience in teaching and research. Her research interest lies in analysing asset quality management in the banking sector.