Economic Impact of Cryptocurrencies

Since Bitcoin was created in 2009, several cryptocurrencies have been introduced privately. Still, Bitcoin is the most successful cryptocurrency of all the existing ones. It has garnered huge attention from the media and its total market value is estimated to have reached $20 billion in March 2017.

Most recently separately Central banks had started to explore the scope of cryptocurrencies and blockchain technologies for large-scale payments and retail payments. For instance, the People’s Bank of China has made proposals to establish a nationwide virtual currency that would be based on blockchain technology.

Beyond Bitcoin

Even though blockchain technology and cryptocurrencies have been widely recognized there is only some clarity about their economic impact.

On one hand, policymakers are concerned about the challenges and opportunities that are brought about by these technological developments, while on the other hand, there is only a little guidance provided by different economic theories concerning the appropriate use of these blockchain technologies and also the most feasible design for these systems.

The economic take on cryptocurrencies is very slim. Till now there have been only a few economic theories and models developed to decipher this new technology of payment. These economic models make use of various frameworks for addressing the different research queries and majorly focus on various scopes of cryptocurrencies.

Sometimes experts use the mechanism design approach for reviewing several electronic-money technologies such as PayPal, Bitcoin, and M-Pesa. Sometimes, a mechanism design approach is also helpful when identifying some important characteristics of money that can be useful when implementing constrained allocations. 

Few experts like Halaburda and Gans had developed an economic model for the management of e-commerce platforms and also studied domain-specific digital currencies for trading in bitcoin

Another model developed by Sanchez and Fernandes Villa Verde is to structure or frame cryptocurrencies in the form of private Fiat currencies and to also analyze whether the Crypto competition leads to any efficiency.

Few other experts have advocated that adopting digital currencies as cryptocurrencies can help facilitate the policy of implementing a negative interest rate.

Another few suggestions have been made for subsidizing the benefits of virtual currency to the underbanked or unbanked for phasing out fiat currency. This would particularly facilitate unexpected invasion of tax and other criminal activities.

The economics of cryptocurrency

The economics of cryptocurrency is dependent on several factors. The new world economy is heavily reliant on virtual payment systems. For instance, E-Commerce trades essentially require the use of cryptocurrencies. Thus this E-Commerce requirement would mean that cryptocurrency has the possibility of being accepted as the primary payment method.

It is only a string of bits that works in the virtual payment system. However, an issue might arise from this situation. Strings can be copied and reused which would create the problem of double-spending. One of the problems that cryptocurrency is bound to face in the future is, having to deal with the double-spending problem. Economic researches on cryptocurrencies and blockchain technology have only provided some information till now.

The issue of double-spending can be resolved readily with the help of a trusted third party, for instance, PayPal. The third party must be involved in managing a centralized ledger and transferring balances by debiting and crediting the buyer’s and sellers’ accounts.

In each transaction period, the day market and night market open consecutively. The day market is a competitive market where general goods are traded and the night market is a decentralized one for the trade of consumption good, which is consumed by buyers and produced by sellers

Final Thoughts

Cryptocurrencies have had a very huge impact on the prices of inflation and also influenced several fiat currencies across the world. In the Crypto world, a lot of things need to be made transparent and understood since this is an emerging and promising trend in the technological field, which can certainly develop in the future.

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