Cryptocurrencies are once again under the scrutiny of financial experts. With the prices of Bitcoin surging since the beginning of the year, both institutional and retail investors are crowding the crypto markets to purchase bitcoin for its profit potential.
However, only a small number of these investors really understand why cryptocurrencies are such a revolutionary concept. In this article, we will explore how the crypto market impacts the global financial economy.
To this end, we will explore the benefits of the original cryptocurrency, Bitcoin. We will also touch upon altcoins and how their use can revolutionize the financial world as we know it.
Table of Contents
Understanding Bitcoin
Bitcoin is the first cryptocurrency that was introduced to the public. Its creator, the mysterious Satoshi Nakamoto, imagined this digital asset as the answer to our failing financial system.
He felt that governments and central banks hold too much power by being able to decide the value of the money we use. For this reason, he created this digital peer-to-peer monetary system for exchanging value over the internet.
Consequently, Bitcoin is devoid of any type of central authority regarding issuance and usage. New coins are created through a mathematical process called mining, where powerful computers compete to reach a consensus.
Traditional currencies, on the other hand, can be printed en masse by governments, to fulfill whatever new monetary policy they have in mind.
Based on the revolutionary technology called the blockchain, Bitcoin relies on an immutable, distributed ledger of transactions. As a result, all transactions on the network are accessible by anyone, providing an entirely transparent trustless monetary system.
This is in contrast to banking systems, where everything that happens remains opaque, and under the control of one trusted authority.
Finally, Bitcoin was imagined as a deflationary currency, To achieve this feature, it has a maximum supply of 21 million coins that can ever be created, with already more than 18 million in circulation.
The effects of cryptocurrencies on financial markets
Thanks to these properties, cryptocurrencies have a direct effect on the financial markets. As their adoption by the public grows, the impact of the crypto market becomes even greater on the global economic environment.
Challenging the dollar standard
Due to the coronavirus crisis, governments all over the world have adopted various destructive monetary policies. This has accelerated inflation, dwarfing investors’ portfolio value.
Thanks to its deflationary model, Bitcoin has proven to be a flexible store of value, that is easily stored, transferred, and accessible to everyone. Until now the USD has been considered as the reserve currency for developed countries.
But with hyperinflation on the way, this might well change in the near future. Bitcoin challenges the centralization of the US federal government by providing a decentralized monetary system that is controlled by those that use it where the price of bitcoin depends uniquely on supply and demand.
Providing a free market for everyone
Yet another disruptive feature of cryptocurrencies is that they are permissionless and borderless. This means that anyone, anywhere in the world can use crypto to access the global internet economy and use this opportunity for growth.
With crypto, countries are no longer dependent on strong currencies like the EUR or the USD. Instead, they can use Bitcoin which has the same value all over the world and isn’t subject to exchange rates.
More than just speculative assets
Cryptocurrencies are more than just digital coins meant for exchanging value online. The blockchain technology that makes them possible offers a wide variety of real-world applications.
For instance, cryptocurrencies can be used for decentralizing industries such as healthcare. Patient records can be stored in a decentralized manner, and made accessible to anyone involved in the caring process.
Medical professionals, patients, medical facilities, insurance providers, and payment providers – can all be included in this network that allows for seamless interoperability for better efficiency.
This is just a sample of the possible applications of blockchain technology. Others include insurance, real estate, supply chain, gaming, and many more.
Decentralized finance is the future
The main pain point cryptocurrencies try to solve is the centralized nature of our financial ecosystem. Enter decentralized finance or DeFi.
Thanks to the power of smart contracts, DeFi offers traditional financial products such as lending, borrowing, and earning interest in a decentralized fashion. For instance, lending of crypto assets can be done directly peer-to-peer, on the blockchain.
Consequently, there’s no need for trusted third parties like brokers or banks. As this ecosystem grows, financial institutions will have to adapt if they don’t wish to become obsolete in the near future.
Conclusion
Bitcoin jumpstarted a new, decentralized financial ecosystem. Although its size is still dwarfed by traditional markets, the crypto market has been steadily growing during the last decade.
As blockchain technology is updated with increasingly efficient consensus mechanisms, this growth should continue, and even accelerate in the upcoming years.
