On February 20, 2021, a parabolic rise in Bitcoin drove its market capitalization to US$ 1 trillion. The event hasn’t faded from the minds of investors, despite an unprecedented rise, most of the market participants have raised serious doubts on the sustainability and longevity of cryptocurrencies as an investment vehicle for the future. In this article, we would shed some light on a few reasons why cryptocurrencies would be the future shaping the financial system.
Cryptocurrencies like Bitcoin cannot be created out of thin air like fiat. It is not like a reckless money printing exercise that the Fed is doing in the name of stimulus packages and coronavirus support funding. The event of 2008 is still afresh when Satoshi Nakamoto released the whitepaper after the global meltdown. The world saw how the monetary policy of the government failed, and they wanted to hide their ignominy. There couldn’t be more than 21 million bitcoin in circulation. In this way, these specific protocol level arrangements that bitcoin has managed over the years have driven institutional support in 2020–2021.
You can simply understand what a $100 bill used to buy in 1990 compared to what it buys today. Likewise, in 2008, 20,000 bitcoin bought two boxes of pizza, at present, 20,000 bitcoins can simply buy you private jets, mansions, luxury cars, foreign property, and everything that you can think about. On top of this, there couldn’t be a reckless money printing exercise possible, thus making the ecosystem transparent, democratized, and future-proof for disruption.
2. Identity Theft
At present, one of the pressing challenges that the world foresees is digital or internet fraud. Anyone can simply access the account of another person and siphon out the money in no time. There are other scopes for frauds where funds are getting transferred without legit accountability. Blockchain and cryptocurrencies use the UTXO model that eliminates double spending errors. Meaning, anyone cannot fake an identity and use the same coins more than once. A secure way to transact using an encrypted network and smart-contracts make everything transparent, automated, and decentralized. Thus, practically making the ecosystem unhackable in all its forms.
3. Instant Settlement
At the moment, we are using the SWIFT method for international transfers. A technology that was invented in the 1980s isn’t fit to live to the expectations of the 21st century. That’s why most of the diaspora sending money home trust the crypto or blockchain network. You can perform instant settlement with crypto incurring almost a 10th of the fee that you would incur using the traditional financial system. In this way, even though you pay more, the gratification has been limited and non-satisfying. Thus, driving more people to use crypto for remittance. Some of the key countries practising this are Nigeria, Venezuela, and the UAE or the United Arab Emirates. Even banks have tied up with crypto or they are planning to launch their own version of CBDCs for competing with crypto-currencies. The use-cases on which crypto built itself has attracted institutional money to the market, thus further building the ecosystem for the future.
4. Accessibility to Finance
There are over 2 billion unbanked people who want to get into the financial system. Even though they wish to get into the financial system, the complexities in the form of documentation further complicate participation. DeFi or decentralized finance built on top of blockchain and smart-contracts allow peer-to-peer transactions with no entry barriers. In the absence of KYC and entry barriers, anyone with as little as even $5 can enter the system and make profits out of it. In 2020, during the pandemic, DeFi ended up as the best way to earn passive money via yield farming. As the use-cases of blockchain and crypto further diversify, it would help in building a robust financial system of the future.
There are many events in the past that have triggered concerns for the users. For example, demonetization in India made currency papers no better than toilet papers over-night. Blockchain and crypto, as they are free from the government, couldn’t create a similar situation. On account of the high degree of decentralization, institutional and retail money has shifted to crypto, which will get bigger with time as blockchain use-cases diversify.
There’s a good chance for blockchain and crypto to transform the market as the Internet did in the ’90s. As adoption intensifies with the collective market cap of cryptocurrencies getting bigger every day, cryptocurrencies will undoubtedly emerge as the best investment portfolio that one can think about.