Crypto Intermediate

What is the economic impact of crypto?

Economic impact of crypto

Key Takeaways

  • The impact of crypto goes far beyond their daily price fluctuations; it cuts across sectors and national boundaries.
  • Since the supply of most cryptocurrencies is carefully controlled by block difficulty, mining rates, and regular halvings, they are designed to be deflationary in the long term, unlike fiat.
  • Cryptos can have a significant impact on the economy, but they are also vulnerable to it.

Crypto is bigger than we think. It isn’t just a financial or technological revolution. It represents a social and cultural change too. But more importantly, crypto has the power to stimulate the economy immensely.

What is the economic impact of crypto?

There are several ways in which crypto can stimulate and affect the economy. Let’s get into them one by one.

Global development

The developmental impact crypto can have is tremendous. And it cuts across sectors and national boundaries without discrimination.

The remittance sector, for instance, is ripe for disruption by the blockchain. It’s expensive to send money across borders, and it involves lots of intermediaries. On average, consumers have to pay a 6% charge to send remittances to another country. That would amount to a ₹60 fee for every transaction worth ₹1,000. Cryptocurrencies like Ripple charge an average flat rate of $0.0002 (that’s less than 1 paise per transaction instead). So using crypto could help save money which can then be redirected toward food, education, and other essentials instead.

Accessibility and inclusion in the economy

Crypto allows technology to become accessible to demographics that cannot use traditional banking systems. Data shows that more than 23% of the world’s population doesn’t have a bank account. Since they operate without third parties, coins like Ripple and Bitcoin allow individuals and companies to get paid with or without banks. By allowing these neglected sections of society to interact with the economic system in this way, crypto spurs financial inclusion globally.

Hedge against inflation

Crypto is called a “hedge against inflation.” And they are, to some extent.

Inflation is the rise in the price of commodities. When demand outpaces supply, investors are willing to pay more money for the same asset, and that pushes prices up. One of the reasons for this is the lack of a limit on money printing. With lax monetary policies and inadequate precautionary measures, some governments print so much of their fiat currency that it ends up decreasing its value. When this happens, your everyday purchases require more money than usual. In other words, they cost more.

Most major cryptocurrencies, on the other hand, have mechanisms in place to protect them against inflation. Bitcoin’s supply, for instance, is capped at 21 million. That means more BTC than that number cannot exist. The supply of Bitcoin is kept under control in other ways as well. Increasing block difficulty, reducing mining rates, and regular halvings, for instance, play a role in ensuring that Bitcoin’s supply reduces over time. As circulating supply drops and demand rises, prices will increase. This price appreciation is Bitcoin’s trump card against inflation.

That said, there are limits to how much crypto can serve as a hedge against inflation. The next section will tell you all about it.

Can crypto survive a recession?

Recession is near, or so Reuters says. In their attempts to rein in inflation, central banks—in the US, India, and other countries—raised interest rates, checking the supply of money while boosting its value. As a result, the stock markets suffered corrections. Since crypto is inherently riskier than stocks, the corrections sparked crypto sell-offs, causing prices to fall even more. This, in turn, again caused the markets to redden, generating recessionary pressure. Now crypto companies have started to cut costs through layoffs. In this context, one may wonder if crypto can protect us against falling growth rates and negative stock market returns.

Some countries seem to think so, according to Gemini. A study by the cryptocurrency platform shows that countries that have faced crippling inflation—to the point that their currencies have devalued 50% or more against the US dollar—are more likely to use crypto than others.

Crypto does have mechanisms in place to curb the effects of inflation, but there is no way to know just yet whether they are enough. After all, recent market returns have sent most portfolios into red territory, and cryptocurrencies look nowhere close to beating inflation. Some might argue that this development is due to the series of recent hacks and bankruptcies in the crypto space and the Russia–Ukraine conflict. This may be right to some extent, but it is also true that the crypto market’s current situation does have a lot to do with the broader economic environment. The crypto space is not large or insulated enough to operate on its own. It thus continues to remain deeply affected by broader macroeconomic factors.

And even if the fate of crypto can be reversed, no one can predict when it will happen with 100% certainty. So yes, crypto does serve as a hedge against inflation to some extent. But does that mean it can survive a recession? Only time can tell.

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