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The Future of Cryptocurrencies

The Future of Cryptocurrencies

Intermediate
2024-03-15 | 10m
In the rapidly evolving financial landscape, cryptocurrencies are undergoing a status change from a niche interest to a global phenomenon, challenging traditional notions of currency, assets, and value storage. This paradigm shift, led by Bitcoin, is redefining the very fabric of what constitutes money, assets, and stores of value. At the forefront of this financial revolution is El Salvador, the first country to accept Bitcoin as legal tender, setting a precedent for the future role of digital currencies.

Cryptocurrencies As An Asset

Traditionally, an asset class is characterised by its ability to generate returns, preserve capital, and hedge against inflation. Bitcoin, the flagship cryptocurrency, emerged as a response to the 2008 financial crisis, blending these characteristics with the added dimensions of digital scarcity and technological innovation. With its capped supply of 21 million coins, Bitcoin exemplifies digital scarcity, mirroring the supply limitations of precious metals like gold.

Institutional investors and corporations are increasingly integrating cryptocurrencies into their portfolios, recognising their potential for high returns and diversification. This shift towards mainstream acceptance is a testament to the growing recognition of cryptocurrencies not just as speculative instruments but as legitimate assets.

The Superior Store Of Value

The concept of a store of value evolves as society does. The digital age demands a store of value that transcends traditional boundaries, offering global accessibility, security, and resistance to inflation - and cryptocurrencies, powered by blockchain technology, provide the answer. With their global accessibility, security features, and immunity to traditional banking system failures, crypto offer an alternative to traditional stores of value like gold.

Central banks and governments can control gold prices by buying or selling large quantities of gold and, and thereby single-handedly influencing supply and demand dynamics. Furthermore, currency manipulation, i.e. altering the value of the currency in which gold is priced (usually the U.S. Dollar), can affect gold's affordability on the global market and, as a result, its prices. Cryptocurrencies, on the other hand, can remain relatively unsusceptible to market manipulation through decentralisation, transparency, and widespread participation. Decentralisation ensures that no single entity controls the cryptocurrency network, making coordinated manipulation efforts more challenging, while blockchain technology promotes transparency in the form of a public ledger, allowing for easy detection of suspicious activities, and its cryptographic security prevents unauthorised alterations. The fact that anyone from anywhere can buy and hold their cryptocurrencies in their wallets removes the restrictions on who can enter these markets, hence a higher degree of participation, which should safeguard crypto against any manipulator.

It's worth mentioning that Bitcoin value appreciation is totally unparalleled: even in 2020 at US$10,000, its purchasing power already outpaced fiat currencies, for example U.S. Dollar - the world's reserve currency.

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Source: The Bitcoin Standard: Central Banking's Next Frontier

Cryptocurrency As A Currency: The El Salvador Experiment

El Salvador's bold move to make Bitcoin legal tender in September 2021 marked a significant milestone in the history of cryptocurrencies. This decision was not merely symbolic; it was a practical step toward financial inclusion for 70% of Salvadorans who lacked access to traditional banking services. Their "Bitcoin Law", passed in June 2021, allows the largest cryptocurrency to be used for any transaction within the country, including paying for goods and services, taxes, and other financial obligations.

The quintessential role of any currency is to facilitate transactions. Cryptocurrencies, by design, excel in this domain, offering a technology that simplifies transactions. With Bitcoin, transactions are now made quickly, without the need for a bank account, and at a fraction of the cost of traditional remittance services. This is significant as remittances constitute a considerable portion of the El Salvador's GDP.

Since Bitcoin is recognised as a currency, transactions made in Bitcoin are exempt from capital gains tax. This is particularly beneficial for investors and Bitcoin holders in El Salvador, for it removes the tax burden associated with the appreciation of Bitcoin's value when it is exchanged or used for purchases. This supports the notion of Bitcoin being a prominent store of value in that crypto are not subject to the whims of government policies or tied to the economic performance of a single nation, which means Salvadorians now have access to an asset that transcends national borders and traditional banking systems and frees them from impacts of inflation and economic instability.

The adoption of Bitcoin in this country addresses another critical aspect of a currency: acting as a medium of exchange. The government launched the "Chivo Wallet," with which users can convert Bitcoin to the US-Dollar (the other official currency in El Salvador) and vice versa, withdraw cash from ATMs, and make purchases. This digital infrastructure supports Bitcoin's use in everyday transactions, both at local vendors and international chains. El Salvador's unique position as a Bitcoin-friendly country has attracted tourists and investors interested in cryptocurrencies, leading to an increase in Bitcoin transactions within the tourism sector and international business dealings.

The Bitcoin Law aims to promote financial inclusion by providing access to financial services through Bitcoin to the significant portion of the Salvadoran population that does not have traditional banking access so as to increase participation in the economy and improve the overall financial well-being of the populace. This experiment also exploits the potential of using cryptocurrencies as a medium of exchange and to attract foreign investors, crypto entrepreneurs, and fintech startups. This influx of investment can spur economic growth, job creation, and technological innovation.

The Salvadoran experiment is a real-world laboratory, offering valuable insights into the challenges and opportunities presented by cryptocurrencies. Issues such as volatility, technological barriers, and regulatory concerns are part of this learning curve. However, the potential benefits, including increased financial autonomy, reduced reliance on remittance fees, and enhanced economic inclusivity, present a compelling case for the future role of cryptocurrencies.

Final Words

El Salvador's pioneering role in cryptocurrency adoption has already been closely monitoring by nations and financial institutions worldwide. The successful integration of cryptocurrencies as an asset, store of value, and currency could pave the way for broader acceptance and gradually reshape the world as a place where digital and fiat currencies coexist and complement each other. As we venture into this uncharted territory, cryptocurrencies will most likely continue to challenge and redefine our understanding of money, value, and financial sovereignty.

Disclaimer: The opinions expressed in this article are for informational purposes only. This article does not constitute an endorsement of any of the products and services discussed or investment, financial, or trading advice. Qualified professionals should be consulted prior to making financial decisions.

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