How big an impact are Cryptocurrencies likely to have on us in the future?

Last week we saw how various retailers such as Tesla and Microsoft have begun accepting Cryptocurrency payments for their products. However, is this more marketing ploy on their part, or are the public beginning to view Cryptocurrencies as a legitimate payment alternative to fiat money? 

 

In their current capacity, how are they being used?

 

In recent years Cryptocurrencies and Bitcoin have been used more as speculative investment instruments, being bet on within financial markets, rather than legitimate payment and currency alternatives. This therefore has less bearing on the general public other than helping shape their price. 

 

As an example, a typical 24 hour period would now see trade volumes of Bitcoin of over 40 billion coins (Yahoo Finance, 2021). This trading volume has increased exponentially over the past decade, as more investors look to capitalise on price fluctuations and increases.

Figure 1, Bitcoin Trading Volume in the US from 2013 – 2021. (Statista, 2021)

 

Just as trade volumes have increased, traditional financial powerhouses are now looking to make a move into Crypto investment. Investment bank Goldman Sachs recently announced that they were looking to open a Bitcoin trading desk (Irrera et al., 2021), with fund giant Fidelity looking to take some Crypto funds to market. This signals a move into more mainstream investment circles as an asset class, rather than everyday consumers pockets and businesses balance sheets. 

 

This same rise has not taken place in the extent that Bitcoin and others are used as a form of payment. As a result of them becoming more utilised as investment tools than means of exchange, many view them as not functioning like a real currency (Damak, 2018), making them less likely to have a significant impact on our daily lives in the future. 

 

Academics generally agree and argue that while legitimate currencies we typically interact with such as the Dollar or Pound act as a mixture of a “medium of exchange, a store of value and a unit of account”, Cryptocurrencies do not satisfy all of these (Yermack, 2015). They also see them as not following the same monetary rules as traditional fiat currencies which could seriously limit their prospect of becoming widely used (Cachanosky, 2019).

My research appears to prove these academics right with price fluctuation being the most pressing of these concerns. In order to be seen as both a legitimate medium of exchange and store of value, the price of the asset has to remain at least somewhat value. Looking at price fluctuation of Bitcoin over the past month as contained in figure 2 we see huge shifts over a short period of time. 

As an everyday member of the public, would I be happy for my savings to be in a currency whose value could drop 15% overnight? As a business owner, would I be happy knowing the payment I receive today could be worth a lot less tomorrow? The answer in both of these scenarios is almost certainly no and represents how stabilising price fluctuations are a necessary first step in Cryptos journey to everyday legitimacy. Only from here can Bitcoin and others likely build into widespread, everyday use. 

Figure 2, Bitcoin Price (BTC-USD), 1 month. (Statista, 2021)

 

Cryptocurrencies as payment instruments 

 

If the use of Cryptocurrencies in the future is to be widespread, then their use as a payment instrument will need to increase markedly. Large scale global survey’s such as Statista’s below demonstrate the relatively low levels of use of Cryptocurrencies, especially in the lives of western consumers. 

Figure 3, Finding Results from a Global Survey Looking at Cryptocurrency Use. (Statista, 2021)

 

For Nigerians, comfortably the highest users of Crypto from the above study, Bitcoin is predominantly used to send money overseas as it offers a cheaper alternative than transferring money via traditional currencies (Buchholz, 2021). This is therefore potentially an avenue we would see grow in other nations in the future.  

This lack of widespread use as a payment instrument specifically however can be put down to the switching costs and lack of benefits for average consumers. This is described as an “Incumbent-Monies Problem” (Luther, 2016, p. 2), where the benefits from using a new currency need to outweigh the costs of switching.

 

In the case for an average member of the public, the lack of security and government regulation as well as large price fluctuations can put them off. For merchants and retailers, the additional cost in accepting Crypto payments and low levels of customer uptake are most likely to go against them 

 

Therefore, at this moment it is right to say that it is unlikely Cryptocurrencies will play a large role in the lives of average consumers at any point in the close future. This is due to the fact that its use as an investment instrument is increasing, while daily use as traditional currency alternative remains low. However, given the speed of technological change and adoption of new technologies globally, to completely write off the future of Cryptocurrencies would be a mistake. 

 

Next week I will be looking at the introduction of new forms of Cryptocurrencies that are seeking to change this narrative and concluding the blog by looking at how the public can help prepare themselves for any increase in the use of Crypto. 

 

References 

Baer, J. (2021). 'Fidelity Plans to Launch Bitcoin ETF', The Wall Street Journal, March 24th. Available at: https://www.wsj.com/articles/fidelity-plans-to-launch-bitcoin-etf-11616634221

Buchholz, K. (2021) These are the countries where cryptocurrency use is most common, Available at: https://www.weforum.org/agenda/2021/02/how-common-is-cryptocurrency/ (Accessed: 5th March 2021).

Cachanosky, N. (2019). ‘Can Bitcoin become money? The monetary rule problem’, Australian Economic Papers, 58(4), pp. 365-374 [Online]. Available at https://onlinelibrary.wiley.com/doi/10.1111/1467-8454.12158 

Damack, M. (2018). ‘The Future of Banking: Cryptocurrencies Will Need Some Rules to Change the Game’, S&P Global, February 19^th. Available at: https://www.spglobal.com/en/research-insights/articles/the-future-of-banking-cryptocurrencies-will-need-some-rules-to-change-the-game

Irrera, A., Withers, I., White, L. (2021). 'Exclusive: Goldman Sachs restarts cryptocurrency desk amid bitcoin boom', Reuters, March 1st. Available at: https://www.reuters.com/article/us-crypto-currency-goldman-sachs-exclusi-idUSKCN2AT390

 

Luther, W.J. (2016). ‘Bitcoin and the Future of Digital Payments’, The Independent Review, 20(3), pp. 397-404 [Online]. Available at https://www.jstor.org/stable/24562161?seq=1#metadata_info_tab_contents

Markets Insider (2021). Bitcoin Price (BTC-USD) [Online]. Available at https://markets.businessinsider.com/currencies/btc-usd

 

Statista (2021). Bitcoin trading volume on online exchanges in the United States from March 16, 2013 to February 13, 2021 [Online]. Available at https://www-statista-com.uoelibrary.idm.oclc.org/statistics/1196036/bitcoin-market-size-usa/

 

Statista (2021). How Common is Crypto?  [Online]. Available at https://www-statista-com.uoelibrary.idm.oclc.org/chart/18345/crypto-currency-adoption/

 

Yahoo Finance. (2021). Bitcoin USS (BTC-USD) Price. Available at https://finance.yahoo.com/quote/BTC-USD/ (Accessed February 15^th 2021)

 

Yermack, D. (2015). ‘Chapter 2 – Is Bitcoin a Real Currency? An Economic Appraisal’, in Lee, D., Chuen, Kuo. (ed.) Handbook of Digital Currency. Academic Press, pp.31-43.