In recent years, cryptocurrencies like Bitcoin and Ethereum have been generating a lot of buzz. Much of it centers on their potential to disrupt our collective financial system and be an economic game-changer. But a lot of the hype has also been fueled by its wildly fluctuating value.
Some investors might become millionaires practically overnight, while others could lose fortunes with a single tweet from Elon Musk. It’s turning off many people from participating in the fledgling crypto economy.
That’s unfortunate because indications are that cryptocurrencies are here to stay. And we can use them wisely if we take a different approach.
The basics you don’t need to know
For the layperson, it can be hard to grasp how a cryptocurrency works. The common explanation is that transactions are recorded in a securely encrypted digital ledger. Cryptocurrency miners use high-powered computers to confirm the details and append them as blocks in a chain.
It all makes sense if you possess a certain level of familiarity and literacy in computer science. But that typically describes only a small segment of the population. Thus, companies that use blockchain and cryptocurrency technology still need a specialist PR company such as reblonde.com to help explain what they do.
The thing is, you don’t need to know how a cryptocurrency works in order to participate. You just have to create an account in one of the many online platforms to get your wallet and start trading. Depending on the platform and account type, you might not even need to provide any proof of identity. This stands in stark contrast to the verification and documentation procedures required to open a bank account, for instance.
Lack of understanding isn’t necessarily a flaw for cryptocurrencies, any more than it is for our prevailing fiat currencies. Most people lack financial literacy and struggle to understand different products offered by banks and other financial institutions, but that doesn’t stop them from owning and spending cash.
But the dearth of “crypto-literacy” becomes a problem when you combine its ease of access, decentralization, lack of regulation, and overall perception as a speculative asset. Especially in these uncertain times, people are easily drawn to investments that seem to promise explosive growth. This behavior, along with the fact that cryptocurrencies are still in a nascent price discovery stage, helps explain their dramatic volatility.
An equal-opportunity currency
Seasoned investors tend to be cautious about cryptocurrencies, adopting a long-term approach or using them as a hedge against inflation. Some avoid investing in crypto altogether.
However, digital currencies are steadily gaining traction across the globe. And this trend is particularly pronounced in developing economies. In June 2021, El Salvador became the first country in the world to accept Bitcoin as legal tender. Other countries, like Panama and Paraguay, are taking steps to follow suit.
In these countries, high levels of inflation and prevailing inequality contrive to shut people out of a fiat-based economy. As many as 70% of the population may not use banking services, but the majority do have mobile phones and internet access, the minimum necessary for cryptocurrency exchange.
By recognizing Bitcoin, El Salvador has taken a significant step towards giving its poor equal opportunity to participate in the economy. Remittances from overseas, representing nearly 20% of GDP, will no longer be subject to transaction fees imposed by foreign-based institutions. These features will no doubt prove attractive to other developing countries with a similar profile of inequality.
Acceptance as a currency
Those who prophesy a cryptocurrency-driven revolution in the global financial system may be disappointed. It comes in many forms, not all of them as trusted as the established players like Bitcoin, Ethereum, Cardano, or XRP. And in the developed world, governments prefer to exercise regulatory control over their financial systems. Thus, countries like China, the U.S., and the UK are exploring central bank digital currencies instead of adopting existing decentralized ones.
But the utility of cryptocurrencies to developing countries hints at where the future lies. Money must be circulated in order to drive economic activity. Any digital currency will only hold value if it’s being widely accepted.
Can you pay for food and utilities, buy a car or property, or shop for non-essentials using cryptocurrency? As of now, the answer to all these questions is a conditional yes. Some vendors will accept transactions using specific currencies. But they aren’t universal yet.
If acceptance grows, then the average person can take advantage of the decentralized, accessible nature of cryptocurrency. And that will require changing our perspective. Instead of treating them as speculative investments or a path to easy wealth, we should be spending them just like real money.