Cryptocurrency, also known as crypto, is a form of digital currency created from code and traded through the blockchain—a decentralized database. In recent years, digital currency moved closer to the mainstream as investors dignified its value and observed its potential for large financial gain. As cryptocurrencies such as Bitcoin continue to drive the financial market, investors are racing to purchase stocks before the prices skyrocket.
Cryptocurrencies can be used for quick payments that avoid transaction fees but can also be investments for financial earnings. They can be purchased with a credit card or through a process known as mining, where individuals use computerized technology to create new coins by collecting transactions and organizing them into blocks—hence the aforementioned database of blockchain. The most popular form of minable currency is Bitcoin, a public ledger shared by a network of computers.
Other widely known cryptocurrencies are Ethereum, Bitcoin cash (BCH), Litecoin (LTC), and Ripple (XRP).
Unlike the traditional U.S. dollar, cryptocurrencies are not insured by the government and an investor cannot be reimbursed for their losses if a coin declares bankruptcy or gets hacked. They are also highly volatile and tend to fluctuate frantically. For this reason, there are existing apprehensions surrounding cryptocurrency and trading platforms.
As of February 28, a single Bitcoin could be purchased around a price of $44,000 USD, or $56,000 CAD. In 2010, one Bitcoin was priced around $0.06, meaning an investment of $100 at the time would garner a return on investment (ROI) of nearly $73,333,333 USD today.
Over the years, Bitcoin investors have acquired astronomical ROIs. As such, Bitcoin has become an impressive portfolio asset, despite its financial insecurity and inclination to fluctuate. The uncertainty surrounding Bitcoin and other digital currencies questions the worth of such investments and their impacts on the future of finance.
Andreas Park, an associate professor of finance at UTM, provides input about a contingency plan for a Central Bank Digital Currency (CBDC) program designed by the Bank of Canada. Essentially, CBDC is a digital form of a country’s fiat currency and is a central bank’s liability. Unlike cryptocurrencies, the government is responsible for maintaining these reserves rather than a private company.
In an interview with U of T News he describes this blockchain as “an intelligent, open-source social operating system for programmable e-money.” Unlike other cryptocurrencies today, this financial asset is not volatile and is not prone to speculation.
Professor Park goes on to write, “A company like Tim Hortons can plug into it to develop an enhanced reward program, or a firm can customize a service for smaller merchants. Entrepreneurs will ensure the payment mechanism keeps pace with incoming tech: Internet-of-Things micropayments, for example.”
As Bitcoin and other cryptocurrencies become more popular, central banks are entering this competitive financial market where money is transcending into a digital field. Banks feel the need to implement this mode of payment as they compete with prominent cryptocurrencies around the globe. For many Canadians, this acquisition may be a more viable option as it reduces unsecured crypto investment.
Regarding the Bank of Canada, Professor Park says, “The bank has spent the better part of the last decade preparing for this moment […] It has a head start over most other central banks in the world.”
CBDC appeals to major financial institutions compared to cryptocurrencies since it allows for greater control and traceability. The CBDC would hopefully reduce financial crime incidents and mitigate offences like counterfeiting and tax evasion while enhancing the safety and stability of banks.
Cryptocurrency is impacting the financial world as banks and companies enter the crypto market with large acquisitions and integration with payment platforms, such as MasterCard and Paypal. For instance, Tesla has recently announced a $1.5 billion Bitcoin purchase and is now accepting the coin as a payment method for its electronic and clean energy vehicles.
Is cryptocurrency the future of finance? The answer to this question is uncertain, despite its rapid rise in popularity and value in the last decade. The spikes in value may have unintended consequences for the future. For example, Bitcoin’s dramatic price surge in 2017 pushed the blockchain and crypto sector to develop alternatives to the decentralized and distributed nature of this asset as investors scrambled to keep their assets safe.
Digital currencies are constantly being created and assimilated into the market while investors try to understand if they will produce large financial growth.
On the other hand, cryptocurrency and blockchains allow anyone to participate in the global economy and create an inclusive global financial system. Transactions occur without going through the disruption of central parties to keep track of the internal ledger—such as governmental financial systems that limit and monitor large transactions and charge fees.
Cryptocurrency’s technological networking aspect brings wealth and richness to the world with less commitment and more inclusivity. As cryptocurrency becomes integrated into financial markets, individuals have the equal opportunity to obtain the skills and knowledge for investing, regardless of their geographical positioning—another advantage to the integration of crypto into global financial markets. Today, cryptocurrency has the potential to enhance the global economy and have an influential impact on humanity.