Cryptocurrencies are now on everyone’s lips. Technological innovation and the wave of innovations in a sector, finance, which is not very prone to change, have made virtual currencies the phenomenon of the moment. It is enough to weigh how many times in 2023, for example, Bitcoin and Dogecoin were talked about, to name a few.
But to what extent can these new tools represent the future of money and what risks can they bring?
An exhaustive analysis was made on the occasion of an event held at a more than particular moment for the world economy and, specifically, between the vaccination campaign, economic recovery, a growing public debt and the shadow of inflation on the horizon. Here, then, is the most interesting evidence from the report.
The savings capacity is growing
Although 2020 was one of the worst years for the country since the Second World War, thanks to the timely economic measures, after the fall in GDP the economy headed towards recovery.
Among the most interesting results of the report regarding the financial situation of Americans, it emerges that the saving capacity of families during the outbreak of the pandemic has grown by 50%.
However, this positive change was not accompanied by an increase in the yields of these savings which, instead, were close to zero. A worrying figure if we consider that if we had been able to generate that savings, even with a remuneration of a simple percentage point, Americans could have earned 30 billion, a value close to 2% of American GDP. Saving is precisely what is needed to protect but which is threatened, by the shadow of cryptocurrencies. Cryptocurrencies are dominating the world by trading. Find more information about this.
Bitcoin: a threat similar to 2008
Savings and exports have been confirmed as the two pillars of the country’s social and economic strength. Faced with these huge amounts of capital, the protection of savings is an imperative for institutions which, however, requires constant updating in the face of technological innovations affecting the financial sector.
The spread of cryptocurrencies is in fact a river in flood that is overwhelming the financial sector and recruits many followers, attracted by the idea of possible easy earnings and encouraged by the greater availability of savings compared to previous years but who, at times, ignore some mechanisms.
Investments or virtual currencies
This is a real threat to international markets, so much so as to compare the speculative effect that is involving Bitcoin and other cryptocurrencies more generally, to the events that took place before 2008 with subprime mortgages and that have triggered one of the most important financial crises of the last few centuries. With due distinctions, it is foreseeable that something similar is developing in the market for virtual money and financial products (especially crypto). An example is the fact that with just one Bitcoin, in a certain time frame of 2023, it was possible to buy a luxury electric car (referring to Tesla), but after a short time the purchasing power of the coin dropped by half.
How could this be done?
The warnings addressed to investors on the risks of cryptocurrencies are no longer sufficient. The interchangeability of these tools with each other and with traditional tools require urgent regulation as, without adequate standards and bodies, the transparency of the market and, therefore, the legality and rational choices of the operators are to the detriment. Just think of the most common criminal activities, such as tax evasion and money laundering, which are facilitated by this opacity.
Measures required, therefore, not only by the supervisory authorities but by the market operators themselves who recognize the decision-making uncertainties.
How can a supervisory authority intervene to ensure greater consumer protection? The traditional tools currently used are no longer sufficient but it is necessary to use the advantages offered by digital technologies in order to cooperate internationally to find a solution.
There is also the vision of a European cryptocurrency, a digital euro which, unlike Bitcoin, being issued by a central bank could also be legal tender. The ECB has in fact proposed the creation of a CBDC (Central Bank Digital Currency) and the European Commission has put forward a strategy for digital finance, submitting it to Parliament for consideration. Some nationwide experiments have already been conducted in France and Germany.
Bitcoin and cryptocurrencies: another point of view
It is now undeniable that the proliferation of digital innovation is also permeated in finance. In particular, there are currently three trends that are revolutionizing the sector: the tech platforms that are strongly entering the world of payments and banks; governments that are trying to launch Central Bank Digital Currencies (CBDCs), which are digital currencies issued by central banks; DeFi or Decentralized Finance which represents an alternative way, as it does not want to centralize power but expand it, replacing the classic intermediaries. This is made possible thanks to large computer networks, the blockchains, which do not need a central authority and which guarantee a high level of trust (in traditional finance this required huge infrastructures).
Focusing on the latter trend, the promise of DeFi is to lead to a better version of finance: a faster, cheaper, more transparent system and less dependent on centralized bodies. The best known example is that of Bitcoin, born in 2009 with the aim of allowing P2P (peer-to-peer) transactions in a decentralized form. But technology has evolved and Bitcoin is increasingly seen as a form of speculative investment and as the main future antagonist of fiat currencies, at least in the digital world.
The proliferation of decentralized finance must be taken into serious consideration: at a time when people are living a large part of their life online, cryptocurrencies can review the structure of the digital economy. DeFi is in fact growing at an accelerated pace: the Ethereum blockchain reached transactions worth $ 2.5 trillion in the second quarter of 2023, practically like Visa.
There are various gaps related to DeFi, however, it is possible to see decentralized finance also in another light. This revolution, if it manages to move beyond speculation and straddles a disruptive technology and traditional finance, can lead to a true overhaul of the system, in which tech platforms, governments and DeFi will compete with each other. This is a revolution comparable to the advent of the internet in the 90s and, as in that case, no one can say exactly where it will lead us in the future but it is plausible that it will cause a transformation in how money and the digital world currently operate.
How can savers orient themselves?
What everyone must always keep in mind when dealing with investments is the principle of diversification, that is, the rule of not putting all the eggs in the same basket but, in fact, adopting different financial instruments to reduce risks, typical of the world of finance.
Furthermore, before using any financial instrument it is necessary to find out about the advantages but also about the specific risks that this can bring – a less arduous task if you consider clear instruments such as mutual funds – then making informed decisions in line with your needs.