Impact of cryptocurrency on the economy

Modern digital currencies have the power to greatly impact the traditional economy. Usually all the monetary transactions are done through central banks, but now with the coming up of crypto the scenario is rapidly changing. It is shifting from a centralised economy into a decentralised one. Thus, greatly impacting the economic structure globally.

Cryptocurrencies have also changed the national- international monetary relationship as they are not confined to physical boundaries and provide cryptocurrency users access to global markets.  Thus making it easier for them to tap into international markets and expand their reach. It can rightly be stated that with crypto the world will change into a global village.

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If we look at the global response then it is a mixed one with some supporting this new trend and change while others are opposing it. We also have seen this response from governments, and banks of many developed as well as developing nations. The main threat to a central bank is that cryptocurrencies cannot be regulated, and the economy as a whole will be decentralised, a democratic one.

Responses:-

USA Federal Reserve:  Chairman Jerome Powell says there are technical issues which need to be addressed before crypto becomes a part of mainstream society.

China:  The Chinese government has made it clear that cryptocurrencies are illegal in China and is banning them.

Indian government: Not to ban cryptocurrencies but rather provide cryptocurrency via the RBI( Central Bank of India).

Germany: The German government is positive about crypto and looks forward to supporting it.

Japan: No cryptocurrency is supported by the Japanese government.

Venezuela: The country’s central government plans to launch its own central bank digital currency (CBDC).

While there are many countries opposing crypto currencies, calling them risky and volatile, there are some who plan to launch their own digital currency. Some of the countries that have fully launched their own digital currencies are Bahamas, Grenada and Saint Lucia. While El Salvador is the first country to give Bitcoin a legal tender, making it the first country to do so.

Biggest problems with cryptocurrency

Though in this internet driven age cryptocurrency has become famous; the fact that it is a new technology, which came into existence only in 2009 and is yet to be fully upgraded cannot be ignored. And yes it holds the power to change the economy yet its future survival remains questionable.

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Some of the biggest drawbacks of cryptocurrency include:

Price volatility: As said earlier crypto is still a new technology and is yet to be accepted completely. It is the newness that adds more to this volatility, along with government regulations and media hype.

Criminal activities: As it can be hacked, and is digital,  it is widely used by criminals and Bitcoin has a reputation of being used in the dark web.

Crypto fraud: Fraud related to cryptocurrency is on the rise. According to a source, scammers netted cryptocurrency worth $14 billion in 2021 alone, up by 79 percent from $7.8 billion in 2020.

Hacking: Hackers are one of the major problems underlying a digital economy. While major steps are taken to reduce it, yet small crypto chains generally suffer from such attacks where hackers steal in millions.

Scalability: It is the ability of a cryptocurrency to handle large numbers of transactions at a go. Ethereum can handle 15 transactions in a second, so if there happens to be more transactions than 15, the other transactions are queued up. Thus, not functioning smoothly. It is a major problem which needs to be managed.

Harmful effects of Bitcoin

Bitcoin is a decentralised digital currency that can be sent from user to user without the help of any intermediaries on the peer to peer (P2P) Bitcoin network. It uses cryptography and blockchain systems to record it’s transactions. Blockchain is a transparent database that is shared across a network, and all those transactions are recorded in blocks linked together. It was created in 2009 by Satoshi Nakamoto, a yet unknown mysterious person. As of 2010, one Bitcoin was worth US$ 0.0008 per token and in 2021, it touched an all time high of $65,000 giving it a market capitalisation of US $1.149 trillion; the largest cryptocurrency ever created .It is rising daily at a rapid pace and also has seen some hard crashes.

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But along with this growth has come some serious effects. It requires a huge amount of electricity to mine Bitcoins. For instance, each Bitcoin transaction uses 1,173 kilowatt hours of electricity, which is the equivalent of up to 6 weeks of electricity usage in an average American home. On an annual basis, according to a report by Cambridge Center for Alternative Finance, Bitcoin uses around 110 terawatt hours of electricity, that is more than the total consumption of some small countries, such as Sweden, Malaysia and Finland. It is also estimated that Bitcoin accounts for 0.5% of the total global energy consumption.

Along with it, in 2019 it was estimated that Bitcoin emits 20 to 22.9 million metric tons of carbon dioxide, CO2, emissions each year and to the worst part is that it is still rising. In fact, a single Bitcoin transaction emits nearly a million times more carbon emissions than those transmitted by visa transactions. It is said with Bitcoin’s current rate of production and usage, it alone could push global warming by more than 2°C. Which is disturbingly alarming.

Though new methods are developed and implemented to reduce the energy consumption and carbon footprint of Bitcoin, it is still far away from making a positive impact on the environment.

Why cryptocurrency is bad for the environment

The digital change with the emergence of cryptocurrencies comes with a price. First of all they consume a lot of energy, sometimes as much as countries like Argentina and next they add to environmental pollution, including carbon emissions. Tim Berners Lee, the inventor of the world wide web, described Bitcoin mining as one of the most useless ways of using energy. Along with this, crypto mining also adds up to global warming. And the amount of energy used even for the smallest of transactions is staggering. 

Despite all these issues it is being accepted by many countries and the experts of the UN, believe that cryptocurrencies through the use of blockchain can help in sustainable development, listing transparency as one of cryptocurrencies’ most useful aspects. This transparency is useful in countries and regions with high levels of corruption.

NFTs, the other form of digital items, also relies on blockchain technology, the same as crypto. It is a form of digital art, and the owner has the rights to those art pieces. And only the original pieces are valuable, while the copies are practically worthless. NFTs are also associated with huge drawbacks mainly due to their effects on the environment. Nevertheless, they bring change and also have many advantages, especially to digital artists. As of now it has become a popular art and active participation can be seen among influencers and high net worth individuals who are willing to pay high prices for owning this digital art and many artists have sold their digital art pieces for millions, including those by Beeple, a digital artist who sold his NFT art for a whopping US $69.3 million.

Bitcoin environmental impact debunked

Bitcoin provides us with advantages such as cost effective modes of transaction, transparency, privacy, protection from inflation and decentralisation to name a few. Yet it is the environmental impacts that act as a hindrance; stopping people from accepting it completely. But with modern technology, many people and industries are working on finding an environmentally friendly way of mining cryptocurrencies.

Ethereum, the second largest cryptocurrency aspires to work on finding technology that greatly minimises the total energy usage. It now uses a ‘proof of work’ system to verify transactions, similar to Bitcoin. But currently they are working on new methods to verify transactions, called proof of stake, or PoS, which is estimated to cut the energy usage of each ethereum transaction by 99.95 per cent.

Though Bitcoin has some environmental issues as of now, it has the potential to solve them for a likely and budding future. 

What is crypto climate accord?

It is an initiative undertaken by organisations (Energy Web Foundation, Rocky Mountain Institute and the Alliance for Innovative Regulations) to fight climate changes and other environmental effects of crypto. With its slogan of “make crypto green”, the accord aims to decarbonize the global crypto industry and achieve net zero greenhouse gas emissions by 2040, and accelerate the adoption of and progress towards renewably powered blockchains.

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Bitcoin environmental impact 2021

Every Bitcoin investor looks hopeful as Bitcoin touched and exceeded it’s all time high of US $65,000 thrice in 2021 (February, April and November). The prices were soaring in its all time high and were doing great but along with it, Bitcoin mining and transactions greatly impacted the environment.

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In 2021, major companies including Bank of New York Mellon, MasterCard, Twitter and Tesla invested in Bitcoin. Tesla, a company led by Elon Musk, the world’s richest man, made an investment of US $1.5 billion and also made an announcement that it will start accepting Bitcoin as a medium of payment for its products. Though again in a short time it suspended acceptance of Bitcoin as payment citing climate concern.

As per Cambridge University, between 2015 and 2021, Bitcoin’s energy consumption rose by 62 fold, and 39 percent of this comes from renewable sources, which is greatly harming the ecosystem and its biodiversity. 

Bitcoins are generated by a process called mining, where the miners use highly advanced computer softwares to solve complex mathematical problems. The process itself requires a lot of power and energy. Thus, often relying on fossil fuels including coal as a power source. Coal being one of the the most harmful contributors to polluting the environment; as it adds to greenhouse gas and the burning of coal also results in emitting toxic substances. Annually coal alone results in thousands of premature deaths and a million more serious illnesses.

Impact of cryptocurrency on society

The one thing that cryptocurrency greatly impacts is society. With its transparent, secure and digital nature, it gives entrepreneurs the incentive to do business on a global level and provides many opportunities. With cryptocurrency it is now easier for people to reach the global market and pay people from different countries, neutralizing the financial system and its borders. And with time and advancement digital currency may take over cash and soon there will be a time where cash will just be a term, as payments and trade for the smallest to the largest of things can be done virtually. And there will be virtual wallets! Yeah we will miss our physical ones.

It also eliminates the need for middlemen, such as banks, as the transaction can be done directly from user to user through crypto’s peer to peer (P2P) network, where everything’s decentralised and no entity controls it.

Various NGOs and entities are using it for a wider cause. As everything is recorded and transparent, all the transactions in crypto can be tracked. The beginning, where was it supplied, who bought it and this has such a huge impact. Many enterprises such as IBM, Agridigital are using blockchain to provide a transparent supply chain for food products, thus gaining the trust of customers.

What will happen if cryptocurrency is banned

Cryptos are already banned in some countries including China, while other countries such as India look to regulate them, and yet there are some countries such as El Salvador which has given Bitcoin it’s legal tender.

Countries will mainly look to ban crypto so as to protect their citizens from the risks involved in carrying out such transactions. 

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Other factors include concepts such as decentralisation; which can be stated as the transfer of power back to the people. The crypto industry is based on the concept of decentralisation. Meaning that it cannot be controlled by any external entity, player or factors. Crypto is a serious threat to the government and central banks as they want to keep on holding regulatory power as they do with fiat currency to better control the economy. Institutions and persons, who act as middlemen in a transaction and earn interest and revenue by collecting fees and granting loans (Banks, lenders, brokers), are also under serious threat as virtual currencies are based on a peer to peer (P2P) system, thus excluding middlemen. Thereby seriously disrupting the bank ecosystem.

There are other issues which the government will consider before banning cryptocurrencies and they are the harm that cryptocurrencies cause to the environment.  The staggering usage of energy and massive CO2 emissions being some of them.

However, crypto is a global network; it is borderless and if it is banned in one country, then crypto circulation of that country can be transferred to other global crypto exchanges.  Crypto can be regulated as per the governmental requirements of a particular country but cannot be completely banned. A complete ban on digital currency would require restrictions in the usage of the Internet, which is practically impossible as of now.

Conclusion

A cryptocurrency is a digital or virtual currency working on a decentralised network and blockchain system, that keeps a track of each transaction and records it on each block. Founded in 2009, it is a globally interconnected network allowing investors and entrepreneurs to work on a global basis, as it is not confined to physical borders of economies and countries.

It is being widely accepted as it provides us with a secure payment system and the other main reason being transparency. Various experts in the UN also listed transparency as cryptocurrency’s most useful aspect. This transparency is useful in countries and regions with high levels of corruption. Other cryptocurrencies’ positive impact includes inflation hedge, decentralisation and it’s easy, fast and cost effective nature.

Some of the issues relating to crypto includes them being highly volatile, their scalability, crypto fraud and other harmful effects of crypto mining to the environment. According to a source, scammers netted cryptocurrency worth $14 billion in 2021 alone, up by 79 percent from $7.8 billion in 2020. Another study stated yearly Bitcoin power consumption to be more than that of Argentina. A single Bitcoin transaction uses 1,173 kilowatt hours of electricity, which is equivalent to 6 weeks of electricity usage in an average American home and emits nearly a million times more carbon emissions than those transmitted by visa transactions. It is estimated that Bitcoin accounts for 0.5% of the total global energy consumption.

In 2019 it was stated that Bitcoin emits 20 to 22.9 million metric tons of carbon dioxide, CO2, emissions each year, which could push total global warming by more than 2°C. There are also initiatives taken by various organisations to reduce the crypto carbon footprint and also its energy usage by bringing in new innovations and technology. 

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We have seen people supporting as well as criticizing cryptocurrencies. On a countrywide level it is opposed by many nations as it is volatile and a threat to their traditional economy, mainly because of decentralisation. Yet we have seen countries giving it a legal tender value and others yet looking at ways to regulate it. As of now the global response is a mixed one. 

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Cryptocurrency has a promising future but it has not yet been fully developed to be accepted completely.