Will The Rise in Cryptocurrency Lead to the Downfall of the Global Economy?

Abstract:
With the recent crisis of a global pandemic, cash is increasingly becoming less popular as a
form of currency, with a rise in the use of cryptocurrency. Cryptocurrency is a decentralised
form of digital currency that people can keep as a store of value or use for consumption.
While a cashless society may sound intriguing, it certainly is not sustainable due to the many
negative externalities it has. This includes increasing rates of criminal activity, large wastes
of energy and low productivity . Thus, it should not become an objective to transition into a
crypto economy.

Cryptocurrency is a form of digital currency that records and processes transactions. Many
people believe that the future of our economy may be reliant on cryptocurrency, or we may
potentially end up living in a cashless society. The financial crisis of 2008 occurred due to
deregulations in the banking industry, which ultimately led to a global recession with millions
of people losing their jobs (for instance unemployment rates in the United States rose from
5% to 9.5%)1. This sparked extremely high levels of uncertainty and caused people to lack
faith in the way the government handled economic issues. As a result, Satoshi Nakamoto
created the first decentralised cryptocurrency in 2008, known as ‘Bitcoin’. This form of
currency did not require any trust in third parties, which made it extremely appealing to
people who had just lost their money as a result of human errors and bad decisions. It can
be argued that its decentralised nature will revolutionise many industries as this currency
can neither be seized nor controlled, but to what extent will this lead to growth rather than
the downfall of the global economy?

Cryptocurrency is created through the process of mining, where people earn the currency as
a reward for verifying transactions which are collectively referred to as blockchains. The
transactions in blockchains are verified through solving extensive mathematical problems
that increasingly become more difficult as the length of the blockchains increase. As these
problems become more complex, more processing power is needed in order to solve them.
However, this creates a spiral as an increase in processing power also increases the
difficulty of the problems. Many people undergo the process of mining to receive Bitcoin as a
store of value, as they can later resell the coin at a higher price to retain a profit. However,
this can be seen as unsustainable as the profits can be said to be relatively low when we
take into account the large computational and maintenance costs required in order to verify
the transaction in the first place. Many economists see this process as a zero sum game2, as
despite rewards being proportional to the difficulty of the problem, the costs to have even
solved it in the first place would have been extremely large. In addition, this problem will
grow excessively worse as we live in a generation that is predominantly focusing on
technological advancements, which means computers will become more powerful and the
costs will keep rising. This is harmful for the economy, as it can be seen as a waste of
powerful resources. Miners believe that the reward of bitcoin outweighs the costs, as Bitcoin
will increase in value in the future meaning it can be sold at a much higher price. However,

1
B. Duignan, ‘Great Recession’
2
K. Saito ‘Can We Stabilize the Price of a Cryptocurrency?’
this causes people to partake in speculative behaviour where they dedicate time in
predicting how the value of cryptocurrency will change in order to make more money. While
this technique may work at first, it is not effective considering the volatile nature of
cryptocurrency. It relies on people selling bitcoin to other people who also want to sell bitcoin
to other people and so on. This essentially shows how cryptocurrency can be seen as a
financial instrument for investing, rather than a currency for consumption. As more miners
enter the competition to earn bitcoin, these computers can be seen as a waste of resources,
as instead of being used to mine cryptocurrency it could be used for creating complex
market models or increasing productivity. Thus, the competitive nature of cryptocurrency will
continue to decrease the productivity of an economy’s workforce and cause it to harm the
growth of economies overall.

Although, cryptocurrency can be considered to be beneficial to society as people can easily

manage and access their transactions. After the transactions in a blockchain have been
verified by the network’s users, it is recorded and then accessible by anyone. This is
especially helpful for industries that involve trading or shipping, as it organises the plethora
of transactions that occur. Furthermore, cryptocurrency can be seen as a prosperous tool for
the economy as it allows low income households with low credit scores to have access to
currency and ultimately become their ‘own bank’. This is because crypto wallets allow people
to transfer money internationally without any transaction fees or minimum balance, as long
as they have internet connection. For instance, another cryptocurrency known as Ethereum
allows low income households to invest as well as store things like medical records and
licences. If low income households are able to retain currency and make profits, this may lift
them out of relative poverty to which they can then be able to afford basic needs and wants.
This increases consumption in the economy, causing aggregate demand to increase which
ultimately creates economic growth. While this may seem ideal, this is unlikely to occur due
to information failure. This is when people are not aware of the benefits cryptocurrency can
bring, or even the fact that it simply exists. In addition, cryptocurrency can be argued to still
be exclusionary as low income households can not afford to invest in currencies with higher
values. Furthermore, the fact that the government can not take down many forms of
cryptocurrency results in a rise in criminal activity. For example, many criminals use it to
assist money laundering or illicit trading3. This is evidently an issue as an increase in crime
will result in government spending to increase, worsening national debt. Therefore,
cryptocurrency may cause more problems than it solves through assisting financial crimes
and being misused.

After the recent global pandemic struck our economy, the number of contactless payments
has substantially increased, with cash becoming less common as a medium of exchange.
For instance, the increase in digital payment platforms in the Philippines has demonstrated
promising growth of up to 5000%4. This shows how over time, society may rely less on cash
and more on digital currency in order to achieve prosperous growth. Living in a cashless
society may be possible, as we can already see central banks across the globe looking into
central bank digital currencies to potentially replace cash. While this transition may take
long, it is argued that with the right education, this can be sped up drastically. For instance,
many software applications have been created in order to fill the knowledge gaps of those

3
Elizabeth R., ‘Financial Attacks on Democracy’
4
Julian. H., ‘Crypto is the next step towards a cashless society’
unaware of cryptocurrency, such as Coinbase which allows people to easily invest in crypto
currencies. Although this may seem ideal, transitioning crypto entirely is highly
unsustainable. For instance, the computers needed to mine the currencies to supply it
consume extremely large amounts of energy. Despite ATMs across the globe remaining
powered on and idle, the time taken to process a transaction takes around 60 seconds
compared to Bitcoin which could take around 6 hours to process just one transaction.This
shows how digital currencies are slow and ineffective, and thus not a suitable form of
exchange.

To conclude, while cryptocurrency opens up many opportunities to people, it has more

negative consequences than benefits. Cryptocurrency is more of an asset that can be
purchased and sold to earn money, rather than being used for consumption. While I agree
people should be educated about its uses, I believe that it should not become the future of
the global economy, as it presents far too many negative externalities that would put strain
on resources as well as the government. This may result in a recession, followed by low
development and potentially unemployment rates rising. Therefore, the rise in
cryptocurrency may lead to the downfall of the global economy if it becomes the
predominant form of currency used.
Reference List:
Duignan, D., ‘Great Recession’
Hosp, J., ‘Crypto is the Next Step Towards a Cashless Society’
Rosenberg, E., ‘Financial Attacks on Democracy’
Saito, K., ‘Can We Stabilize the Price of a Cryptocurrency?’