Will Cryptos Ever Replace Fiat Currencies?

Since the inception of Bitcoin back in 2009, many crypto enthusiasts predicted that it would soon take over and replace fiat currencies globally. They may have been partially right. Over the past decade, we have witnessed the explosion of various cryptos. There are currently close to 5000 cryptocurrencies with a combined market capitalization of over $1 trillion and an average daily turnover of about $150 billion. These numbers are dwarfs compared to the estimated market capitalization of Forex, which is about $2400 trillion with a daily turnover of $6.6 trillion.

Why will cryptos replace fiat currencies?

Despite the dominance of fiat currencies, most proponents of cryptocurrencies maintain that cryptos will replace fiat. Here is why.

Cryptos are scarce

If you ever took an econ 101 class, you know that one property of money is its scarcity. For something to be of value it must be scarce, and the scarcer it is, the more valuable it will be. That is why even in ancient times, they didn’t use grains of sand instead of cereals for barter trade. What does this have to do in the debate of crypto vs fiat?

Well, for the longest time, central banks have controlled the amount of money in circulation to determine the value of a country’s currency. When inflation is higher, contractionary policies are implemented to mop up excess liquidity. Similarly, when inflation is dangerously low, expansionary policies help bring back liquidity into the market. Suffice to say, the value of fiat money almost entirely depends on these two policies.

Cryptocurrencies, on the other hand, are limited. Since the supply of cryptocurrencies is limited, their value will almost entirely depend on their demand. For example, Bitcoin is capped at 21 million coins. This property has made cryptos invaluable as a store of value, since crypto holders do not have to worry about inflation eroding their purchasing power.

This was witnessed in 2020 when central banks and governments globally adopted aggressive fiscal and expansionary monetary policies. Naturally, these policies threatened unprecedented inflation. Consequently, institutional investors opted for cryptocurrencies as a store of value. Due to their decentralized and limited supply nature, these policies would not impact their value.

Cryptocurrencies usher a decentralized and fairer financial system

A decentralized financial system means that the control of the entire financial system shifts from the governments, and the few elite financiers and bankers. Inarguably, the most notable contribution of cryptocurrencies is ushering the decentralized finance (DeFi). DeFi mimics the traditional financial system’s functions but is built entirely upon blockchain technology and is entirely decentralized.

Since DeFi is based on the Ethereum platform, anyone can develop a particular financial service, say a lending platform. Here, you create the rules of how that particular service will operate, and once you deploy it on DeFi platform, it becomes decentralized — you no longer have any control over it. This means that individuals globally can trade with each other without the stringent rules and regulations pervasive in the traditional financial system. DeFi eliminates the fiat financial systems’ hurdles and puts everyone on an equal footing regardless of their financial status or influence.

Increased adoption of cryptocurrencies

For cryptos to successfully replace fiat currencies, they must be adopted widely. Luckily, over the past two years, the mainstream adoption of cryptocurrencies has been unprecedented. Over the years, the majority of traders and holders of cryptocurrencies were small-scale, retail investors. 2020 saw the influx of institutional money and mass adoption of cryptocurrencies. This has been driven by increased acceptance by merchants and online payment platforms specifically designed around the use of cryptocurrencies.

The advent of stablecoins

Since cryptocurrencies like Bitcoin and Ether are viciously volatile, a crypto opponent might argue that DeFi is bound to fail. Without stablecoins, that would be true. Stablecoins are cryptos whose value is pegged on a real-world asset, such as the USD. This pegging effectively eliminates the uncertainties of crypto volatility by creating a stable cryptocurrency which creates a stable financial ecosystem around DeFi.

Bottom line

We owe you an answer to the topical question — will cryptocurrency replace fiat? Most probably not. Let’s face it… unless there is a drastic fundamental shift from traditional finance to DeFi, the chances of cryptos replacing fiat are slim to none. Why? Although the adoption of cryptocurrencies is on the rise, their popularity is primarily driven by the need for a store of value and speculative trading — not for transactional purposes.

What’s more probable is that DeFi will integrate with the traditional financial ecosystem. This will be due to the increasing uptake of Bitcoin and Altcoins, not just for speculative trading and as a store of value, but for transactional purposes as well.

Therefore, we believe that it is high time for us to understand and learn how the cryptos work, their usage, etc., as they will eventually be a part of our life. There are many different resources online on different trading strategies, the most common one being crypto day trading, and we suggest you choose one that suits your financial goals and personality. As you gain trading experience, you can start to diversify your crypto portfolio and allocate funds to different strategies.

The post Will Cryptos Ever Replace Fiat Currencies? appeared first on Home Business Magazine.

Original source: https://homebusinessmag.com/money/cryptocurrency/cryptos-replace-fiat-currencies/

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