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Negative Impact of Cryptocurrency on the Economy

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If you’ve been following how some countries such as Qatar, Egypt, China, and Nigeria clamped down on cryptocurrency, you might be forced to ask: Does digital assets really hurt their economy?

Here is the summary of what this article will cover:

  • The negative impacts of cryptocurrency on the economy
  • Challenges the emerging technology brings to our economic systems
  • The potential for revolution it brings to the traditional financial systems and economies

And of course, the goal of this article isn’t to demonize cryptocurrencies, but to shed light on potential risks and why economies around the world should pay attention to the grew area so as to minimize the potential negative impacts on the economy.

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The Biggest Negative Impact of Cryptocurrency pn the Economy

Going by the favorable environment created by some countries for cryptocurrencies, there are lots of benefits the new digital money has shown a lot of promise.

Some of the advantages as pointed out in our publication include: providing quick, cheap, and borderless transactions and offering a level of anonymity not seen in traditional banking systems.

As interesting as the benefits of crypto are, there are also downsides that must be acknowledged, which can simply be described as the biggest disadvantages of crypto:

  • It is volatile and it is capable of triggering economic instability,
  • Its energy-intensive mining process can possibly have a negative impact on the environment.
  • It is capable of facilitating illicit activities. There are fears that it could possibly be used to finance terrorism.

How Cryptocurrency Negatively Affects the Economy?

Beyond the aforementioned disadvantages of crypto, on a broader note or beyond individual use, how can it spur economic instability?

Volatile Nature of Cryptocurrency

Cryptocurrencies are well-known for their volatile nature. Prices can skyrocket within a few minutes and plummet the next seconds.

This happens because it is often driven by speculative trading, sudden influxes of investment, or rapid sell-offs can impact the price.

These unpredictable swings in value can create financial risks and contribute to economic instability.

Salvadoran President, Nayib Bukele, is a reference if you want to know how crypto volatility can push an economy high deficit. Being the first country to adopt Bitcoin as its legally recognized currency in September 2021, the country went fully into experimenting with using Bitcoin for economic development.

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Unfortunately, its $375 million investment in Bitcoin as of October 2022, led to a loss of of at least $60 million. That’s one of the ways crypto can negatively affect an economy.

Bitcoin crash

Bitcoin investors or traders who have been in business before and after 2018 may never forget the Bitcoin crash in 2018.

After reaching a peak of nearly $20,000 per BTC from December 2017 through January 2018, Bitcoin’s value plunged to just around $3,100 by December 2018. Its market capitalization equally fell below $100 billion for the first time since October 2017.

Ripple effect

Within a year, the sudden drop wiped out billions in market value. It sent ripples through the economy, investors were hurt, and since then, crypto generally has raised concerns about economic stability.

And most importantly, the volatility of Bitcoin doesn’t just impact investors or traders, it can also affect other areas of the economy.

A company that invests in Bitcoin around November – December 2017, without a financial backup would close shops, pushing its employees to the job market.

Sharp rises and falls in value can create bubbles and subsequent crashes. These fluctuations can lead to loss of wealth and even contribute to recessions if it’s not properly monitored.

Capability of Disrupting The Traditional Banking

It is faster and quicker when compared with the traditional banking, but it could also negatively affect traditional banking and financial systems by their nature.

It is a double-edged sword. While they allow users to store, trade, and transact value without the need for a bank or a government, cryptocurrencies could technically render traditional banking systems obsolete and useless.

It could push traditional banking to cut on the workforce because fewer customers mean only a few employees will be needed, and cryptocurrency is a threat to the banking sector and the economy.

Lack of Control and Oversight

Every country has a central bank that controls and regulates the activities of financial sectors, for the trading of stocks, there are agencies that monitor and regulate that operators comply with laws. This is not the case in cryptocurrency.

Lack of control remains among the biggest challenges of cryptocurrency around the world. Without the control and oversight that banks provide, the financial system could become more vulnerable.

It is easier to use Bitcoin or other forms of cryptocurrencies to perpetrate fraud or keep illicit funds in crypto, making it difficult to trace the real owners of such funds.

The absence of a central body to control the use of crypto could lead to economic instability, as there is no entity to step in during times of crisis.

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Potential Threat to National Currencies

In countries where cryptocurrencies become very popular, national currencies could face devaluation.

Countries such as El Salvador and the Central African Republic (the first African country to adopt Bitcoin as a second currency) adopted Bitcoin with the hope that it would improve their economies, but it has rather disrupted their economies, caused inflation, and caused more economic instability.

Environmental Impact of Cryptocurrency

High energy consumption

The high energy consumption of crypto mining is among the problems caused by cryptocurrency. Miners use high-performance computers to solve complex mathematical problems, a process that consumes enormous amounts of electricity.

The Carbon Footprint of Bitcoin

Bitcoin has a particularly large carbon footprint. Bitcoin mining consumes more energy annually, consuming 127 terawatt-hours (TWh) a year, which is more than the energy consumption of Norway and many countries around the world, says U.S-based Non-governmental organization Rocky Mountain Institute (RMI) in its January 2023, report.

The high energy consumption of Bitcoin mining is a threat to other regulated sectors that contribute more to the economy of a country.

Compared to Gold Mining

Compared to gold mining and traditional banking systems, the energy consumption of Bitcoin is significantly higher. This cannot be ignored, especially in an age where the world is battling with climate change and looking for ways to reduce carbon emissions.

Trading Anonymity Could Promote Financial Crimes

Cryptocurrencies offer a level of anonymity that traditional banking systems don’t. While this can be beneficial, it can also be misused by the political class of countries that are extremely corrupt.

This anonymity makes cryptocurrencies an attractive option for activities like money laundering, and other financial crimes. A check on the movement of Bitcoin and transactions on platforms that track BTC transfers such as blockchain.com will reveal to you the huge amount that is moved from an account to an unknown destination every second.

For instance, the first concern raised by a Democratic Senator, Robert Menendez, when El Salvador adopted Bitcoin was that, “Bitcoin can open the doors of corruption in El Salvador”.

However, the same senator has just been indicted for corruption by Federal Prosecutors who seized $100,000 in gold bars and $480,000 in hidden cash from his home.

Who knows if Senator Menendez also has some of his money hidden in Bitcoin or other forms of cryptocurrencies?

It Promotes Tax Invasion

For context, tax invasion is an illegal activity where an individual or corporation deliberately conceals information to reduce their tax liability. It also involves dishonest tax reporting, such as declaring less income, and profits than what was actually earned.

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The anonymity of cryptocurrency can make it difficult for the government to tax profits from trading or investment, and this will make the government to lose part of its revenue. This will hurt the economy which largely relies on revenue from taxation.

Funding Illegal Operations

Beyond financial crimes, cryptocurrencies can also be used to fund illegal activities. From purchasing illegal goods and services online to funding organized crime, cryptocurrencies can be misused due to the difficulty in tracing transactions.

For countries that face issues of terrorism such as Nigeria, there are fears that crypto could be used to finance their activities.

The Silk Road As A Case Study

One example of how cryptocurrency can hurt the economy was the case of The Silk Road, which was founded by Ross Ulbricht in 2011.

The Silk Road can be described as the first modern dark web marketplace, where people bought and sold illegal products and services anonymously using Bitcoin.

Thanks to the intervention of the FBI was found and shut the platform down in 2013 while its founder was arrested, tried, and jailed for life.

A prominent example is the Silk Road, an online black market on the dark web. Here, Bitcoin was used as a medium for transactions, including the sale of illegal drugs. The Silk Road was eventually shut down, but it highlighted the potential misuse of cryptocurrencies.

Challenges Ahead

Cryptocurrencies pose a significant challenge to regulators because its decentralized nature. Since there is no central authority, it’s difficult to apply traditional regulatory methods. National laws can be hard to enforce, especially given that digital currencies transcend national borders.

The anonymity nature of Bitcoin and other cryptos still creates a complex legal landscape that is difficult to navigate for users, investors, and authorities alike.

Approach to regulation

Cryptocurrency has come to stay, economies have to form alliances. regulating cryptocurrencies effectively may require international cooperation.

However, reaching a consensus among nations can be a slow and complex process. Despite these challenges, efforts towards developing a robust regulatory framework are possible.

Takeaways:

The negative impact of cryptocurrency on the economy of a country can be summarized as:

  • Volatility could lead to the collapse of businesses that invest in it without proper guidance
  • It could disrupt the traditional banking system and lead to a large-scale reduction of the workforce
  • Regulation is still a big challenge because of the anonymous nature of Bitcoin
  • Crypto adoption is a threat to traditional currencies of economies around the world.
  • It promotes tax evasion, leading to a reduction in government revenue.
  • It can be used to perpetrate financial crimes. Financial crimes hurt the economy.

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