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Finance

Cryptocurrencies- And Its Problems

The property as a store of value is quite controversial, with reference to the extreme volatility of the Bitcoin price. The daily fluctuations in the Bitcoin exchange rate to the US dollar are often several percent so an intertemporal transfer of wealth from today to tomorrow or the day after tomorrow is sometimes not stable in value. The high volatility reflects the low level of liquidity in the bitcoin market. In view of the around 16 million bitcoins currently in circulation, the trading volume is low and, as is to be expected in a “thin market”, even minor changes in supply and/or demand lead to substantial price fluctuations with cryptocurrency prices.

Bitcoin market

Because the maximum number of Bitcoins in circulation is technologically fixed, the Bitcoin market will continue to be less liquid in the future, and the high price volatility will not decrease. For risk-averse consumers, this may be a good enough reason not to experiment with cryptocurrencies like bitcoin in the first place. In any case, this is an additional hurdle for general acceptance as a means of payment. The high price volatility generates two further effects:

The mirror image of exchange rate risk is the uncertainty about the real value of a transaction. This applies to buyers as well as sellers of goods. The latter often react to this by using a service provider (software) that immediately converts the Bitcoins received into euros or US dollars and credits the seller with the equivalent value. In this case, consumers pay with bitcoin, but it is unclear whether it can really be said that the sellers accept bitcoin. 10

High price volatility

The high price volatility prevents the use of bitcoin as a unit of account. The companies that accept Bitcoin also formulate their prices in euros or US dollars, the Bitcoin price is only calculated after conversion with the current exchange rate. The large number of zeros that result from the conversion is also a hindrance to the function as a unit of account so at today’s exchange rate a 50-cent roll costs around 0.0005 Bitcoin. Due to the purely digital character of the cryptocurrency, however, this is a solvable problem, the scaling could easily be changed to a level that is easier for consumers to handle.

Relative Strengths of Cryptocurrencies

In order to establish themselves as a means of payment in the long term, cryptocurrencies must be classified as “better” than previous currencies or payment methods, at least with regard to individual properties. A first, primarily macroeconomic point of view is the already mentioned value stability. Much of monetary history to date has been a history of sinking, time and time again governments have rendered currencies worthless through inflation with cryptocurrency prices. The outsourcing of monetary policy to a non-governmental central bank is a relatively recent development that has put a stop to this. But central bank independence can be changed quickly by law, it is fragile. In addition, independent central banks can also pursue an unsound monetary policy.

Cryptocurrencies rigorously

Cryptocurrencies rigorously overcome these problems. At least so far, cryptocurrencies have been issued exclusively by private individuals, with no government or other central authority involved. The incentive for private inflation (a frequently used argument against private currency competition) is lost for two reasons. For one thing, there is no private individual issuing cryptocurrencies. The newly created currency units fall to those who solve a cryptographic task first. This mining process is carried out according to transparent rules that can be viewed by everyone, and everyone can take part in it.

Cryptographic tasks

On the other hand, the size of the money supply is not decided on a discretionary basis, Instead, the supply of money follows the rules of mathematics by solving the cryptographic tasks. With bitcoin, the supply is limited to around 21 million units, so inflation of bitcoin is definitely ruled out. Other cryptocurrencies such as the peer coin do not fix the supply in absolute terms, but also allow a positive growth rate in the long term. The fact that binding to mathematical rules does not make absolute sense from an economic point of view will be discussed further below.

At the microeconomic level, blockchain technology allows traditional financial intermediaries to be circumvented. And commercial banks in particular are threatened with an erosion of their business models. Similar to peer-to-peer lending. Where lenders use platforms to transfer financial resources directly to borrowers. Blockchain transfers can be made directly between payers and payees with cryptocurrency prices. The technology ensures that if Ms. A wants to transfer money to Mr. B, only Mr. B can be the actual recipient. That Ms. A can prove that she has the appropriate balance and that the amount actually comes from Ms. A. A trustworthy third person or institution such as the commercial bank, which has so far clarified these questions for Ms. A and Mr. B, is not necessary.

Processing or transfer fees

The processing or transfer fees charged by traditional financial intermediaries allow a rough estimate of the savings potential. The extreme point is cross-border transfers, where the average fee is 8.9% of the transfer amount. 11Credit card companies such as Visa and Mastercard charge a fee of 2% to 3% of the turnover. PayPal charges a fee of 1.9% of the sales value plus 0.35 euros per transaction with cryptocurrency prices.

However, these savings must be compared with the fees that Bitcoin payment service. Providers such as BitPay or Coinbase charge. When converting traditional currencies into Bitcoin and vice versa. Currently around 1% of the conversion amount. Whether Bitcoin transactions will retain their current cost advantage in the long term is occasionally questioned. With reference to the likely increase in transaction fees. 12The currently dominant remuneration of the miners in the form of new bitcoins. Will have to be replaced by fees as a reflex of the increasingly complex mining process. The amount of which can only be speculated at the moment.

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