Cryptocurrencies are no longer an idea from a science fiction movie, but rather a reality that lies ahead of us with the widespread popularity of money markets and speculative platforms for Bitcoin and its sisters. Despite the severe turmoil in the trading of these digital currencies, and the rapid rise and fall in their prices, they attracted the interest of an increasing number of traders, including companies, businessmen and investment funds.
According to a report published by the American “New York Times” at the beginning of this month, the value of digital currencies currently in circulation has jumped to about $ 2.4 trillion from about $ 200 billion two years ago. The amazing thing is that these currencies were only born 12 years ago, when the first digital currency, Bitcoin, appeared.
Digital currencies such as “Bitcoin”, “Ethereum”, “Cardano”, “Litecoin” and others, are not ordinary currencies, but rather raise a lot of controversy. They are not tangible monetary currencies, and they are not issued by a central bank that guarantees their value and is subject to its policies and controls. Therefore, they have no real value other than their artificial value in deliberations and stock market speculation. Until recently, you could not use these currencies to buy anything, but after their widespread popularity in the deliberations, some companies, payment platforms and applications, and a few shops in a few countries have begun to accept their use for payment in the buying and selling process. Indeed, a major company such as Tesla announced that it would accept Bitcoin in selling its cars before returning and canceling the decision.
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And within the controversy surrounding it, some call it “dirty currencies”, based on two points of view; First, government departments in several countries say that these currencies are used by criminal networks in money laundering operations, and by wealthy and ordinary individuals in tax evasion because they are far from the eyes of control. The second thing is that their production consumes very high electrical energy, sufficient to light cities. The production of only one unit of these currencies requires the use of a number of computers over long hours to perform complex calculations to obtain its unique encryption key.
With this reputation, why have these currencies become popular and desirable for many speculators in the financial markets and for a number of companies and investment funds?
The first factor is profit, of course, in light of the staggering increase in the value of these currencies. In early 2019, the value of Bitcoin, for example, was about $ 3,500 per unit, but in just two years its value reached more than $ 60,000, an increase equivalent to more than 1,700 per cent, before it declined again to about 38,000 (its average price during this week).
Among the factors that have escalated the value of digital currencies during the last two years is the rise in global debt, and central banks’ infusion of funds with more currency printing to counter the repercussions of the Corona pandemic on the economies of the world countries, especially the major countries. For example, the size of the national debt of the United States exceeded 28 trillion dollars (more than 3 trillion dollars more than last year). Also, the US Reserve Bank printed and pumped dollars in huge quantities to support the economy, which increased the volume of dollars in circulation by nearly 27 percent. America was not alone in accumulating debts and printing currencies, which raised fears of inflation and spread anxiety in the financial markets.
Feelings of anxiety prompted investors and speculators to search for havens that would protect them from inflation and the decline in the value of the dollar, so many resorted to digital currencies. These currencies are not subject to depreciation in value due to inflation and the injection of additional quantities of them by the decision of the central banks, and this is one of the reasons for their attractiveness, in addition to, of course, the large and rapid rise in their value, and being far from the eyes of financial supervision. All digital currencies currently in circulation are limited in terms of the quantities that can be “produced”, because they are related to the arithmetic units available in the encryption process for each of them. Take Bitcoin, for example, the amount you can produce from it is limited to 21 million units, and you cannot exceed it.
The astonishing popularity of these “virtual” digital currencies worried the major countries, and prepared the ground for a two-pronged “digital” war; The first is directed against these currencies that operate outside the official financial authorities and control, but withdraw large amounts of money from traditional financial markets, and provide havens for tax evaders and money laundering operations. Several governments have already started calling or moving to impose procedures and enact legislation to control the deliberations of these currencies and subject them to the control of the financial and tax authorities.
As for the second part, it is related to the debate that opened about whether it is necessary now to accelerate the issuance of “official” digital currencies that would be subject to the control of central banks and pull the rug from under Bitcoin and its counterparts. It is expected that this matter will spark a “fierce” competition between America and China, in which other parties may enter. Beijing began practical steps to issue its own digital currency, by experimenting with the “digital yuan” on a limited scale in a number of its cities, and then by announcing that it would test this currency during the Beijing Winter Olympics next year. This matter raised the fears of several parties in Washington that if the United States was late in entering this race, it would give a head start to the potential Chinese currency, which would lose the “American digital dollar” an important ground.
The Coronavirus pandemic also stimulated discussion on the issue of digital currencies. Social distancing measures and concerns that cash might transmit the virus have made people more inclined to pay with cards and use the touch and mobile payment system in countries where these methods are available.
“Official” digital currencies, in any case, will not be a strange thing, but rather will be a natural development in the history of dealing with money. Over the centuries, various technologies have appeared in the system of payment and cash circulation, starting with coins and banknotes, passing through the system of paying checks, then with credit cards, and finally the payment system through applications and programs using mobile phones and personal computers. What is clear is that in many countries the use of cash has begun to diminish in favor of credit card payment systems or mobile phone applications. In Sweden, for example, the use of cash has been declining in recent years to the point that a number of stores no longer accept cash at all.
The Corona pandemic and the rise of Bitcoin and its sisters may have pushed the issue of digital currencies to the fore, but the truth is that a number of countries have been conducting experiments and preparing studies for years on issuing their digital currencies, and their steps may accelerate now.
I recently read a study issued in August 2020 by the Bank for International Settlements that stated that since late 2019, a group of central banks representing roughly one-fifth of the world’s population have reported that they are likely to issue digital currencies in the future. It was remarkable that 80 percent of the central banks surveyed were found to be involved in research, experimentation, or the development of digital currencies.
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It is not clear who will be the first in the field of official digital currencies, but it is certain that it will spark a fierce competition between America and China in light of their war on the center of the economic leader in the world