What type of problems or risks could cryptocurrency pose to the financial system in the future.

February 1, 2021

Reading Time: 3 minutes

Bitcoin soared over $32,000 over the weekend, people have resumed speculating the promising future of cryptocurrencies. Chief experts from notable investment companies suggest that Bitcoin could potentially replace the dollar as a global reserve currency.

Cryptocurrencies have developed immensely over the last period of a decade or so. The user base has grown drastically, the market is worth well over $800 billion with $200 billion being traded every 24 hours. Cryptocurrencies are at the forefront of digital finance with assets such as Bitcoin, Ethereum, and Litecoin doing exceptionally well.

A lot of Cryptocurrency’s success can be awarded for its new market and decentralized nature. Cryptocurrencies are still new and growing with how well they are doing the future of cryptocurrencies replacing the dollar may seem nearer than ever. What happens if they do replace the dollar and what type of problems or risks could cryptocurrency pose to the financial system in the future.

Cryptocurrencies and their Technology

Investors, users, and financial institutions cannot mitigate the advanced technology and the risks that come with it. The development and vogue of blockchain technology running cryptocurrencies could eventually impact the value of cryptocurrencies. If Blockchain technology becomes dated, then cryptocurrencies could lose all of their value. Suppose cryptocurrencies lose all of their value, it could create unique risks such as potential risks such as managing custody. Ownership of assets is normally present as private keys and if investors lose their keys, it would be impossible to retrieve their assets. Financial systems would because there will be no FIDR backstop for cryptocurrency deposits.

Centralized Cryptocurrencies

After being introduced more than a decade ago, Bitcoin still reigns supreme. Despite its ups and downs over the years, speculations of the asset replacing the dollar may seem more likely now than ever. Experts report that the U.S. dollar’s influence is destined to die when the United States’ ability to pay debts hinders.

But what does that signify for the time to come of financial systems around the world? Cryptocurrencies serve a very important role in fulfilling the demand for a decentralized and direct payment asset. That is why stablecoins such as Tether are worth over $21 billion. Cryptocurrency pegged to the dollar is in everyone’s interest today.

However, experts suggest that in the future, the institutions endorsing dollar-pegged stablecoins could be a lot riskier, less transparent, and more difficult to deal with than using dollars themselves. Experts predict that the dollar-linked stablecoin could potentially break thanks to pegged exchange rates.

Moreover, stablecoins and cryptocurrencies could pose a risk to the financial system by attracting more regulatory interest which in turn could taint the identity and decentralized nature of cryptocurrencies. With more regulatory interest, Cryptocurrencies wouldn’t be any better than traditional assets.

The value of currency

It is enticing to speculate on Cryptocurrency’s future based on its recent performance. With speculative high yields, long-term store of value, and its consumption as a Medium of exchange. However, taking its notorious volatility into account, Cryptocurrency value always has the risk of potentially dropping to zero.

To understand what risks cryptocurrencies could potentially pose to the financial system in the future we need to learn how Fiat currencies work. Some fiat currencies are valued by the gold to which it is classified and some are conferred by the number of people that have to pay taxes in it.

However, cryptocurrencies aren’t backed or conferred by anything. Experts suggest that the metallist and charlatist fundamentals of fiat currencies are what give its stability and value. The successful financial system is attributed to metallist and charlatist fundamentals. With cryptocurrencies potentially replacing the financial system could bring about chaos. Governments wouldn’t be able to collect taxes and neither could assets be backed by gold. Which could bring a social and political collapse that could destroy currencies around the world such that it could destroy global civilization.

Cryptocurrency code isn’t near to perfect, if it were it wouldn’t have been forked multiple times, however, despite its code being less than perfect, Bitcoin is still valued at around $32,000.

What happens if the dollar is replaced?

Experts suggest the switch to cryptocurrency could cause drastic financial crises around the world. The switch to cryptocurrency could destabilize conventional markets because cryptocurrencies do not adhere to charlatist and metalist fundamentals. The switch could trigger quantitative easing which would potentially hyperinflate major fiat currencies worldwide.

Bitcoins may have the advantages of gold and the perks of being a digital currency because they’re decentralized. Moreover, Bitcoins and cryptocurrencies have a finite supply and can be divided into nominal amounts which makes them more adaptable than gold.

Suppose the volatility of cryptocurrency persists, the prices of goods and services could alter unpredictably. Prices could fall or rise any second of the day. Moreover, cryptocurrencies could restore the trust in money; however, for cryptocurrencies to persevere, the dollar has to collapse. With the collapse of the dollar, currencies around the world will eventually collapse unraveling international order. The exchange rate could be extremely volatile and financial services companies could project a high amount of liquidity risk.

Conclusion

Cryptocurrencies are geographically available everywhere in the world, the plethora of cryptocurrencies can pose to traditional systems and it could introduce political and regulatory risks around the world. With how successful cryptocurrencies are, that future may seem nearer than ever so only time can tell what the future has in store.

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