Cryptocurrencies and the Economy

Introduction

Cryptocurrency is a type of digital currency that was introduced in the market in the year 2009 by Satoshi Nakamoto. Bitcoin is one type of cryptocurrency, others are Litecoin and PPcoin and are all based on the Bitcoin except for slight modifications. Bitcoin makes use of the peer to peer technology in its operations and does not involve the central authority or the banks. The paper will focus on how Bitcoin affects the economies and the currencies of the US and United Arab Emirates(UAE).

Effects of Bitcoin on the Economy of US and UAE

Economy involves all activities related to production, consumption, and exchange of goods and services in a given country. When a person wants to involve in trade, the currency has to be there and it has to need a trusted party such as a bank and the government and that is when Bitcoins get to challenge the traditional currency.

Tax problems

The use of Bitcoin as a medium of payment has led to tax problems. There is a debate on whether to tax Bitcoin or not. Bitcoin, however, can neither be applied for tax payments nor for government obligation. It is an illegal form o payment in Germany while Canada has declared the income that is earned from Bitcoin to be taxable (Salman 3).

Smart Transport

The use Bitcoins can lead to a smart transport, especially in the UAE. When the residents of Dubai or non-residents do not have Dirhams, they instead tend to possess their local currency which is in turn converted. The likelihood of them not having cars is also high and in case they want to use Dubai’s well connected public means, then they will be forced to convert the currency yet again. It is for this reason that the government is aiming at ensuring that people can carry out the transactions on a smart device and Bitcoin seems to be the answer to this need. Various websites have a virtual wallet software which works in sync with Bitcoins (Singhal 5). Any individual in any part of the globe can have both the virtual wallet and the Bitcoins. The wallet is usually in form of an application in the smart devices. Bitcoin, therefore, makes its possible for the government to make its services accessible on smart devices with neither conversion of currency nor extra charges. Dubai taxes have actually embraced the strategy and are freely providing Wi-Fi to their customers (Singhal 5).

Smart Economy

Bitcoins will also play a great role in ensuring that the money transaction is revolutionized leading to a smart economy. Bitcoin automatic teller machines(ATMs) will ensure an increased spending power among the people and consequently straining the budget further to accommodate higher levels of purchases. This will make people be aware of the Bitcoin currency and accept it as a valid medium of exchange (Singhal 5).

Accelerate Growth of GDP

The use of Bitcoins will also accelerate the GDP growth, especially in Dubai. UAE experienced a rise in the GDP in the year 2001 which was as a result of the shopping malls, retail sector, and online trading. The trading sector, therefore, formed the largest part of the GDP growth. The use of Bitcoin technology will further ensure that cheaper transactions take place online and will also offer a simpler means of shopping in the outlets. This will further boost the trading activities and result in a further increase in the GDP of the UAE and the US countries.

Boost Tourism

The use of Bitcoins will also boost the tourism sector. Taking Dubai as an example, it attracted nine million tourists in 2011 which were from various parts of the world. The majority of the tourists, however, were from Eastern Europe, Africa and the Americans (Singhal 5). In cases where the floating population is more than the static population, there is always a massive exchange of currency which has a way of inhibiting purchases and various transactions. The presence of a single global currency would have been a solution to such instances since there would be no set boundaries for conversion of the currencies. Shopping would, in turn, be made more enjoyable and this would hasten the industrial growth.

Education and Health Sectors

Education and health sectors can also be made smarter through the introduction of Bitcoins as a means of payments. The tourists visiting the UAE would have found it easier to access such services since there would be no currency relating to currency conversion. Education can also be made smarter through the use of online Bitcoin payment to attract overseas teaching. The money will also be safe as it will be kept in the teachers’ virtual wallets. Bitcoins can also lower the logistics costs by the government since money will not be lost in the process of currency conversion as it involves large amounts of money (Singhal 5).

Emergence of a New Type of Market

Bitcoins will lead to an emergence of a new type of market that is controlled by no one. This will, in turn, make the cyberspace rise up and be the managing body that will handle and maintain such a kind of a market that is disrupted. The transactions costs that are near zero will further make the Bitcoin to be superior to the traditional currency. This will be a beginning of a number of impossibilities. Bitcoins further renders the government authorities jobless as it does not require the regulatory bodies. It is also transparent since users of the electronic wallet will not be required to disclose to the third party which wallet belongs to them and each transaction they make is recorded publicly. The bitcoin account can also neither be frozen nor seized. Bitcoins allows its users to make payments to anyone without any form of interference. This will make it easy for people to trade with anyone in any part of the globe thereby bringing about economic growth.

Effects of Bitcoin on the US and UAE Currencies

Merchants are slowly accepting Bitcoin as a new method of payment. Different types of merchandise can be purchased by the use of the Bitcoin such as cars and candies. Its value is becoming more stable with its wide use. The price of Bitcoin rose from thirteen dollars in 2013 to one thousand dollars currently. Many people in the US now invest money in form of Bitcoin instead of keeping cash in the bank. Investing in Bitcoins by the nationals of the US and UAE will cause depreciation of their currencies.

In case Bitcoins are accepted worldwide, it will be a gain in the economy in terms of job creation and the public will also benefit from an effective system of value transfer. Bitcoins will also make it easier for a common citizen to send and receive money. The current situation forces them to pay heavy taxes, especially for international transactions. The problem will get solved with the use of Bitcoin. The local citizens will get motivated to engage in international transactions and even expand their business outside the borders of their countries (Singhal 2). This will, in turn, lead to economic growth of the US and the UAE. Multinational corporations that are located in the US and the UAE will also benefit greatly international money transfers will take lesser days and also lesser transaction fees (Singhal 2).

Negative Effects

Hyperinflation and Inflation Control

Bitcoin can solve the issue of overprinting of traditional currency which has a tendency of causing hyperinflation (Singhal 4). Hyperinflation is a concept which refers to a situation where there is an increase in the amount of money in circulation with no proportionate growth in the output levels. Bitcoin will reduce inflation in the US and in the UAE. Inflation will, in turn, reduce unemployment and this causes a massive growth in the economy of the nations that will legalize the use of the Bitcoin. Bitcoin also keeps a record of each transaction in a blockchain and which in turn acts as a public ledger for any transaction that was ever made. This makes it easy to trace each transaction for accountability purposes. Accountability makes it easy for the people to channel money in the intended sectors and also increase savings which are later used in further investments.

Money Laundering

Drug smugglers and terrorists, however, are taking advantage of the Bitcoin to engage in money laundering. They are using Bitcoin to cover up their actions and manage to enter the money received in such actions in the economy. Regulations are not easy to be enacted because of the core decentralized anonymity of the technology surrounding it. This increases the amount of money in circulation consequently lowering the value of the US currency.

Dependence on Bitcoin and Hacking

There is a risk that comes with a country depending on Bitcoin more than the national currency. The traditional currency is controlled using monetary policy unlike the Bitcoins that the bank has no control over (Das 2). Monetary policy is a tool for controlling the rates of interest and money supply and consequently other economic factors such as unemployment rates and inflation. A complete dependence on Bitcoins will make the country survive at the people’s mercy all over the world. This will pave the way for the politicization of the money. The Bitcoins will compromise the economic independence of the countries. There will be price deflation making people less happy (Das 2).

Bitcoins just like other forms of Cryptocurrencies are prone to hacking. Bitcoins are risky since they are stored in an electronic wallet and people that invest in such are prone to loss of passwords, hacking and even an attack by malware. There are still no regulatory bodies that have been put in place to foresee Bitcoins transactions and no entities have been given a license to operate such currencies. This poses a risk to investors as there is no one to turn to for complaints in case the money in the electronic wallet is interfered with. Although hackers have not attempted to crack the encryption method of Bitcoin yet the risk is high since technology moguls are evolving with each passing day. They have, however, already tried with success to hack multiple Bitcoin Exchange rates and managed to get away with millions of dollars. This also drove down the Bitcoins’ value as the hackers offered to sell millions of Bitcoins for just a few dollars. Bitcoin is also not easily convertible to all other forms of currencies. The owner of Bitcoin Satoshi Nakamoto, however, argues that the system can never be hacked (Nakamoto 8).

Conclusion

The advantages of the Bitcoins, however, outweigh the disadvantages. The role the Bitcoins will play in promoting economic growth in both the US and the UAE is massive. The effects on the currencies are, however, mostly negative. The opinions of people regarding the Bitcoins are, however, divided as other people have offered praises to the Bitcoins while a significant number of people have termed the Bitcoins as a scam in waiting. The use of Bitcoins in my opinion, however, has to be accepted as a means of payment and be made official so that people may invest in Bitcoins with no fear of losing their money. Bitcoin is a sign of hope for a robust digital currency and consequently a better financial system in the US and the UAE. The study of Bitcoin could make it easier for a true digital currency to come into existence in the near future. This would be very crucial considering the uneven economic prosperity that is experienced across the globe. Bitcoin, however, has to liaise with different forms of online payments and also involve the government to provide protection against theft which is a major threat. Bitcoin has the potential to replace traditional money.

Works Cited

Das, Delhi. “Bitcoin Boom: The Side Effects.” Business Today 12 December 2017. Document. 8 May 2018.

Nakamoto. ”Bitcoin: A Peer-to-Peer Electronic Cash System.” Bitcoin (n.d.): 9. Document. 8 May 2018.

Salman, Muthanna,Razzaq. ”Bitcoin and the World of Digital Currencies.” Intech Open Science (2018): 16. Document. 8 May 2018.

Singhal, Rafiuddin. ”Role of Bitcoin on Economy.” Proceedings of the World Congress on Engineering and Computer Science II (2014): 6. Document. 8 May 2018.