The Impact of Bitcoin on the UAE and U.S. Economies

Cryptocurrency and its Impacts on Economies

Cryptocurrency refers to a digital asset that is designed in such a way that it works as a medium of exchange. Advancements in the levels of technology have in the past five years contributed to a significant increase in the reliance on cryptocurrency in various parts of the globe. One of the benefits of cryptocurrency is that it is easy to transfer and this is done within the minimal processing fees. Economies, medium traders and black markets benefit directly from this electronic medium of exchange. Impacts of bitcoins on economies include the emergence of new markets, increased cases of money laundering, and the provision of investment platforms that contribute to an improvement in GDPs of countries. As at the end of 2017, the value of all the cryptocurrency that was in circulation around the world was estimated at $100 billion. In this paper, an analysis will be directed on the effects of Bitcoins on the U.S. and UAE economies and their currencies and the measures that the countries will have to put in place in addressing the adverse effects of cryptocurrencies.

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In the past decade, the roles played by the financial markets in the economy have also undergone a lot of changes, and this has been resulted by the innovations witnessed in various countries around the world. First and foremost, they have been critical in enhancing investment through the provision of a platform where investors can engage and transact without fears of losses. Financial institutions have also found it easy to expand into foreign countries due to the standardized regulations that are slowly being adopted globally. The use of cryptocurrency and Eurocurrency has also facilitated enhanced international transactions and investments.

Effects of Bitcoin on economies

U.S.

The U.S. economy has in the past five years undergone immense growth and this is evidenced by an increase in its GDP, the number of companies, both local and international operating in the country and the reduction in unemployment rates. With the aspect of globalization, the U.S. has been on the frontline in bolstering its international relations and trade (Szmigielski, 2016). In the recent years, cryptocurrency usage in the country has been on the increase and this has been attributed to the desire by investors to change some of their investment strategies.

One of the main impacts of Bitcoin is that it has led to economic development across the U.S. Estimated 35% citizens from the country currently use Bitcoin as an investment platform. Usually, individuals look at its prices before injecting their investments. Compared to stocks, investors will purchase Bitcoins when the prices are low and cash in at high prices. Moreover, it allows users to carry out safe online transactions and this in return contributes to an overall increase in economic development around the country. Financial analysts argue that in the next five years, with the strengthening of cryptocurrency, Bitcoin will be a major factor in leading to an increase in the U.S. GDP.

Bitcoin has been instrumental in the enhancement of financial services within the U.S. and the quality of life of people in the country. With the adoption of Bitcoin, mobile banking around the country has been supplemented. Individuals currently have the ability to access inexpensive financial services. Reliance on the cryptocurrency as a form of investment has also been instrumental in changing the lives of most of the American citizens. Financial institutions have occasionally advised individuals to try out the Bitcoin platform. Poverty levels have been on the decline and this is an indication that the U.S. economy is on the upward spiral.

Bitcoin has also been beneficial to the U.S. economy as a result of the elimination of frauds and scams in electronic transactions. The cryptocurrency provides its users with a safe platform where they can invest, send, and receive money. Moreover, the use of Bitcoin has resulted in the pacing of various business activities around the country due to its quick and instant transactions. Subsequently, this has been instrumental in the enhancement of the U.S. economy.

Fluctuations in the Bitcoin prices due to its volatility are a major risk to the U.S. economy. Bitcoin’s performance in December 2017 was impressive but it has since been on the decline. Based on this assessment, it is evident that excessive reliance on the platform may in the future lead to massive losses that may in return contribute to a significant reduction in the country’s GDP. Investors, on several occasions, are worried about investments that lead to a loss in their returns and this implies that should the Bitcoin bubble burst, cryptocurrency will have its reputation painted negatively.

UAE

Despite the news that Bitcoin is a global “economic bubble,” it has in the past three years gained significant popularity in the Gulf. In the UAE, there are a handful of operators that are promoting the low cost and secure mode of transactions and advising individuals to try it out. Earlier in 2017, the country had banned the use of Bitcoin but this was uplifted in March 2017 when new regulations and standards were imposed. Bitcoin-related activities have since increased around the UAE, with financial analysts arguing that the platform will, in the future, have a positive impact on the economy.

The impact of Bitcoin on the UAE’s economy remains insignificant in the modern-day and this is attributed to the fact that it is still a growing platform in the region. Until March 2017, the UAE had banned Bitcoin transactions, and it meant that firms dealing with this digital currency were not given licenses to operate (Wilson, 2018). However, the ban has since been lifted and the online trading platform is fast gaining popularity in the Gulf. More people in the UAE are currently showing interest in online trading activities and this is expected to improve in the coming years, thus positively affecting the country’s GDP.

Application of Bitcoin has been essential in enhancing business transactions. Firms that have been legalized to use the platform in their daily financial transactions in the UAE have recorded a strengthened financial performance and this has resulted in an enhancement in the country’s GDP. Currently, oil is a major factor contributing to an increase in the UAE’s economy, but most analysts in the investment and financial fields argue that should Bitcoin become legalized, it will play a significant role in bolstering the country’s GDP. According to Ahmad Al Kholifey, the governor of the Saudi Arabia Monetary Authority, digital currency is the future of the UAE and needs to be given the necessary attention.

Financial markets in the UAE are slowly coming to the realization that Bitcoin is the future of their growth. Most companies in the country have started adopting the digital currency platform with the aim of improving their performance as well as competitiveness. As the popularity of Bitcoin continues improving in the Gulf, the economies of countries such as the UAE keep on increasing in the future (Vigna, 2016). Economists in UAE keep on arguing that in the coming years, the government will come up with policies that will be vital in protecting digital currencies.

However, the biggest fear, according to the financial regulatory bodies in the UAE, is that the reliance of Bitcoin as a mode of financial transactions will result in an increase in the black market. Moreover, circulation of black money around the Gulf will be on the increase and this will end up having a negative impact on the economy by discouraging foreign investors to invest in the country. Issues of tax avoidance will also be on the rise and this will deny the government a percentage of revenues.

Effects of Bitcoin on currencies

Cryptocurrencies are slowly taking over as the main mediums of exchange around the globe. The impacts of digital currencies have already started being witnessed in the form of economic growth and the fluctuations of the values of currencies applicable by various countries around the world. With the advancements in the levels of technology, Bitcoin’s popularity has been on the rise and this is expected to shape the global economy. Currencies applicable in the UAE and the U.S. have in the past five years been directly impacted by cryptocurrencies.

U.S.

Bitcoin can hardly be created nor devalued and this implies that it is immune to inflation. An estimated 23% have in the past two years purchased the cryptocurrency with the aim of protecting their money from declining in value. The Federal Reserve is currently contemplating on depending on Bitcoin in ensuring that it prevents the dollar from fluctuating due to global economic shocks (Shin, 2018). Consequently, this will, in the future, result in the appreciation of the value of the dollar, thus signifying an increase in the country’s economy. According to financial analysts, a stable currency attracts foreign investors to a given country, and this implies that the U.S. will majorly benefit from Bitcoins in terms of improved international trade.

The growing popularity is slowly leveling the playfield for all the players. The platform has minimal transaction fees and this attracts various individuals to apply it. By relying on Bitcoin, the U.S. has, in the recent past, found it easier to engage in international trade with countries that depend on currencies that are different from the dollar (Shin, 2018). Due to the low cost of digital currency transactions, exchange rate risks have been significantly reduced. International companies from the U.S. can now operate in countries in Africa or any other country around the world without having fears of currency fluctuations.

Another impact of Bitcoin is that it has led to an increase in the value of the dollar. As a secure investment platform, financial institutions around the country have started relying on it as a trading tool, and this has, in return, led to a significant strengthening of the value of the currency. The Federal Reserve has forecasted that in the next five years, the dollar will continue appreciating in value, and this is attributed to the increased popularity of digital currency.

UAE

The UAE depends on the dirham as its currency in carrying out various transactions. The region has, in the past decade, enjoyed significant economic growth, and this is attributed to oil sales, the incorporation of advanced technology, and an increase in foreign direct investments. With stunning growth in the value of bitcoin, the UAE stands out as one of the countries in the Gulf that have embraced the ideology (Townsend, 2018). At the beginning of 2017, the government was against digital currencies, arguing that they would have negative impacts on the economy. However, this has since changed and Bitcoin is slowly gaining popularity around the UAE. The impacts of the digital currency are already evident, and one can easily tell from the growth in the value of the dirham and the strengthening economy.

In the past two years, the value of the UAE currency has been on the increase. Most of the economic and financial analysts argue that this is majorly attributed to the changes in the oil prices. However, Bitcoin is also a major factor that has resulted in the appreciation in the value of the dirham (Szmigielski, 2016). Currently, several Bitcoin firms have opened up their offices around the UAE, and this implies that accessibility of the digital currency has been enhanced. Investors that rely on the platform have openly stipulated that it is a fast and reliable mode of financial transactions. The positive news on Bitcoin on the financial markets has led to an enhancement in the value of the currency.

The strengthening of the UAE currency as a result of Bitcoins is essential in that it has provided the country with an opportunity to attract various foreign investors. Most of the international companies prefer setting their operational bases in countries that have low currency risks and where they will be able to maximize their profits while at the same time cutting down on the costs of production (Townsend, 2018). A stable currency in the UAE has, in the past five years, attracted investors to the country, and this is expected to continue resulting in an increase in the nation’s GDP. Moreover, Bitcoin is hardly affected by economic factors such as inflation, changes in the interest rates, and high tariffs, and this implies that it is one of those tools that are vital in enhancing the stability of currencies.

The value of Bitcoin has, in the past decade, fluctuated immensely, and this, on the other hand, is a major risk to the dirham. Most investors that have purchased Bitcoins and held onto them waiting for an increase in their prices have at some point in time ended up frustrated. Such fluctuations in the value of the digital currency tend to have a negative impact on the performance of currencies on the exchange rate. A UAE-based company operating in the U.S., for instance, may end up experiencing losses, especially when the value of the dollar is strong and that of the dirham is weak. Fluctuations in the demand for Bitcoin in the UAE has, in the recent past, ended up leading to wild swings in its prices, and this has made it hard for it to be used as money.

Dealing with adverse effects of Bitcoins

There are various measures that both the UAE and the U.S. need to put in place in addressing the adverse effects that come along with the applications of Bitcoin. Firstly, the Central Banks of both countries need to come up with suitable monetary policies that will be vital in the governing of the digital currencies (Wilson, 2018). The regulations will be designed in such a way that the Bitcoin firms will have to ensure that they regularly update the investors about the safety of the platform as well as assuring them of the safety of their investments. Additionally, the regulatory bodies will be tasked with the role of monitoring the Bitcoin firms to ensure that they hardly engage in any activities that are contrary to the agreed policies.

Another measure that the two countries need to embrace in dealing with adverse effects of Bitcoin is by raising awareness to the citizens in the applications and use of digital currencies. In both countries, a large portion of the population has minimal knowledge of Bitcoin and its use as an investment platform or a mode of exchange in business transactions. Due to the lack of information and knowledge, most individuals that channel their investments to the digital currency end up suffering losses (Vigna, 2016). Through campaigns and awareness programs as well as educating students in schools on cryptocurrency, adverse effects of Bitcoins will be mitigated significantly.

Bitcoin is borderless and this implies that any adjustments that are made regarding its application may have a spillover effect on other countries. In the quest for dealing with this form of risk, it will be advisable for the Central Banks of both the U.S. and UAE to step in and start offering their own forms of digital currencies with the aim of preempting bitcoin takeover. In so doing, this will be vital in combating issues of tax evasion that have, in the past five years, been on the increase due to electronic money transfers and adoptions of digital currencies (Szmigielski, 2016). Moreover, the move by the Central Banks of the two countries will be vital in contributing to a reduction in the interest rates. Consequently, this will result in an increase in investments around the two nations.

Conclusion

In the past decade, the global economy has undergone growth, and this has majorly been attributed to various factors including the implementation of suitable regulations in the financial markets, advancements in the levels of technology, and the strengthening aspect of globalization. Cryptocurrency is an outcome of changes in technology, and it has in the recent past enjoyed popularity around the world. Countries such as the U.S. and the UAE are currently enjoying growth in their financial markets and economies, and this is partially attributed to the adoption of Bitcoin. The investment platform is safe and secure, and it allows individuals to make transactions at lower costs. On the other hand, Bitcoin has come along with adverse effects such as a reduction in the returns, especially when its value plummets, an increase in cases of tax evasion, and unfair competition among financial organizations. In the quest for dealing with these challenges, it will be necessary for the Central Banks of both countries to put in place suitable monetary policies and regulations.

References

Shin, L. (2018). Why Cryptocurrencies Could Push The Dollar From World Reserve Currency Status. Forbes.com. Retrieved 2 May 2018, from https://www.forbes.com/sites/laurashin/2017/11/07/why-cryptocurrencies-could-push-the-dollar-from-world-reserve-currency-status/

Szmigielski, A. (2016). Bitcoin essentials. Birmingham, UK: Packt Publishing.

Townsend, S. (2018). Banking on bitcoin: cryptocurrency’s growth in the Gulf. ArabianBusiness.com. Retrieved 2 May 2018, from http://www.arabianbusiness.com/interviews/banking-finance/377722-banking-on-bitcoin-cryptocurrencys-growth-in-the-gulf

Vigna, P. (2016). Cryptocurrency. Random House UK.

Wilson, A. (2018). What Are The Most Important Effects Of Bitcoin On The Global Economy? - Life Business Growth. Life Business Growth. Retrieved 2 May 2018, from http://www.lifebusinessgrowth.com/important-effects-bitcoin-global-economy/