What Cryptocurrency Means For The Future Of Cash:

There has been much in the news lately around the controversy that is Bitcoin. No doubt much of the hype can be attributed to Elon Musk. As the world’s richest man, the media is always keen to court the Tesla boss’s latest antics. So, when Musk announced that his firm had bought a staggering £1.1bn of Bitcoin cryptocurrency, the world naturally took note. And, it’s true that if Tesla does indeed start accepting the cryptocurrency as payment in the future as they have indicated, the ramifications across the world will be far-reaching.

By any standards, the cryptocurrency has richly rewarded those people who hold it. To put that into figures, Bitcoin closed December 2019 at £5,400. In round figures, it has risen six times in little more than a year. Also, as of the beginning of March, it had just broken through the $50,000 (£36,020) barrier.

But what is a cryptocurrency? And could the fact that the world’s most valuable car company is now accepting it as payment mean the end of cash?

What is a cryptocurrency?

Cryptocurrency is a digital asset that operates ‘like’ real money without being real money. It is effectively a form of payment that can be used online for goods and services. But, it is also one that is not overseen by a central bank. As such, it doesn’t exist in a physical form. One of the easiest ways to think about it is as casino chips. You’ll need to exchange ‘real’ money for the cryptocurrency to access the good or services you wish to purchase.

Ethicality

For many years cryptocurrencies have not been seen as a legal tender, with the anonymity it affords, often lending themselves to criminal activity in ways that other currencies do not.

Add to that, Bitcoin, in particular, has had many critics, not least for the amount of electricity needed to produce it. In 2018 alone, it was estimated that more energy was used in Iceland in ‘mining’ (creating) Bitcoin than was used by the entire Icelandic population to power their homes.

It has also been derided as a ‘bubble’ that is bound to burst, and there are claims that it is used for money laundering and other illegal purposes.

The Future of Cryptocurrency

Whether Bitcoin takes off as Tesla hopes or not is yet to be seen. What is clear is that there will eventually be some form of widely accepted digital currency. So, yes, in all likelihood, the days of ‘cash’ are probably numbered. But, if it does come to pass, it will likely be some time off yet.

The great advantage of a digital currency is its traceability. So, if you are the Chancellor of the Exchequer, a means of finance that does away with cash-in-hand will be particularly appealing. Paying your plumber in cash to save the VAT would simply not be possible under a digital regime.

Yet cash remains essential for many people: the elderly, those living in remote areas and those with poor credit histories who cannot get bank accounts have all been cited as examples of people who need cash. So, while a shift to cryptocurrency may be inevitable, it will require appropriate planning and a very gentle integration before it could ever fully replace cash.

 

Written by Ben Griffiths

Ben is a financial planner from our Whiteley office. While he specialises in pension planning, Ben is also able to generalise into all other areas of financial planning.

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