Digital currencies, also known as cryptocurrencies, are growing increasingly with time. Not too long ago, bitcoin was the only one that was even tangentially known in the mainstream, but far-reaching acceptance of the different cryptocurrency tools available means that these new forms of currency are actually having direct impacts on regional economies.
Studying the ebbs and flows of a cryptocurrency through an Ethereum chart (live charts and prices can be found on Yahoo Finance, Bloomberg, Binance, etc) or a real-time data interface that gives you key information about new and exciting decisions can be very complicated since there are so many different factors and variables at play.
So, to make things a little more understandable, let’s take the time to break things down and understand what, specifically, cryptocurrencies are doing to impact regional economies.
Increased electricity use
This is something that a lot of different crypto outlets don’t focus on as it’s not as flashy and exciting as some other potential growing points of upcoming crypto coins. However, it’s still exciting, and could be leveraged for a fascinating change in the economy of crypto.
Interestingly, authors from VoxEU have found that the demand for electricity increases at the same rate as the price of bitcoin. This may seem a little strange when you first hear it, but it does make a little more sense once you realise that Bitcoin is ‘mined’ using highly electricity-intensive hardware.
Once you understand that, it becomes clear what’s happening – it’s almost like a form of gold rush! As the price of bitcoin increases, an increasing number of people want to get a piece of that pie. Therefore, they invest in bitcoin mining computers or make their own computers mine, then leave them switched on for a long period of time. This results in a lot more energy being used, which can have knock-on impacts on the local economy of a town, city, or country.
Reduced reliance on foreign currencies
After El Salvador made bitcoin legal tender in 2021, PWC called the law “a meaningful test for Bitcoin”. PWC’s report said, “All existing obligations in the country may be payable in either bitcoin or US dollars, including bank loans.” There were unclear implications for the country’s currency reserves and how it might be affected in the capital markets. Further afield, PWC said that bitcoin’s new legal definition may affect governments around the world that “may need to adjust their legislation” on money.
In May, Reuters reported on El Salvador having mined nearly 474 bitcoins since 2021. The country’s volcano-fueled geothermal power plant had helped bring the government’s portfolio to be worth around $350 million (at then-current prices). El Salvador has an official Bitcoin Office, which reported that the government held 5,750 bitcoins.
El Salvador’s economy is not without its challenges. The publication openDemocracy reported on the cost of basic food, slow growth, and poverty. But criminality has been curbed, with one resident saying, “The president has done well. Before, you couldn’t go out. Now you feel more comfortable, you can walk safely, go to the parks.” In 2023, the International Monetary Fund (IMF) noted the economy’s “full recovery” to pre-pandemic levels, “driven by the effective government response to the health crisis.”
Easier international money transfers
A more simplistic way in which local economies could be directly impacted by digital currencies is through international money transfers, which can be made cheaper, faster, and easier through the use of cryptocurrency.
Many people don’t have to interact with this, but if you were dead set on sending some of your paychecks back to your family in your home country, using crypto would make that process cheaper and easier. Remittances (money that migrants send home to family and friends) account for 20-38% of the GDP of some developing nations, according to World Bank Group.
Data gathered by LearnBonds from 2019 to 2020 showed the vast difference in crypto transaction time compared with traditional banking methods. Bitcoin’s average transaction time was 10 minutes, while Ethereum’s average transaction time was just 0.22 seconds. Traditional international wire transfers typically take 2-5 business days.
Conventional transfers have to go through several different layers of checks and balances to ensure no fraud is taking place. While these checks make sense the first time you make the transfer, they make a lot less sense if you keep being subjected to them every single month as you send money to your family.
This method also typically incurs a great number of fees. While none of the fees are typically extremely large on their own, they can add up to create a very costly method of sending money around the world. There are some ways that this can be made easier, such as the use of secondary online bank accounts, but this can be too technically challenging for many people. Plus, even if you do overcome the technical challenges, it will still take a long time, as any wire transfer does.
Using cryptocurrency can solve both of these problems at once. While there are transfer fees, there will be far fewer fees involved in a given transaction and, therefore, less overall money lost as you send funds around the world and the transactions will be quicker.
