Imagine a currency with 400 million users, USD 3 trillion average market value, and a 45.43% growth forecast by 2029.
The cryptocurrency market has seen exponential growth in 2024 with an impressive (and dizzying!) comeback from the 2022 crypto crash.
However, cryptocurrency didn’t become a financial giant overnight. When it was first introduced into the mainstream in 2009, cryptocurrency (Bitcoin, in particular) faced significant skepticism from the public.
Crypto was largely unregulated, extremely experimental, and generally complicated.
Looking back , crypto conceptualization can be traced back to 1980s when the cryptographic David Chaum developed the first digital currency named eCash. By factoring in cryptographic technology into digital financial transactions, eCash can be transferred directly from person to person anonymously over the internet.
This ‘cyberbuck’ has one sole purpose – to create a future where money can move freely over a decentralized network, bypassing the costly layers of traditional banking.
Four decades later, the cryptocurrency market has met Chaum’s expectations. Cunningly, it defeated skepticism, even winning the hearts of investors with its profitable opportunities.
Not only that. The fast-paced digital progression, commerce crypto adaptation, and support from big market players, banks, and authorities suggest one thing: the cryptocurrency market is causing transformative changes in global finance.
Indeed, cryptocurrency is a technology for streamlining peer-to-peer digital financial transactions. But its rapid growth and development suggest otherwise; it’s geared toward becoming a global currency.
Will Crypto Dethrone the US Dollar?
The idea of global currency lies in the concept of having a single currency that can be seamlessly transacted anywhere in the world, with no set borders.
It’s the US dollar that has proven time and again to be the best fitting global currency.
It has a strong economy, competitive government, and the largest gold reserve. Thus, central banks across the world hold significant amounts of USD, not just to facilitate international trade and interbank transactions but also to hedge inflation and counter economic distress.
But there’s undoubtedly a hurdle, especially for the public and investors: the cumbersome and costly layers of international banking transactions.
Cryptocurrency, in itself, may be the solution.
One World, One Currency – A Digital One
Cryptocurrencies change the way people transact and connect.
Contrary to costly and exclusive traditional digital banking operations, cryptocurrency is naturally developed to ensure faster and cheaper borderless transactions.
While cryptocurrency exchanges still require processing fees, it is still far cheaper than those of traditional banks. To put it into perspective, Binance – the world’s largest crypto exchange – charges only a few dollars to a fraction of a cent for a single crypto transaction.
In comparison, most banks charge 0.5% to 4% fees for each international transaction. Additionally, banks also implement a minimum transferable amount of USD 100. This means that, at minimum, a single international banking transfer would cost around 0.5 to USD 4.
Crypto Engendered Financial Inclusion
One benefit of cryptocurrency as a global currency is the financial inclusion.
Financial inclusion involves providing easy access to useful and affordable financial products and services, including;
- Payment
- Remittance
- Savings
- Credit
- Insurance
Backed by blockchain technologies, cryptocurrencies operate in an open and democratic financial system. In other words, everyone (literally) can access these digital currencies and leverage them to participate in global finance.
This democratized system has become the only means for unbanked or underbanked countries to boost their participation in the global exchange of money.
Briefly, unbanked/underbanked countries have a significant portion of adult population who doesn’t have a bank – reasons being the distrust to regulators and difficulty in accessing banking services.
This financial inclusion brought about by cryptocurrencies is not simply hypothetical.
Crypto Financial Inclusion Use Case: El Salvador Made Bitcoin Legal Tender
In 2021, El Salvador became the first country ever to officially classify Bitcoin as a legal currency.
As per the government, this action aimed to boost the country’s gross domestic product growth by making international remittance cheaper. When this decision was made, 26% of the country’s GDP was from remittances – those money transferred from abroad to the country.
To further take advantage of this growth, the government made bitcoin a legal tender in the country. This made remittance within and toward the country faster and cheaper compared to when using fiat currencies.
Not only that, but El Salvadorian can also legally use bitcoin to buy goods and services in the domestically and internationally. This provided opportunities to unbanked 64% of El Salvadorian access and participate in global finance.
As of the time of classifying Bitcoin as legal tender, El Salvador had an extremely high poverty rate of 28.4%, with an estimate of 1.8 million citizens living in poverty.
Three years later, the country has seen growth in its cash inflows, specifically driven by investors’ confidence, goods exports, increased foreign demand, and higher remittances.
Crypto Mechanism Ensures Scarcity
The lower the supply, the higher the demand.
This economic concept alone makes the idea of crypto as a global currency attractive to financial enthusiasts. If the idea truly manifested, cryptocurrencies would be the next gold – but in the form of a liquid currency.
Cryptocurrencies are uniquely designed with mechanisms that ensure scarcity. Unlike fiat currencies, which governments can print unlimited quantities, most cryptocurrencies operate on a finite supply.
For example, Bitcoin is capped at 21 million coins, creating built-in scarcity that prevents overproduction.
The limited supply also makes cryptocurrencies resistant to inflation and economic instability, much like gold.
If widely adopted as a global currency, cryptocurrencies’ scarcity mechanisms could offer immense benefits to the global economy and people’s purchasing power.
Crypto Changes People’s Money Perception
The rise of cryptocurrencies is fundamentally altering how people perceive money and the financial system at large.
By introducing decentralized and borderless alternatives, Bitcoin and other cryptocurrencies challenge the financial system status-quo – the longstanding reliance on centralization and government control that hinders efficiency needed in past-faced financial technology market.
Historically, every aspect of money transaction follows a systematic approach – from layered recordkeeping to regulatory oversight from control by governments and monetary authorities.
While this system has provided structure and stability, it has also revealed inefficiencies, including high transaction costs, delayed processing times, and limited access for underbanked populations.
Cryptocurrencies address these inefficiencies – solving what many now recognize as flaws in the traditional financial system.
With a more efficient and streamlined digital financial transaction, cryptocurrency inevitably penetrated global finance, most notably the e-commerce market.
Deloitte, in collaboration with PayPal, conducted a survey about merchants’ readiness for crypto trend and revealed that 46% of e-commerce businesses in the US alone have adopted cryptocurrency as a mode of payment.
This caused concerns from the critics. For skeptics and conservative economists, this disruptive crypto intervention to the global financial system poses threats to fiat currencies and their valuation, especially to major currencies especially the USD.
Currently, the US dollar is used in most global financial transactions; a non-USD holder must convert their currency to USD first to execute their international financial transaction. This consistent usage ultimately keeps the demand for USD above any currencies.
For critics, cryptocurrencies’ accessibility would challenge and even rival USD to the global finance transactions.
By Nature, Crypto Doesn’t Need a Single Monetary Authority
The idea of a single global currency has long been debated among economists and policymakers. But most experts agree that its implementation is highly impractical at the moment.
The primary obstacle lies in the necessity for international consensus on regulatory control—deciding who or which nations would oversee this global currency.
Potentially this entity would be the “Global Currency Monetary Authority.”
In this context, cryptocurrencies present an intriguing alternative due to their decentralized nature. By design, cryptocurrencies operate without reliance on any single country, government, or central bank. Instead, they are maintained through distributed ledger technology (blockchain) to ensure borderless transactions with resistance centralized control.
This inherent decentralization aligns well with the concept of a global currency. Here’s why:
- Neutrality and Inclusivity. Cryptocurrencies are not tied to any specific nation, making them neutral tools for global exchange. Unlike fiat currencies, decentralized cryptocurrencies avoid national biases.
- Transparency and Security. The blockchain infrastructure ensures transparent and secure transactions, fostering trust across borders without requiring central regulatory authority.
- Accessibility. Cryptocurrencies offer financial inclusion for individuals in countries with limited access to traditional banking systems, making them suitable for global use.
However, challenges remain. While by nature, cryptocurrency seems to be a better fit for a decentralized global currency system, its viability depends on overcoming hurdles and achieving broader acceptance in the global economy.
For now, the concept of cryptocurrency as the global currency remains promising but aspirational.
Conflicting Jurisdiction Attitude
One of the biggest challenges of cryptocurrency becoming the global currency is the divergence with nation’s perspective about them.
The biggest countries per economy, including the United States, the United Kingdom, and countries under the European Unions, have adopted comprehensive regulatory framework to ensure the security and transparency of cryptocurrencies when transacted within their borders.
In contrast, countries like China and India remain resistant to the influence of cryptocurrency. This resistance is mainly rooted from the distrust to the decentralized and unregulated system of cryptocurrency, citing that such natures breed financial terrorism and other illicit financial activities.
These conflicting juridical attitudes create a fragmented regulatory landscape for cryptocurrency – impeding the potential for these digital currencies to function as a unified global currency.
Environmental Mining Impact
The environmental impact of cryptocurrency mining is another significant barrier.
Energy-intensive proof-of-work (PoW) mechanisms, like those used in Bitcoin mining, contribute to carbon emissions and environmental degradation.
However, technological advancements like proof-of-stake (PoS) and other energy-efficient algorithms offer potential solutions to mitigate these risks. Continued innovation in this area is crucial for addressing environmental concerns and making cryptocurrencies more sustainable.
Ununiformed Cryptocurrency Standard
With thousands of cryptocurrencies operating under different protocols, interoperability and consistency in market standards are challenging.
A global currency would require standardization to ensure seamless cross-border transactions, but achieving consensus among diverse stakeholders remains difficult.
Is the Cryptocurrency Market Disrupting the Financial Markets?
Disruption happens when the agent must redesign its strategy to “survive a change in the environment” (Kilkki., et al., 2017)
Evidently, the entirety of global financial institutions felt and were challenged by the rapid growth and influence of cryptocurrency.
Aside from the normal changes that cryptocurrency technologies bring to the financial system (P2P explosion), the influence of cryptocurrencies pushed central banks from experimenting and creating their own digital currencies, called the Central Bank Digital Currency (CBDC).
CBDCs are digital currencies issued and controlled by central banks, offering the benefits of digital money without the volatility or regulatory uncertainties of cryptocurrencies.
In 2021, the Bank of England announced to the public the creation of its own CBDC to ride with the period of significant change in money and payment – the new financial dynamic brought by cryptocurrencies acceptance.
With their influence on financial institutions and economies and shifting regulatory landscape, cryptocurrencies are more than likely to penetrate global finance.
But a more important question arose from investors, “ Could this growth disrupt the existing financial ecosystem?”
When Crypto Goes Up, Will Other Assets Go Down?
Whether or not crypto affects other assets has become a hot topic for debate.
One of the major concerns of traders, especially those that deal with forex, stocks, or commodities, is how cryptocurrencies will affect their traditional investments.
Traders with different assets in their portfolio spend a lot of time determining the correlation between their assets, or how assets relate to and influence each other.
Specifically, portfolio managers use asset correlations to determine investment strategies.
For instance, the correlation between gold and the US dollar is inverse. This means that when the US dollar strengthens, the price of gold tends to fall, and vice versa.
Therefore, having both gold and the US dollar in the same portfolio would likely generate returns when one or the other falls.
Now that crypto has strongly integrated into the financial ecosystem, the question whether crypto will affect other assets has come up.
In the industry, a very complex relationship between crypto and conventional assets has been revealed.
Crypto has a major influence on the stock market
Many investors, strategists, and academics have already pointed out the positive relationship between Crypto and the Stock Market.
In 2022, macro-trader Mark Dow wrote on a Tweet that “the correlation between bitcoin and the S&P 500 Futures is highly statistically significant.”
Moreover, Charles Schwab Chief Investment Strategist Liz Ann Sonders said that “the correlation between S&P 500 and Bitcoin remains in positive territory and continues to pick up.”
In a recent study, they concluded that there is a significant positive relationship between cryptocurrency and the stock market. This means that as the cryptocurrency market grows, so does the stock market.
In fact, there has been a growing correlation between crypto and the stock markets since 2017, when retail and institutional investors began to merge their exposure to traditional finance with crypto markets.
Meanwhile, JPMorgan Asset Management Global Market Strategist Gabriela Santos said that fund managers are having a “really hard time including crypto assets in a portfolio,” but they’re including it, nonetheless.
Crypto Doesn’t Affect the US Dollar or the Forex Market – Yet
This is quite the controversial topic – is crypto challenging the US Dollar’s status?
Well, the current answer seems to be no. Research shows that there is an insignificant relationship between the crypto market and the US Dollar.
A bigger or smaller crypto market will not strengthen nor weaken the US Dollar.
For instance, the collapse of the FTX Cryptocurrency in 2022 caused a major impact on the global crypto market. Users simultaneously withdrew a total of $8 billion from their FTX accounts, causing a significant drop in the crypto market and fluctuations in other major cryptocurrencies.
Despite that, the US Dollar remained stable.
Additionally, in a paper published by Fed economists, they said that cryptocurrency alone was unlikely to “completely set off” the standing of the dollar.
Therefore, cryptocurrency might not challenge the US Dollar’s status as the global reserve currency nor impact the forex market . Not yet, anyway.
Crypto is new and it’s not going anywhere
Determining correlation between different assets requires statistically sound evidence. But cryptocurrencies are such a new asset class that it’s still difficult to establish a consensus between traders and academics.
There simply has not been enough time for crypto’s existence to confirm these correlations in the long run, and no way for us to predict if crypto is a threat to traditional assets.
However, one thing is for sure – crypto isn’t going anywhere.
In fact, the crypto market has already been integrated into the traditional financial system with positive results. For instance, traditional banks are integrating blockchain technology into their systems.
Moreover, software developer and tech strategist Jinan Glasgow George wrote in a Forbes article that companies are investing in research and development to keep up with the pace of crypto’s fast development.
To address the security and sustainability concern of cryptocurrency technology (blockchain), David Chaum – the godfather of cryptocurrency – launched xx network. With his new company, Chaum attempts to create a quantum-resistant blockchain to ensure the continuity of the market.
In the current landscape, cryptocurrencies might not entirely eradicate banks or currencies. But it’s definitely pushing traditional finance to innovate to new heights.
How should traders prepare?
Since we already established that crypto is here to stay and traditional finance is constantly innovating, how should traders prepare for whatever changes await in finance?
So far, we’ve established that:
- Crypto has a low correlation with fiat currencies but a positive correlation with stocks.
- Crypto continues to challenge traditional banking, often pushing central banks to innovate and keep up.
- Crypto doesn’t pose a significant threat to the global ecosystem just yet, but the asset will continue to develop and potentially change our monetary systems.
Investors are excited and anxious to see how it plays out. However, a smart investor shouldn’t wait around for what will happen.
Regardless of the outcome of crypto’s disruption, investors should focus on maximizing profits. They can do this by diversifying their portfolio, learning the technicals, and keeping up with the industry’s developments.
Diversify portfolio, especially with digital assets
Diversification has always been highly regarded in traditional assets. It is an investing strategy that can manage risk and lead to more consistent returns. In other words, it’s safe not to put your eggs in one basket.
Crypto, new as it is unpredictable, is a strategic portfolio diversification because its correlation with other assets is yet to be established.
Anna Svahn, founder and CEO of Swedish-based investment company Antiloop, said, “Although the asset class is still young, it is clear that digital assets work and will continue to work as diversifiers in portfolios due to their low correlation to traditional markets.”
According to a report from the CFA Institution Research Foundation, allocating 2.5% quarterly investment to Bitcoin for four years improved returns on a traditional portfolio by nearly 24%.
Of course, you can’t have too much of a good thing. Experts say that cryptocurrencies should make up at most 5% of your portfolio.
Bitwise CIO, and one of the world’s leading crypto experts, Matt Hougan, said that adding more than 5% crypto in your portfolio can lead to major drawdowns.
“There’s a magic dividing line around 5% of the portfolio,” said Hougan. “If you put it into a portfolio optimizer, it will want more and more crypto…but something funny happens at around 5% on a historical basis…crypto becomes the primary driver of the drawdown.”
Hougan likened Bitcoin to a condiment rather than a main dish—a condiment that will likely elevate your entire trading experience!
But what cryptocurrencies should you invest in?
Many investors assume that adding Bitcoin is enough. However, Bitcoin doesn’t embody everything that crypto has to offer. As of writing, there are 9,935 different digital assets on the market that can play into your profit-maximizing strategy.
What if crypto assets crash?
In this unlikely scenario, where all crypto assets go down, the possibility of incurring major losses is incredibly low – if you keep your crypto investments at or below 5%.
Again, a diverse portfolio will likely be your hedge for disastrous outcomes.
But what if I don’t want to trade crypto?
That’s totally fine. Trading traditional and digital isn’t a binary option. You don’t have to choose one over the other; any professional will tell you to spread out your investments.
As we’ve mentioned before, never put your eggs in one basket. If you don’t want to trade crypto but want to make the most out of its profitability, here are some strategies that you can incorporate.
If you’re a forex trader, you can trade CFDs
CFDs or Contracts for Differences are a good instrument to invest in when crypto surges, but you don’t want direct exposure to the digital currency.
Crypto CFDs are a little more complex than traditional spot trading but follow the same principles. They allow traders to profit from market fluctuations; in other words, CFDs pay the difference between opening and closing prices.
In this type of trading, cryptocurrencies can be traded in pairs with other cryptocurrencies or fiat currencies. These pairings include:
- BTC/USD – Bitcoin against USD
- BCH/USD – Bitcoin Cash Price against USD
- ETH/USD – Ethereum against USD
- BTC/ETH – Bitcoin against Ethereum
If you’re a stock trader, you can trade ETFs…
Trading Crypto ETFs can expose you to crypto without actually buying digital assets.
This is an indirect, cheaper, and less risky way of investing in crypto. It gives you broad access to the asset without directly exposing you.
Additionally, the US Securities and Exchange Commission (SEC) recently gave the green light to ETFs that owned cryptocurrency future contracts, specifically for Bitcoin and Ethereum.
For instance, the exchange-traded fund iShares Ethereum Trust ETF (NASDAQ:ETHA) saw a 9% increase within a week.
…or crypto-related stocks
Buying crypto-related stocks is a lot like investing in gold through gold mining stocks.
You get to invest in a high-value asset without directly purchasing it. Crypto-related stocks include crypto-mining companies, crypto exchanges, crypto companies, or blockchain developers that are publicly listed.
This can prove a valuable investment to stock traders. For instance, crypto-dependent securities grew significantly this week. Crypto-mining business Mara Holdings (NASDAQ:MARA) had a nice 7% gain with an S25.75 peak.
Keeping up with the Market
It’s every trader’s responsibility to keep up with the market’s developments —whether that’s through reading the news, developing their strategy, or investing or not investing in crypto.
Fast-paced developments in the finance sector are a given, and for any investor to succeed in this multipolar world, the ability and skill to diversify stocks becomes necessary.
This doesn’t only apply to the changes in cryptocurrency. In today’s political and economic landscape, things are changing by the second. China is emerging as an economic superpower, while the conflict in Ukraine is trying to destabilize the decades-old US-led world order.
While the dollar is likely to remain the currency of choice, cryptocurrencies will likely play a huge part in world finance developments. The clearest conclusion is that currency volatility will rise, and investors will have to diversify.
