Cryptocurrency has exploded in popularity in the past few years. The overall market capitalization for the asset class was a mere $200 billion in 2019, and then it peaked at $2.4 trillion only two years later in 2021.
This asset class has a steadily increasing (and often decreasing) market capitalization that has led to many people wondering if cryptocurrency could ever replace cash.
The anonymous creator of Bitcoin described the initial cryptocurrency as a “peer-to-peer electronic cash system.” The goal was to allow people to transact directly with each other without relying on a trusted third-party, such as a bank or government.
However, Bitcoin and its crypto cousins have struggled to gain adoption as an actual currency. One recent study has shown that only one-tenth of Bitcoin transactions are ‘economically meaningful.’ Most meaningful transactions are conducted by traders hoping to buy low and sell high.
Will cryptocurrency ever gain widespread popularity as a currency? If so, will crypto replace cash? Today, we explore these questions alongside considering what switching to cryptocurrency would mean for the world.
What is Cash? What is Cryptocurrency?
Let’s take a moment to define precisely what we mean by each of these terms before diving deeper.
“Cash” in this instance means fiat currency, which is currency minted by a government and given the legal status of a currency. So we aren’t only talking about paper money, but any type of fiat currency, ranging from the bills in your wallet to the numbers in your bank account.
“Cryptocurrency” refers to any digital currency based on the blockchain technology introduced with Bitcoin. We’re not restricting the conversation to Bitcoin but instead discussing the entire asset class.
Now, let’s discuss if the latter will ever replace the former.
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The True Flippening: Cryptocurrency Usage Exceeds Fiat Usage
In crypto circles, people have long discussed “the flippening” when another cryptocurrency surpasses Bitcoin in market capitalization.
However, some experts say the real flippening is when cryptocurrency usage exceeds fiat usage. These analysts say that it doesn’t matter which coin has the highest capitalization, but instead, if consumers have fully embraced cryptocurrencies as the backbone of our society.
Consider that the current market cap of all cryptocurrencies is US$1.3 trillion, but Apple’s market capitalization is US$2.6 trillion. This comparison helps put all the hype and excitement about cryptocurrency into perspective; Apple is worth more than all cryptocurrencies combined.
Let’s compare the cryptocurrency market capitalization to the United States Dollar. As of 2021, The Federal Reserve says all of the USD, including bills and coins, in existence, equals US$5.8 trillion. When considering fiat currency held by financial institutions, the U.S. government, and foreign institutions, the total amount of USD is estimated at $19.9 trillion.
The above figures don’t even include the value of stocks, bonds, and other assets that cannot be easily converted into physical currency.
Remember, cryptocurrencies are global currencies. So, comparing them to USD isn’t accurate. We would need to know the total amount of all fiat currencies. But considering cryptocurrencies aren’t even getting close to USD, we have some ground to cover before the raw value of cryptos would add up to the global value of all fiat currencies.
Could cryptocurrencies fully replace fiat currency? It’s feasible, but we aren’t even close to reaching that point. We would need to see pervasive adoption of the asset class, which includes using it as a currency rather than an investment opportunity. This means it’s a great time to build your crypto portfolio.
What Would Replacing Cash Mean for Society?
Let’s imagine a future where cryptocurrencies replace cash in terms of transactions and overall value.
In our imaginary future, cryptocurrency has a market capitalization exceeding US$20 trillion, and nearly everyone has a cryptocurrency wallet on their phones.
What would that look like?
Benefits of a Crypto Society
Crypto enthusiasts have long-preached the benefits of cryptocurrency over fiat. Those benefits would dictate how a crypto society would look.
- Decreased manipulation due to decentralization: World governments regularly manipulate fiat currency, for better or worse. Cryptocurrency advocates often say it creates a ‘separation of money and state’ that would create a more stable economy due to the lack of external influence.
- Lower costs thanks to cutting out the middleman: Merchants pay fiat payment processors upwards of 2% to process your debit and credit card transactions, plus other fees incurred between your payment and their profit. A crypto-future would eliminate all middlemen and trusted parties, paying only the miner fees who process transactions. Miner fees cost significantly less than fiat processor fees in this ideal world.
- A global universal currency: If cryptocurrencies usurped fiat currencies, we would have a global universal currency. Or rather, a collection of them. This would eliminate the fees and frustrations with converting one currency into another, alongside opening up the economies of every country to citizens of other countries. Someone in Taiwan could buy something in Denmark, and it wouldn’t make a difference.
Drawbacks of a Crypto Society
A crypto society would have plenty of drawbacks, too, including:
- We would need a new infrastructure: Operating the world on cryptocurrency would mean the dire need for Internet connectivity, including strengthening existing networks. Additionally, people without smartphones or Internet access would be entirely locked out.
- Decreased manipulation could mean instability: Manipulating fiat currency is often touted as a bad thing, but in many cases, it allows governments to react to conditions that could otherwise cause a recession or depression. Governments would be largely powerless to influence the economy in a futuristic crypto society, which many say will spell disaster.
- Fiat currency would plummet in value: As society adapted to cryptocurrency dominance, fiat currency would rapidly become worthless. The drop in value would have far-reaching consequences, especially for people and institutions that resisted cryptocurrencies.
Cryptocurrency: Is it Tulips or Gold?
Perhaps cryptocurrency will surpass fiat currency, and we’ll see the ‘true flippening’ transform every aspect of our lives. It’s possible but is unlikely to happen anytime soon. We would need a radical increase in both overall adoption and usage of digital currencies for commerce. Buying low and selling high isn’t going to help cryptocurrency supplant fiat currency.
We’re really waiting to see if cryptocurrency is a modern ‘Tulip-mania’ that will end up crashing and losing all value or if the emerging asset class will become a new store of value similar to gold.
Time will tell if cryptos are tulips, gold, or a fiat-killer. Those who think cryptocurrency will become the new gold or the new standard will need a trusted crypto banking service.
Coinmotion is a secure crypto banking platform that will help you build your cryptocurrency portfolio. Set up your account today to plan for whatever future.
The views, thoughts, and opinions expressed in the text belong to the author and not necessarily to the author’s employer, organization, committee, or other group or individual.
