They can ensure stability and transparency even in politically volatile environments.
After all, many emerging countries depend on remittances. Remittance flows to low- and middle-income countries reached a record high of USD 548 billion (USD 708.7 billion) in 2019, outperforming foreign direct investment flows (USD 534 billion) and overseas development aid (approximately USD 166 billion) . USD).
Cryptocurrencies allow people to send money at a significantly lower cost than other currencies – transaction costs can be 50 to 90 percent lower than traditional methods.
It is clear that cryptocurrencies as a store of value – similar to digital gold – must be convincingly justified. However, it is less clear whether they can solve structural problems on the medium of exchange and the unit of account.
One could argue that a reshaping of the global financial architecture or system is already underway, with China being the largest trading partner, foreign direct investor and lender for both developed and developing countries, and the second largest foreign lender to the U.S. government after Japan. Though China has started to pull back after a decade of expansion.
In addition, the Chinese political class supports its own digital currency, a virtual yuan. This, unlike peer-to-peer cryptocurrencies, is issued and controlled by the central bank and could challenge both Bitcoin and the US dollar.
The US Federal Reserve recently announced that it would investigate a digital dollar. The fact that dominant global economies could support digital currencies makes it impossible for business leaders and market watchers to completely devalue the future of new currency platforms.
“Greater Fool Theory”
As of December 2020, MicroStrategy – a business analytics and mobility platform – held $ 1.8 billion of Bitcoin on its balance sheet. Some business executives are likely to follow suit, speculating that the price of the currency will rise and, according to “the bigger fool’s theory,” they will be able to sell their holdings for a profit and make a profit.
Still others will conclude that they should secure Bitcoin to suit those in their customer base or supply chain who might want to transact in the currency. How much they would buy would obviously depend on the needs of their customers.
However, there is a third reason to think seriously about adding Bitcoin to your balance sheets – that of reducing risk. Even if a company’s executives don’t believe in the long-term effectiveness of the currency, they should make sure they are not on the sidelines against a rival.
If Bitcoin continued to appreciate in value, a significant increase in a competitor’s balance sheet could put your company in strategic danger of being dwarfed in the market or even being acquired.
In this case, securing Bitcoin today would essentially be prudent risk management and has little to do with whether the board and management believe in the longer-term effectiveness of cryptocurrencies. Instead, business leaders need to watch out for the tipping point when the absolute risk of not owning bitcoin outweighs the risk of owning bitcoin.
The author is a global economist and the author of Edge of Chaos.