Economic Impact of Legalizing Bitcoin

Table of contents

  1. Promote Financial Independence
  2. Foreign Investment
  3. Development of an International Economy
  4. Market Instability
  5. Author’s Take

Bitcoin, the world’s first cryptocurrency, has grown to lead the digital currency economy with a market capitalization value of approximately $1.03 trillion in May 2022. With the rise of bitcoin use, El Salvador became the first country to legalize bitcoin as a legal tender. El Salvador’s choice created a domino effect with many other countries considering the move. However, in order to do so, it is vital that the administrations understand the economic impact of legalizing Bitcoin. Thus, we should explore the economic results of identifying bitcoin as a legal tender in a country.

Promote Financial Independence

Bitcoin legalization is an effective way of providing an alternative currency for use in a given country. As with most countries contemplating the move, a potential economic impact of legalizing Bitcoin would be the direct solution to the use of weak or foreign currencies. Bitcoin, being decentralized in nature, is beyond the control of the country in question. Thus, while using such currencies, countries are limited with regard to monetary policy and decision-making.

As evident in the case of El Salvador, the country’s reliance on the US dollar created limited financial control for the country’s financial sector. However, with the use of bitcoin, the country became better positioned to determine its financial position and adjust it accordingly. This change has enabled the country to create and enforce policies that will shape its financial future rather than relying on outside influences.

Foreign Investment

In the wake of crypto acceptance into the economy, bitcoin has become the staple of digital finance. The uptake of cryptos has seen the tech-savvy and young population being the driving force behind the digital currency surge. Over the last few years, cryptos such as bitcoin have become tightly interwoven with innovation and investments. Despite cryptos being touted as independent of traditional financial institutions, this is not the case in the current markets. This correlation has seen many new upstarts capitalize on crypto use to raise capital from global investors.

As indicated by current reports, the correlation between cryptos and the Nasdaq stands at an all-time high. This correlation is largely due to the fact that over the last few years, many upstarts have gravitated towards crypto use. These companies have used crypto during their funding stages. Thus, in a country where crypto is legal, such investments would increase. The increase is partially due to many governments’ strong-armed approach to bitcoin. Therefore, another economic impact of legalizing Bitcoin would be the international investments that will flow into the country via ventures looking to set up under a conducive crypto economy.

Development of an International Economy

Cryptocurrencies are typically decentralized and unlimited by geographical location. The nature of cryptos allows users to transact across borders in a safe and timely manner from anywhere in the world. As a result, these features allow users to experience extensive freedom in exercising financial options. The legalization of bitcoin as a tender may thus work to promote international trade and money transfer.

For many countries, remittances make up a significant part of the economy. With the legalization of bitcoin, these funds can be quickly and securely transferred at low fees. This move may work to ease remittance from abroad and promote the growth of the local economy as evident in El Salvador. The ease of fund transfer may also encourage international trade with businesses unlocking the global feature of cryptos to expand.

As with all things, the use of cryptos has both advantages and disadvantages. Amongst the many characteristics of cryptos, their volatile nature is the biggest Achilles-heel they possess. This trait makes prices of tokens such as bitcoin fluctuate unpredictably. Additionally, the issue of cryptos has left many gray areas with regard to policy and regulation. These gaps will in turn work to create even more uncertainty for the market in question.

With the price of bitcoin being controlled by ownership and trading on exchanges, the weakness of cryptos affects normal markets. The fluctuation of bitcoin prices as currently evident has made itself a bane to the development of the country’s market. The lack of adequate policies and regulatory frameworks at the local and international levels breeds even more uncertainty. These combined aspects work to negate the growth of the economy and may even cause it to regress. Therefore, market instability could be the most adverse economic impact of legalizing Bitcoin.

Author’s Take

Bitcoin has become one of the world’s greatest advancements since the turn of the century. The use of cryptos has revolutionized digital finance. Identifying bitcoin as a legal tender in El Salvador has led to some economic implications. These implications are mostly positive for poor and struggling countries with limited control over their economies. However, while seemingly beneficial for struggling economies, the move’s real outcomes remain to be seen. Given that the legalization is still in its early stages, only time will tell if the implications are positive in the long term.

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