They can also provide stability and transparency in politically volatile environments.
Finally, many emerging markets rely on remittances. Remittance flows to low and middle-income countries touched a record high of $US548 billion ($708.7 billion) in 2019, larger than foreign direct investment flows ($US534 billion) and overseas development assistance (about $US166 billion).
Transaction costs
Cryptocurrencies allow people to send money at a significantly lower cost than other currencies – transaction costs can be 50 per cent to 90 per cent lower than those of traditional methods.
Clearly, there is a compelling case to be made for cryptocurrencies as a store of value – akin to digital gold. However, whether they can resolve structural issues on the medium of exchange and unit of account is less clear.
One could argue that a remaking of the global financial architecture or system is already under way, with China being the largest trading partner, foreign direct investor and lender to both developed and developing economies, and the second biggest foreign lender to the US government after Japan. Although, after a decade of expansion China has begun to pull back.
Furthermore, the Chinese political class is backing its own digital currency, a virtual yuan. This is issued and controlled by the central bank, unlike peer-to-peer cryptocurrencies, and could challenge both bitcoin and the US dollar.
The US Federal Reserve has also recently announced that it is exploring a digital dollar. The fact that dominant global economies could back digital currencies makes it impossible for business leaders and market watchers to discount the future of new currency platforms completely.
‘Greater fool theory’
In December 2020, MicroStrategy – a business analytics and mobility platform – held $1.8 billion of bitcoin on its balance sheet. Some corporate leaders are likely to follow suit, speculating that the currency’s price will go up and – according to “greater fool theory” – they will be able to sell their holdings at a profit, reaping a windfall.
Still others will conclude that they ought to secure some bitcoin to match those in their customer base or supply chain that may wish to transact in the currency. How much they would buy would obviously depend on their clients’ needs.
However, there is a third reason to seriously consider adding bitcoin to their balance sheets – that of risk mitigation. Even if a company’s leaders do not believe in the currency’s long-term efficacy, they should ensure that they do not find themselves “offside” against a rival.
Were bitcoin to continue to appreciate in value, a substantial increase in a competitor’s balance sheet could, in effect, place your company in strategic danger of being eclipsed in the marketplace or even being acquired.
In this case, securing bitcoin today would essentially be prudent risk management and have little to do with whether the board and management believe in the longer-term efficacy of cryptocurrencies. Corporate leaders must instead be alert to the tipping point when the absolute risk of not owning bitcoin outweighs the risk of owning it.
The writer is a global economist and the author most recently of Edge of Chaos.
Financial Times
