Impact of Cryptocurrencies on Global Supply Chains (Part 1)
Many have made gains from Bitcoin’s recent explosion in price. However, cryptocurrencies promise to deliver far greater value beyond our digital back pockets.
Blockchain, characterised by its decentralisation and immutability has gained significant attention and adoption notably in financial services but it is starting to play an important role in global supply chains.
Supply chain management faces two large challenges — efficiency and counterfeits.
Digging further, international businesses are being held back by high banking fees, terrible currency conversion rates and human errors in documentation to name a few. Cryptocurrencies such as Bitcoin and Ethereum which use blockchain technology have promised to revolutionise the way individuals and businesses make payments.
Mass adoption of blockchain and cryptocurrencies can have a huge impact by increasing efficiency and reducing barriers faced by global supply chains. Global economic output could increase by $3 trillion per year should these issues be solved. At present cryptocurrencies have yet to be widely adopted as a means of payment, largely due to its price volatility.
What are cryptocurrencies?
A cryptocurrency is a digital currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend.
Cryptocurrencies are decentralised networks based on blockchain technology — a distributed ledger enforced by a network of computers.
A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.
At its core a cryptocurrency, like a regular currency, is based on belief. Our current notion of value regarding the USD is that it is backed by the economy. However, it is actually backed by our trust in the central banks which regulate the money supply. Since the gold standard was removed entirely in 1971 the USD has no intrinsic value other than the belief that it is worth something.
Where does the value and belief in cryptocurrencies come from?
- The work put in mine cryptocurrencies (Mining is a process where privately held computers provide processing power to the network to verify transactions that occur directly between users)
- The rate at which units are created
- Total number of units ever allowed into circulation
- The competition between miners
- The specific issues a cryptocurrency solves
Cryptocurrencies are the result of a large enough group of people with computers coming together because of how corrupt and inefficient our current central banking systems are.
We can think of cryptocurrencies as a representative of digital value while the blockchain records the movement of this digital value. The most significant benefit is that there is no corrupt central distributing authority, no printing of money. Cryptocurrencies are in limited supply and are therefore deflationary.
This year cryptocurrency’s total market cap surpassed $1trillion for the first time in its history. For comparison the market cap for Amazon and gold are $1.5 and $10 trillion respectively.
Cryptocurrencies have huge impacts in developing countries and have gained significant traction in Africa.
Cryptocurrency basically works like mobile money. High mobile penetration rates combined with unstable governments and fragile financial systems has driven cryptocurrencies’ adoption in these markets.
It is without doubt that cryptocurrencies have the potential to revolutionise our financial systems and thus entire economies. In my next article I will dive deeper into how it can impact global supply chains…
