How cryptocurrencies can help you during a financial crisis – Why cryptocurrency is better than fiat
30 January 2019 | Wed
In a recession, people would usually reduce their asset allocation of stocks and bonds and convert these assets into liquid assets, like cash.
Likewise, they will invest wisely in a certain asset class and focus on preserving their capital from deteriorating. In this article, cryptocurrencies and digital currencies are used interchangeably.
For cryptocurrencies to tackle a situation like a recession, one has to consider two phenomena: what will happen to digital currencies over a short-term? And what will happen to digital currencies over a long-term?
To answer the first question, we believe the adoption of any cryptocurrencies over a short-term period relies upon the risk appetite of the people. However, Over the long-term, cryptocurrency will regain its popularity when people understand its benefits in the broader economy.
Short-term implications in the event of a crisis
Once there is a severe recession, the financial system will have a cash crunch effect upon its liquidity to the public. Money flowing into the market economy is greatly reduced, and the livelihoods of these people are affected. This will change the risk appetite of the people and people will shun digital currencies in favor of fiat currencies. We believe the demands for digital currencies will be slowed. Once money becomes more widely-available again, people’s risk appetite will increase, and they will be more inclined to invest in digital currencies.
If the effect of a recession is unfavorable to owning a digital currency, let us consider the long-term effect of owning a digital currency.
Long-term implications in the event of a crisis
During the 2008 crisis, Satoshi Nakamoto launched a new cryptocurrency called Bitcoin. However, it was unavailable to the people seeking an alternative to fiat currency. After several years, Bitcoin now has become a widely recognized asset as a more versatile alternative to gold and silver.
Today, it is common for people to devise ways to elude the next financial crisis by protecting their wealth. People often do not want to make the same mistake twice by holding onto fiat currency and trusting the central banks for protection.
Crisis in Venezuela will help us understand the gradual change in perception of digital currencies after the crisis. Venezuela gets 95% of revenues from oil exports, and when oil prices dropped in 2014 their economy collapsed. With the loss of revenue from a drop in oil prices, government budget-deficits rose to 30% of its GDP. To finance this deficit, the government started printing more money which resulted in the devaluation of Bolivar (Venezuela national currency).
In 2014, before the crisis started, a person with 50,000 Bolivar could purchase a car in Venezuela. Now assume that this person has another 50,000 Bolivar saved in his bank account. And let us also assume that this particular person didn't convert his 50,000
Bolivar into any other digital currencies after the crisis in 2014. Today, forget about buying another car with 50,000 bolivars, it costs 2.6 million bolivars to purchase toilet paper in Venezuela. If an individual had converted 50,000 bolivars into Bitcoin at the start of the crisis in 2014, it would have amounted to nearly 25 Bitcoins. However today, 50,000 bolivars have almost no value.
With this example, we can understand how a centralized authority (Venezuela government) has manipulated their fiat currency and thereby having a serious impact on someone who has accumulated their life savings in Bolivar (Venezuela national currency). The impact is also observed in citizens using their fiat currency to transact for their daily necessities.
With Venezuela’s inflation rate exceeding 40,000%, people understood that it is no longer viable to store their savings in their national currency. In the midst of the crisis, it has been observed that people in Venezuela turned to Bitcoin when their currency value started declining. This shows us the long-term potential in digital currencies as people have an avenue to store wealth away from the influence of central authorities. This notion is further evidenced by data that was published by LocalBitcoins (A bitcoin trading exchange), that the weekly transaction volume of digital currencies has been steadily rising in Venezuela.
Today with increased awareness and use of digital currencies people are thinking about various alternatives to their existing fiat currency. In an event of a crisis, people now have a choice to adopt digital currencies. As we have seen in the above example of the Venezuela crisis, people will gradually realize the devaluation of their fiat currency after the crisis. This change in perception of people will help in the widespread adoption of digital currencies after the crisis.
How will Skyrus Network play an essential role in the growth of cryptocurrencies?
With more people interested in purchasing cryptocurrencies, we will be providing services that make it more accessible to purchase digital currencies and at Skyrus Network we have instituted plans to provide ATMs for purchasing digital currencies and storing them in digital core wallets. We have further planned to initiate and expand digital currency payment systems in everyday retail to promote the use of alternative currency as a payment method.
Skyrus Network ATMs provide the option of converting your fiat
currencies(dollars) into various digital currencies. The main aim of these ATM services is to provide people with a more accessible and effortless experience of purchasing digital currencies without any stipulated minimums. With these options, we are bringing individuals into the digital currency network irrespective of their income levels.
Unless there are circumstances that direct people to change, people are not going to be as receptive in changing their perception of money and adopt digital currencies. A financial crisis surely can be understood as a catalyst to change people's’ perception of cryptocurrency and see a push for mass adoption, but it would be beneficial if more was invested on the idea of increasing awareness through education and making digital currencies readily accessible.
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