9 Oct, 2019

Cryptocurrencies and the Traditional Financial Market

Every new technology that the world witnesses, has thrown some of the older technologies to the chapters of history. Like what computer did to typewriters and mobile phones to fixed-line phones. Now, the whole world is witnessing something revolutionary that has compelled businesses and governments to rethink and redesign their business functions.

Cryptocurrencies which were earlier perceived as evil and often associated with dark web transactions now holds the ability to change the structure of how the whole world conducts business. Already it has thrown questions on the existence of many such business organizations and most affected is the financial institutions. So. how cryptocurrencies will change the whole structure of the financial world going forward.

Global Trade

The blockchain technology’s main aim is to remove centralization and allow trustless transactions in the system. With the rise of cryptocurrency, the dollar will take a substantial hit as it lies at the core of global finance and will bring a paradigm shift in the global trade. With more and more trade gets channelled through the decentralized structure at a rapid pace, the financial transactions are also moving towards cryptocurrencies against the dollar-based economy.

Everyone knows about the global financial crisis of 2008, how the world was taken aback by the collapse of Lehman Brothers and other financial institutes in the US. And since the large part of the global trade was done through USD and is also reserve currency of the global economy, that deepened the financial crisis allowing it to spread to other parts of the world within no time.

Investing Scenarios

In the investment world, cryptocurrencies have emerged as the next alternative to investors for investing in projects without any limitation of borders, unlike in stock market where one has to go through long documentation process in order to invest outside their home countries. Also, Initial Public Offerings (IPO) are being replaced by Initial Coin Offerings (ICO) making both processes of raising funds and investing in new projects simplified.

The cryptocurrency market already holds a clear advantage over the traditional financial market. Its round the clock (24/7 and 365 days) functioning makes it a unique and most easily assessed market that no established market in the world offers. Now, If we compare with the forex market, the cryptocurrency market is nowhere close to in terms of liquidity and its size (the forex market generates an average daily volume of $4 trillion).

But here is the beauty, the forex market halts trading for the week between Friday evening and Sunday evening, and at this time the cryptocurrency market is on its own, without any influence of external factor like of central bank interventions. Also, we can see, Bitcoin is taking over the dollar as a preferred mode of payments in the countries like Zimbabwe and Venezuela where economies are facing hyperinflation and their own currency is worthless.

Also, cryptocurrencies have the huge potential to bring a level of technological innovation in the traditional financial market like decentralised exchanges which can eliminate the market manipulators. Taking the example of the forex market, trading hours can be well extended outside the central bank operating hours, as the blockchain technology will eliminate the need for any authorising agencies in the transactions.

Concluding here, the emergence of cryptocurrency and blockchain technology is both a challenge and opportunity for the global trade and finance. But also we have to see, how this new asset class evolves and takes over the traditional financial market as it needs to clear many regulatory hurdles.