There has been a debate raging in most countries where citizens invest in cryptocurrencies. Governments that enforce capital control, think of Bitcoin and other cryptocurrencies as a means, to siphon off money outside the borders of the nation.
Cryptocurrencies move money outside their monetary control – possibly from their entire economy.
- Can investment in a crypto-currencies lead to a credit crunch – because people stop holding money in zero balance accounts?
2. Can capital exit banking systems that lend for other economic activities?
Can cryptocurrencies add to a nation’s GDP( nominal/PPP)if they appreciate (e.g. gold or other assets)?
A few caveats to consider are as follows…
a) global money flows – Crypto-currencies do not differentiate amongst nations – because all cryptocurrencies are transferrable amongst peers globally, without the need for any intermediary agency (like a bank or a wallet or any other service).
b) relative size of the monetary system – currently the total market capitalization is about 0.5 Trillion dollars. Compare this to the size of the monetary system (i.e. cash in circulation, stock market capitalization and other forms of liquid assets). Economists (monetary) have classified this into M0-M4 systems. For nation-states like the US, the 0.5 Trillion dollars is small enough and not as yet significant to cause major swings in the M0-M4 system. However, for many other states, the M2, M3 and M4 systems could see significant reduction owing to the short-term attractiveness to attract higher appreciation.
c) relative size to the nation’s GDP-. For many smaller nation-states with smaller nominal (or PPP) GDP’s, the crypto-economy is large enough to cause (either a positive or negative) swing in the economy. As an example, holding crypto-assets that are valued internationally can increase the nation’s GDP.
d) Volatility – The extremely volatile nature of crypto-currencies, and sometimes totally unknown currencies such as BTCC, cause enormous risk. For example, the direction of monetary flow, demand and supply is completely not controlled by a single entity.