How Might Virtual Currencies Impact the World Economy?

The impact of the new virtual currencies and their related technologies on individual early adopters has been relatively well publicized. Some have made considerable gains while others have lost quite a bit. While the pioneers decide whether digital currency will be an investment vehicle or a medium of exchange, the rest of the market is wondering how blockchain-based digital money is going to affect the rest of the economy.

To be fair, the questions are profound. What if digital money replaces other forms of currency? How can that possibly work in such a complicated finance system? Will there be an official exchange rate? How will that be managed and by whom? The answers might end up being just as confusing as the questions. The Washington Post points out, too, that there is also a fear of missing out on this hot financial craze. So what does it all mean?

The Limits of Math

The most well-known digital currency is Bitcoin. One of the key features of Bitcoin is the fact the total number of coins can never exceed a certain pre-determined limit, which is set to run out in roughly 120 years with the mining of the 21 millionth coin.

Because the total supply of Bitcoins is fixed, the value of any one coin is likely set to increase dramatically over time, especially if the demand for Bitcoin continues to increase. While this does make the currency a tempting investment vehicle, it also makes it a rather stable medium of exchange.

For products paid for in Bitcoin, this means their prices may gradually drop over time, as a lower sum of Bitcoins may have the same buying power in three months as a higher sum has today. While some might warn this could lead to a deflationary cycle, the reality is if the buying power and the resulting exchange rate remain stable, it will more likely produce a surplus of value in the markets.

Efficiencies

The blockchain technology that makes Bitcoin possible is set to create a freely auditable ledger that can neither be tampered with nor mistaken. Transactions denominated in Bitcoin and other virtual currencies will carry the records of their accounting with them, producing a perfectly efficient and error-free finance system that will eliminate, for all intents and purposes, the costs of mistakes and flawed custody of the general ledger.

International Exchange

As a stable store of value that does not have to be converted from one form to another across national borders, virtual currencies could create an import/export economy with artificially-enforced trade balances. This may have a profound effect on countries with limited exports or countries that have little or no influence on pricing for the products they sell to other nations. Some products will naturally decrease in value but others may skyrocket if there are inefficiencies in the current systems that create unnatural advantages for some and disadvantages for others.

Virtual currencies will also naturally have a huge impact on the market for loans and other kinds of investment vehicles. Without a mechanism for increasing the money supply, interest on loans and returns on investments may change to reflect the value surplus, and that may end up being very good news for enterprise and investor both.