By Ghadeer Ghloum
KUWAIT: Using cryptocurrencies or digital currencies is a relatively new phenomenon that has been gaining popularity among investors and users around the globe. Cryptocurrency is a type of currency that utilizes cryptography, which is a method of encoding information to secure it to facilitate financial transactions. This currency is decentralized and operates independently of banks and governments, which enables it to offer users more privacy and flexibility. However, cryptocurrency’s unstable nature presents a significant risk for investors, with fluctuating prices and frequent market corrections.
This occurs because the currency is relatively new, and demand is not yet steady or predictable. Prices can drop as fast as they rise, which creates a risk for investors who may not be well prepared. Thus, cryptocurrency is undoubtedly an enticing option, but caution remains crucial when investing in this type of currency. Investors should thoroughly explore the market and make informed decisions before investing in any cryptocurrency. Educating oneself about the technology behind cryptocurrency and understanding its risks and benefits is essential in making informed investment decisions.
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For a thorough and more accurate examination of cryptocurrencies, Kuwait Times interviewed Kuwaiti economist Salman Al-Naqi. Risks associated with cryptocurrencies Naqi told Kuwait Times inflationary pressures after the massive financial stimulus packages during the COVID-19 pandemic revealed the attractiveness of cryptocurrencies as alternative assets to hedge against inflation. However, the riskiness of cryptocurrencies was exposed when prices dropped remarkably, as there are significant fundamentals that drive cryptocurrencies’ risk.
The current sharp decline in cryptocurrency prices is attributed to several macroeconomic factors, mainly the hawkish stance and tightening monetary policies of the US Federal Reserve and its peers among other global central banks. Furthermore, cryptocurrencies are highly sensitive assets. The recent collapse of some cryptocurrency exchange platforms has widened the associated risk of cryptocurrencies. Cryptocurrency adoption Naqi explained the global adoption of cryptocurrencies has been moving slowly since 2019 due to the uncertainty of funds flows and the anonymity of users.
Most central banks around the globe consider this type of currency as unregulated financial property, and some of them have introduced regulations to impose taxes on these properties. Therefore, the vast majority of countries and payment gateways do not accept payments through cryptocurrencies. Nevertheless, the decentralized functions of cryptocurrencies threaten the monetary tools of central banks and compete with the services of financial firms. Future of cryptocurrency Moreover, Naqi shared with Kuwait Times his thoughts about the future of cryptocurrency.
He said although it’s difficult to determine or predict future prices and adoption of cryptocurrencies, this type of currency sheds light on features that have been considered and exploited by financial authorities. The decentralized infrastructure provided by blockchain and distributed ledger technology introduces new developments in the context of fintech, such as digitizing trade finance instruments, increasing efficiency in funds transfer to be faster, and expanding financial inclusion.
Various countries have shown interest in introducing their own Central Bank Digital Currency (CBDC), which has cryptographic functional features and is pegged to the national currency. The infrastructure of cryptocurrencies can be applied to financial services to solve legacy issues such as double spending, money laundering, fraud and inefficient due diligence processes.