Bitcoin, Cryptocurrencies and The Money in the New Era - 3 -

 4. Trust, Belief and Regulation

As almost for all commodities or financial instruments, trust, belief and legal regulation have a very important effect in also the currency. If a currency has not legal infrastructure, public trust and belief, probably it will not live and be acceptable in the long term.

The reason why most of the people trust and believe the fiat money system is clear. We know that fiat monies are issued by the central banks and mostly they are backed by the states. Actually, issuing by a central bank and backed by a state make fiat monies “the real currency” for the humankind. Unfortunately, it is clear that cryptocurrencies don't have the public trust and belief enough yet. Due to fact that they are not backed by a state and not issued by a central bank people generally consider cryptocurrencies as an unreliable, even a speculative investment tool.

On the other hand, Bitcoin is very young now but it has possibility to become very popular sooner, then it will be able to be a rival for traditional fiat money system or other currencies which means that it could be better to create necessary legislation for cryptocurrencies now. Because later could be too late for this action to take. Even though Bitcoin is not yet widespread and isn’t as wide as other international currencies, taking consideration Bitcoin continues to increase its popularity, regulatory measures will be needed.

There are countries in the European Union that haven’t taken an official stance towards Bitcoins and other virtual currencies, but as Bitcoins continue to be more popular, it is very clear that we are going to see more countries begin to create their own policies in order to regulate virtual currencies. “Further action from other authorities can reasonably be expected in the near future” (European Central Bank, 2012).

 

5.Conclusion

As we have discussed before, it is well-known that Cryptocurrencies have a lot of disadvantages about being widely accepted for now at least. Generally, in financial subjects, making people trust you could take a long time. Due to fact that Cryptocurrencies-Bitcoin have high volatility of value, there is no state or bank guarantee in the back of it and it has not been widely accepted by the community yet, we could say easily that cryptocurrency cannot acquire the role of money for now.

On the other hand, it is an undeniable reality that cryptocurrencies have been attracting a lot of public attention in recent years. Especially western governments, universities and Non-governmental Organizations have been making researches about cryptocurrencies increasing day by day. Moreover, the number of people who invest on Bitcoin are mounting and everyone asks for information about Cryptocurrencies in almost every day to financial consulting firms or the banks. Bitcoins could be regarded as a bad alternative to traditional money with the scope of criminal activities, because virtual currencies would make easier to conduct criminal activity such as: money laundering, drugs trafficking, computer hacking and terrorism.

It is clear that, none of these activities is widespread or extensive to the use of Bitcoins. There are other bad or negative sides to using a virtual currency that do not have to do with criminality such as speculation, risky investment and issue of unpredictability. It is obvious that without necessary legal regulation and central bank or government guarantee, Bitcoin or all other Cryptocurrency users bear all the risks.

It should be accepted that keeping Bitcoins in a digital Bitcoin wallet will leave your virtual currency vulnerable. If we consider the issue in the scope of computer hacking for example. We would say that a digital wallet is weak to computer hackers. In order to attract people attention to this issue, The European Banking Authority has issued this warning to its citizens, “Exercise the same caution with your digital wallet as you would do with your conventional wallet” further urging users of Bitcoins, “not to store large amounts of Bitcoins in their digital wallets for an extended period of time” 

In conclusion, we could say that if cryptocurrency will gain the role of money one day in the future, it must serve also as functions of money also. Even it has some of functions of money like being a store of value, a unit of account and a medium of exchange, Cryptocurrencies cannot execute all these functions properly yet.

Despite the fact that the most known cryptocurrency-Bitcoin has a lot of popularity and a good number of investors, it is clearly known that it is not highly accepted yet all around the world.

After considering all these facts, especially in the short term, it seems that cryptocurrency could be an investment instrument for the investors who like taking risk instead of acquiring the role of money.

Birth and Rise of Macroeconomics

 
Economics as a term, is as old as humanity.  Despite the fact that Macroeconomics became important just after The Great Depression (1929), it is obvious that economists were tackling macroeconomic issues like inflation, unemployment and growth etc. even before 1929. For example, it is well known that Adam Smith who is one of the most famous classical economists, analysed macroeconomic variables and for example said that economy is always in full employment equilibrium in his most known book "Wealth of Nations" in 1776.

In the classical economic theory, it is not crucial and necessary to emphasize and analyse macroeconomic variables as an issue very much due to fact that whenever a disequilibrium emerges, “an invisible hand” brings it to the equilibrium level again owing to flexible prices, wages and interest rate. (Price Mechanism) According to classical economists, “every supply creates its own demand” (Say’s Law) and economy is always in full employment equilibrium, as a result of this there is not involuntary unemployment in economy. Moreover, the money is just a veil for they which creates only inflation if it is not controlled. They believe that government should not intervene free market because it will be just harmful for the economy. The event or disaster which changed almost every thing about economics was The Great Depression. It could be easily said that it was the birth of Macroeconomics as a science and J. M. Keynes as a popular economist. According to Mankiw  “The Great Depression had a profound impact on those who lived through it. In 1933, the U.S. unemployment rate reached 25 percent, and real GDP was 31 percent below its 1929 level. “
 
After 1929 and during the years of the Great Depression, it was realized that there was no invisible hand which brought the market to the equilibrium again and provided full employment output level. Keynesian revolution was the most important turning point in that period of time for Macroeconomics. On the contrary to classical approach, Keynes said that in order to overcome the depression, demand should be supported and fiscal policy has to be used. Because, he believed that prices and wages are not flexible and therefore there is no invisible hand in the economy which brings it to equilibrium level again. Moreover, on the contrary to classical theory, he said that every demand creates its own supply and full employment is an exceptional situation not a general equilibrium.

He asserted the idea that classical point of view about economics was an exceptional situation but his own views were general theory of economics. Therefore, Keynesian approach was accepted quite successful to overcome the great depression and almost all of countries applied his views and boomed success of their economies until 1970’s.
 
In the early 1970s, The Oil Crisis and its aftermath events emerged some monetary and neoclassical counter revolution against Keynesian theory.  Because Keynesian economists could not explain solution of stagflation issue which caused high inflation and high unemployment occurred at the same time. Then, as a natural result of this especially Phillips Curve was criticised because it was not accurate according to the New Classical and Monetarist economists. After 1980s, "expectations" and new approaches based on old classical theories in the economics became more popular and New-classical and Monetarist economists emerged based on traditional classical theory in fact. Even there are Real Business Cycle Theory, New Keynesians and New Classicals (rational expectations) in last the decades of economic evolution, it could be said that these all form of economic theories are arisen from new interpretations of two main economic theories: Classical and Keynesian approaches.
 
In conclusion, it is obvious that generally, today there is not a one-side macroeconomic system in the world economics like strict capitalism or socialism. It could be said that nowadays, wide-spread macroeconomic approach in the world is a mixed version of New-Classic micro approach and New Keynesian macroeconomic theory.