 Digital economy is one collective term for all economic transactions that occur on

the internet. It is also known as the Web Economy or the Internet Economy. With
the advent of technology and the process of globalization, the digital and
traditional economies are merging into one. 

 Digital economy is defined as an economy that focuses on digital technologies, i.e.

it is based on digital and computing technologies. It essentially covers all business,
economic, social, cultural etc. activities that are supported by the web and other
digital communication technologies.

 Digital economy refers to activities and transactions driven by the public and
private sectors as well as the citizens to produce, adopt and innovate digital
technologies and services in relation to socio-economic functions for enhanced
wealth creation, productivity and quality of life. 
I. EFFECTS OF DIGITAL ECONOMY AROUND THE WORLD
1. Advantages of the digital economy
 Saves time. Before if you needed office supplies, you would have to make a
journey into town and purchase. Now, you can make an order over the internet and
it will arrive the next day.

 Reduced costs for business. Firms can save on renting expensive buildings by
running most of business through the internet. A digital economy enables firms to
cut out an aspect of the retail chain and send personalized goods direct from
factory or warehouse to people’s goods, rather than through shops. This enables
lower costs and lower prices (Tejvan Pettinger, 2020).

 Lower barriers to entry. In some markets, aspects of the digital economy make it
easier for new firms to enter. If an entrepreneur has an innovative idea that catches
on, they can create a new product which challenges traditional firms. The digital
economy has brought many new services which were inconceivable before, such
as online home deliveries for grocery to dating apps.

 Big data usage. The mass production of data can help inform governments and
charities about what is happening in the economy. For example, in tracking of
COVID-19 spread, the use of an app on mobile phones may indicate where local
hotspots emerge (Tejvan Pettinger, 2020).
 Benefits for developing world. The digital economy is opening up opportunities
for the developing world. For example, computer programmers in India can easily
underbid western counterparts, leading to new job opportunities and higher
income in India (Tejvan Pettinger, 2020).

 Enables people to work from home. The digital economy has been a huge asset
during the COVID lockdown. Without digital technologies, the decline in
economic activity would have been even greater. The digital economy gives
greater scope for people working from home and having greater flexibility in their
hours (which may suit parents with children). Working from home can reduce
contact and spread of a virus. It can also help reduce traffic congestion and
pollution.
2. Problems of digital economy
 Monopoly power of tech giants. Despite the potential for new start-ups, many
aspects of the digital economy have become dominated by firms with monopoly
power. For example, Amazon has cornered the market for online sales, meaning
many firms have to go through the Amazon market place to reach consumers who
go to Amazon out of habit. Similarly, Google and Facebook have all developed
very strong brand loyalty and market share in their respective markets. This has
made a few tech giants very profitable. With monopoly power, Google are able to
charge high prices for online advertising and Amazon have the market power to
undercut traditional booksellers (Tejvan Pettinger, 2020).

 Less community. A traditional bookshop can act as a focal point for local
community. It may holds events, book signings and individuals may enjoy the
experience of browsing physical books. With the digital alternative undercutting
traditional firms, old fashioned bookshops are forced out of business. Although
books may be cheaper, we have lost physical interaction between sellers and
buyers which was an important aspect of the buying experience.

 Addictive nature of technology. Whilst, in theory, the internet can save time, e.g.
finding bus times is much easier with internet than paper copies, this time saved
may be outweighed by the time we waste checking Facebook, twitter, internet
searches. Also, the sheer volume of information can cause us to drown in
information and lose sight of what we actually need. More choices do not
necessarily lead to better outcomes. When faced with a bewildering range of
outcomes, we can take time to decide and it becomes easier to procrastinate. 
 Privacy issues. Harvesting and using data has become big business. Facebook
collects a large range of data on its users and this has been bought by political
interests who can give very targeted political ads to its users.

 Bypassing of labour laws. The digital economy has created a trend towards using
self-employed freelancers, who are not protected by the same labour laws. For
example, delivery drivers for Deliveroo and Uber drivers have often been
employed on zero-hour contracts. This enables firms to cut labour costs, be more
flexible, but it can leave workers without sick pay or employment protections. 

 Social media has led to more graphic content. The anonymous and distant nature
of social media has exacerbated trends to personal attacks and the posting of
conspiracy theories or posting of violent/sexual images. The digital economy has
enabled the proliferation of content that is damaging to human well-being.

 Disruption patterns. The economy has always faced disruption from new
technology – from the period of the Luddites to the assembly line. However, the
digital economy is increasing the pace of change, causing many traditional firms
(high street retailers) to go out of business. The rise of AI may threaten jobs in a
whole new range of service sector industries. In theory, new technology will lead
to changing patterns of activity, but no increase in overall unemployment.
However, the pace of digitalisation can lead to structural unemployment, with
some unskilled workers increasingly losing out to skilled workers. Combined with
the monopoly power of big tech firms, it is causing an increased inequality in
society, which may lead to feelings of alienation and unfairness. 

 Environmental costs. It is a mistake to think that the digital economy implies a

‘green solution.’ Data centres use electricity and cause CO2 emissions. In the US,
data centres account for around two per cent of U.S. electricity use in 2014 (Mark
Kaufman, 2020). A bigger potential cost is how the digital economy encourages a
‘throw-away’ culture. E.g. the planned obsolescence of mobile phones and
computers, encouraging consumers to buy new models, leading to greater use of
raw materials.
At various times in history, feathers have been money, shells have
been money, dollars and euros are money. Gold and silver are
certainly money. Bitcoin and other crypto-currencies can also be
money.

People say some forms of money, such as Bitcoin or U.S. dollars, are
not backed by anything.

But that’s not true. They are backed by one thing: confidence. If you
and I have confidence that something is money and we agree that it’s
money, then it’s money. I can call something money, but if nobody else
in the world wants it, then it’s not money. The same applies to gold,
dollars and crypto-currencies.

Governments have an edge here because they make you pay taxes in
their money. Put another way, governments essentially create an
artificial use case for their own forms of paper money by threatening
people with punishment if they do not pay taxes denominated in the
government’s own fiat currency. The dollar has a monopoly as legal
tender for the payment of U.S. taxes.

According to John Maynard Keynes and many other economists, it is

that ability of state power to coerce tax payments in a specified
currency that gives a currency its intrinsic value. This theory of money
boils down to saying we value dollars only because we must use them
to pay our taxes — otherwise we go to jail.

So-called crypto-currencies such as Bitcoin have two main features in

common. The first is that they are not issued or regulated by any
central bank or single regulatory authority. They are created in
accordance with certain computer algorithms and are issued and
transferred through a distributed processing network using open
source code.

Any particular computer server hosting a crypto-currency ledger or

register could be destroyed, but the existence of the currency would
continue to reside on other servers all over the world and could
quickly be replicated. It is impossible to destroy a crypto-currency by
attacking any single node or group of nodes.
The second feature in common is encryption, which gives rise to the
“crypto” part of the name. It is possible to observe transactions taking
place in the so-called block chain, which is a master register of all
currency units and transactions. But, the identity of the transacting
parties is hidden behind what is believed to be an unbreakable code.
Only the transacting parties have the keys needed to decode the
information in the block chain in such a way as to obtain use and
possession of the currency.

This does not mean that crypto-currencies are fail-safe. Large amounts
of crypto-currency units have been lost by those who entrusted them
to certain unregulated Bitcoin “banks” and “exchanges.” Others have
been lost to old-fashioned fraud. Some units have been lost because
personal hardware holding encryption keys or “digital wallets” has
been destroyed. But on the whole, the system works reasonably well
and is growing rapidly for both legitimate and illegitimate
transactions.

It’s worth pointing out that the U.S. dollar is also a digital crypto-
currency for all intents and purposes. It’s just that dollars are issued
by a central bank, the Federal Reserve, while Bitcoin is issued
privately. While we may keep a few paper dollars in our wallets from
time to time, the vast majority of dollar denominated transactions,
whether in currency or securities form, are conducted digitally.

We pay bills online, pay for purchases via credit card, and receive
direct deposits to our bank accounts all digitally. These transactions
are all encrypted using the same coding techniques as Bitcoin.

The difference is that ownership of our digital dollars is known to

certain trusted counterparties such as our banks, brokers and credit
card companies, whereas ownership of Bitcoin is known only to the
user and is hidden behind the block chain code.

Bitcoin and other crypto-currencies present certain challenges to the

existing system. One problem is that the value of a Bitcoin is not
constant in terms of U.S. dollars. In fact, that value has been quite
volatile, fluctuating between $100 and $1,100 over the past few years.
It’s currently around $575.

It’s true that dollars fluctuate in value relative to other currencies such
as the euro. But those changes are typically measured in fractions of
pennies, not jumps of $100 per day.

This gives rise to tax problems. For example, if you acquire a Bitcoin
for $200 and later exchange it for $1000 of good or serveries, you
have an $800 gain on the purchase and sale of the Bitcoin itself. From
the perspective of the IRS, this gain is no different than if you had
purchased a share of stock for $200 and later sold it for $1000. You
have to report the $800 as a capital gain.

It seems unlikely that most Bitcoin users have been reporting these
gains. Those who do not may be involved in tax evasion. The IRS has
broad powers to investigate evasion, and may require counterparties
to reveal information, including computer keys, which can lead to
discovery of the transacting parties. Given the fact that the IRS has
engaged in selective enforcement against Tea Party activists and other
political opponents in recent years, this is a serious potential problem
for libertarian users of Bitcoin. 

One potential solution to the Bitcoin volatility problem I find

interesting is to link bitcoin to gold at a fixed rate. This would require
consensus in the bitcoin community and a sponsor willing to make a
market in physical gold at the agreed value in bitcoin. This kind of
gold-backed bitcoin might even give the dollar a run for its money as a
reserve currency, especially if it were supported by gold powers such
as Russia and China who are looking for ways out of the current
system of dollar hegemony.

Another problem is that Bitcoin and the other crypto-currencies have

not survived a complete business and credit cycle yet. Bitcoin, the first
crypto-currency, was invented in 2009. The global economy has been
in a weak expansion since then, but has not experienced a financial
panic or technical recession.
Investors have some experience with how stocks, bonds, gold and
other asset classes might perform in a downturn, but we have no
experience with Bitcoin. Will liquidity dry up and prices plunge? Or
will investors consider it a safe harbor, which will lead to price
increases? We don’t know the answer.

I believe Bitcoin and its crypto cousins represent an opportunity. It is

still too early for investors to hold in their portfolios due to excessive
volatility and unresolved tax issues. But the time may come, sooner
than later, when some Bitcoin technology companies might warrant
investor interest based on their possible role in the future of
payments and in other forms of wealth transfer. Companies such as
Western Union and PayPal dominate the private payments systems
space today. They may have company from crypto-currency start-ups
soon.

One of the things I like about gold is it’s not digital, it doesn’t depend
on the internet, it doesn’t depend on the power grid. It has intrinsic
value independent of those things. Bitcoin does not.

If the power grid goes down, your Bitcoins are worthless. I’m not anti-
Bitcoin, but physical gold does not have the disabilities of Bitcoin and
digital currencies like the U.S. dollar.

Disadvantages
Like any currency, there are disadvantages associated with using Bitcoin:

 Bitcoins Are Not Widely Accepted

Bitcoins are still only accepted by a very small group of online merchants. This makes
it unfeasible to completely rely on Bitcoins as a currency. There is also a possibility
that governments might force merchants to not use Bitcoins to ensure that users’
transactions can be tracked.

 Wallets Can Be Lost

If a hard drive crashes, or a virus corrupts data , and the wallet file is corrupted,
Bitcoins have essentially been “lost”. There is nothing that can done to recover it.
These coins will be forever orphaned in the system. This can bankrupt a wealthy
Bitcoin investor within seconds with no way form of recovery. The coins the investor
owned will also be permanently orphaned.

 Bitcoin Valuation Fluctuates

The value of Bitcoins is constantly fluctuating according to demand. As of June 2nd

2011, one Bitcoins was valued at $9.9 on a popular bitcoin exchange site. It was
valued to be less than $1 just 6 months ago. This constant fluctuation will cause
Bitcoin accepting sites to continually change prices. It will also cause a lot of
confusion if a refund for a product is being made. For example, if a t shirt was initially
bought for 1.5 BTC, and returned a week later, should 1.5 BTC be returned, even
though the valuation has gone up, or should the new amount (calculated according to
current valuation) be sent? Which currency should BTC tied to when comparing
valuation? These are still important questions that the Bitcoin community still has no
consensus over.

 No Buyer Protection

When goods are bought using Bitcoins, and the seller doesn’t send the promised
goods, nothing can be done to reverse the transaction. This problem can be solved
using a third party escrow service like ClearCoin, but then, escrow services would
assume the role of banks, which would cause Bitcoins to be similar to a more
traditional currency.

 Risk of Unknown Technical Flaws

The Bitcoin system could contain unexploited flaws. As this is a fairly new system, if
Bitcoins were adopted widely, and a flaw was found, it could give tremendous wealth
to the exploiter at the expense of destroying the Bitcoin economy.

 Built in Deflation

Since the total number of bitcoins is capped at 21 million, it will cause deflation. Each
bitcoin will be worth more and more as the total number of Bitcoins maxes out. This
system is designed to reward early adopters. Since each bitcoin will be valued higher
with each passing day, the question of when to spend becomes important. This might
cause spending surges which will cause the Bitcoin economy to fluctuate very rapidly,
and unpredictably.

 No Physical Form
Since Bitcoins do not have a physical form, it cannot be used in physical stores. It
would always have to be converted to other currencies. Cards with Bitcoin wallet
information stored in them have been proposed, but there is no consensus on a
particular system. Since there would be multiple competing systems, merchants would
find it unfeasible to support all Bitcoin cards, and therefore users would be forced to
convert Bitcoins anyway, unless a universal system is proposed and implemented.

 No Valuation Guarantee

Since there is no central authority governing Bitcoins, no one can guarantee its
minimum valuation. If a large group of merchants decide to “dump” Bitcoins and
leave the system, its valuation will decrease greatly which will immensely hurt users
who have a large amount of wealth invested in Bitcoins. The decentralized nature of
bitcoin is both a curse and blessing.

1. Bitcoin affects the inflation control target of monetary policy

Cryptocurrency was born in the context of the global financial crisis in 2008 (Nakamoto,
2008) and Bitcoin is the most popular cruptocurrency in the cryptomoney system that is
attracting a lot of people's interest in recent times. This coin is not controlled by anyone,
not even the Government or its creators.
The first Bitcoin cryptocurrency transaction took place in 2009 and the first exchange
rate announced by the New Liberty Standard was 1 USD for 1,309.03 Bitcoins. Nearly 4
years later, at the beginning of January 2013, the transaction price of 1 Bitcoin was about
13 USD. By the end of November 2013, the price of Bitcoin cryptocurrency crossed the
$1,000 mark for the first time, but by April 2018 it was trading at approximately
$9,000/Bitcoin after hitting an all-time high of $20,000/Bitcoin in At the end of
December 2017, the equivalent of bitcoin market capitalization reached over $320
billion. 
According to the exchange equation:  MV = PY 

Where:  M is the quantity of money, 

              V is the turnover of money,
              Y is the level of real output, 
               P is the price

If the money turnover V and real output Y do not change, an increase in the money
supply M will lead to an increase in the price level P i.e. inflation without any effects on
the real economy (Franco, 2015). Franco's research also points to the possible effects of
Bitcoin cryptocurrency on the monetary policy of the US Federal Reserve (FED). That is,
if Bitcoin is used more, it will lead to an increase in the turnover of money and this
increase can lead to inflation (Franco, 2015)
 Ratio of Bitcoin value to cash in circulation of some regions/countries
Regions/Countries Ratio of Bitcoin value to cash in circulation
Europe 2.2

America 2.1
Switzerland 355

Hong Kong 63.5

Canada 51.9

With the US or the European Union (EU), Bitcoin accounts for a low proportion, 2.5%
and 2.1% respectively. However, compared to Sweden, a country that rarely uses cash
but mainly uses payment cards and online, the proportion is very large, up to 355%.
(Committee on payment and market infrastructures, 2016)

2. Bitcoin makes it difficult to control the money supply

Technology platforms have made information gathering and transaction networks faster
and cheaper. This gives an impetus to the sharing economy and allows financial
technology institutions to capture some of the banking business.
For example, blockchain technology can create a very reliable lending platform for
decentralized transactions, whether those transactions are denominated in fiat or
cryptocurrency.
This creates a significant challenge for central banks. Specifically, with the fundamental
advantage in cryptocurrency transactions being smart contracts, which settle transactions
between two parties independently without the need for a third party, cryptocurrency has
a decentralized nature that breaks channels. normal currency transactions. Unlike the
supply of fiat currencies, which are based on the decision of the monetary policy maker,
the supply of electronic money is in principle not subject to human intervention and is
regulated based on the verifiable results. With fiat currency issued by the central bank as
a means of payment for the economy. The volume of money issuance is decided by the
central bank based on the needs of the economy. Therefore, the central bank easily
controls the amount of fiat money.
When cryptocurrency transactions increase or is used as a medium of exchange,
households will reduce their cash holdings, and money tends to return to the banking
system. As a result, the central bank's income from issuing money will decrease. Another
possible adjustment is that households will reduce the amount of short-term deposits they
normally use to pay for credit card or bank transactions in addition to hold less financial
assets such as securities as they view cryptocurrencies as a new asset class. From there,
deposits tend to shrink and the demand for deposits by banks at the central bank also
tends to decrease leading to a smaller central bank balance sheet size and hence issuance
income. less money too.
 
The difference between cryptocurrencies and fiat currencies is a big challenge for
monetary policy enforcement. Because in order to implement effective monetary policy,
one of the important conditions is that the central bank must control and make statistics
of the entire amount of currency circulating in the country. But in reality, banks are
having difficulty in counting cryptocurrencies into the total payment means, because
cryptocurrency payments can be made without the participation of an intermediary such
as: Bank.

3. Other effects
Cryptocurrencies with investments and frauds also cause other consequences that affect
the effectiveness of monetary policy. The magic of cryptocurrencies has attracted many
people to the investment channel in the hope of "terrible" profits, but when the price falls
rapidly, cryptocurrencies has created chaos in society, causing macroeconomic
instability. 
A part of the public put their time and effort into cryptocurrencies business without being
recognized by the law, the products they make are not included in GDP, reducing the
economic growth rate.
Another consequence is black credit, leading to market interest rates being pushed up, the
risk of bad debt increasing, contrary to the central bank's efforts on credit policy to
restore production and circulation of goods, lower by interest rates, and improve bad debt
situation…
BTC will go to the moon (just not so fast)

The scarcity effect will be felt not earlier than in six months. Don’t be deceived by volatility following the
date of halving; it will be triggered more by speculations than by fundamentals. We’ll observe short-
term volatility just because everyone is very excited or very panicked, and after bitcoin halving date
everything will return to normal.

The price may reduce for a period bitcoin needs to accumulate a renewed confidence and
understanding in the space. From a long perspective, this pause will help bitcoin grow even more.

Mining will tend towards monopoly

Mining is the only way for new bitcoin to be released and distributed. That’s why mining trends affect
the whole ecosystem. So what is the trend expected?

Halving is going to increase the difficulty of mining. Some small and the least efficient miners may
become unprofitable and turn their equipment off, while the big mining companies have a wide safety
margin. Big companies will probably try to take a larger piece of the pie during the rough times.

The rough times won’t last long, however. In order to ensure a smooth and reliable network, every two
weeks, based on how many blocks were mined in the period, the mining difficulty adjusts.
Effect of crypto self-purification will intensify

For the last three years, we observed weak altcoins continued to devaluate as compared to bitcoin.
Uncertain times may reinforce the existing trend, so we recommend consolidating around assets you
trust.

Some cryptocurrencies that were created just for fun or for making easy money survived after the
crypto-winter of 2018. But there’s a chance that these bad projects will disappear during 2020.