Cryptocurrency (or crypto in short) has become a major topic in news headlines and everyday conversation.
But in 'A' Level Economics, the key question is not whether crypto is trendy or risky.
The key question is how cryptocurrency fits into economic concepts you already know, and how you can analyse and evaluate it clearly, like an economics exam essay.
In simple terms, cryptocurrency is a digital asset that can be used for payments or held as a store of value. The most famous example is Bitcoin. Another major cryptocurrency is Ether, which is linked to the Ethereum network.
Many cryptocurrencies are decentralised, meaning they are not issued by a government and do not rely on a central bank. Transactions are recorded on a blockchain, which is essentially a shared digital ledger that records transfers. For 'A' Level Economics, you do not need to be a computer science expert. If this topic comes up in economics case studies, what really matters is what crypto does in the economy, who it affects, and why and how governments respond to it in terms of economic policies or approaches.
A useful way to start is to ask whether cryptocurrency is money.
In Economics, money usually has three functions. It is a medium of exchange, a store of value, and a unit of account.
Bitcoin can sometimes act as a medium of exchange, since some merchants accept it. But in most countries it is not widely accepted for everyday purchases.
It can act as a store of value, since many people hold it rather than spend it. However, it is highly volatile, which weakens its usefulness for ordinary households.
Crypto is rarely used as a unit of account. Goods and services are priced in dollars, not in Bitcoin or Ether, although some shops do accept crypto as payment. This is why most economists would say cryptocurrency is not fully functioning money in the way national currencies are.
Now consider why cryptocurrencies became popular.
From a demand perspective, many people buy crypto because they expect prices to rise. This is speculative demand. If people believe Bitcoin will keep increasing in price because supply is limited, they may buy it today and hold it. This can create self reinforcing price increases.
Some buy crypto as a way to diversify their assets, especially if they view it as different from shares or bonds. Others are attracted to it because they distrust traditional banking systems or want a decentralised alternative. Some use crypto for cross border transfers because it can be faster than traditional bank transfers, and sometimes cheaper.
In economics exam terms, crypto demand is strongly shaped by expectations, confidence, information, and herd behaviour. When sentiment turns positive, demand surges and prices rise sharply. When sentiment turns negative, demand collapses and prices come down sharply.
From a supply perspective, different cryptocurrencies have different supply rules.
Bitcoin has a fixed maximum supply, which is why many people call it “digital gold”. The argument is that if supply is limited, it cannot be inflated away in the same way as fiat currency.
However, this argument must be evaluated carefully. Inflation in the economy is not only about the supply of money. Inflation depends on aggregate demand, aggregate supply, inflation expectations, and supply shocks. Even with limited supply, Bitcoin’s price can still swing wildly. A highly volatile asset cannot be a stable store of value for most people. This is why it is risky to assume that crypto automatically protects against inflation.
It is also important to recognise that crypto is not one single thing. Bitcoin was designed mainly as a digital currency and store of value. Ether is different. Ether is the main token used on the Ethereum blockchain, which supports decentralised applications, smart contracts, and many digital finance activities. This difference matters in analysis.
Bitcoin demand often behaves like a speculative asset demand.
Ether demand is shaped both by speculation and by usage, since it is linked to activity on the Ethereum network. From an economics perspective, that means you could consider Ether as having "derived demand" or possibly being considered "complements".
That is why the economics of crypto is not just about money. It is also about technology platforms, networks, and demand for digital services.
Now consider crypto from a macroeconomic angle. Some people believe crypto threatens central banks and national currencies. In reality, in most countries, crypto adoption is not high enough to replace national currency. Most wages are still paid in legal tender, taxes are still paid in legal tender, and most transactions still rely on the banking system. But crypto can still create macroeconomic issues. If crypto ownership becomes widespread, price crashes can reduce household wealth and confidence, affecting consumption. If households invest large portions of savings into crypto, a crash can weaken financial wellbeing and reduce spending. This is one way crypto can affect aggregate demand indirectly.
Crypto can also reduce the effectiveness of monetary policy if it replaces traditional financial assets. Central banks influence spending by affecting interest rates, credit conditions, and expectations. If households and firms shift away from bank deposits towards crypto assets, the role of banks and the transmission mechanism may weaken. However, this depends on scale.
In Singapore, the Monetary Authority of Singapore conducts monetary policy mainly through the exchange rate rather than interest rates. This is because Singapore is a small and open economy. Therefore, the key issue is not whether Bitcoin replaces the Singapore dollar. The key issue is whether crypto markets create financial instability, speculative bubbles, and confidence effects that spill over into the real economy.
This leads to a strong section for evaluation, which is market failure.
Crypto markets can involve severe information failure. Many consumers do not fully understand what they are buying. They may not understand custody risks, hacking risks, scams, leverage, or market manipulation. There can be asymmetric information, where platforms and insiders know far more than retail consumers. This can lead to exploitative outcomes.
There are also negative externalities. Some cryptocurrencies historically used proof of work mining, which requires large amounts of electricity and can contribute to environmental costs. This is why Bitcoin mining has been criticised for energy usage. However, evaluation requires precision. Not all cryptocurrencies use proof of work. Ethereum, for instance, shifted to a proof of stake system, which uses much less energy. So the environmental externality argument depends on which cryptocurrency and which system you are analysing.
Crypto may also be considered to be associated with criminal activity and perceived public harm. It could be argued that scams, fraud, and money laundering risks may exist, especially in unregulated environments. In Economics terms, these are negative externalities and also a failure of consumer protection in markets with poor information. When scams rise, trust falls. This reduces welfare and creates broader social costs. That is why governments and regulators often justify intervention.
Now analyse the policy response. Regulation has clear benefits. It can reduce fraud, require exchanges to meet standards, improve disclosure, and reduce unfair practices. It can also reduce contagion into the wider financial system.
At the same time, regulation has costs. Over regulation can stifle innovation, raise compliance costs, and push activity into offshore or unregulated spaces, making monitoring more difficult. Regulation may also create a false sense of security. Some consumers may assume that a regulated platform means the asset itself is safe. But crypto remains risky because price volatility is a feature, not a bug. So the best approach is not extreme regulation or no regulation. The best approach is targeted, risk based regulation focusing on consumer protection, disclosure, financial stability, and prevention of illicit flows.
In the final analysis, cryptocurrency is best understood in 'A' Level Economics as a speculative asset market and a financial technology development, rather than fully functioning money. Bitcoin and Ether can sometimes perform some functions of money, but volatility and limited acceptance prevent them from being reliable currencies for daily life. The most convincing case for policy intervention arises when market failures are serious, such as information gaps, fraud risks, and potential spillovers into the broader economy. However, governments must strike a careful balance. Too little regulation harms consumers and trust. Too much regulation drives activity underground and reduces innovation. The strongest judgement is that crypto should be allowed to develop within a controlled framework that reduces consumer harm and systemic risk, while recognising that crypto remains a high risk asset that cannot be treated like a stable currency.
As a quick disclaimer, this particular post I have written on JC Economics Essays is meant purely as an analysis blog post for economics examination purposes (e.g. case studies, a brief overview of crypto, teaching and learning purposes) and is not meant as any investment advice or financial analysis.
Thank you for reading and cheers.
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JC Economics Essays is my popular economics blog where I write about how to write better economics essays for the ‘A’ levels, as well as other academic levels. A former educator, I have around 20 years of experience in teaching and learning about economics. From 2007 to Dec 2025, more than 120,000 readers have visited my economics essays blog. Thank you for reading, and I hope these useful economics materials help you.
