The idea behind Bitcoin was that it would be a secure means of payment, independent of national governments, a game-changer in international commerce, and a revolution for the world’s unbanked. However, huge price fluctuations have caused crypto to become more of an investment instrument, a means of speculation instead of a payment method. So, what’s around the corner for the coin that’s on everyone’s lips? Let’s take a closer look!
What is Bitcoin?
It is convenient to think of Bitcoin as money. However, for it to be considered money, it should, at the very least, serve as a legal tender in one place or another. A fiat currency has a homeland, where it’s universally accepted to buy goods and services, yet Bitcoin is a universal means of exchange only among crypto fans. Some companies, most famously Tesla, have accepted Bitcoin as a means of payment in the past, and in Holland, the coin is gaining increasing acceptance by companies. By and large, however, Bitcoin serves as an investment asset- held with the view to it gaining in value. In this case, Bitcoin serves as an asset class, a ‘store of wealth,’ if you will; something akin to gold.
Many people are aghast when they see how the value of Bitcoin has skyrocketed in the last couple of years. How could something intangible have such value? They ask. However, paper money also has no value now; no one is willing to accept it (consider Germany in the Weimar republic). So, the fact that Bitcoin only exists electronically should not be a problem- indeed, today, most money changes hands electronically anyway.
Fans of Bitcoin point out that while national banks can print off an unlimited amount of fiat currency, which generally causes inflation, the supply of Bitcoin is mathematically finite, therefore eradicating the inflation risk. However, one only has to look back to the issues faced during the era of the Gold Standard to know that a currency being finite does not alleviate all potential pitfalls.
The Threat of Regulation
It’s no secret that the criminal underworld uses Bitcoin to undertake transactions outside of the prying eyes of authorities. Large sums of Bitcoin are indeed held by criminals, which serves to maintain the current price. Should regulation become strict enough for criminals to cash out their coins, the knock-on effect could force the price into a downward spiral.
Another controversial threat is that Bitcoin can become too successful. Even in this scenario, Bitcoin is unlikely to take control over the development of domestic monetary policy.
Bitcoin, the Currency of the World?
Bitcoin, or cryptos, in their current forms, are unlikely to become the currency of the world. Bitcoin won’t be able to become even a global currency anchor. The development of a currency anchor is a political process. The cryptocurrency system is neither fast nor transparent. The concept of a global currency is deeply flawed as economies move at different speeds. A common world currency would likely require political unity to function. The implementation of a single currency across the comparatively similar economies of the European Union was also not without its challenges. Bitcoin could instead serve to facilitate transactions across borders.
The Next Steps
While it is unlikely that Bitcoin is going to replace cash any time soon, so far, it has been full of surprises, and no one could have predicted it would have become as valuable and mainstream as it has. There could still be money to be made in Bitcoin, and it could continue to adapt to fill in needs that we have not yet considered! Watch this space!