As our civilization evolves, our currency does too. Since Satoshi introduced the idea of Bitcoin in 2009, people have speculated its place in our every day life and how it could revolutionize how we purchase things and how we interact with money. However, in this piece, I argue that Bitcoin’s value does not come from the possibility of it replacing the fiat currency but rather something much more interesting.
Bitcoin’s flaws as a replacement for fiat currency
As unintuitive as it might sound, a good currency system needs a way to create money out of thin air. Facts are, humans are not perfect. We often forget our password, accidentally destroy valuable objects and unintentionally lose our hard earned cash. To compensate for this loss, the federal reserve has to print new bills every year. In fact, the feds printed over $213 billions in new bills in the year of 2016 alone. Bitcoin, on the other hand, has a limited supply of 21 million units. Combined with lost wallets and forgotten password, this number could decrease over time. As the supply decreases, people are less incentivized to exchange it for goods, which stagnates the economy.
Compared to traditional banking, Bitcoin is much harder to properly secure in the context of everyday use. First, each or user is fully responsible for the appropriate protection of his credentials. This is extremely difficult for the average person. In contrast, central institutions such as banks or credit card companies employ teams of security experts to properly secure any sensitive information. Second, the non-reversible nature of transactions, combined with the pseudo-anonymity of Bitcoin, add incentives for scam and fraud. While long-term storage is relatively simple, everyday use is completely different since it requires the coins to be easily accessible, increasing its exposure to malware.
Moreover, it is difficult to incorporate Bitcoin network into the current banking system on which billions of dollars and countless hours of work has been spent to perfectly accommodate our lives. Our current fiat system is not perfect and suffers from many issues such as the lack of intrinsic value, the centralization of development, the price instabilities. However, Bitcoin, for the most part, does not fix those issues.
One of the most significant strengths of Bitcoin and cryptocurrencies, in general, is the independence from trusted third party escrows. However, in everyday use, the benefits of a third party escrow often outweigh the risks. For example, if your bank account was hacked or your credit card information was stolen, the bank or the credit card company will assist you in the recovery of your funds. The centralization also means that they can provide loan services which have been proven to be valuable. In the Bitcoin network, however, any loss or theft is fully assumed by each individual user.
Why Bitcoin doesn’t need to replace fiat currency
That being said, Bitcoin does not need to replace our fiat currency in order to be successful. In fact, most of Bitcoin’s value comes from the fact that it is one of the best stores of value ever to exist.
When we think of “store of value”, we usually think of precious metal, land property or collectible art. However, Bitcoin is superior to all of those. First, as mentioned previously, Bitcoin’s supply is limited and can only decrease. This ensures that Bitcoins are exclusive and are more likely to increase in value. Second, unlike most other stores of value, Bitcoins are virtually indestructible, thanks to the decentralization of the network. Other than pulverizing all storage device on Earth, there is no way to definitively destroy the Bitcoin network. Finally, and perhaps most importantly, Bitcoin is rather accessible. When it comes to precious metal and rare artwork, the high price and the complexity of transaction and long-term storage is often outside of the reach of average investors. Comparatively, it is rather easy to setup long-term storage for Bitcoin and the internet is full of guides to help investors in this regard. Moreover, Bitcoins can be sold in tiny fractions, down to 0.00000001 BTC. This eliminates the discrimination against smaller investors where they simply cannot afford to purchase larger amounts.
Another valuable asset that people often overlook is the technology and the development team behind it. Bitcoin is the first successful network using the blockchain technology and has been at the forefront of it ever since. Behind it is an entire group of talented developers and researchers who try to push this new paradigm into new domains. As this technology continues to grow, it will become increasingly valuable and the value of Bitcoin will increase along with it.
Disclaimer: This article is not intended to provide legal or financial advice. Forward looking statements are not guarantees of any future events. Any opinions expressed in this piece are the author’s own and do not necessarily reflect the view of the SkycityCI team.