Bitcoin as the New Money
15 October 2018 | Mon
Tracing back to the origins of commerce, people have been using various kinds of money, and the adoption of one monetary standard over another has been occurring throughout history. There have been certain characteristics of money that different societies have preferred over time. Precious metals like gold and silver have a higher virtue compared to others and remained the de facto monetary standard for many years.
Roughly half a century ago, before the 1970's, cash was a paramount form of money. As decades go on the monetary landscape is changing and the use of cash has steadily been reduced. At present, most developed societies tend to prefer electronic transactions spurred on by the internet revolution and all things digital. It is safe to assume that for the most part, we are progressing towards a cashless society. Now enters Bitcoin. A decentralized cryptocurrency introduced in 2009, is fast becoming a popular form of currency when it comes to online transactions.
We have designed an infographic to further provide you an insight into what the benefits and drawbacks of cryptocurrencies are in comparison to fiat currencies.
Note: A guide to the reader: Bitcoin shall be used to refer to any class of cryptocurrencies.
Bitcoin has surely come a long way since its genesis, but how will the world react as it progressively permeates into our lives and redefine how we spend? Discover the significant differences between bitcoin and fiat currencies and why we think bitcoin shall emerge victorious as we advance towards a more digitized world.
For Bitcoin to reign supreme, the first is to understand why Bitcoin is a good source of money for immediate use. Secondly, why precious metals are insufficient in a market-based economy that operates by voluntary exchange in a free market. Lastly, why fiat money is considered inferior.
Why Bitcoin is a good source of money?
For Bitcoin to assume the monetary standard for the coming millennia, one of the most important characteristics to note is its scarcity can be measured. There are only 21 million Bitcoins and there can never be more. We know how many there will be tomorrow or ten years from today. This helps prevent inflation and devaluation of a currency. However, the same cannot be concluded with fiat currencies that are printed at the discretion of governments.
Bitcoin is interchangeable, each Bitcoin is worth the same as every other unlike exchanging one fiat currency to another. It is important to note that whilst governments around the world have undertaken immense anti-counterfeiting measures, counterfeit money still remains a real threat. On the other hand, Bitcoin cannot be counterfeited because it requires a tremendous amount of computing power and even then, the list of transactions that are secured by mining makes counterfeiting virtually impossible.
Another characteristic that deserves mention is Bitcoin is highly movable. It is the only form of money today that can be transferred around the globe without the need for paying and trusting a third party. It does not require permission from an overseeing authority. Bitcoin possesses an innate program-ability which is critical for a new form of good money. This program-ability should enable all kinds of economic activity, without a middleman, escrow agent or human intervention. This program-ability to trust a network spread across the globe (miners) sets it apart from fiat currency.
Why precious metals are insufficient?
So why are gold and silver insufficient? Gold is a perfect form of money. But gold is physically a heavy commodity and cannot be efficiently used as money for large-scale transactions. You definitely cannot pay your salaries with a gold coin, or purchase food with a gold bullion, or buy a drink with a gold nugget. Gold in physical form is impractical for commerce. For gold to work in an economy, it has to be physically stored somewhere and then certificates to be created for its users, against the stored quantity of gold.
These gold certificates could work well as money in a modern economy except for centralization. A digital gold payment service or any privately issued market-based service requires a centralized entity to ensure control or custody for efficient payments but this exposes users to counter-party risk. There is a real danger that if these private companies were to grow too big, a central governing authority may shut them down and seize their assets. Private money when centralized, cannot attain large-scale deployments and thus it cannot surpass fiat because the government would not permit it.
Why fiat currency is inferior?
Since the abolishment of the gold standard where a unit of account is based on a fixed quantity of gold, fiat means value by decree, not by merit. Fiat currency was created. Fiat has a built-in value bestowed by its backers with faith. A skeptic would have us believe that fiat money is an absolute deception and altogether inappropriate for an ethical market-based society. A market cannot exist freely if its fundamental money supply is centrally planned and controlled based on faith alone. Fiat money and market economy are like oil and water, they can be mixed when force is applied but they will eventually separate and dispel each other over time. The average lifespan of fiat is less than 50 years, the US Dollars only become fiat in 1971.
Another inferior feature of the fiat currency is it can be systematically created with no limit on supply nor can supply ever be known. Fiat is willed into existence by politicians and banks because printing money enriches the central authority at the expense of the public who hold previously-printed money. This is inflation. Fiat struggles with durability. Your fiat will only last so long as your bank exists. Your bank could destroy your fiat with a click of the button. With fiat, you are ever so dependent on third parties. It is hardly befitting of a society geared towards global digitization.
While the long-term potential of Bitcoin is yet to be established due to its infancy, it can be said that cryptocurrency is predicted to go far. In comparison to Bitcoin and other forms of money, Bitcoin has paved the way for individuals to take the power back from banks and establishments to promote the rebuilding of free market capitals. A further advantage of Bitcoin is it is not affected by inflation and is much faster to move than fiat currencies. Although from using fiat currencies and banks to cryptocurrency will not occur immediately, due to its core of being decentralized, cryptocurrencies are here to stay.
Bitcoin will gradually come to be used as an alternative to fiat when players in the global market innovate to make it easier, faster, safer and cheaper to use Bitcoin to store or transfer wealth than using credit cards or bank payments. Bitcoin is a potent tool of individual empowerment in comparison to fiat currency that persists solely on the momentum of tradition. All these factors are empowering the notion that although in the near future cryptocurrencies are here to co-exist with fiat currency, it is only a matter of time when we completely transform the way we view and use our money.
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