Many see Bitcoin as the currency of the future that would gradually replace USD, especially with those unbelievable breakthroughs of the digital currency. But in reality, there are very few things that are similar about BTC and USD, and there is no solid ground for viewing Bitcoin as the rival of the world’s dominant currency.
Reserveum Group analysts believe that by the end of 2021, there is still no digital currency that could be used for settlements and savings as effectively as USD.
From the long-term perspective, crypto assets with limited emission like Bitcoin work well for savings but are absolutely not suitable for settlements due to their extreme volatility. Stablecoins like Tether work well for payments, but are absolutely not good for savings, as they are susceptible to inflation.
To create the perfect currency for both savings and payments, we should solve four problems of non-inflationary currencies that we reviewed in our article “Why does a cheeseburger become more expensive?”.
One of the thousand reasons why Bitcoin is never replacing dollars.
To understand why Bitcoin is never going to replace dollars, we should look into the foundation of modern money. The only thing similar about dollars and Bitcoins is that fiat currencies are not backed by anything. You can say that they only exist due to general agreement, but it is in fact much more complicated.
Paper money, though it has no value as itself, gains value due to one important factor — backup from the government and the Central Bank. These institutions serve as guarantors that the money is valid. Every country fixes the functions of the official currency in its constitution, so the society can trust the money as the means of settlements and savings.
It became possible to maintain the order under the following conditions:
· centralized emission and distribution,
· regulation of the money supply,
· control of the rate against other currencies.
And now imagine the money that no one is responsible for. It is issued by volunteers, its supply is strictly regulated or vice versa, endless, and the rate depends on the market. Users of such money cannot expect financial stability because their savings may lose in price as out of the blue as gain in price. It would be just as hard to indicate the price of goods and services in this currency.
All of it shows that Bitcoin, as well as other existing cryptocurrencies, cannot serve as such currency.
The volatility is another nail in the coffin for Bitcoin.
It is no secret that Bitcoin is first of all a speculative instrument. It has never been taken seriously as a payment method, but always — as a means of quick profits with mining and speculations. This is why it has such high volatility that is millions of pips per day.
Expenses of mining.
Just several years ago, the market of mining was bursting, but now there are fewer and fewer people willing to mine Bitcoin. The mining equipment is expensive, and the electricity bills are so high that they have long since become the topic of news articles and memes. Also, every four years the number of Bitcoins in every mined block is reduced, and the payback of mining falls drastically.
The money supply does not correspond to the market needs.
It might have been one of the major reasons.
For the money to be effective, its supply should be enough for all buy and sell operations. But it is impossible to align the number of cryptocurrencies with the number of goods and services produced in a country. If like with Bitcoin, the cryptocurrency implies limited emission, the money will never be enough. If like with Ethereum, the cryptocurrency has an unlimited emission, then its amount would grow sporadically, according to the issuer’s desires.
The perfect money should have a dynamic supply. This supply should grow and reduce according to the economic situation.
So the emission of the ideal non-inflationary money should imply feedback. The feedback should regulate the emission amount and increase or reduce the number of coins in circulation.A block scheme is a smart contract, feedback, change in the speed of reserve norm growth
Dependance on the market situation
The weak spot of every financial market is that its participants easily fall into panic mode that can be caused by literally anything, and most often just gossip. The conventional currency market has mechanisms that should tame the panic and prevent falls. When the currency rates change too fast, Central banks make interventions and return the price of the national currencies to acceptable values. The cryptocurrencies market consists of private investors and is not regulated, so here even big players are not interested in spending their money on supporting the rate. This makes Bitcoin a highly vulnerable and risky investment instrument. It can be only viewed as an instrument of long-term investment because the price will always grow due to the limited emission. But using Bitcoin for savings and settlements is impossible.
Due to all that, we may ask: can we even consider Bitcoin a currency? There are different opinions on that. For instance, Michael Saylor, a CEO of MicroStrategy, the world’s largest owner of Bitcoins among public companies, offered to see Bitcoin as digital property, but not a digital currency. This is fair, because, while having all the characteristics of money, Bitcoin also rivals other popular assets like real estate and gold.
True, there is a trend among big Bitcoin holders to keep Bitcoins waiting for further growth. The same MicroStrategy, having invested 2,74 billion USD, currently owns 105’085 BTC worth 3,32 billion USD.
In fact, the interest of such large investors is the main source of Bitcoin growth. Every new transaction creates a large wave of demand. For instance, the investments of MicroStrategy became the source of an upward trend, and another push upwards was the integration of Bitcoin with the PayPal payment system.
Other large holders of BTC are Tesla (42’902 BTC), Galaxy Digital Holdings (16’400 BTC), Voyager Digital (12’260 BTC), Square Inc. (8’207 BTC), Marathon Digital Holdings Inc. (5’784 BTC), and others. All of these companies have a similar strategy concerning Bitcoin: it is a long-term investment.
The Bitcoin capitalization by December 2021 reached 67 trillion USD, and the optimism of large investors supports the market growth. But globally, the trust in digital currencies is still too low to talk about a new reserve currency, and this is the situation where trust plays an important role. The US Dollar became the world’s top currency because the USA stored gold reserves during the World Wars. The American national currency consolidated due to other countries’ weakness, and the situation remains similar because of cheap dollar investments into developing countries. It is impossible to perform this strategy with a digital currency due to the drawbacks of Bitcoin listed in this article.
The digital meta currency that may become a true rival to Bitcoin should be equally useful for settlements and savings. Such currency should have an in-built algorithm that would raise the cost of mining according to the external inflation and regulate the supply according to the external volume. So this hypothetical currency should be an algorithmic stablecoin with a good feedback mechanism.
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