Bitcoin provides an efficient means of transferring money over the internet and is governed by a decentralised network with a clear set of rules, making it an alternative to central bank-controlled fiat money.
1 There has been much discussion about how to price Bitcoin, and we set out to investigate what the cryptocurrency’s price might look like if it achieves further widespread adoption. However, it is necessary to take a step back first. Bitcoin and other digital currencies have been promoted as viable alternatives to fiat currency. But what determines the value of any currency?
- Currency has value because it can be used as both a store of value and a unit of exchange.
- Currency success is defined by six key characteristics: scarcity, divisibility, utility, transportability, durability, and counterfeitability.
- The cryptocurrency bitcoin has value because it performs admirably in these six areas, though its main issue is its lack of acceptance as a unit of exchange, as most businesses have yet to accept it as payment.
- Difficulties in the cryptocurrency storage and exchange spaces pose a threat to Bitcoin’s utility and transferability.
- However, if bitcoin gains traction and captures 15% of the global currency market (assuming all 21 million bitcoins are mined).
Why Are Currencies Valuable?
Currency is usable if it serves as a store of value, or if it can be counted on to maintain its relative value over time and without depreciating. Commodities or precious metals were used as payment methods in many societies throughout history because they were thought to have a relatively stable value.
Rather than requiring individuals to carry around bulky amounts of cocoa beans, gold, or other early forms of currency, societies eventually shifted to minted currency as an alternative. Nonetheless, many examples of minted currency were usable because they were reliable stores of value, having been made of metals with high value.
In the modern era, minted currencies are frequently in the form of paper money, which lacks the intrinsic value of coins made of precious metals. Individuals, on the other hand, are more likely to use electronic currency and payment methods. Some currencies are “representative,” which means that each coin or note can be directly exchanged for a specific amount of a commodity.
However, as countries abandoned the gold standard in order to alleviate fears of a run on federal gold supplies, many global currencies are now classified as fiat. Fiat currency is issued by a government and is not backed by any commodity, but rather by the trust that individuals and businesses have in it.
The majority of the world’s major currencies are now fiat. Many governments and societies have discovered that fiat currency is the most durable and least likely to deteriorate or lose value over time.
Scarcity, divisibility, utility, and transferability are all factors to consider.
A successful currency must meet criteria related to scarcity, divisibility, utility, transportability, durability, and counterfeitability, in addition to the question of whether it is a store of value. Let’s take a look at each of these characteristics one at a time.
The supply of a currency is critical to its value remaining stable. An excessively large money supply may cause price increases in goods, resulting in economic collapse. An insufficient money supply can also cause economic problems. Monetarism is a macroeconomic concept that seeks to address the role of the money supply in an economy’s health and growth (or lack thereof).
Most governments around the world continue to print money as a means of controlling scarcity in the case of fiat currencies. Many governments operate with a predetermined level of inflation, which serves to depreciate the value of the fiat currency. In the United States, for example, this rate has historically hovered around 2%.This is in contrast to bitcoin, which has a variable issuance rate that fluctuates over time.
Possibility of division
Currency that is successful is divisible into smaller incremental units. A single currency system must have the flexibility associated with divisibility in order to function as a medium of exchange across all types of goods and values within an economy. The currency must be divisible enough to accurately reflect the value of every good or service available throughout the economy.
In order to be effective, a currency must have utility. Individuals must be able to trade currency units for goods and services on a consistent basis. This is one of the primary reasons why currencies were created in the first place: so that market participants could avoid having to barter directly for goods. Utility also necessitates the ease with which currencies can be transferred from one location to another. This stipulation is difficult to meet with heavy precious metals and commodities.
To be useful, currencies must be easily transferable between participants in an economy. In terms of fiat currency, this means that units of currency must be transferable within the econometric framework of a specific country.
A currency must be reasonably durable in order to be effective. Coins or notes made of easily mutilated, damaged, or destroyed materials, or that degrade over time to the point of being unusable, are insufficient.
It is a term used to describe the ability of a product to
In order to remain effective, a currency must be both durable and difficult to counterfeit. If not, malicious parties could easily disrupt the currency system by flooding it with counterfeit bills, lowering the currency’s value.
To determine Bitcoin’s currency value, we will compare it to fiat currencies in each of the above categories.
Bitcoin in Comparison to Fiat Currencies
Lack of availability
When Bitcoin was first introduced in 2009, its creator(s) specified in the protocol that the supply of tokens would be limited to 21 million.
To put this in context, the current supply of bitcoin is around 18 million, the rate at which Bitcoin is released decreases by half roughly every four years, and the supply is expected to exceed 19 million in 2022.
This is based on the assumption that the protocol will not be altered.
Bitcoin’s approach to supply differs from that of most fiat currencies. The global fiat money supply is frequently divided into four buckets: M0, M1, M2, and M3. M0 denotes the amount of money in circulation. M1 is the sum of M0 and demand deposits such as checking accounts. M2 is M1 plus savings accounts and short-term investments (known as certificates of deposit in the United States). M3 is the sum of M2 and large time deposits as well as money market funds.
M0 and M1 will be considered mediums of exchange because they are easily accessible for use in commerce, whereas M2 and M3 will be considered money used as a store of value. Most governments maintain some flexible control over the supply of currency in circulation as part of their monetary policy, making adjustments based on economic factors. Bitcoin, on the other hand, is not in this category.
So far, the continued availability of more tokens to be generated has encouraged a thriving mining community, though this is likely to change dramatically as the 21 million coin limit approaches.
It is difficult to predict what will happen at that time; an analogy would be if the United States government abruptly ceased producing new bills. Fortunately, the final Bitcoin will not be mined until around the year 2140. In general, scarcity can raise the value of an item. This is evident in precious metals such as gold.
Notably, 21 million bitcoins are far fewer in circulation than the majority of the world’s fiat currencies. Bitcoin, fortunately, is divisible up to 8 decimal places. The smallest unit, equal to 0.00000001 Bitcoin, is known as a “Satoshi,” after the cryptocurrency’s pseudonymous developer. This allows for quadrillions of Satoshis to be issued.
One bitcoin is much more divisible than the US dollar and most other fiat currencies. While the US dollar can be divided into cents, or one-hundredth of a dollar, one “Satoshi” is only one-hundredth of a billionth of a billionth of a billionth of a billionth of a billionth of a billionth of a billionth of a billionth of a billionth of a billion This extreme divisibility enables bitcoin’s scarcity; if bitcoin’s price rises over time, users with tiny fractions of a single bitcoin can still participate in everyday transactions. A price of, say, $1,000,000 for 1 BTC would prevent the currency from being used in most transactions if there was no divisibility.
The use of blockchain technology has been one of Bitcoin’s most compelling selling points. Blockchain is a decentralised and trustless distributed ledger system, which means that no parties involved in the Bitcoin market must establish trust in one another for the system to function properly. This is made possible by an intricate system of checks and verifications that is essential to the ledger’s upkeep and the mining of new Bitcoins. Best of all, because blockchain technology is so adaptable, it has applications outside of the cryptocurrency space as well.
Bitcoin is now transferable between parties in minutes, regardless of transaction size, and at very low cost, thanks to cryptocurrency exchanges, wallets, and other tools. In the current system, transferring money can take days at a time and incur fees. Transferability is a critical feature of any currency. While it takes a lot of electricity to mine Bitcoin, keep the blockchain up to date, and process digital transactions, most people don’t have any physical Bitcoin in their possession.
For fiat currencies in their physical form, durability is a major issue. Even if a dollar bill is strong, it can be torn, burned, or otherwise rendered unusable. Digital forms of payment are not as vulnerable to these physical harms.
As a result, bitcoin is extremely valuable. It cannot be destroyed in the same way a dollar bill can. That is not to say that bitcoin cannot be lost. If a user loses his or her cryptographic key, the bitcoins in the corresponding wallet may become permanently unusable. 13 However, bitcoin will not be destroyed and will continue to exist in blockchain records. Click here for Segredos do bitcoin 3.0 funciona
Bitcoin is extremely difficult to forge due to the complicated, decentralised blockchain ledger system. To do so would entail confusing all Bitcoin network participants, which would be no easy task. The only way to make a fake bitcoin is to perform a double-spend. This is when a user “spends” or transfers the same bitcoin in two or more different settings, resulting in a duplicate record. While this is not a problem with fiat currency (it is impossible to spend the same dollar bill in two or more separate transactions), it is theoretically possible with digital currency.
The size of the Bitcoin network, on the other hand, makes a double-spend unlikely. A so-called 51 percent attack would be required, in which a group of miners theoretically controls more than half of all network power. By controlling a majority of network power, this group could control the rest of the network and use it to falsify records. However, such an attack on Bitcoin would necessitate a massive amount of effort, money, and computing power, making the possibility extremely unlikely.
When compared to fiat currencies, Bitcoin performs fairly well in the above categories. So, what are the challenges that Bitcoin faces as a currency?
One of the most serious concerns is Bitcoin’s status as a store of value. The usefulness of Bitcoin as a store of value is dependent on its usefulness as a medium of exchange. We base this on the assumption that in order for something to be used as a store of value, it must have some intrinsic value, and if Bitcoin does not succeed as a medium of exchange, it will have no practical utility and thus no intrinsic value, making it unappealing as a store of value.
Bitcoin, like all fiat currencies, is not backed by any physical commodity or precious metal. Bitcoin’s current value has been driven primarily by speculative interest for much of its history. Bitcoin has exhibited bubble-like characteristics, such as sharp price increases and a media frenzy. This is likely to decrease as Bitcoin gains mainstream acceptance, but the future is uncertain.
Difficulties in the cryptocurrency storage and exchange spaces pose a threat to Bitcoin’s utility and transferability. Hacks, thefts, and fraud have plagued digital currency exchanges in recent years.
Of course, thefts occur in the world of fiat currency as well. However, in those cases, the law is much more settled, providing a somewhat more straightforward means of redress. When it comes to regulation, Bitcoin and cryptocurrencies in general are still viewed as more of a “Wild West” setting.
Different governments have very different perspectives on Bitcoin, and the implications for Bitcoin’s adoption as a global currency are significant.