Can Cryptocurrency Replace Traditional Money?
This blog post will cover:
- Dollar vs Bitcoin
- Store of value
- Medium of exchange
In terms of the economic crisis, we now can see clearly the flaws in the financial system we have. Undoubtedly, it makes us think if there is a better way. Some enthusiasts claim that cryptocurrency is exactly what we need now. The idea seems exciting. Let’s take a look at what will happen if cryptocurrency replaces traditional money.
First of all, let’s talk about dollars. In a lot of countries the U.S. dollar is seen as a safe haven. It helps to save people’s savings from inner inflation. However, the usage of the U.S. dollar abroad is limited by exchange possibilities. U.S. dollar also plays the role of an intermediary in some exchange operations.
Now let’s turn to the banking system. The banking system has a long history, what we have now started centuries ago. The main argument against it is total control. People do not have an opportunity to use their savings the way they want, there is always a set of rules that come from banks.
In addition, there are some security concerns. History knows a lot of precedents of money being stolen from banks. So you can never be sure that your money is where you left them.
It seems that cryptocurrency may provide things that people actually need. With crypto they have full control over their savings, an opportunity to operate globally and avoid inflation, they can be sure that the system is secure.
All these things look nice. But let’s not forget about the downside of such a change. First of all, we will need a whole new financial system. So far some countries are struggling with even giving legal status to crypto. Moreover, central currencies will lose their value, and therefore the government will lose a significant part of the control. This may seem alright at the first glance, but if we talk about the way the global economy works, it may lead to chaos. One of the things that stands on the way of massive adoption of crypto is a lot of change. Cryptocurrencies have high volatility, and it also may be connected to the fact that they are rather young. And last but not least, the majority of people more or less understand how the current financial system works. The change of system will lead to the necessity to educate people globally and to provide for them means for using cryptocurrencies, such as internet connection or smartphones.
Even though the idea of replacing traditional money with cryptocurrency looks interesting, we should remember that it means changes in a global financial system. Probably, we need a couple more generations of users who will feel natural in the Crypto World to make this transition.
Dollar vs Bitcoin
Now let’s look at the more detailed example: BTC vs USD.
Today because of the current economic situation there are a lot of discussions about substituting one by another. To understand what may happen if the world substitutes the U.S. dollar to Bitcoin, we need to understand what both of them represent.
Store of value
First of all, the dollar is seen as a store of value and, as it was mentioned above, not only in one country. The value of the dollar is not just on paper, but it is in credit that the world gives to the U.S. economy. Basically, the dollar remains the store of value because of the general belief in the U.S. economy. This is pretty similar to the BTC situation. Bitcoin exists and grows because of the increasing demand. Demand means that some people believe in BTC. The important thing here is to understand that besides the belief, the U.S. dollar can be spent in various ways. On the other hand, utility opportunities of BTC are not that diverse. Undoubtedly, more and more ways to use Bitcoin appear nowadays, and the BTC value now is increasing.
Medium of exchange
Comparing BTC to USD, it is important to mention that both of them are mediums of exchange.
A lot of assets on the market are pegged to the dollar, due to its low volatility. Its low volatility is backed by the U.S. trusted economy.
Nothing is pegged to Bitcoin, because of its high volatility. As it was said before, cryptocurrencies rates are changing fast, Bitcoin is not an exception.
However, in the situation of the economic crisis like the one we witness now, it may turn out that the dollar behaves in a more volatile way reacting to everything that happens on the world market. It also seems that Bitcoin can overcome some stress faster.
As time goes by, the dollar loses its value, it happens because from time to time some more units are added. On the contrary, the Bitcoin price is increasing, because the estimated number of BTC is not changing with time.
Although comparing Bitcoin to USD people may say that there are some similar things in them, there is one significant difference. Transparency of a whole system. Today the world can witness a severe way to interfere in the financial system. Usually people may not notice this interference. Generally, people only have common knowledge about some institutions that have a right to interfere in a number of situations.
On the other hand, Bitcoin provides a system free from the third party. All the participants may be sure about how the system regulates itself, and be sure that no institution is able to influence it.
So right now it is hard to choose between USD and BTC. As we can see, the existing financial system is not suitable for Bitcoin yet. At the same time, it is obvious that people are looking for some changes, and cryptocurrency seems to give some response to people’s demand.