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In some ways our own money is an illusion. It has value only because we believe it has value. What if we stopped believing in it?
We can hold it but what gives money value is our belief in it. It all sounds very dystopian but many people are losing faith in their currency as they see its purchasing power decline.
This decline is largely down to oversupply through ‘overprinting’. We all know that scarcity creates value. It’s just that our money is not so scarce anymore. One-fifth of all US dollars in circulation were printed last year.
The Bank of England has bought 895 billion pounds worth of government bonds through quantitative easing (‘money printing’) as of November 2020 (https://www.bankofengland.co.uk/monet.../quantitative-easing
Bitcoin can protect people from money devaluation. It has a fixed supply - 21 million - and can’t be ‘overprinted’. What other features does it have?
People can send bitcoins (or part of one) to your digital wallet, and you can send bitcoins to other people. No intermediary, like a bank, is required.
Every single transaction is recorded on something called a blockchain. A blockchain makes it possible to trace the history of bitcoins to stop people from spending coins they do not own, making copies or undoing transactions. This means we can use it as money - as a medium of exchange. Some places are already using bitcoin as a medium of exchange, such as Overstock and Rakuten. In fact, bitcoin became legal tender in El Salvador on September 7th this year. Bitcoin has many characteristics of money which are: durability, portability, divisibility, uniformity and limited supply.
It’s durable in the sense that it’s a digital asset that can’t be destroyed.
Bitcoin is portable because you can send it from one wallet to another.
It’s divisible because you can divide bitcoin up to eight decimal points. The smallest unit, equal to 0.00000001 bitcoin, is called a Satoshi after the pseudonymous developer behind the cryptocurrency.
Bitcoin is uniform as each one is exactly the same. It has limited supply: there will only ever be 21 million bitcoins. What it doesn’t yet have is stability and broad acceptability.
The price of bitcoin compared to fiat currency is volatile and there aren’t that many places where you can spend your bitcoin. However, as bitcoin becomes more widely adopted the price of bitcoin will stabilise and hence will become more accepted as a medium of exchange.
Research from Global Macro Investor shows that the rate that people are using cryptocurrencies is growing at a faster rate than internet adoption from 1993 - 2006. At this rate the number of cryptocurrency users will be 1 billion by 2025.
Would I like to be paid in bitcoin? Not currently. Too few places accept it as payment and the price is volatile when compared to my fiat money. On May 18th its price fell 12% so my May 17th pay packet would have made for depressing reading. However, I am excited by bitcoin. Its acceptability is growing rapidly. More and more people, institutions and countries are holding it which will stabilise the price which, over the long term, is growing exponentially. Its limited supply and lack of government control make it a great protection against currency devaluation in the long run.
It's not money yet, but the future looks bright for bitcoin.
