What is the Purpose of Bitcoin: Speculation or Dollarization?
What is the Purpose of Bitcoin: Speculation or Dollarization?
The US currency has left its mark imprinted worldwide, and several countries are now looking to integrate the foreign currency system independently. Dollarization indicates the use of the US Dollar alongside a Local currency of FIAT, and it usually happens when the currency has lost its local value.
As technology has evolved, we have a more futuristic form of money in Bitcoin and other cryptocurrencies. Experts have several opinions if Bitcoin is a speculative asset, indicating that it can be riskier than other investments.
When he introduced the project, Satoshi Nakamoto did not think that Bitcoin was a speculative investment. He had predicted Bitcoin cryptocurrencies to be an alternative to traditional FIAT currencies.
Twelve years after its inception, there is still some confusion about investing in Bitcoin technology. What is the purpose and function of Bitcoin? Could the world’s first cryptocurrency be considered a speculative asset due to its volatility, or is Bitcoin eligible to be a new form of dollarization?
People might think that Bitcoin is merely speculation. Will cryptocurrencies begin to coexist with traditional fiat money, or will they completely replace individual currencies?
In this blog, we will understand the current state of Bitcoin and if the cryptocurrency has what it takes to replace the dollar or should remain in the background as a more speculative investment.
Read More: What is Bitcoin?
The Original Purpose of Bitcoin
Satoshi Nakamoto developed the cryptocurrency in 2009. So what does Bitcoin do? As per the document, Nakamoto had wished Bitcoin to be a purely peer-to-peer version of electronic money. The document outlined how Bitcoin works as an anonymous alternative payment system and can eliminate the need for third-party participation.
Almost a decade after its release, it is arguable whether Bitcoin achieved Nakamoto’s initial bold vision. After all, the Bitcoin network suffers from scalability issues and high transaction fees, leading many to believe that Bitcoin is more of a store of value than an alternative form of cash.
Compared to its rivals, Bitcoin has certainly risen in value in terms of price. When it comes to using Bitcoin as alternative cash, Satoshi’s anticipation might not have been fulfilled. Bitcoin still stumbles to process more than seven transactions per second (TPS) and suffers high fees in times of network congestion during transactions.
Visa had processed an average of 84 million transactions per day in March 2021. During the same period, Bitcoin had processed an average of 350,000. On a journey to a global alternative to fiat money, 350,000 daily transactions are a significantly low threshold to be achieved.
The low transaction value of Bitcoin has caused many to argue that cryptocurrency is intended to be a store of value rather than an alternative currency, especially after 12 years of its presence in the market. However, Bitcoin contains some characteristics relevant to a currency, such as its use as a medium of exchange scalability issues. These seem to prevent Bitcoin from reaching new heights as a global alternative currency.
How Useful can Bitcoin be in the Long Run?
A trusted store of value is an asset that appreciates slowly over time. Gold, for example, is probably the most popular store of value. Any asset that appreciates over time is a trusted source of an asset. For instance, gold is the most popular commodity, and several believe Bitcoin to be a form of digital gold.
It can be highly debated that the world’s first cryptocurrency is a fairly reliable store of value. Bitcoin has started in the market at less than a dollar and has been slowly rising in value every year. In 2010, Bitcoin could not even reach a dollar. In 2013, the value of Bitcoin spiked to $ 220 before falling below $ 100. In 2017, Nakamoto’s assets exceeded $ 20,000 before skyrocketing above $ 64,000 in the year 2021.
Long-term holders can be given due credit for the success of Bitcoin’s price. These are investors of Bitcoin who have no intention of trading with them. HODLers trade millions in Bitcoin and are popularly called whales, and they can change the asset’s market with a single sale. Nonetheless, the reliable whales comprehend that they keep the price of Bitcoin high and seem to have no purpose of selling for a long time. Like gold investors and others who invest in value assets, HODLers view Bitcoin as a form of money that continually appreciates over time.
Several financial assets suffered a price crash as investors withdrew their money out of fear during the COVID-19 pandemic in early 2020. That being said, over the years, investors ran their money into Bitcoin and gold at an alarmingly similar rate.
While a positive balance and relation could be seen between Bitcoin and gold, it could believe in the cryptocurrency as a store of value and an asset similar to gold. Consequently, the two assets saw an inverse correlation the following year.
When two variables move in the same direction or parallel, 2 variables have a positive correlation. A haven asset is a financial instrument that is predicted to maintain or increase value during an economic crisis. Since these assets are uncorrelated or negatively related to the overall economy, they can rise in value in the event of a market crash.
From an institutional point of view, several companies believe that the purpose of Bitcoin is to be the next potential reserve asset globally. For instance, JPMorgan Chase and Blackrock, 2 financial companies, believe that the former cryptocurrency is digging into the market share of the gold.
In contrast, Europac’s chief economist and global strategist Peter Schiff argues that Bitcoin is just a “giant pump and dump .” In mid-2021, Schiff publicly had a controversy with Anthony Scaramucci, the investment firm SkyBridge. Peter Schiff claimed that gold can be utilized even 1,000 years from now due to its physical nature, which implies that another asset could easily replace Bitcoin in the short term.
Scaramucci defended Bitcoin, stating that the scarcity of the digital asset is reason enough for it to hold its value over the long term. Unfortunately for Bitcoin, Schiff pitched the audience towards a 51% belief in gold, with only 32% of them favoring Bitcoin.
Schiff’s argument does make for valid points. A majority of stores of value, such as property, gemstones, and art, have been physical items that stand the test of time. This is proved historically. The digital nature of Bitcoin could mean that if everyone walks away from the first cryptocurrency, it is basically useless and could conclude to live. Meanwhile, physical assets have other uses, which are part of their value.
However, as the world transforms towards a more digital future, Bitcoin believers argue that a digital store of value is a progression from what came before. Subsequently, Bitcoin is a globally accessible asset with more than $ 1 trillion liquidity. Bitcoin cannot deteriorate over time as the scarcity of the asset could be positive for Bitcoin price speculation or Bitcoin investment speculation as long as users invest in the cryptocurrency.
The Case for Bitcoin as a Currency
In Spite of the constant volatile nature of Bitcoin, it could be reasoned that Bitcoin exists as a currency in the form that Nakamoto initially presented it.
Bitcoin is a relatively easy asset to acquire in terms of documentation. Likely, Bitcoin holders do not need a bank account or deal with a third-party controller to work with Bitcoin. The financial infrastructure of Bitcoin is already thriving in place. Traders can decide to start accepting Bitcoin, assuming their local regulators respect the cryptocurrency, and anyone in the world can easily come and devour it.
Compared to the three elements of traditional currency: storage of value, medium of exchange, and unit of account, Bitcoin is not considered by its opponents as an alternative form of cash.
1. Bitcoin as a Medium of Exchange
Bitcoin can be considered as a medium of exchange quite well. The world’s first cryptocurrency is already accepted for goods and services on various websites and even some local businesses in numerous countries.
In several parts of history, bitcoin as a medium of exchange lies in its use on the dark web. In particular, It was the currency of preference for users purchasing illegal narcotics and conducting dangerous activities on Silk Road and the dark web.
To believe that the purpose of Bitcoin as an anonymous currency was wrong. Governments removed Silk Road after using various tracking methods within the public Bitcoin ecosystem. Due to the lack of anonymity of Bitcoin, it could be disputed that Bitcoin was used as a medium of exchange on Silk Road, as goods and services had a certain value within the online platform, and Bitcoin was used to pay for the goods and services.
Bitcoin is fungible in nature, which means that each Bitcoin stands interchangeable with another, similar to the US dollar and other fiat currencies. Some countries are even starting to adopt Bitcoin as a medium of exchange. In September 2021, El Salvador was the first country to adopt Bitcoin as legal tender. President Nayib Bukele believes that Bitcoin cryptocurrency will help 70% of Salvadorans who do not have access to adequate banking.
But if the government of El Salvador believes that Bitcoin is a great supplement to its use of United States fiat, 70% of its citizens are against bidding for the currency. Numerous Salvadoran citizens have no knowledge of how to use Bitcoin, so the government of El Salvador must educate the people to see if Bitcoin as legal tender alleviates their despair.
Scalability is prevalent in Bitcoin. At present, the Bitcoin network can only process seven transactions per second (TPS), compared to 24,000 for Visa. Few second-layer solutions, such as the Lightning Network, can seem to solve Bitcoin’s scalability problems.
The Lightning Network is new and still experiencing some level of adoption. It evaluates if a project can function at scale, as the Bitcoin network cannot be considered a medium of exchange if Bitcoin cannot increase its average TPS.
On the other hand, it should be remarked that Bitcoin is a deflationary asset due to its hard cap of 21 million coins. Assuming that Bitcoin is believed to rise in value as the asset becomes rarer, the cryptocurrency could very well be used as a medium of exchange similar to the gold standard.
The deflationary attribute of Bitcoin would lend itself more to a store of value than an alternative currency if businesses do not decide to consider Bitcoin as a form of payment.
Read More: What to Buy with Bitcoin?
2. Bitcoin as a Unit of Account
Bitcoin’s volatility makes it challenging to exist as a unit of account. An asset that can fluctuate tens of thousands of dollars in a day can scarcely be issued in a local economy which is much less to be considered a reliable way to transact value.
A product can be worth $ 0.00034 in Bitcoin one day, only for the product’s value to thoroughly change in the next hour due to the constant price fluctuations in Bitcoin.
It can be problematic to assess the true value of Bitcoin at any time. Crypto exchanges show different prices for Bitcoin, with price disparities of hundreds of dollars each time. If the world shows fluctuating price points, traders cannot be expected to keep up with Bitcoin price changes.
Also, we know the average denomination of Bitcoin. Considering that the price of a Bitcoin is well above $ 10,000, how can retailers set the price of their products? If the price of a coffee is $ 0.00035 Bitcoin on Tuesday and $ 0.000012 on Thursday, both customers and vendors would have difficulty analyzing the true value of the coffee.
For accounting and convenience reasons, today’s monetary systems worldwide are presented simply. Asking traders to adopt another form of fluctuating and confusing accounting in Bitcoin could not be taken well.
3. Bitcoin as a Store of Value
In the points noted above, Bitcoin could best be considered a store of value, even if there are some issues with this moniker. On the other hand, speculation about Bitcoin points to its volatility, making citizens doubt seeing Bitcoin as a reliable long-term storage method.
When people invest in gold, they expect it to increase in value slowly from purchasing it. At the very least, investors of gold expect to resell the metal at a relatively similar starting price when needed.
On the other hand, Bitcoin can go down in price by more than 100% from the moment of its purchase. Although the volatility of Bitcoin may also lean towards the positive, such a high level of risk does not bode well for the future of Bitcoin as a store of value.
We must also consider the lack of physical representation of Bitcoin. Gold, art, and other stores of value can be hidden or safely stored for as long as they are kept. Bitcoin can be safely stored in a few ways, in hardware or electronic wallet, but most investors keep their Bitcoins on a cryptocurrency exchange or other internet-connected wallet. The constant connectivity of online wallets has left Bitcoin at constant risk of theft being completely out of the holder’s control.
Bitcoin insurance exists to some extent, but accessible insurance depends on the user’s cryptocurrency. Even if an investor finds the safest way to store their Bitcoin, traders are still at the mercy of the extreme volatility of Bitcoin. All this assumes that Bitcoin continues to be in demand. While the limited supply of the cryptocurrency is expected to create steady demand if a better crypto project comes into play, what is everyone doing with their now useless Bitcoin?
The Case for Bitcoin as a Speculative Asset
Looking at the first 12 years of Bitcoin’s existence, the asset can be considered speculative. Given that the classification of Bitcoin may certainly change in the future, the erratic nature of the cryptocurrency makes it challenging to describe it as anything other than speculative.
Rosa Ríos, former Treasurer of the United States, has argued that most cryptocurrencies, including Bitcoin, are entirely hypothetical and have no primary purpose. Rios cited Ripple as less than speculative, believing that the asset facilitates cross-border payments worldwide.
Gary Gensler, the United States Securities Commission president, has declared that Bitcoin is primarily a speculative store of value. Gensler commented that Bitcoin and other cryptocurrencies do not serve citizens the same way as the dollar. We should consider Bitcoin as a single asset class and not an asset that can legislate widespread dollarization.
Bitcoin Against the Dollar
The promise of a digital alternative to traditional currency, not governed by a central government or party, is polarizing for many reasons. It is easy to apprehend why a merchant may not want to accept Bitcoin against their local currency. If a merchant accepts Bitcoin for a good or service, Bitcoin can lose its value the next day. If a business is in jeopardy, it likely wants the established dollar’s steady income to regulate its operations.
But Bitcoin advocates could argue that not accepting a Bitcoin currency indicates that the coin will only rise in value as it becomes more infrequent, claiming that Nakamoto’s cryptocurrency is a deflationary asset. In contrast, the US dollar is inflationary and will lose value over time. In the long term, assuming the demand for Bitcoin continues to grow, Bitcoin may very well be the asset to hold for the long term.
Let’s understand the discrepancies between the dollar-based monetary system and a Bitcoin-based global monetary system.
If Bitcoin were to become the replacement asset for the US dollar in other countries, there would have to be a regulatory inspection. After all, Bitcoin is a global cryptocurrency, and economic policy would have to change to respect the high reach of Bitcoins value. There would have to be tax changes, value adjustments based on the different fiat currencies, and a current global financial system coalition.
It is important to note that the government cannot print more Bitcoin than it can with a dollar. The limited amount of Bitcoin could mean that millions of people cannot have even a single bitcoin currency. Could the limitation of Bitcoin yield a financial strain similar to that of gold? We can expect the same problems involved with the gold to Bitcoin. Given these reasons, correlated with Bitcoin’s scalability issues and the lack of convenience of this asset, Bitcoin may never experience dollarization in the way that the United States dollar has.