Bitcoin has been the fore-runner amongst the stream of digital currencies that are set to disrupt Fintech. With growing popularity and adoption, the Bitcoin ecosystem has developed rather quickly owing to its underlying technology. Major financial institutions trying to exploit Blockchain technology has called for drafting legislation on this front. While all this looks positive, let’s look into if the cryptocurrency can actually replace fiat currencies:
Evolution of means of Exchange
Historically Barter system has been a strong medium of exchange; gold coins, beads and feathers later replaced it. Finally we have arrived upon fiat currencies or paper cash. As such the paper cash doesn’t have a value of its own. Backed by Gold reserves with central banks, they have served as store of value for a long time.
The ‘Gold Standard’ collapsed with the ‘deflationary’ Great Depression of 1930. Then on, the backing of currency by Gold slowly disappeared into shadows. The fiat currencies started to run mostly on backing of central banks. From an exchange of value, the monetary system shifted to an exchange of confidence issued as currency by the government.
Bitcoin vs Ideal Currency
An ideal currency should stand good on these three important characterstics:
- Easy and convenient means of exchange
- Should serve as a unit of account
- Act as a viable store of value
Bitcoin would fulfill the first criterion with flying colors as it has been one of its major selling points. It is a borderless, zero fee peer to peer transaction network. In the second criterion, unit of account implies being able to get goods and services in exchange. Bitcoin can serve as a better unit of account on the basis of having uniform value across borders. For the third criterion, Bitcoin faces some challenges due to high volatility currently. But with better adoption, the currency will achieve stability and can transform into a safe store of value. Hence Bitcoin looks good on all criteria for an ideal currency.
Why Bitcoin will win
As an alternative to the current monetary system, we can fall back on Barter System or exchange through solid Gold. But barter system is highly inconvenient owing to unequal valuation of goods and services. While Gold can hold value, it is difficult to carry the same securely at all times. Hence the technological alternative in the form of cryptocurrencies would be best fit solution for replacing fiat currencies.
Contrary to people’s speculation, this change wouldn’t be so hard to accommodate. This is because all the transactions today are carried out electronically over wires, net banking, paypal and other means. Roughly about 10 % of the transactions are actually dealt in hard cash. Adopting a system that would make these dealings easy and peer to peer would be a welcome change. It is just a matter of time and fluid adoption after which Bitcoin would become primary means of exchange. All it needs is people’s confidence similar to what they currently have in paper currencies.