Can Cryptocurrency Ever Replace Fiat Currency?

Posted by Michael Cao on December 11th, 2019

We all agree that bitcoin has accomplished a lot since its release ten years ago.  Bitcoin was released to the world on January 9, 2009, without fanfare by a person who used the pseudonym Satoshi Nakamoto.  The first-ever bitcoin transaction happened four days later when Satoshi sent Hal Finney 10 bitcoins.  In 2010 Laszlo Hanyecz posted an offer on the forum to pay 10,000 bitcoins to anyone who’ll buy him pizzas.  Another user, who went by the alias of “jercos”, took Hanyecz up on his offer. Hanyecz sent the bitcoin to jercos, who then placed the pizza order. Papa John delivered two large pizzas to Hanyecz for bitcoins that were more or less worth at that time.

This purchase was groundbreaking because bitcoin was less than two years old at that time and was only exchanged amongst a group of programmers.  It was the first time it was used in the real-world for real-world purchases.  Also, no store accepted bitcoin as a medium of payment. Nine months after the purchase, bitcoin’s value equaled the U.S. dollar, making the two large pizzas worth ,000. The value of bitcoin today is ,032 so the present value of the two pizzas is million.

In 2016, bitcoin was pegged at 0.09. It peaked at ,783 in December 2017. On Feb. 21, 2019, the exchange rate for one bitcoin was ,890. The price bitcoin is currently hovering at ,000.  Those who bought bitcoin from 2016 and earlier must be congratulating themselves. Even those who invested in bitcoin in February 2019 should buy a round for everyone on their good luck.

The Value of Fiat Currency

Let’s use the US dollar as an example. The underlying value of a currency used to be predetermined by precious metals like gold and silver. From 1879 until 1933, a citizen could trade with the federal government .67 for an ounce of gold. That privilege was stopped at the height of the Great Depression when the US faced increasing business bankruptcies, high unemployment rates, and spiraling deflation. In 1933, President Franklin D. Roosevelt decided to end the United States’ ties to gold.  His action allowed the Federal Reserve to pump more money into the economy than the federal government had gold in its reserves.

The United States severed its ties with the gold standard in 1971. That led all other currencies (i.e. Pound, Yen, French franc) to be valued against the U.S. dollar. The United States now has what is called a “fiat” money system, meaning the dollar’s value is determined by faith or confidence, rather than a physical asset. The dollar remains the prime medium of exchange in international trade. All countries use fiat currencies and their money’s value is based on the stability of their political, economic, and financial systems. According to Michael Cao, fiat money is at risk from inflation, meaning it can lose its value in the face of economic insecurity. If too much money is printed by a government, then the value of its currency will plummet.

That was the case of Zimbabwe, Venezuela, and South Sudan.  They all experienced hyperinflation—extremely volatile and wild inflation—caused their currencies to lose value.   The Zimbabwean and Venezuelan government started printing banknotes with higher values to keep up with inflation. Zimbabwe’s central bank stopped printing money and used the US dollar as its base currency.  Venezuela began printing paper money with higher values to keep pace with its hyperinflation of 10 million percent.

Bitcoin As Currency

Bitcoin is not tangible – meaning it has no shape or form like traditional fiat banknotes or coins. The lines of code that make bitcoin are not worth anything by themselves.  Yet, the international financial system has valued each bitcoin at thousands of dollars.  Remember that bitcoin was practically worthless during its first two years.

Cryptocurrencies operate on a technology called “blockchain”.  It is important to remember that blockchain is the technology that makes cryptocurrencies possible.  Many blockchains do not have their cryptocurrency. Some blockchain networks do not need a currency to function. The development of a blockchain does not necessarily mean an increase or decrease in the price of its native digital coin.

Bitcoin remains the bellwether for the cryptocurrency market.  It accounted for the largest market capitalization.  Ethereum, Ripple, and other cryptocurrencies hurried to catch up. An article in Futurism explored scenarios if cryptocurrencies beat fiat currencies in the future.  There would be some major advantages to an all-cryptocurrency future: its value can’t be manipulated as easy as fiat currency, and it lends itself to the concept of universal basic income. Universal basic income (UBI) is an idea for providing all citizens of a country or other geographic area with a given sum of money, regardless of their income, resources or employment status. The purpose of the UBI is to eliminate or reduce poverty and increase equality among citizens.

The cryptocurrency infrastructure would need to scale up in order for the world to adapt.  Fiat currency would become obsolete leaving some people with worthless paper.  Government and financial institutions will feel the pressure too.  They would no longer control how much money to print.  Cryptocurrencies would be dependent on mining operations

The Roadblocks for Cryptocurrencies

The biggest issue with cryptocurrencies at this point is mass adoption.  Cryptocurrencies must see wider use and adoption before anything else.  Many consumers are still using their credit or debit cards.  Many businesses remain resistant or undecided in accepting bitcoins.  It is evident that bitcoin adoption is stalling a bit.

There a bright spots in the cryptocurrency space.  Japan and South Korea have seen the integration of cryptocurrency payments into a number of major retail outlets.   Bic Camera, Capsule hotels, and Peach airlines have integrated bitcoin payments in Japan.  Bitcoin kiosks have sprung in restaurants and cafes in South Korea.  There has been an increase in the number of bitcoin ATMs worldwide.  Most of the machines are located in the United States.

In the meantime, bitcoin remains an attractive investment class, though a speculative one at that.  Of course, Satoshi never intended bitcoin to be an investment vehicle.  However, a lot of the technologies we use and enjoy today were so different from what their creators envisioned them to be.

Source: https://michaelcao.net/can-cryptocurrency-replace-fiat-currency/

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Michael Cao

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Michael Cao
Joined: December 11th, 2019
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