It is safe to assume that the cryptocurrency Bitcoin has grown faster than any other asset in history. Attention to the cryptocurrency raises many questions, especially if the hype surrounding the 10-fold increase in value of Bitcoin will end in a crash this year.
But the bigger question for prospective buyers is what Bitcoin actually represents. Satoshi Nakamoto, a pseudonym for the creator of the cryptocurrency, designed it in 2009 as a secure online alternative to cash. A way to make payments without using the trust and checks of the bank-based dollar system.
Bitcoin misses its purpose
Even though the digital currency may be a wonderful academic creation, the cryptocurrency does not do what its founder envisioned: reducing transaction costs and allowing “small occasional transactions”.
Instead, bitcoins are hoarded by libertarians and hard-currency enthusiasts fearing that central banks will inflate their balance sheets. And in addition, the cryptocurrency attracts hordes of speculators who gamble with the wild price fluctuations.
Everything I’ve just written will make cryptocurrency fans mad. So let’s go through the three roles of a currency:
- Medium of exchange. If you cannot pay someone with it, it’s definitely not money.
- Memory. A currency should be a means to save money. And because of its function as a medium of exchange, this should be more convenient than keeping its savings in property, gold or livestock.
- Unit of account. Other things should be valued in the currency: the accounts of a company or the price of property, cows and everything else.
Bitcoin is a poor medium of exchange because of relatively high fees to give priority to a transaction on Bitcoin “Miners” computers. These people operate the database known as blockchain distributed on many computers. On Wednesday, 70,000 trades awaited their settlement. That’s pretty normal. In May there were even 230,000 and low-fee transactions sometimes wait days for confirmation.
Barely suitable for storing value
Fans often point to the number of businesses that accept Bitcoin as evidence of the digital currency’s success. This year, dozens of new funds, listed vehicles and apps with the selling point started, making it easier for investors to get started in Bitcoin Profit. If it is easier to get bitcoins by buying a listed company than buying bitcoins, it is unlikely to be widely used in the near future.
The cryptocurrency is also hardly suitable as a store of value. An investor who made $ 1,000 at the beginning of the year may disagree, as bitcoins now have a value in excess of $ 10,000. The real purpose of value preservation, however, is to be reasonably sure about the future value. The dollar is losing value through inflation, but if the US Federal Reserve does its job properly, the value should erode slowly and reasonably predictably. By contrast, Bitcoin had five-day periods this year, with the value rising 44 percent and 25 percent against the dollar, respectively.
The storage of large quantities of bitcoins is also a problem. For those who see it as “digital gold”, Bitcoin funds have physical safes ready – storing paper sheets printed with cryptographic keys. This is intended to protect the cryptocurrency from hackers and employees. This is not much more convenient than real gold, especially since fund fees are often higher than gold funds.
High expectations, uncertain prospects
The price volatility of the digital currency would not matter if it were a unit of account. Bitcoin has no volatility from a bitcoin perspective, because 1 bitcoin is always worth 1 bitcoin. However, the base price is set in traditional currencies so that the bitcoin price of pizzas and other things will fluctuate wildly as the exchange rate moves.
But right now, the biggest hope of the cryptocurrency is that it’s attracting more and more buyers who want to confide their savings to blockchain – and speculators who are betting that these people are coming. The sharp rise in prices shows that expectations are high.