Bitcoin in the global economy
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Fiat money and cryptocurrencies created for the exchange of goods and services. Each currency has its advantages and disadvantages. However, rubles, dollars, euros or any other national currency could support the development of the economy, unlike Bitcoin, in the event that it totally replaces fiat money.
Pros of Bitcoin
- Anonymity. Compared with the national currencies for transfers nobody watches cryptocurrencies. Therefore no one can apply any sanctions to the sender/ recipient. Likewise, no one can prohibit the transfer of money to any one individual. There is complete freedom of transactions.
- Small commission. The minimum commission guaranteeing transaction processing and transfer from one bitcoin wallet to another is 0.0001BTC, which at the current exchange rate is approximately 2 rubles. Given that for such a commission one can transfer relatively large amounts (tens or hundreds of thousands of rubles), it is completely insignificant – we could say in fact that it hardly exists. Of course, when transferring large amounts it is better to increase the commission in order to speed up the transfer, but even then, the commission will be very small compared with the transfer amount.
- Translation speed. Minimum time implementation of the transfer of cryptocurrency from one person to another is a couple of minutes. There are delays and these can last up to several hours, but if you add a transaction fee transfers will be made quickly. While a transfer between different countries may continue for several weeks, should any problems occur, the account can be frozen for a month. So it is with interbank transfers that there can be a long period of confirming the agreement and transfer.
- Inability to cancel the transaction can be regarded as an advantage and as a disadvantage, depending on the situation.
- Block chain. Availability browser blocks in the Bitcoin network allow us to follow with what and to which address a transfer is sent, what commission was taken, view the transaction history of each address. The banking system of the traditional economy does not offer this option at all.
Disadvantages of Bitcoin
Inability to cancel the transaction. When transferring money to cryptocurrency nobody controls your money and cancellation of the transfer is not possible. If money is sent as a deposit, you can only rely on the honesty of the recipient. Traditional national currency in this sense is more reliable and allows for claiming a full refund in the event of a problem.
For a chance at wider dissemination cryptocurrencies need to consider the opportunity to secure a refund.
There are other types of vulnerabilities not found in the traditional world of money which hinder the globalization of cryptocurrencies.
Transaction time. In some cases transfer speeds are inferior, even within the same bank. For example, the transfer from a card to a bank takes a few minutes, while the Bitcoin transfer can last a few hours (depending on the amount and the size of the commission).
To keep savings in a particular currency man needs to be confident that his investment will not decrease in value or depreciate. That is to say, the currency needs to have a fairly stable exchange rate against other currencies. Traditional money in this regard is more stable than cryptocurrencies. Its minor fluctuations (a few hundredths per day) can ensure stored savings over the average length of time remain relatively unscathed.
Bitcoin exchange rates are very volatile. Volatility reaches high values; on one day the price could change by 100 or even 1000 rubles. Bitcoin and the other cryptocurrencies are more suitable for speculation than for long-term investment and at the moment really are not very suited for storage.
Also hindering Bitcoin is the fact that not all states are ready to accept it. Prices may decline due to a ban on cryptocurrencies in any given country. The value of 1 Bitcoin can be influenced by the complexity of its production, which depends in turn on the power network (total output of the miners mining it).
Inflation and deflation
Inflation in the traditional economy
Savings stored long-term in national currency gradually lose their value and their purchasing power is reduced. Traditional monetary inflation is mainly due to the increase in money supply in a country beyond the requirements of commodity circulation. In fact, to date, rubles, dollars, euros are unsubstantiated; not backed by gold. Creating a certain amount of money is easy: you do not need to dig for gold in order to print the equivalent amount of paper money. Similarly, it is easy to increase the money supply, if required by the government (the reasons may be different - the growth of government spending, massive unsecured lending currency).
Determining the required amount of money in a certain moment is difficult, so in the traditional economy there is inflation almost everywhere.
Deflationary nature of cryptocurrencies
Cryptocurrencies initially denied even the possibility of the appearance of inflation since their quantity like that of gold on Earth is limited by an algorithm. To create new Bitcoins it is necessary to spend time and energy - that's why they are valuable, like gold. And, as in the case of gold, when the majority of bitcoins has been produced, their price will rise. Of course, this will only happen in the event that Bitcoin receives worldwide recognition with more and more people requiring more and more Bitcoins. And to compensate for the limited number of coins, one coin’s worth will grow.
The necessary “mass” of bitcoins can also be easily adjusted for the entire Bitcoin community – with the help of miners. If the time taken to produce cryptocurrencies is longer than that required by the market, the value of the coin is reduced and capacity of the network decreases, because a number of miners leave, due to lower profitability of mining bitcoins . Consequently the volume of mined Bitcoins is reduced to the required values. This situation persists until the weight of the Bitcoin market becomes insufficient to meet users’ purchasing power.
Cryptocurrency deflation should be regarded as a long-term phenomenon, because now, in the initial period, the value of cryptocurrencies is very dependent on the actions of various financial regulators. Bitcoin can be a good means of long-term storage of savings.
Problems of Bitcoin
Despite Bitcoin’s significant advantages over traditional money, it is not suitable for use as the base currency for the whole economy.
The main reason is its deflationary nature and, at the moment, high volatility.
Deflation leads to the situation where people are starting to accumulate more and spend less, which affects the production of goods and services. And in conjunction with the high volatility, this leads to the fact that people can make a profit simply from accumulation. This will lead to fewer and fewer people producing anything, and it will kill the entire economy.
Bitcoin, in its current form, cannot be a replacement for traditional money and is not suitable to play the role of base currency for the world economy. Even if regulators give up and accept bitcoin, deflation and other factors will hinder the development of the cryptocurrency economy.
And these days, people are using Bitcoin more for earning money on their fiat currency than conventional exchange. To build an economy based on cryptocurrency, we need to make changes to them so that they do not to lose their benefits, but also become more similar to traditional money.