Bitcoin in world economy
Fiat money and cryptocurrencies are created for the exchange of goods and services. Each currency has its advantages and disadvantages. However dollars, euros or any other national currency could support the development of the economy, as opposed to Bitcoin, in the event that it will totally replace fiat money.
- Anonymity. Compared to national currencies there’s nobody watching over Bitcoin transactions. Therefore no one can apply any sanctions to the sender or the receiver. Also no one can prohibit transferring money to a certain person. There’s complete freedom of transactions.
- Low commission fees. Minimum commission which guarantees processing of transactions between Bitcoin wallets is 0.0001 BTC, which at the current exchange rate is approximately 4 cents. Given that such a commission can be used to send relatively large sums (tens or hundreds of thousands of dollars), it is quite small, in fact you could say that it’s neglectable. Of course, when transferring large amounts it is better to increase the commission fee to expedite the transfer. But even then the commission will be very small compared to the transfer amount.
- Transfer speed. Minimum time of the cryptocurrency transfer from one person to another is a couple of minutes. There can be delays up to several hours, but if you add a transaction fee the transfer will be made quickly while wire transferring between different countries may continue for several weeks, any problems can happen and then the bill could be frozen for as long as a month or even longer. The same is with interbank transfers - a long time is usually needed to confirm the agreement and transfer.
- Impossibility of transaction rollback can be considered both as an advantage and a downside depending on the situation.
- Block chain. Availability of a block browser in Bitcoin network allows anyone to trace which address a particular transfer was performed to and from, what commission was taken, which transactions are included along with yours, view transaction history of each address. The banking system of the traditional economy does not offer any of these options.
- Impossibility of transaction rollback. When transferring money through cryptocurrency there’s nobody controlling their movement and thus cancelling the transfer is impossible. If money is sent as an advance you can only rely on the honesty of the contractor. Traditional fiat money is more reliable in this respect as it allows for a refund in case of accidents.
A safe way to refund money has to be designed for cryptocurrencies to see a more wide spread.
- Double spending or repeated spending of the same bitcoins. Despite constantly growing difficulty there’s still a possibility of such an attack because of services like GHash.IO.
- Transaction time in some instances is inferior to transfer speed within one bank. For example a transfer from one bank’s card to another card of the same bank usually takes just a couple of minutes while Bitcoin transfer may last several hours (depending on the sum and commission fee).
To keep savings in a particular currency a person has to be sure that after a while their deposit’s worth won’t go down or devalue altogether i.e. there have to be rather stable exchange rates with other currencies.
Traditional money is more stable in this regard compared to cryptocurrencies. Insignificant fluctuations in their exchange rates (several hundredth per day) help keeping savings for short- and mid-terms without substantial losses.
Bitcoin exchange rates are very changeable. Volatility reaches levels as high as $3 or even $30 per day. Bitcoin and other cryptocurrencies are better suited for speculation than for long-term investment and entirely aren’t usable to keep savings at the current moment.
Inflation and deflation
Inflation in traditional economy
Long-term savings in national currency gradually lose their value and as such their buying power. Traditional money inflation happens mainly due to the increase in money supply in the country beyond the needs of commodity circulation. In fact to date dollars, euros and other currencies are unsubstantiated, not backed by gold. Creating a certain amount of money is easy, there’s no need to mine gold to print the equivalent amount of paper money only after that. Because of this it’s easy to increase money supply, if it’s required by the government (the reasons may be different - the growth of government spending, massive lending unsecured by currency).
To determine the required amount of money at a certain moment is difficult, so the traditional economy is inflated almost everywhere.
Deflationary nature of cryptocurrencies
Cryptocurrencies are inherently depraved of the very possibility of the appearance of inflation since their number just as the amount of gold on the earth is limited by the algorithm. Spending time and energy is required to create new Bitcoins, that's why they are valuable like gold. And as in the case of gold the price will rise when the majority of bitcoins will be produced. Of course this will only happen in the event that all world recognizes Bitcoin and more and more people will require more Bitcoins. Then the price of single coin will grow to compensate for the limited number of coins.
The "mass" of bitcoins necessary for the entire Bitcoin community is easily regulated by miners’ activity. If at a certain period of time there’s more cryptocurrency produced than needed by market the value of the coin is reduced and capacity of the network decreases because part of the miners will opt out due to profitability of mining Bitcoins becoming lower. Consequently amount of bitcoins mined is reduced to the required values. This situation persists until the mass of Bitcoin market becomes insufficient to satisfy the users’ purchasing power.
Cryptocurrencies’ deflation should be examined over long periods of time because right now during starting period of Bitcoin the price is highly dependent on actions of different financial regulators.
Bitcoin may become a good means of long-term savings someday.
Despite the significant advantages of Bitcoin over traditional money, it is not suitable for use as the basic currency for a proper economy.
The main reason is its deflationary nature and, at the moment, the high volatility.
Deflation leads to the fact that people are starting to save more and spend less which badly affects the production of goods and services. And in conjunction with the high volatility this leads to the fact that people can only make profit off accumulation. This will lead to fewer people producing any goods which will prove fatal for the whole economy.
Bitcoin in its current form cannot be a replacement for traditional money and is not suitable for the role of the basic currency for the world economy. Even if regulators give up and accept Bitcoin the deflation and other factors will hinder the development of cryptocurrency economy.
Naturally Bitcoin has seen more frequent use as a means to earn fiat money than as an exchange tool per se.
To build an economy upon cryptocurrencies much of their qualities need to change so they will become more similar to traditional money without losing their current advantages.