Can bitcoin replace fiat currencies, or is it irreplaceable?
With a finite supply of commodities and artificial limitations on the amount of currency in circulation, geopolitical instability can lead to an economic meltdown.
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After the crash of 2008 and several other crises, many commentators predicted that the world would move to alternative currencies.
So far, this has not happened, but bitcoin is becoming a viable alternative for many people worldwide.
Bitcoin is safe from inflation, with a finite supply of 21 million bitcoins that users will ever mine. Regulators can’t control what people do with their bitcoins (although there are some rules about how people can use them).
Bitcoin transactions don’t require banks or clearinghouses and don’t incur any banking fees; it’s quicker than transferring money by Western Union or similar services.
Challenges bitcoin might face while outplaying fiat currencies:
The bitcoin network is nearly impossible to disrupt or control, which could revolutionize how we think about money.
Bitcoin is not without its critics, however. Because some people are worried about how bitcoin works, the media has branded it as a drug-dealing currency, even though very little drug-dealing takes place on the network.
Because it’s anonymous, it also has a reputation for being used by criminals; in reality, most users aren’t criminals, and regulators aren’t stupid enough to ban something completely legal just because they think criminals are using it.
Bitcoin is still relatively new and shouldn’t be treated as an investment or a full-fledged currency. It’s not as safe or reliable as the dollar or euro today, but its potential as a currency is obvious.
The biggest threat that bitcoin faces are associated with drug dealing and other criminal acts.
It is still too early to say whether bitcoin will take over the world’s economy or whether it will have any impact, but it does seem to be a step in the right direction for some people around the world.
Fiat Currency Issues That Bitcoin Addresses
1. Fiat currencies are produced by governments, whereas the system’s users produce bitcoin. Therefore, no government can increase the supply of bitcoins to the extent that it will lose its value, and if too much money is printed, there will be deflation in its price.
2. Fiat currencies rely on trust in institutions such as banks or governments, whereas bitcoins are based on mathematics.
3. Fiat currencies are not anonymous and are prone to abuse and fraud, whereas bitcoins have privacy features built-in, which keep transactions opaque from third parties.
Fiat Currency Risks That Bitcoin Addresses
1. Fiat currencies are subject to inflation and can lose their value over time because of excess supply. If too much money is printed, its value against the dollar decreases.
2. If any government or organization malfunctions, the currency could become worthless. For example, in 2008, the subprime mortgage crisis resulted in a financial meltdown that affected many countries worldwide.
3. Fiat currencies require a third party to process transactions in physical form. Human intervention gives rise to costs and the risk of fraud. Bitcoin only requires two parties to process a transaction and therefore is free from such risks associated with conventional currency transactions.
4. Individuals worldwide have access to bitcoin, unlike fiat currencies tied to specific countries’ economies.
5. The value of bitcoin is not affected by domestic or international politics.
6. Bitcoin transactions are nearly impossible to track, making them highly safe from fraud compared to fiat currencies, which anyone can abuse.
Above are some of the advantages and disadvantages of Bitcoin compared to traditional fiat currencies.
Of course, since everybody has different financial needs, we cannot advise you to invest in one currency over another.
Still, we would advise you to research and carefully consider where you stand about your financial health, the opportunity cost associated with investing in the future, and your current accounts and finances.
What Would Happen If Cryptocurrency Replaces Fiat?
Fiat currencies have been around for thousands of years, but how we use them has changed significantly.
They have become more straightforward, less connected with physical tokens, and more convenient.
1. What will happen to the governments?
The government does not need hard cash to function.
Its demand is also limited since it has to pay its employees, soldiers, and other expenses in fiat. So if most people decide that they would instead hold bitcoin instead of holding fiat, then the value of the fiat currency will drop.
At the same time, that of cryptocurrencies will rise because they are limited in their supply, and their demand will grow.
The government’s ability to collect taxes in any form may decline as those who do not have a problem paying fees use bitcoin for transactions, and those who have a problem with using digital currencies for transactions use physical cash instead, where no fees are ever charged.
2. What will happen to the banks?
Banks are already facing competition from cryptocurrencies in terms of international payments.
Ripple, for example, is a cryptocurrency that’s been signing partnerships with central banks for their payments hub technology.
So if cryptocurrencies replace fiat currencies, then even local currencies will be replaced by users because you won’t need fiat currencies if everyone uses bitcoin.
As a result, banks will become obsolete or transform into platforms that make money by investing in digital currency and providing services such as physical storage and security of your digital cryptocurrency assets.
