Bitcoin vs Money

The relationship between Bitcoin and fiat money is a fairly complicated topic.Bitcoin was supposed to eventually replace traditional centrally controlled currencies. However, today Bitcoin (and any other cryptocurrency, for that matter) is rarely used as a medium of exchange. It is first of all a speculative asset. So let’s find out what happened and whether Bitcoin is really better than fiat currencies.

What are the problems of fiat money?

Most national currencies today (all the major ones for sure) are so-called fiat currencies or fiat money. Fiat currency is issued and controlled by an entity, authorized by the country’s government. Usually it means a central bank or an entity similar to the US’ Federal reserve.

However, fiat currencies are backed only by the economy of the respective country. Or, to be more precise, by people’s belief in the economy of said country. The gold standard of old is not used by major countries since the early 1970’s.

Fiat currencies have a fair share of issues that stimulated Bitcoin development as an alternative to traditional money:

• Centralized control makes fiat money vulnerable to mistakes by governmental agencies.
• Governments capable of competent economic and monetary policies are quite a rare sight
• Inflation is the major issue for any fiat currency
• It is easy to steal fiat money
  Fiat currencies require intermediaries to conduct transactions and manage funds, which drives operational costs

So the demand for an alternative medium of exchange is quite understandable. However, it is not all bad for fiat. There are also some major advantages:

1. If there is an economically strong government that manages it, fat currency is stable in terms of purchasing power
2. Monetary policy can be adjusted rapidly in accordance with the economic situation due to centralized control
3. Fiat money is easy to use
4. Most countries try to protect their money, so there are asset insurance programs and laws against fraud involving fiat money.

What Bitcoin has to offer

Bitcoin was launched in 2009 and was designed specifically to address major fiat issues. And it launched the whole cryptocurrency movement in the process.

Bitcoin is a cryptocurrency, meaning that it is a digital currency, built on blockchain and relying on cryptography to ensure protection against double-spending or counterfeiting. It is also decentralized – there is no central bank, no government and no other entity that is able to change the rules, or micromanage transactions or interrupt the network operation. There are some later cryptocurrencies that have governing bodies, however, Bitcoin is fully decentralized.

And when compared to fiat, Bitcoin has quite a list of things going for it:

• Due to decentralization, there is no single point of failure, either technical or political
• No intermediaries means more cost-efficient transactions (at least when it comes to large volumes and/or international money transfers)
• Users have full control over their coins
• There is no way to block or reverse a transaction
• No inflation – the maximum number of bitcoins is fixed at 21 million and there is no way to speed up the emission
• Transaction history is fully transparent and publicly available, although there is no direct connection of wallets to users’ identities

While these are indeed major improvements in comparison to traditional money, there are also some serious issues with Bitcoin:

• It is harder to use than cash or even digital fiat
• Funds lost due to fraud or mistakes cannot be returned
• Transaction fees for low-amount transactions are the same as for large ones, which makes Bitcoin unsuitable for everyday expenses
• Its purchasing power is less stable than that of major currencies
• Large amount of energy and computing power is required for transaction processing

New updates of Bitcoin protocol, such as Lightning Network, make some of these issues less acute, but they are still present.

However, these issues are not the only reasons for Bitcoin failure to replace traditional money.

Why people don’t switch to Bitcoin

First of all, despite Bitcoin’s advantages, it is still quite similar to fiat:

• The value is determined by people’s belief what the value is
• Fiat money is also mostly digital (about 90% of world’s money exists only in digital form)

Second, the value of Bitcoin is primarily determined by the willingness of market participants to exchange it for fiat. As soon as this willingness disappears, Bitcoin will lose most, if not all its value.

Third, while Bitcoin allows you to save some money on operational expenses, it is even more profitable to use it as a speculative asset than as a medium of exchange.

So there is very little actual incentive for the general public to switch for Bitcoin. However, this paradigm shift opened up the way for even more interesting and promising cryptocurrency developments, less focused on the idea of replacing traditional money and more – on bringing value to users.