Tuesday, May 30, 2023

Should Bitcoin Replace Currency of Central Banks?

Difference between bitcoin and central banks’ currency

What is the difference between central bank fiat currency and bitcoin? The holder of currency authorized by the central bank can only tender it for exchange for goods and services. Holders of bitcoins cannot tender it because it is a virtual currency that is not authorized by a central bank. However, bitcoin holders may be able to transfer bitcoin to another account of a bitcoin member in exchange for goods and services and even central bank authorized currencies.

Inflation will bring down the real value of bank money. Short-term fluctuations in the demand for and supply of bank currency in the money market affect changes in the cost of borrowing. However, the face value remains the same. In the case of bitcoin, both its face value and real value change. We have recently seen the bitcoin split. It is something like the splitting of shares in the stock market. Companies sometimes split the stock into two or five or ten depending on the market value. This will increase the volume of transactions. Therefore, while the intrinsic value of a currency decreases over time, the intrinsic value of bitcoin increases as the demand for the coins increases. As a result, hoarding bitcoin automatically enables a person to make a profit. Furthermore, early holders of bitcoin will have a huge advantage over other bitcoin holders who enter the market later. In this sense, bitcoin behaves like an asset whose value increases and decreases as evidenced by its price volatility.

When the original producers, including miners, sell bitcoins to the public, the money supply in the market is reduced. However, this money is not going to the central banks. Instead, it goes to a few individuals who can act as the central bank. Actually, companies are allowed to raise capital from the market. However, they are regulated transactions. This means that as the total value of bitcoin increases, the bitcoin system will have the power to intervene with central bank monetary policy.

bitcoin is highly speculative

How do you buy bitcoin? Naturally, someone has to sell it, sell it for a price, a price decided by the bitcoin market and probably by the sellers themselves. If there are more buyers than sellers, the price goes up. This means that bitcoin acts like a virtual commodity. You can store them and sell them later for profit. What if the price of bitcoin goes down? Of course, you will lose your money just like you lose money in the stock market. There is also another way to get bitcoins through mining. Bitcoin mining is the process by which transactions are verified and added to the public ledger, known as the black chain, and through which new bitcoins are issued.

How liquid is bitcoin? It depends on the volume of the transaction. In the stock market, the liquidity of a stock depends on factors such as company price, free float, demand and supply, etc. In the case of bitcoin, it seems to be free floating and demand is the determining factor in its price. The high volatility of bitcoin price is due to low free float and high demand. The value of a virtual company depends on the bitcoin transaction experiences of their members. We might get some useful feedback from its members.

What could be a major problem with this system of transactions? No member can sell bitcoins if they do not have bitcoins. This means that you must first acquire something of value you have by tendering it or through bitcoin mining. A large portion of these valuables eventually end up with the person who is the original seller of the bitcoin. Of course, some amount in the form of profit will definitely go to other members who are not the original creators of bitcoin. Valuables of some members will also be lost. As the demand for bitcoins increases, the original seller may produce more bitcoins as is being done by the central banks. As the price of bitcoin increases in their market, the original creators can slowly release their bitcoin into the system and make huge profits.

Bitcoin is a private virtual financial instrument that is not regulated

Bitcoin is a virtual financial instrument, although it does not qualify to be a full-fledged currency, nor does it have legal recognition. If bitcoin holders set up private tribunals to settle their issues arising out of bitcoin transactions, they may not worry about legal sanctity. Thus, it is a private virtual financial instrument for a specific group of people. People who have bitcoins will be able to buy vast quantities of goods and services in the public domain, which can destabilize normal markets. This will be a challenge for the regulators. The inaction of the regulators can lead to another financial crisis as happened during the financial crisis of 2007-08. As always, we cannot judge the tip of the iceberg. We will not be able to estimate the damage caused by this. It is only in the last stage that we see the whole thing, when we are unable to do anything other than make an emergency exit to escape the crisis. This, we have been experiencing ever since we started experimenting on the things we wanted to control. We succeed in some and fail in many, though not without sacrifice and loss. Should we wait till we see the whole thing?

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