Cryptocurrencies such as bitcoin (BTC) continue to gain worldwide recognition. El Salvador plans to make BTC legal tender, merchants worldwide accept cryptocurrency as payment and American singer Akon even plans to build his own city that runs solely on crypto.
The essential properties – does BTC have them?
According to the Foundation for Economic Education, BTC has several properties that may make it viable as a currency in the future. For a currency to be viable, it must maintain value over time, have a limited supply, and be easily divisible and portable. If a currency is missing any of these qualities, it may not have long-term viability.
BTC is incredibly portable and can be sent anywhere in the world instantly thanks to the blockchain technology that underpins it. It can also be easily divided down to one hundredth-millionth of a bitcoin and its supply is strictly limited - there will only ever be 21 million BTC. However, the remaining question is its value. Most notably, its extreme volatility. A report by Knowledge@Wharton argues that it’s this volatility that prevents it from being a reliable asset for long-term value. It also added that limited supply and the frequent extension of blockchain decreases mining return but increases the cost of it.
BTC’s subjective and intrinsic value
Critics argue that BTC doesn’t hold any “intrinsic value”, or non-monetary use. However, this is negated by the fact that BTC works as both a cryptocurrency and a network.
We should also look at BTC’s subjective value by how it satisfies needs. BTC achieves this by allowing users to move money anywhere in the world quickly, at a low cost and with no need for financial intermediaries, such as banks. El Salvador’s imminent adoption of BTC as legal tender is a prime example of this. Before, sending money home through the traditional banking system was proving to be too costly, time-consuming and at times, complicated. Therefore, BTC holds subjective value in providing citizens an easier alternative to sending and receiving funds.
A digital world – will BTC rule them all?
Jesse Powell, CEO of cryptocurrency exchange Kraken, believes that commented that BTC will eventually become the currency of the world. He explained that BTC’s price target of $1 million within the next 10 years is reasonable and that many people see it “surpassing gold as a store of value”.
Additionally, he commented that traditional currencies were “already showing extreme signs of weakness” and that prices will soon be measured in BTC. Believers of the cryptocurrency also expect it to completely replace fiat money at some point in the future.
However, it’s important to remember that there are many alternatives to BTC out there. The CEO of software company MicroStrategy, Michael Saylor, commented that BTC isn’t the only cryptocurrency with good potential for the future.
Saylor told CNBC that different cryptocurrencies have different purposes and that “as the market starts to understand these things, there’s a place for everybody”. For example, he described BTC as a digital property and a store of value, while he saw Ethereum (ETH) as a traditional finance disruptor.
In recent events, BTC has also faced criticism for its energy-intensive mining processes. Fortunately, there are several alternatives that use significantly less energy. Most notably, Ripple (XRP), Dogecoin (DOGE) and Cardano (ADA) were reported to have the lowest use of Kilowatt hour (KWh). There are also several cryptocurrencies out there that solely focus on being environmentally friendly, such as EcoCoin (ECO), SolarCoin (SLR) and BitGreen (BITG). You can read more about eco-friendly cryptocurrencies in our post here.
Another issue is that BTC transaction fees tend to be high. For example, transaction fees reached $59 (£41.81) back in April due to miner outages in China. This resulted in slowed block production time during a time of great block space demand. While the average transaction fee has dropped since then, people may want to turn to cheaper alternatives. Most notably, Nano (NANO) has zero fees and only takes 0.14 seconds for confirmation. It also has no inflation, meaning that holdings are safe and not constantly diluted. On top of that, it doesn’t rely on mining, printing or minting, which adds to its environmentally-friendly qualities.
Will BTC replace fiat currencies?
While BTC is considered the “king of cryptocurrency”, each cryptocurrency is unique in what it offers - there are cryptocurrencies that hold certain qualities that BTC doesn’t. With El Salvador’s full adoption of the cryptocurrency and the amount of enthusiasm surrounding its viability for the future, we could see it become part of our everyday lives. In terms of completely replacing fiat, it was predicted in 2018 that cryptocurrencies will replace 25% of fiat assets by 2030. Additionally, Morgan Creek Capital Management stated that all fiat currencies will be replaced by cryptocurrencies in the distant future.
Neil Wilson, chief market analyst at Markets.com, doesn’t see BTC as a currency at all. Wilson stated that BTC is too volatile to be a currency, and that he views it as more of a security, such as a stock or bond. He added that people buy BTC for long-term investment, rather than everyday spending, therefore doesn’t feel it is a threat to current fiat currencies.