Is virtual bitcoins as money substitute with pitfalls? This is the biggest question that arises in everyone’s mind, and every person is talking about it because digital currencies are becoming popular rapidly. Everyone is curious what if digital currencies will take the place of paper currency? It is tough to determine the answer to this question. This thing consists of both Advantages and Disadvantages. So, here we are going to discuss whether a digital currency (Bitcoin) as a money substitute is dangerous or profitable.
Bitcoin is the first digital currency that launched in the market in 2009. It is a decentralised virtual currency. Bitcoin is a peer-to-peer form of digital currency through which you can make payments directly from one person to another without using any financial institution. When you purchase virtual Bitcoin, you will get the key of an address that consists of digital currency. When you send bitcoin as a transaction from one address to another, that transaction is recorded on an immutable public block.
All these blocks are linked together to form a blockchain. A blockchain is a publicly available record of bitcoin historical transactions.
These “blocks” are developed once every ten minutes through the transaction done by any network user. The user will get a reward as a newly issued Bitcoin. The “proof of work” helps to determine which user-developed this block and get the reward. Do you know what proof of work is? It is the utilisation of computing power used for determining a huge random number. A new bitcoin is issued to the users who find it nearer to this number. This process is called “mining” bitcoin.
Rewards are becoming zero as per timing due to the absolute limit of 21 million on the number of virtual bitcoin present.
Can bitcoin replace fiat currency in future?
According to some financial experts, those days are not too far when people use bitcoin to buy things. According to them, bitcoins are not the future, and they are the present. As we all know, cryptocurrencies have already made their identity in the financial market, But what about other places. Can you purchase a car in exchange for Bitcoin? No, you can’t; even Tesla also stops selling cars in exchange for bitcoin.
Next, can you purchase a property using bitcoin? Not yet, Bitcoin is not treated as a centralised currency. Not even you can buy pizza using bitcoin. You may still require fiat currency for purchasing all these things. So how can we say that bitcoin is present? And We can’t estimate how much time it will take when we can use bitcoin to buy all these things? We know it isn’t easy.
Technically anything can be treated as money if the sender is ready to receive and the buyer is ready to sell their produce in exchange for that thing. Like this, our barter system has been working for decades. Until people realised that everything is not equally valuable, due to this paper currencies were invested, which brought stability in the market. At that time, people were also concerned about fiat currency centralisation, which provided strength to the government and banks. They also thought paper currency also lose its value over time.
After the financial crisis of 2008, the cryptocurrency came out in the form of a decentralised currency. At that time, the public believed that as more people started purchasing it, its value would automatically increase, and it may also be considered as paper currency in future. But things do not happen like that. The reality is, the possibility can’t always be ruled out. Even fiat currency has developed and changed its appearances over the years. However, there are various factors that stop Bitcoin and other cryptocurrencies from becoming valuable as fiat currency.
Advantages of Bitcoin over fiat currencies
As per the bitcoin supporters, virtual Bitcoin consists of two major advantages against fiat currency. The first one is that its supply is limited, which makes it impossible for a government to deliver it in an amount that would devalue it. This refers to its less vulnerability to unrestricted crises like Zimbabwe, Germany, Venezuela. But it can also be treated as a weakness because it makes it impracticable for managing deflation. The continuity of that can also drag us toward severe economic consequences.
The second advantage of virtual Bitcoin is that all transactions are immutable and permanent. When money is present in a bank account, the bank can take away the money from its user and claim that it is never present. But with bitcoin, these types of things will not take place ever because the database of transactions can not be edited by any authority. All transactions are visible to everyone. This is because bitcoin is defined as “trustless”.
All these advantages are not technical. Hyperinflation is not a prime problem in modern economies, and when financial institutions are popular for engaging in fraudulent practices, they are generally finer than simply to seize their clients’ money and deny their money existence. The truth is that the significant benefit of bitcoin is its decentralisation that allows it to be used to break the law with fewer risks of prosecution.
Disadvantages of Virtual Bitcoin over existing currency
As we discussed before, bitcoin is a prime medium of exchange of transactions that need confidentiality. Using virtual bitcoin for other transactions is always unnecessarily costly. The average bitcoin transaction fee of 2020 has occurred between 28 cents to $ 13.41. Moreover, Bitcoin transactions are very challenging for those who do not belong to the computer science field. They can only handle bitcoin transactions through third parties like crypto exchanges or crypto brokers. This is because most traders use a virtual wallet or exchange managed by the brokers. This thing makes bitcoin trustless because many investors lose that money due to fraudulent brokers or exchanges.
Some top risk-free crypto brokers are PrimeFin and 101investing. An example of significant crypto fraud was the theft of $460 million worth of bitcoin that took place in the Mt. Gox Bitcoin exchange in 2013.
The utilisation of Bitcoin as a store of value is restricted via its volatility. On December 9, 2020, Bitcoin value in US dollar and However the number of goods that should be bought with Bitcoin get charged nearly 2.22% per day. The cost of bitcoin is increasing over time, and there is always a debate between advocates that the cryptocurrency is excellent storage of value due to its price increases as per timings.
We all know that future price prediction is a difficult task. But if optimization is proper, its costs will increase; this is the only point that shows virtual bitcoin is a good speculative investment. It does not mean that it is a valuable form of currency. Nations generally target to hold a stable currency compared to keeping high volatile currency.