The 21st century came with a pile of challenge for the global monetary system with Bitcoin on top of the platter. The demand and use of paper money has continued to decline at a massive rate while mobile payments increase. And this new digital money has banked on this upturn, gaining quite a widespread adoption which has led many to ask if Bitcoin is another revolution of Money.
How Bitcoin Works
Bitcoin is a peer-to-peer digital currency first created in 2009 by an anonymous developer or group of developers under the pseudonym “Satoshi Nakamoto”. According to its whitepaper, Bitcoin was originally intended to be used as an alternative medium of exchange that enables the transfer of value in a decentralized manner. Bitcoin eliminates third parties (i.e. Banks) and gives users full control of their money. Interesting, right?
The digital currency aims to reduce the cost of cross-border remittance by allowing users to transfer value almost instantly to anywhere in the world for a “near-zero fee”. Bitcoin bypasses all the conceptions of banks and credit cards and instead, the currencies are securely processed in “blocks” of transactions, based upon a public ledger called the “Blockchain”.
While Bitcoin has quite a lot of potential to go mainstream, the currency faces a major setback: Volatility. Bitcoin is known for stark jumps in price, high peaks and deep valleys which have made the asset very popular among speculators. Today, more people are buying Bitcoin with the hope of a price surge, than spend it on real goods and services. Price volatility has, on a large scale, hindered the widespread adoption of bitcoin for commerce.
However, one can hardly say any currency is stable. Even the seemingly stable fiat currencies such as the Euro and the US Dollar are not immune to fluctuating exchange rates, inflation, and diminishing purchasing power. In fact, some national currencies have lost over 50% of their value as more users turn to bitcoin to avoid the exorbitant charges by traditional banks for cross-border remittance.
For those who think it impossible, here is a national currency even more troublesome than bitcoin, the Nigerian Naira (NGN).
The chart below shows us the behavior of the NGN/USD pair over the last five years:
And this is the Bitcoin-USD behavior:
While both currencies have shown instability, one thing is sure: Bitcoin’s value increased over the years, having started July, 2013 with a value smaller than $100, while the NGN lost more than two-thirds of its value. Changes in the value of NGN can happen overnight as well and businesses are often faced with major loses as a result of its instability. No wonder Nigerian entrepreneurs are turning towards bitcoin to manage their businesses – on both national and international level.
Nigeria is reported to have recorded the second largest growth in P2P bitcoin markets, trailing behind only China, after witnessing a growth of approximately 1,500% in 2017. According to a report by Paxful, a peer-to-peer cryptocurrency exchange, Nigerians trade approximately $4 million worth of Bitcoin weekly. For a country whose currency lost more than 90% of its value in two years and whose Central bank has enforced strict capital controls designed to limit the use of U.S dollars throughout the nation, then a digital currency like Bitcoin seems to be the only viable option for the citizens to store value.
With the entire buzz going on about bitcoin in Nigeria, its adoption rate has increased considerably in the country. In a short video shared on Instagram in July this year, renowned Nigerian record producer and singer Don Jazzy asked his followers if there will ever come a time when paper money will be no more and Bitcoin will become the official currency.
Don Jazzy on Bitcoin
Bitcoin vs. Fiat Money: Who Rules?
Fiat money has been in use ever since 1000AD and its influence extend beyond the banking system. It is the global, standardized means of payment and receives a total backup of governments. The confidence of the user is protected by the government machines that monitor the regulation of creation and supply of paper money. Business institutions and banks transact with money because central banks guarantee their security.
The economy usually progresses normally even in instances where there has been regime change. This has proven that paper money is reliable despite the fact that it has no intrinsic value. Bitcoin, on the other hand, has no back up from any entity and operates through computer processes. Just like paper money it has no intrinsic value, thus doubling the risks of working with it. Nevertheless, it offers privacy and it’s more secure than paper money.
In order for bitcoin to substitute paper money, it needs to uproot the undue influence of paper money in politics and social- economy of the world. This means that it has to be accepted by the governments as the main means of payment, banking sector, and ordinary people.
In some countries like Nigeria, Bitcoin is unregulated and the government has issued multiple warnings against investing in Bitcoin and other cryptocurrencies. Even while some other countries like Japan have taken a lighter approach to Bitcoin and attempted to regulate the industry, the virtual currency is yet to gain a legal tender status in any country.
A good number of experts have pointed out that there is a possibility of radical changes in the monetary system as a result of Bitcoin and the currency will require no regulation so long it maintains its decentralized model. Others have maintained that bitcoin does not meet the criteria for money; therefore, it lacks the capacity to replace fiat money.
The Bottom Line
Theoretically, the supply of money is supposed to reflect the productivity of the economy. In a centralized economy, the Central banks issue traditional currencies at a rate that is supposed to match the growth of the number of goods that are exchanged. This increases the money supply and helps the government control inflation. Bitcoin, on the other hand, uses a generation algorithm which defines in advance how much currency will be created and at what rate.
The digital currency has a decreasing-supply algorithm which matches the rate at which commodities like gold are mined. According to the whitepaper, there will only ever be 21 million Bitcoin created, and the production rate is scheduled to halve every four years. This decentralized economy that Bitcoin offers is only efficient in its operations, but there is some certain area of concerns it does not address:
- As a digital currency, how will bitcoin service the analog parts of the world?
- Without a controlled supply of money, what will happen if productivity increases?
- Will the 21 million total supply of Bitcoin be able to service the world population of over 7 billion people?
In as much as Bitcoin is convenient to send and receive money globally, it does not hold the capacity to replace paper money. Different countries respond differently to the use of bitcoin; therefore, the effect of bitcoin will be different in every country. It can only manage to become a new digital asset as it is evident in the launch of bitcoin futures, but not a new medium of exchange. However, if the world switches to a digital economy, bitcoin might pose a threat to paper money. And that is unlikely to happen in the near future.