The US dollar has established a foothold throughout the world, with other countries adopting the US currency beside their own. What is, then, dollarization? Dollarization is a term that refers to the simultaneous use of the US dollar and a local, fiat currency. It frequently occurs when the local currency has lost value.
However, technology has improved. We now have a more futuristic form of money in the form of Bitcoin and other cryptocurrencies.
Experts disagree that bitcoin intends to be a speculative asset. They are implying that it is riskier than the majority of other investments.
However, Satoshi Nakamoto, the Bitcoin project’s founder, did not intend for Bitcoin to be a speculative investment. Nakamoto views Bitcoin as a cryptocurrency that can replace regular fiat currencies.
After twelve years, the market is still debating what Bitcoin is or how it should be classified. What is the purpose and function of Bitcoin?
Could the world’s first cryptocurrency be classified as a speculative asset? Or will Bitcoin serve as a new kind of dollarization?
Furthermore, why do individuals believe Bitcoin is solely for speculation? Will cryptocurrencies coexist with regular fiat currencies or will they eventually supplant certain currencies entirely?
This article will discuss the current condition of Bitcoin. Whether it has the potential to eventually replace the dollar or should remain a more high-risk investment.
💡 Bitcoin’s Initial Purpose
As all cryptocurrency fans are aware, the white paper for Bitcoin was published in 2009 under the pseudonym Satoshi Nakamoto.
What is the purpose of Bitcoin?
According to the text, Nakamoto wanted Bitcoin to be a “completely peer-to-peer” electronic cash alternative.
According to the paper, Bitcoin intends to be an anonymous alternate payment method that would eliminate any need for third-party intervention.
However, almost a decade after Bitcoin’s conception, it is debatable if Bitcoin fulfilled Nakamoto’s initial, audacious ambition.
After all, the Bitcoin network is plagued by scalability concerns and prohibitively high transaction fees, leading many to conclude that Bitcoin is much more of a store of value than a substitute for currency.
Without a doubt, Bitcoin’s worth has increased to the point where it has surpassed competitors such as gold in pricing.
Bitcoin is unable to handle more than 7 transactions per second (TPS) and continues to incur significant transaction fees during periods of network congestion.
Visa processed a record of 84 million per day in March 2021.
During the same time period, Bitcoin processed an average of 350,000 transactions. 350,000 daily transactions is a rather low requirement for an attempt to develop a global alternative to fiat.
With almost a decade of existence, Bitcoin’s lack of significant daily transaction value leads many to suggest that the world’s first cryptocurrency intends to serve as a store of value instead of an alternative currency.
While Bitcoin does possess some characteristics of a currency, such as its usage as a means of exchange, scaling challenges, among others, appear to be impeding Bitcoin’s ascension to greater heights as a universal alternative currency.
🧐 In the Long Run, What Significant Purpose Might Bitcoin Serve?
A trustworthy store of value is an investment that gradually appreciates in value over time. For instance, gold is arguably the most widely held store of wealth.
Bitcoin is widely regarded as a type of “digital gold” by many. However, what is the purpose of Bitcoin or how is Bitcoin used?
By examining the total price history of Bitcoin, one could claim that the world’s first crypto is a fairly trustworthy store of value.
Bitcoin began at a value of less than a dollar and it has steadily increased in value year after year since its launch.
In 2010, Bitcoin was unable to reach even a single dollar. Bitcoin reached a peak of $220 in 2013 before plummeting to below $100.
By 2017, Nakamoto’s assets had surpassed $20,000, and by 2021, they had risen to almost $64,000.
Long-term holders, or HODLers, are responsible for a portion of Bitcoin’s price success. HODLers are Bitcoin enthusiasts who do not intend to trade their currency.
HODLers who keep millions in Bitcoin are referred to as whales because they have the ability to single-handedly influence the asset’s market value with a single sell-off.
However, committed whales recognize they are maintaining Bitcoin’s price and seem to have no intention to sell for an extended period of time.
HODLers, like gold investors and others who invest in safe-haven assets, perceive Bitcoin as an ever-appreciating form of currency.
When the COVID-19 epidemic began in early 2020, practically every financial asset experienced a price collapse as investors fled in panic.
Nonetheless, investors have pumped millions into Bitcoin and gold at a frighteningly similar rate over the years.
While a positive connection with Bitcoin and gold could imply that the cryptocurrency is a good store of value and safe asset.
When two or more variables move in lockstep, or in the same direction, there is a positive correlation.
A safe-haven asset is a financial tool whose value is to remain constant. It could even increase during an economic downturn.
Due to their uncorrelated or negative correlation with the wider economy, these assets may rise in the event of a market crash.
Institutionally, a sizable number of businesses believe that Bitcoin’s ultimate goal is to become the next global reserve asset.
JPMorgan Chase and Blackrock, for example, feel the first crypto is diminishing gold’s market share.
On the other hand, Peter Schiff, Europac’s senior economist and global strategist, thinks Bitcoin is nothing more than a “massive pump and dump.”
In mid-2021, Schiff engaged in a public argument with Anthony Scaramucci, the CEO of the financial firm SkyBridge.
Due to gold’s physicality, the former indicated that it will have a use case 1,000 years from now. They are hinting that another asset might simply replace Bitcoin throughout the short future.
📈 Support of Bitcoin
Scaramucci supported Bitcoin, stating that its scarcity should be enough to justify its long-term value retention.
Regrettably for Bitcoin, Schiff shifted the audience’s belief in gold to 51%, with only 32% backing Bitcoin.
Schiff’s reasoning is persuasive. Traditionally, all stores of value have been physical goods that have stood the test of time. Examples of such are real estate, diamonds, and art.
Due to Bitcoin’s digital nature, it will serve no function and may as well cease to exist.
However, physical assets have some other uses that contribute to their worth.
However, as the world progresses to a more digital future, proponents of Bitcoin say that a digitized store of value is a natural evolution from what has come before.
And besides, Bitcoin is a publicly available asset with a market capitalization of over $1 trillion.
Bitcoin cannot deteriorate with time. Its scarcity may benefit Bitcoin speculative trading or Bitcoin investment speculations. This is true as long as consumers continue to invest in cryptocurrency.
🎌 Arguments in Favor of Bitcoin as a Currency
Despite Bitcoin’s ongoing volatility, one may argue that it exists as money in the manner in which Nakamoto first presented it.
After all, Bitcoin appears to be a reasonably simple item to acquire on paper.
Bitcoin users do not require a savings account or to engage with a governing third party in order to use the currency.
Bitcoin’s financial infrastructure is now in place on a global scale.
Merchants can easily choose to take Bitcoin, if their local regulators permit it. Anyone else in the world can easily come and spend.
However, the justification for a currency is not solely dependent on its ability to be spent.
When compared to the three components of traditional currency — store of value, means of exchange, and unit of account — Bitcoin’s opponents argue that it is not a substitute for cash.
💵 Bitcoin’s Purpose as a Store of Value
As previously said, Bitcoin may be best viewed as a store of value, despite certain concerns about this designation.
For one thing, Bitcoin speculation points to the currency’s volatility, which makes citizens wary of Bitcoin as a long-term storage option.
When investors invest in gold, people anticipate the precious metal’s value gradually increasing over time. Or in the very least, gold traders anticipate being able to resell the metal at a comparable beginning price.
Bitcoin, on the other end, can experience a price loss of more than 100% from the time of acquisition.
While Bitcoin’s volatility can also be beneficial, such a high-risk level does not speak well for the currency’s potential as a store of wealth.
Additionally, we must take into account Bitcoin’s absence of physical representation. Anyone can store gold, art, and other valuables for the duration of their ownership.
Anyone can store bitcoin in a variety of methods, including hardware wallets, the majority of investors store it on a cryptocurrency exchange or some other internet-connected wallet.
Due to the constant connectedness of online wallets, Bitcoin is constantly at risk of theft that is completely beyond the control of the holder.
Bitcoin insurance is available to some extent, but the extent to which it is accessible is totally dependent on where the user stores their cryptocurrency.
Even if an investor chooses the safest method of storing their Bitcoin, they are still subject to Bitcoin’s extreme volatility. All of this is based on the assumption that Bitcoin will continue to be in demand.
While the cryptocurrency’s finite supply is supposed to maintain demand in the event that a superior crypto project emerges, what happens to everyone’s now-useless Bitcoin?