Bitcoin Might Never Fully Replace Fiat Currency
Here are some reasons why
Bitcoin is an open source software that revolutionalised the way people transact on the internet. Through a blockchain and the proof of work concept, the system operates on a peer-to-peer network that eliminates the need for a trusted third party.
In an attempt to remove the need for banks or the government in financial transactions, Satoshi Namakoto bitcoin’s creator also envisioned his cryptocurrency replacing fiat currencies in the future.
Even though the crypto environment is constantly changing making it hard to accurately predict its future, chances are dim for bitcoin (or any other cryptocurrency) fully replacing fiat currencies for several reasons below.
The availability of altcoins
There are currently 9000 available cryptocurrencies. Some such as Ether, are advantageous to bitcoin as they offer more than just a store of value but also allow for smart contracts. Others use proof of stake in their mining of new coins which is more environmentally friendly when compared to bitcoin’s proof of work concept. Other altcoins process transactions faster than bitcoin does.
As more altcoins are invented and the technologies behind them improved, it is hard to predict which one might eventually come on top. Even though bitcoin is the top cryptocurrency right now based on market capitalisation, competition from altcoins and their very existence might render it highly unlikely to replace a fiat currency.
The price of bitcoin is highly unstable. It changes abruptly sometimes even overnight. Media reports and public perception sharply affect its price. This instability makes it less likely for it to be universally accepted as a medium of exchange. It also makes it an unsuitable replacement for fiat currencies as they are more stable.
There will only be 21 million bitcoins in total once all of them are mined. Not all of the 21 million bitcoins will be in circulation though as some of them will be in dormant wallets due to lost private keys or because they would have been burnt.
What if the global economy grows to more than the value of the total available number of bitcoins? That’s an issue with the crypto replacing regular money in the future. Economies are constantly growing. This necessitates the constant pumping of more money into the system. The capped number of all mined bitcoins makes this impossible currently were the crypto to replace fiat currencies.
The supply of money has to increase with economic growth in a working economic system.
It only serves the tech-savvy
With a global internet penetration of 59.5 % and with global computer literacy rates still low, only the tech-savvy have access to bitcoin.
Ten years after its invention, bitcoin trading is concentrated in western countries. And even in these western countries which are comprised of ageing populations, it locks out the majority of the citizens mainly catering to the younger populations or some in the older population that are open and adaptive to new technologies.
Third-world countries are almost completely locked out of the bitcoin economy. This leaves bitcoin in the hands of a selected few.
If these third-world countries were to catch up somewhere in the future, they would do so at a disadvantaged position when the bitcoin prices would be super high.
Fiat currencies on the other hand are open to everyone. Young, old, tech-savvy, or not. There is no limitation as to who can participate in it.
The main reason why new inventions and technologies such as social media and mobile money have been able to grow exponentially is that they are few barriers to entry which helps in fostering inclusion.
The fact that there are many inhibitions to participating in bitcoin such as its high market price, the high costs of mining, and the technology needed to participate, limits its future replacing of a fiat current as a globally accepted means of trade.
Limited ways of obtaining it
You can only earn bitcoin through mining it. This is a highly expensive process that locks out the majority of the population. You can also buy it at its current price which is very high.
Fiat money on the other hand can be earned or obtained in various ways. You can create goods in the real life in exchange for it, you can provide services in real life to earn it. They are also systems in place that all individuals can access grants, loans, and even subsidies in fiat currencies.
Many students fund their studies through student loans and many homeowners fund their homes through personal loans or mortgages. This allows them to obtain fiat currencies that enable them to improve their lives even when they did not originally have all the resources needed to obtain it at hand. Such a system is not possible in the bitcoin system.
Even though bitcoin can also be earned in some similar ways as fiat currencies in some parts of the world, its limited availability and acceptability prevent it from being a total replacement to fiat currencies in any near future.
As grants, loans and subsidies offer valuable injections of currency into the economy they are vital. They are no trustworthy organisations or a system that can offer loans, grants, or subsidies to citizens in bitcoin.
Because the demand and supply of bitcoin is solely determined by peers and is out of the control of any fiscal or monetary policy, bitcoin might never reach all in the global economy.
Unlike fiat currencies, the crypto is not well distributed in the global economy. And there no policies in place to ensure its even distribution in the future.
Mining new bitcoins in 2021 is an expensive affair that can only be afforded by a selected few. The current high prices also lock out many that would wish to purchase it. As it gets more and more expensive to mine bitcoin, and as the limited supply pushes demand and its price even higher, only a wealthy selected few will be able to participate.
And if the less wealthy would participate, it would be in insignificant ways. Bitcoin pushes for capitalism.
After a while, the bitcoin economy will become a big boys club. Right there in line with megayachts and private jets. For that reason, chances of it replacing fiat currencies are slim.
Even capitalist economies have some socialist aspects incorporated in their systems for efficient functioning of their society.
Increased difficulty in obtaining it
Because it gets harder and harder to obtain bitcoin, regular people might just give up on chasing the desire to own a piece of it.
Think about everyday people not working hard or having any insensitive to actively work at owning a mega-yacht because the dream is way out of their reach and is too unattainable.
Fiat money is relatively easy to obtain. If you walked outside your door right now or randomly at any other time, to get it, you could borrow it from strangers and passersby. That’s a highly unlikely scenario for bitcoin.
Its poor distribution in the economy and the fact that this poor distribution could get poorer is disadvantageous. Such properties that make bitcoin unavailable to all might prevent it from replacing fiat currencies in the future.
Leads to more inequality
As the value of bitcoin increases and as the cost of mining it increases too, only the rich and wealthy will be able to afford it.
This locks out the majority of the global population from accessing it. The scarcity of coins due to the limited number of coins in circulation will also increase their value thereby locking out even more people from participating resulting to even more inequality.
The rich that might own bitcoin will keep on getting richer and due to its high volatility, this could even happen overnight or in short periods. The poor on the other hand might remain in the same positions or be pushed to even worse ones.
Bitcoin pushes for capitalism at the expense of social issues.
As bitcoin does not offer solutions to such issues that are already associated with fiat currencies, bitcoin might not be their ideal replacements.
Its value is pegged on fiat currencies
What’s the value of bitcoin as we speak?
Exactly! Bitcoin has no intrinsic value. Economically, so far, it’s almost impossible to know the exact value of bitcoin at any given time without pegging it to a fiat currency.
The crash of fiat currencies would also lead to the crash of bitcoin.
For bitcoin to be more widely and universally acceptable, fiat currencies would have to be completely done with. This might not happen any time soon or at all! The high volatility of bitcoin also is connected here and makes it unsuitable as an everyday currency. Therefore, bitcoin may never be a replacement for fiat currencies.
Its classification has not yet been determined
Is bitcoin a currency in itself, a store of value, a commodity, a unit of account, a measure of value, or all of the above? Even if it shares some properties of money, there is an overlap in other areas.
Currently, bitcoin is acting or being used more as a store of value than as a means of exchange or as a tool that performs the other functions of money. It can be compared more to gold than to fiat money. It is this ambiguity that might hinder its full uptake by the whole economy as currency.
Fiscal, monetary, and regulatory policy issues
Were bitcoin to fully replace fiat currencies, governments would miss out on huge tax revenues.
As it’s impossible to know all the true real-life owners of bitcoin wallets, it would be impossible for the government to collect sales taxes on peer-to-peer transactions completed on the network. Capital gain taxes, VAT, and inheritance taxes in cases where private keys are passed from parent to child or other beneficiaries would also be impossible to collect.
Many governments and regulatory bodies would also not allow it as they would not be able to collect taxes from a financial system that they do not regulate.
Governments are designed to protect themselves from any events or changes that would pose a threat to their structures and status quos.
Any strong developments that would push bitcoin to be the generally accepted currency in a country’s economy at the expense of its fiat currency would be quickly shut down or attacked by the government.
Cigarettes are used as a form of currency in many prisons. Image this concept finding its way into the outside world and being widely adopted as everyday currency by citizens. No working government would allow that.
Due to diminishing sources of tax revenues as a result of the massive adoption of peer to peer transactions, the government would not be able to fund initiatives such as building and maintaining roads, providing social services, paying its workers such as the police, paying workers in communications authorities that regulate the telecom companies that provide and maintain the internet services that allow the bitcoin network to operate, etc.
This could lead to increased crime, high rates of unemployment, poor internet structures, and connectivity among other social issues.
Conflict of interest
Satoshi Namakoto is reportedly one of the largest owners of bitcoins. As its inventor, he was its very first miner and also one of the original groups of miners. It’s not known how many blocks he mined exactly but the estimates are at 1 million bitcoins.
Did Satoshi Nakamoto create a system solely intended to enrich himself? Did he create this concept and its money out of thin air and convinced the world to use it just so that he could make himself rich?
As bitcoin is not a company or a business owned by individuals intended to create goods and services and to pay taxes to the government derived on revenues from its activities and even though its code is open source and anyone is open to participate and can potentially benefit from it, the very fact that Satoshi Nakamoto potentially owns a large stash of bitcoin that he himself created from thin air then probably sat it out and over the years watched it increase in value is a conflict of interest.
Since it was initially advantageous to him as the very first bitcoin miner this is completely unfair especially as he posits to have sought out to create a financial system that would not be manipulated by a third party.
There are several ethical issues right there too.
In a working economic system, money should be competitively available to everyone at any given point and in a fair way. Even though it suffers from its own set of issues, the fiat system is relatively fair to all in terms of accessibility. That is why bitcoin and other altcoins may not replace fiat currencies in the near future. They already offer uncompetitive advantages to their coders and creators.
Why work hard for money in the regular system when you can create code that can mine you money out of thin air, allocate yourself a huge stash and then convince others through a proper understanding and some manipulation of human behavior to give it value?
Those that send or store bitcoins from their pseudonymous account are exempt from paying taxes based on the inability of their real-life identities to be known to their governments.
However, those that buy bitcoins through exchanges and the companies that run them have to pay taxes. This is a double standard. If bitcoin were to replace fiat currencies, only a few people would be contributing to the social aspects of the economy through paying taxes and that would be unfair.
Also, different jurisdictions have different laws and policies regarding bitcoin. This affects its universal acceptability and were it to replace a fiat currency, it wouldn’t be as seamless to navigate through with it in the real-life in a global economy.
Potential usage in illegal activities
The anonymous and pseudonymous nature of bitcoin transactions makes it a potential currency in facilitating illegal activities. For this reasons, its role as a currency at the expense of fiat money could be fought.
Criminals can take advantage of the intractability of their transactions to conduct their criminal activities. The very fact that bitcoin has to eventually be converted to fiat currencies for it to be fully usable in the real world is what may help track, arrest, and prosecute some criminals.
Even though Satoshi Nakamoto intended to create a global financial system that could potentially replace the fiat system, chances are dim for bitcoin.
Some governments have banned its trading in their countries while others have pushed regulations that make it difficult for citizens to participle in it. Some governments are even exploring the idea of rolling out their own digital currencies.