While bitcoin has been dubbed as the worst investment for last year, many enthusiasts still believe that the cryptocurrency can surpass fiat currencies as the main mode of payment around the world. Its scarcity and the use of the blockchain are its defining features but it could also be it source of weakness. Can bitcoin really replace the U.S. dollar or other currencies at some point?
Fiat currencies draw their value from being backed by assets or by central banks. In contrast, bitcoin draws its value from scarcity in that there are only a limited number available in circulation or from mining operations. Bitcoin is not dependent on any change in value of underlying assets, such as gold or silver, but is backed by the basic market principles of supply and demand.
Bitcoin vs. Fiat
In addition, there is no monetary authority that restricts or boosts the number of bitcoin available, unlike fiat currencies whose levels can be controlled by central banks. There is lower uncertainty associated to this, as bitcoin can’t be used to control inflation or economic growth.
The decentralized nature of bitcoin is seen as its main advantage over typical currencies. Bitcoin holders can have full control over their finances, with encryption and automation technologies being enhanced these days. However, it is also this decentralized nature that makes bitcoin prone to security threats and hacking incidents, which have resulted to the loss of funds and the shutdown of some exchanges worldwide.
Using bitcoin can transform the global payments arena into an open-source one, which means that its increased adoption can also drive up its value. More and more online merchants and large companies are opening up to the idea of accepting bitcoin payments while clients are also enjoying better transparency, lower costs, and quicker transactions on these.