Bitcoin

Bitcoin vs Dollar

Updated: Dec 30, 2021

Today, Dollar is the most widely accepted form of money. Can Bitcoin replace dollar? Before we answer this question, let us understand what money is and haw it is being used today. Academically, money is supposed to fulfill three functions



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Medium of Exchange

Money should be widely accepted type of payment accepted for transactions and for extinguishing either debt or obligations and payments are usually made through intermediaries such as banks.

Store of Value

Money should be able to buy in future the same things that we are able to buy today theoretically. But, it is practically not possible. Today we have two types of inflation - price inflation and currency inflation. Price of the consumer good and services increase over a period of time and and our purchasing power decreases. This is called price inflation. Monetary inflation happens when lot of money is made available without increase in production. When lot of money is chasing a little amount of goods and services, we can have hyperinflation that severely reduces your purchasing power.

Money has traditionally been a bad store of value. According to statistics, the purchasing power of US Dollar from a consumer perspective has fallen by 96% since the federal system was introduced in 1913.

Today, people do not store money and invest in equities ,metals ( Gold, Platinum, Silver etc) and real estate etc to beat inflation.

Unit Of account

Money should be able to measure consistently the total value of assets and compare the value of two assets. Net worth of an individual measured with money indicates his purchasing power at that point of time.


How does Bitcoin fare as a medium of exchange

Bitcoin is changing the way how either exchange of services or goods are made. It is totally decentralized without involvement of third party or banks. It is the very first digital asset of value that can be transferred over the internet without any specific third party having to approve the transaction or being able to deny it. It is also an asset that is transferred from one owner to another rather than moving via a series of third party debits and credits, for example, through one or more banks.

Is it widely accepted? Bitcoin has a very strong community and we see a lot of merchants beginning to accept Bitcoin as a mode of payment. However, it is not yet widely accepted as the dollar


How does Bitcoin fare as store of value

This is one area where Bitcoin has been performing well. Unlike money, which can be printed whenever needed by Fed, Bitcoin has a cap of 21 million and this limit ( more demand) is increasing the value of Bitcoin year over year. Bitcoin is burnt at the rate of 12.5 BTC per year and is expected to reach its limit in 2040. Today, Bitcoin has become speculative from investor point of view. Also, some investors consider it as digital gold. Statistically, Return of investment in bitcoin to date has been way more than any investment in stocks, metals and real estate combined.


How does Bitcoin fare as unit of account

Bitcoin is performing poorly here because of high price fluctuations (very volatile) over a period of time. Key word for unit of account is consistency. Bitcoin, with its price fluctuations, cannot be used either to compare items or to measure the total value of assets. In the future, as the number of coins available decreases, I expect the bitcoin price to be higher but will the volatility decrease? As the supply is more limited, will the volatility also spike up?


Summary

I am a big fan of blockchain used in bitcoin which promotes decentralization with enhanced security. However, I am still not sure how Bitcoin can replace money in the current state. How would you feel if dollar was fluctuating as much as a Bitcoin? It would make me nervous looking at my possessions fluctuating very much in value everyday. Dollar is one of the most stable currencies available there and every country loves to invest in dollar for that reason.


I also do not like the fact that Dollar is not backed by gold ( removed by President Nixon in 1971) and Fed having permission to print unlimited amount of money as needed. This is going to cause hyperinflation ( we are in the midst of inflation that can speed up). Countries like Venezuela have crashed and never recovered because of hyperinflation. That is too scary.


As we have seen again and again, markets have their own way of stabilizing themselves. We might see Bitcoin compared to US dollar stabilize and have less volatility in the near future because of the macro and micro economic conditions along with regulations and policies. Today, Cryptocurrencies, which were considered not so legit investment a few years ago, have been accepted as legitimate investment vehicle and many ETFs are available today tracking the crypto currencies. Similarly, I am pretty positive that bitcoin will stabilize at a price in the near future and will be widely accepted as a medium of exchange. In a nutshell, can Bitcoin be used as a form of money in the future? I think so. When will it happen? I do not know.


If you like this post, you might also want to know the differences between crypto trading and crypto futures? Also, did you know that Breakout trading strategy is one strategy that can be used for trading cryptos, stocks, options and other derivatives and gives you the best risk reward ratio (RRR) for the trades placed.


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