As Bitcoin’s halving is getting closer and closer, demand for digital assets continues to soar, having seen an increase of around 15% against the U.S. dollar last month. The halving of Bitcoin is expected to take place in May 2020 and the Bitcoin emission rate will drop from 12.5 to 6.25 BTC each block or approximately every 10 minutes. Over time, the scarcity of Bitcoin and its high stock rate continue to make it an increasingly attractive asset for investors.
As Bitcoin’s advance into the mainstream continues to progress, it’s important to try to find out how the world sees the first cryptocurrency. With that in mind, here are some very important questions to ask: What is Bitcoin? Is it a currency? A form of money? A store of value? All of these answers or none of the above? Maybe something completely new?
Choose a side
Some defend Bitcoin as a store of superior value due to its scarcity, impregnability and refuge properties. In a recent blog post, Coinbase cited these features and more to demonstrate that Bitcoin competes with gold as the ultimate store of value in the digital age.
While the analysis is valid, others would argue that it is overshadowed by the true purpose of Bitcoin, which is to be used as a decentralized payment method, or, in Satoshi’s terms, “a peer- to-peer electronic payment system to-peer “.
Bitcoin’s decentralized properties provide a predictable emission rate while theoretically being immune from government intervention both in its monetary policy and in transaction processing, allowing for cheap, fast and censorship-free transfers in the whole world.
Although its peer-to-peer nature confers Bitcoin immunity from human intervention (although a 51% attack), it also comes with certain limitations in terms of usability, which can be cited to strengthen the position of Bitcoin as more of a store of value like gold and less of a virtual currency for everyday use.
Reserve of value vs money vs money
What makes gold as a store of value and what makes the US dollar a currency? To put it simply, a store of value is an asset that can maintain its value without depreciating over time, including precious metals like gold or silver and interest-bearing assets like bonds. On the other hand, money has no intrinsic value. It is a widely used unit of measurement and medium of exchange that has no intrinsic value in itself. Money is a representation of money and its value is always relative to the money it represents.
Unlike money, money has intrinsic value and cannot be created at will. Currency can be considered a receipt for money or for goods. When the gold standard was in effect, people could cash their bank notes for gold. Once the gold standard was removed from the equation, the U.S. dollar began to lose value continuously as new notes were printed, diluting the value of all the notes in circulation. This means that the US dollar has a relative value rather than an intrinsic value. With something like gold or Bitcoin, creating additional units (via mining) does not dilute the value of the remaining units as they have intrinsic value.
While some currencies have been pegged to precious metals in the past or to other stronger national currencies in the present, most currencies have no underlying assets and only derive their value from their broad acceptance and stability of the government and the economy behind it.
Despite its well-known classification as “cryptocurrency”, Bitcoin cannot be a currency because it has intrinsic value. Although some object, the resources spent on issuing new units ensure that, unlike fiat money, Bitcoins cannot be created out of thin air. In other words, bitcoin mining has a tangible cost and, interestingly, that cost is not only used to create new units, it also guarantees the functionality and reliability of Bitcoin as a decentralized registry and international payment system.
Being a store of value is a mandatory characteristic of silver, and although the two concepts are not interchangeable, a precious metal like gold could be considered silver because it meets most of the key requirements such as being divisible, durable and portable – much like Bitcoin. However, gold is not one of the most important factors to be classified as silver, which must be generally accepted as payment for goods and services. So what about Bitcoin?
Bitcoin like money
While Bitcoin has proven to be a store of value by definition, is it really money? There are six key characteristics that define money: durability, portability, severability, consistency, limited supply and general acceptability as a method of payment.
Although Bitcoin obeys the first five rules, it is not a generally accepted payment method. Yes, it is possible to pay for goods and services with Bitcoin online and offline, but it is only accepted by a minority of traders. Although some big players like Microsoft and Overstock already accept Bitcoin as payment for some of their services and even some governments accept it for tax payments, the token is far from “generally accepted” against a currency national like the US dollar. So, just like gold, Bitcoin is not, in practice, money. The question here is, can Bitcoin become money?
Can Bitcoin Become Money? Problems and limitations
Although Bitcoin can, in theory, become money if it is widely used, it has various technical limitations that would make it impossible as money in its current form. Cointelegraph spoke with Antoni Trenchev, CEO of the Nexo crypto-banking app, to assess Bitcoin as a store of value and its potential as money. Trenchev cited the complicated nature of Bitcoin as one of its main limitations:
“It is always a bit geeky and uncomfortable to use. It does not come naturally to make a payment as is the case with your credit card for example. Many companies, including Nexo, work there, but it is always a very complicated product to use. ”
Although using Bitcoin may seem simple enough for a certain demographic group, it is still a very specialized product and can also become expensive to use in certain situations. A standard Bitcoin transaction can cost anywhere from $ 0.02 to $ 0.10, which is fairly inexpensive when transferring money abroad, for example, but can be expensive when used to small transfers and payments.
In addition, fees vary depending on the number of transactions made on the network. Transactions are grouped into blocks and when the block is full, the remaining transactions must wait for the next block. This characteristic can lead to serious congestion problems and creates what is known as a “fee market”, where those willing to pay higher fees are given preferential treatment, leaving transactions with lower fees. relegated to future blocks.
Network congestion was at an all time high during Bitcoin’s 2017 uptrend. It was barely unusable for normal transfers and payments, with fees reaching the $ 50 mark and some transactions taking hours or even days. to confirm.
Related: Can Blockchain Survive Mass Adoption? Disclosure of future perils
Since then, improvements like SegWit have increased Bitcoin’s capacity. Blockchain.com data shows that transactions per second are at an all time high of 3.8 transactions per block since the December 4.7 mark, with no signs of congestion so far. Either way, it says very little for Bitcoin as the main form of money, as payment systems like Visa can theoretically handle 24,000 transactions per second.
Bitcoin for gold: the new store of value for the digital age
While solutions such as the Lightning network seek to resolve the aforementioned problems in Bitcoin, providing a second layer network where microtransactions can take place for lower costs without obstructing the original Bitcoin network, they are far from being at a production level.
Despite this, Antoni, who previously predicted that Bitcoin would reach the $ 50,000 mark by 2020, remains optimistic even if Bitcoin fails to achieve mass use as a form of money. He told Cointelegraph:
“The very first story was that Bitcoin was going to be a revolutionary currency and P2P payment system. I don’t think it materialized in any way. Bitcoin has the functionality of a currency, but it is used more as a store of value and a transition of value, especially in large quantities. ”
Vytautas Karalevičius, CEO of crypto bank Bankera, on the other hand, believes that Bitcoin will reach the status of widely accepted currency and that it is only a matter of time until this happens:
“Bitcoin cannot fail, the question is how long it will take for technology (hardware such as hard drives, broadband) to improve to allow the scalability of Bitcoin and function as a means of widely accepted payment “
Even if these technical solutions do not work exactly as expected, the future still looks bright for Bitcoin as a reliable value store whose scarcity and high stock / flow ratio make it a very attractive investment and excellent coverage against policies and the current instability economies. “The macro-geopolitical reality is such that I cannot imagine a scenario that would not be good for Bitcoin in the short or long term,” said Antoni.
High inflation rates and aggressive monetary policies have historically driven demand for gold, and so has Bitcoin, which continues to prove resistant to government intervention despite several attempts.
How Bitcoin is used
Although the limits of Bitcoin as money are currently undeniable, overcoming these technical limitations would certainly bring unimaginable benefits, especially in countries with aggressive monetary policies and a large proportion of the unbanked population. Demand for digital assets in countries where hyperinflation rules, such as Venezuela, continue to soar.
In addition, it has also become a popular means of evading aggressive capital flight policies in countries like China. Vytautas Karalevicius thinks there would be a huge benefit to the widespread use and acceptance of Bitcoin. He told Cointelgraph:
“This would allow freedom of payment as a form of freedom of expression to eliminate any censorship or potential restriction on payments. While censorship can sometimes work for the benefit of society, eliminating the ability to censor payments should change a lot about the way society works today, that is, finding new ways to fight bad actors.
Bitcoin may or may not be a widely used form of money in the future, but its advantages as a store of value and a safe haven against rapidly depreciating currencies are undeniable. Like gold before it, economic volatility and inflation are driving demand for Bitcoin. With the launch of the first regulated derivatives for Bitcoin, institutional demand has skyrocketed and even pension funds are adding Bitcoin to their portfolios.
In addition, retail demand follows the same trend as retail-oriented exchanges open the trading of derivatives to a wider audience. The desire to hold Bitcoin and other cryptocurrencies as a hedge or store of value can also be seen in the growing popularity of DeFi protocols that provide passive income to cryptocurrency holders.
Despite the reason Bitcoin was created, the way it is used and its actual performance will decide what it is and what it will become. The use of Bitcoin has been mainly speculative, the value transferred over the network each day representing only a small fraction of its trading volume. While some have examined this data to condemn Bitcoin as a bubble, it can also be said that Bitcoin currently has an important role in addition to being a store of value or money – opening the doors of investment to a wider audience. This was true for concepts such as initial coin offers or initial exchange offers, which lowered the entry barrier for crowdfunding and equity investments.
More than a currency or an asset
While we can discuss current and future definitions of Bitcoin, one thing seems universally accepted: Bitcoin’s decentralized registry technology, blockchain, is here to stay, with applications that are already moving out of the realm of money, such as smart contract platforms that allow decentralized contracts and applications.
Asked about the demands for smart contracts and decentralized applications, Sergio Susko, director of business development and partnerships at DappRadar, told Cointelegraph: “There are really a lot of them, and these cater to various user appetites. At DappRadar, we group dapps in various categories, such as games, exchanges, DeFi, collectibles, games of chance, etc. “
Although the concept of DApps and smart contracts is even more complicated to grasp than Bitcoin itself, Sergio believes that the benefits that can be brought by these new concepts are sufficient to support their future adoption by a consumer user base :
“As with any revolutionary new technology, there is a strong need for a broad use case and, subsequently, mass adoption. Blockchain, smart contracts and dapps are at the very beginning and you can compare them to a newborn baby. However, in the modern world, understanding and adopting technology is a fairly rapid process. As soon as there is a clear, usually financial, benefit visible to the user – it is adopted fairly quickly, even without knowing how the technology works. “
As the Greek philosopher Plato said, “necessity is the mother of invention”, and although it is difficult to say what this invention will look like or be used for in the future, Bitcoin and its technology under- underlying were born from a clear need for change in the financial landscape. Until this change happens, projects like Bitcoin will continue to gain relevance.
