Can Bitcoin ever replace fiat currency? If we were to believe the optimistic predictions of some crypto enthusiasts, Bitcoin would soon become a global currency. But is this really possible and what would it mean for society and the global economy if it happened?
Fiat currencies are currently backed by governments that can print more money when needed. Bitcoin doesn't have such an anchor and its value fluctuates wildly, making it unreliable as a store of value or means of exchange. That's not to say that there won't come a time when cryptocurrencies will play an important role in our lives.
In this blog post, we will try to understand how fiat currency works and some issues with cryptocurrency that need to be improved before it replaces fiat currencies.
How Fiat Currencies Work
Fiat currencies work because people believe in its value. The way fiat currencies work is different from other forms of money. For example, gold can't be created out of thin air - it must be mined and refined before it's considered real money. With paper currency, the opposite is true. All you need to do is print more notes on a whim.
The Federal Reserve does this by printing new bills or adding numbers to digital bank accounts. A country that uses fiat currency has the option of making its cash worth less over time by simply printing more money with nothing to back up those printed dollars.
Cryptocurrency Vs Fiat Currency
Bitcoin is a form of digital currency. What does this mean? Well, it's not physical like the dollar or euro. It is decentralized, which means that no single person controls its supply and distribution. It also allows for anonymous transactions, meaning you don't have to provide your name when conducting commerce with others through Bitcoin.
Issue With Volatility
The volatility of cryptocurrency has been a major issue for many. It's important to note that the price of crypto is determined by supply and demand. When people buy or sell, the supply and demand fluctuate which will ultimately affect the value in this market.
The problem with volatility is that it can be difficult to predict what direction the price will go next because there are so many different factors involved.
The Issue with regulation
Instead of being regulated by the government, cryptocurrency is regulated through an algorithm. The issue with this type of regulation is that there are no set guidelines in place to protect people from malicious actors using cryptocurrency for nefarious purposes.
Cryptocurrency can be used anonymously and without any oversight to fund terrorism or other criminal activities like human trafficking, drug dealing, and more. There is also no guarantee as to how much money you will receive when exchanging your hard-earned cash for cryptocurrency on unregulated exchanges. This is because these exchanges are known to shut down abruptly, leaving investors penniless without any warning at all.
The future of the world economy is uncertain. It could very well be that cryptocurrency will replace fiat currency in the next decade. But, there are some issues with regulation and volatility, which need to be improved before it can happen.