In recent times, Bitcoin has gained much traction. But if you could buy a pizza with bitcoin, would you do it? Experts have started questioning if we should use Bitcoin (or other cryptocurrencies) instead of flat money and if it would be a good move for the economy? The results are far from conclusive. Some see Bitcoin as an asset, something similar to gold and silver, while others believe that when Satoshi Nakamoto created Bitcoin in 2009, he intended to replace flat money.
While these two different schools of thought continue to debate the application of bitcoin as a real currency, experiments have already started worldwide. In June of 2021, El Salvador declared Bitcoin legal to be used within the country for all forms of payment. And while it is too early to understand how it impacted the economy of El Salvador and its neighboring nations, it did open the possibility of using Bitcoin as a form of payment. But despite the early and much welcome initiation, cryptocurrency is far from being used to replace the real dollar.
What would happen if the value of $1 you hold today suddenly decreased to 95 cents tomorrow?
The primary reason cryptocurrencies cannot replace flat money is due to the fluctuation in their value. In the first half of 2021, Bitcoin has seen a significant increase in its value. In just three months, its price jumped from 50,000 dollars per coin to over 150,000 dollars. But this spike was followed by an immediate drop. We cannot predict how cryptocurrency prices will fluctuate throughout the years because virtual currencies lack regulation and transparency. And that is not acceptable for a form of money. Until definite rules are implemented and enforced around cryptocurrency, flat currency will likely dominate world economies for many more decades.
Memecoin? Muskcoin? Easily influenced coin?
The rise in the popularity of Bitcoin has not been the most straightforward. Even though it was first created in 2009, it flew under the radar until 2017. But things changed when Elon Musk tweeted that he thought that Bitcoin “was brilliant” and “it had an excellent future ahead.” While the tweet was only sent to his 23 million followers, it didn’t take long for others to notice. Soon after Musk’s post, celebrities like Mike Tyson started endorsing Bitcoin, further increasing its value.
But if we speak about the influence on cryptocurrency prices by tweets or rumors, then Donald Trump is likely one of the most influential. Throughout 2018 and 2019, former President Trump heavily criticized cryptocurrencies via Twitter, saying they were manipulated by China (to make US exports more expensive) or, even worse, used by terrorists! By tweeting these statements, Trump was able to influence the price of Bitcoin and most certainly scare investors away.
China has also played its part in influencing bitcoin prices with rumors and tweets. In June 2019, the Chinese Government banned cryptocurrency exchanges and mining in China, leading people to believe that Bitcoin was banned in China. Even though the rumors were false, investors started selling their bitcoins which caused a massive decrease in their value for almost two months.
The crypto market operates like the stock market. Rumors influence buying decisions, and buying decisions affect the value of crypto. For any commodity to be used as a currency, its value must not be affected by non-economic factors. The purchasing power of the American dollar doesn’t go up or down just because someone tweeted out that it isn’t as powerful as it used to be. As long as rumors and tweets rule cryptocurrencies, they can never replace fiat money.
Co-existence is where it should be
But despite all these factors, it is not to say that Bitcoin cannot and should not exist as a medium of exchange. The reality is that cash will continue to be used for years and probably even decades. We are not ready to replace cash, nor does the infrastructure allow people to go off flat currencies completely. Globally, a lot of the population doesn’t have the knowledge or the financial ability to pay for their necessities with cryptocurrencies. While we wait for this day, the application of Bitcoin as a form of currency should be studied in close environments. Research needs to be done to reduce the high volatility of Bitcoin.
When used properly, Bitcoin could impact small businesses or individuals worldwide who need a medium of exchange but can’t or don’t want to rely on banks. In an ideal world, Bitcoin can be used as a form of exchange alongside the American Dollar. However, to answer the question, will Bitcoin ever replace the American Dollar? Chances are, it never will.