Just as cryptography is planting the seeds of a revolution in payment systems, bitcoin and other cryptocurrencies are planting the seeds of a revolution in currency.
First, there are three main characteristics of a currency: 1) it can be used as a medium of exchange, 2) it is a store of value and 3) it is issued by sovereign governments.
As a medium of exchange, bitcoin offers several unique innovations to currency: global nature, infinite divisibility and easy to carry.
Cryptocurrencies like bitcoin are decentralized and therefore a global medium of exchange. As a truly global currency, it could be used without any need for foreign exchange anywhere in the world. The resulting transactions would be nearly frictionless compared with today’s archaic systems and they would complete immediately.
Bitcoin is also created to be divisible to eight decimal places, with the capability for more in the future. Payments can now be made as small as millionths of a penny. Now the monetization of content becomes much easier. Prices previously too small are now economically viable, allowing many endangered businesses to thrive.
Another advantage is that bitcoin is easy to carry. The impact is most felt with amounts of currency larger than your credit card limits. Imagine carrying a million dollars in hard currency. That’s the equivalent of carrying 22 lbs of $100 bills or 770 ounces of gold. But carrying $1 million in bitcoin would be as light as your smart phone.
As a store of value, bitcoin offers a unique innovation to currency: it is solely market-based.
Currency’s face value was once redeemable for the same amount in a precious metal. Once governments left the gold standard, the U.S. dollar was made the world’s reserve currency, which was backed by the full faith and credit of the U.S. government. While the U.S. dollar’s value vis-a-vis other currencies is driven by market demand, it is also heavily influenced by central banks’ monetary policy.
On the other hand, the market exclusively drives bitcoin’s value. Once bitcoin is more widely adopted, its value will stabilize as it migrates from a speculative investment to a widely accepted medium of exchange.
Cryptocurrencies like bitcoin are decentralized. This means that it is a currency that is not issued by any central authority like a sovereign government. As a result, it is the most profound challenge to governments’ monopoly on creating money.
When all bitcoins have been mined, the total number will be limited to 21 million, which is a natural way to prevent inflation. When sovereign governments’ currencies were no longer redeemable for gold and they could print all they wanted with little accountability, central banks flooded the world with stimulus. With that stimulus comes significant risk, as no country has ever unwound multi-trillion dollar monetary experiments before.
Further, because of its decentralized nature, it has a low risk of collapse unlike a sovereign government’s currency (just ask the Greeks or more broadly, the European Union).
Finally, you can mine your own bitcoins. No mint needed! Even the creation of currency is taken out of a government’s hands, which leaves a government to focus on fiscal policy.
Bitcoin, and the ideas behind it, will be a disrupter to the traditional notions of currency. In the end, currency will be better for it.
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