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Can bitcoin replace fiat systemThe Bitcoin Skeptic: Why Bitcoin Will Never Replace Fiat Currency
The market is still liquid for Bolivars, although not for much longer. If a fiat currency totally collapses, the resulting civil unrest may very well take out the power grid. Those people who have cryptocurrencies may not even be able to access them. More to the point, people living in these countries will only be in need of the basics for survival: food, water, shelter, guns, and ammo. Offering to pay for these necessities in the form of bitcoin is not going to do the seller any good, because bitcoin will not be of any tangible value in these moments of need.
Does the seller think he will be able to convert bitcoin into US dollars, walk over to the local bank, and withdraw US dollars? Anyone that does manage to change their local currency into bitcoin may find that the value of the bitcoin they just purchased declines by a substantial amount in a matter of minutes.
In a limited market with high demand, there will always be volatility that is far above average. In an ironic scenario worthy of O. Henry, how is the value of bitcoin expressed around the world? In terms of the local fiat currency!
For as much as they grow about the replacement of fiat currency, pickling bulls value their cryptocurrencies in terms of that very same fiat currency. This question has made the rounds on more than just a few online forums, mostly cryptocurrency related, admittedly. The debate is real and the opponents are often programmers versus armchair economists. Fiat, or government-backed currency, has been a feature of city-states, kingdoms, and countries now for over a thousand years.
The battle is a truly epic showdown between the establishment and the relentless advancement of technology. A comprehensive analysis of the pros and cons of each would probably take weeks to write. Most fiat-based systems today are built on the back of a potentially infinite money supply.
Modern banks use a system known as fractional reserve banking. In this system, banks can lend actual client deposits to other clients up to a certain level.
The remainder needs to be kept in the bank as reserves in case a depositor would like to withdraw their cash. The reserve requirement in the US has typically been 10 percent. Mary also deposits this in the bank for safe keeping. Fractional reserve banking works well initially to kick-start an economy by providing more loans than could otherwise be provided. It causes a couple of problems, though. If customers lose faith in the banking system, too many may try to withdraw their cash at the same time resulting in a bank run.
The US rapidly approaches a point where not even the interest on the debt can be paid. The upper cap places Bitcoin on the rare currency list along with gold. There is no built-in mechanism to create debt or inflate the currency supply in such a model. A basic rule of wealth is this: the less of something there is that people want, the more they are willing to pay for it.
That may be good from an investment standpoint, but can a deflationary currency like Bitcoin act as a viable medium of exchange? Leading cryptocurrency exchange Bitmex recently weighed in on the debate and had some interesting things to say. Bitmex notes that those who argue against deflation often look back to the great depression of the s.
When the stock market crashed in , people began accumulating gold. The situation became worse when financial institutions started to go under. Civilians hoarded the yellow metal as they lost faith in banks and ultimately the US Dollar itself.
Is society seeing a similar situation play out today? Prosperity comes through circulating a currency, not hoarding it. Until people actually perceive there to be a fair value from crypto to fiat, they may not want to spend their Bitcoin. So to the extent that the experiment [Bitcoin] tells us anything about monetary regimes, it reinforces the case against anything like a new gold standard — because it shows just how vulnerable such a standard would be to money-hoarding, deflation, and depression.
In the meantime, Bitcoin still has some other issues to worry about.