The downside of Bitcoin

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  The downside of Bitcoin

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1. The story: The story of leading cryptocurrency Bitcoin (BTC) is one of extreme optimism and extreme fear. While the supporter are cult-like in their love for the BTC, the detractors say that absence of any real world underlying asset makes it pure speculation. After all, Bitcoin is just one of thousands of cryptocurrencies, and as it is the earliest one, it is the most well-known.
2. The issue of real value: Some say that fiat money (normal currencies in use today) does not have any real value either since the time the gold standard was dumped by governments. But fiat money has the value of the guarantee of the government that issues it, and the power of taxation those governments carry. On the Indian rupee note, there is a “promise to pay the bearer" commitment by the RBI governor. In the US dollar, the words “legal tender" means the same. Governments have the power to tax their people and businesses, the ability to sell public assets, issue bonds and other ways to guarantee their currencies. These powers are missing in Bitcoin. Even shares have value springing from their companies' ability to generate actual profits in the real world. Physical commodities are raw materials actually used, so carry value. To that extent, the only of BTC is the faith that someone else will want to buy.
3. The issue of stabiliser: While fiat money is defended by the government that issues it, and Central banks go into the international monetary markets to perform “market operations" (to buy or sell national currencies to keep them stable), such stability mechanisms don't exist with BTC. Its volatility makes it a bad currency, irrespective of its reach. Most people are investing in bitcoin as a store of value, not as a currency. If bitcoin’s value goes up by 20% in a week, you wouldn't want to make any payment with it now. When bitcoin starts to fall, vendors will stop accepting it as payment (because they don’t want the value to go down by 20% a week after). 
4. The issue of sovereign competition: If anyone thinks that Bitcoin will replace fiat money soon, it's not possible. Is it even possible that the central banks of China, the US and the EU will agree to cancel their currencies and just use bitcoin? Their monetary systems will crack. China has actually banned bitcoin trading and mining. Other countries have hinted that they would be following suit. Countries will not adopt bitcoin, but will issue their own versions instead (digital government coins) and then ban bitcoin.
5. The issue of bitcoin versus blockchains: There are cryptocurrencies called stablecoins, backed up by real assets (US dollar) that use the very latest in blockchain technology. These coins are suitable as currencies because they only fluctuate as much as their underlying assets. So bitcoin is not being bought or sold due to blockchain technology.
6. Summary: The bitcoin was launched by Satoshi Nakamoto in 2009, frustrated with the potential inflation inherent in the limitless dollar printing being done by the US federal reserve, and others. It is like a utopian dream, of believers in a future where currencies are fully democratized and not controlled by governments. Bitcoin is valuable today due to the huge liquidity in markets, created due to monetary and fiscal policies of many governments to combat Covid. Once fiat money goes digital, bitcoin may lose ground really fast.

Read more on - Polity | Economy | Schemes | S&T | Environment

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