Should Bitcoin Replace Currency of Central Banks?
What is the difference between central bank authorized currency and Bitcoin? The bearer of central bank authorized currency can merely tender it for exchange of goods and services. The holder of Bitcoins cannot tender it because it is a virtual currency not authorized by way of a central bank. However, Bitcoin holders may be able to transfer Bitcoins to another account of a Bitcoin member in trade of goods and services and also central bank authorized currencies.
Inflation will bring down the real value of bank currency. Short term fluctuation in demand and offer of bank currency in money markets effects change in borrowing cost. However, the facial skin value remains the same. In case of Bitcoin, its face value and real value both changes. We have recently witnessed the split of Bitcoin. This is something like split of share in the stock market. Companies sometimes split a stock into two or five or ten dependant on the market value. This will increase the level of transactions. Therefore, while the intrinsic value of a currency decreases over a period of time, the intrinsic value of Bitcoin increases as demand for the coins increases. Consequently, hoarding of Bitcoins automatically enables a person to generate a profit. Besides, the original holders of Bitcoins could have an enormous advantage over other Bitcoin holders who entered the market later. In that sense, Bitcoin behaves like an asset whose value increases and decreases as is evidenced by its price volatility.
When the original producers including the miners sell Bitcoin to the public, money supply is reduced on the market. However, this money is not going to the central banks. Instead, it goes to a few individuals who can become a central bank. In fact, companies are allowed to raise capital from the market. However, they are regulated transactions. This means as the total value of Bitcoins increases, the Bitcoin system will have the strength to hinder central banks’ monetary policy.
Bitcoin is highly speculative
How do you buy a Bitcoin? Naturally, somebody has to sell it, sell it for a value, a value decided by Bitcoin market and probably by the sellers themselves. If there are more buyers than sellers, then the price goes up. This means Bitcoin acts such as a virtual commodity. It is possible to hoard and sell them later for a profit. Imagine if the price of Bitcoin comes down? Of course, you will lose your money just like the way you lose cash in stock market. Addititionally there is another method of acquiring Bitcoin through mining. Spice is the process where transactions are verified and put into the public ledger, referred to as the black chain, plus the means through which new Bitcoins are released.
How liquid is the Bitcoin? It depends upon the volume of transactions. In stock market, the liquidity of a stock depends upon factors such as value of the company, free float, demand and offer, etc. In the event of Bitcoin, it seems free float and demand are the factors that determine its price. The high volatility of Bitcoin price is due to less free float and much more demand. The worthiness of the virtual company depends upon their members’ experiences with Bitcoin transactions. We may get some good useful feedback from its members.
What could possibly be one big problem with this particular system of transaction? No members can sell Bitcoin should they don’t have one. It means you should first acquire it by tendering something valuable you possess or through Bitcoin mining. A big chunk of these valuable things ultimately would go to a person who is the original seller of Bitcoin. Needless to say, some amount as profit will surely go to other members who are not the original producer of Bitcoins. Some members will also lose their valuables. As demand for Bitcoin increases, the initial seller can produce more Bitcoins as is being done by central banks. As the price of Bitcoin increases within their market, the original producers can slowly release their bitcoins in to the system and make a huge profit.