Is Bitcoin the new Dollar?
Even if you don’t own any Bitcoin, you’ve likely heard of the recent news about it. Bitcoin’s value has reached over $4000 per coin; that’s three times as valuable as the price of gold per ounce. The entire Bitcoin market is worth almost $70 billion. If you were the lucky one who bought $1,200 of Bitcoin seven years ago, you would be a billionaire today!
Bitcoin is not only for Wall Street investors to make a fortune, but it can also be used as payment, too. You can use Bitcoin to purchase your next vacation package on Expedia. You can get your Starbucks coffee in the morning using Bitcoin. What’s more, you can pay the tuition of private schools in Bitcoin for your kids. It seems that Bitcoin is becoming the universal currency. Is Bitcoin the future?
How is Bitcoin different from the dollar?
Bitcoin is the first decentralized digital currency created in 2009. It uses this complicated thing called blockchain technology and a sophisticated algorithm to create digital coins. Each coin is a serial of code that represents uniqueness, transaction history, and the ownership of this coin. No two coins are the same. So you don’t need to worry about dropping coins accidentally.
Bitcoin’s currency system works without the need for a centralized administration. In other words, there is no government involved. When you make a transaction on Bitcoin, the record is anonymously broadcasted to all other Bitcoin holders so that everyone is on the same page of the mega, collective account book. If there is a conflict or discrepancy about a transaction , Bitcoin holders vote for the correction. Everything happens digitally and anonymously on the Internet.
This system may sound a bit unrealistic. But before we dive into how Bitcoin came into the spotlight today, let’s take a look how real currencies work.
People accept U.S. dollars or other common currencies because governments with good credit back them. For example, the U.S. government issues the dollar, the U.K. issues the British pound, and China issues Chinese Yuan. Backed by good credit from these large nations, these currencies naturally became popular in all type of transactions. Currencies backed by governments in financial trouble like Zimbabwe or countries in wars such as Syria are extremely unstable and may crash at any time.
A currency can’t survive without a good government. However, if no government backs Bitcoin like the U.S. backs dollars, how exactly would people buy goods with Bitcoin like we purchase items with dollars as the medium of transactions?
It’s all about value exchange
Before the invention of money, goods and services were exchanged directly without using any intermediary medium. For example, a farmer offered three bags of wheat in exchange for a pound of meat from a butcher. The spirit of a transaction is to exchange goods in equal values.
Today, when you buy a Starbucks latte in the morning, you pay $5 in cash or credit card in exchange for the drink. The green bill labeled with “five dollars” has an equal value as the hot brown liquid in your paper cup that jumpstarts your morning.
Bitcoin is no different. When people pay with Bitcoins for a vacation package on Expedia, they believe the amount of Bitcoins they pay is worth as much as the vacation package. For example, a 7-day luxury vacation trip in Paris may cost $4,000, or just one Bitcoin.
Is it time to favor Bitcoin over the dollar?
Bitcoin may sound perfect in the digital era. You can travel all of the world without carrying a bunch of bills and coins in different currencies. You don’t need to worry about pickpocketing or theft because every Bitcoin has your name “engraved” on it. The best part is, no government can track where and how you spend these digital coins. It seems like Bitcoin will rule the world as the new dollar, right?
Not so soon. Popularity isn’t the only criterion to establish a strong currency like the U.S. dollar. When hyperinflation occurred in Zimbabwe due to corruption a decade ago, the price of everyday goods inflated 80 billion percent. Put another way, if you held a fortune worth one billion Zimbabwe dollars before the inflation, the real value would drop to less than one cent eventually. At the end of the hyperinflation period, most people couldn’t afford a piece of bread and the whole country was in chaos. Without a stable currency, you would never know how much you need to save for your new home, your next flight ticket, or even next meal.
Over the past eight years, the value of Bitcoin skyrocketed almost 60,000%. In the previous two months alone, the price of Bitcoin doubled. In a single day, it could grow or drop more than 15% for any reason. With such high volatility, nobody can predict how much Bitcoin will be worth the next day, not to mention next year. There are alternatives to Bitcoin such as Ethereum. Yet, they share the same fate of being unpredictable.
The unpredictable future of Bitcoin
If you are excited about investment or gambling, Bitcoin may be the once-in-a-lifetime chance to join the billionaire club. If you prefer a secure life, U.S. dollars and British pounds are better options. No matter what, it will take a few years before Bitcoin or other digital currencies become stable like the U.S. dollar.
It might be a bit too early to withdraw all of the money from your bank account and bet everything in Bitcoins today. However, the trend of digital currencies is unstoppable. It’s never too early to prepare ourselves for the next big change.
