What Is Bitcoin? Can It Become Legal Tender?
Knowing the characteristics of money is key
Bitcoin is a digital currency that has gained more and more adoption. Let’s examine bitcoin to see if we can make a robust case for its’ ambitions.
To make the case, we first need to answer if bitcoin is worthy of the legal tender status.
A quick explanation of Bitcoin.
By investing in bitcoin, people invest in a peer-to-peer electronic cash system. Satoshi Nakamoto invented BTC to make financial transactions easier, more secure, and accessible. Another benefit is much lower fees compared to centralized banking.
Bitcoin miners added the genesis block (the first block) to the blockchain in 2009. Since then, the network has verified and added new blocks every ten minutes without fail. Furthermore, hackers have to this day not hacked the network a single time.
More and more people will adopt bitcoin, as seen in the on-chain data below. The graph shows the number of bitcoin wallets actively buying and selling over time. We are at all-time high levels.
Crypto adoption is proliferating, and new exchanges seem to be popping up every day.
Access the bitcoin white paper here if you want to read more about its inner workings.
What influences legal tender status
Any fiat or digital currency that is aiming for this status must have at least some of these properties.
- Store of value (Durability, density, purchasing power, liquidity)
- Medium of exchange (Portability, divisibility, accessibility, stability)
- Unit of account (Granularity, uniformity)
Let’s examine whether Satoshi Nakamoto did well.
But first, read the quote below to set the tone.
Money that is easy to produce is no money at all, and easy money does not make a society richer; on the contrary, it makes it poorer by placing all its hard‐earned wealth for sale in exchange for something easy to produce. —
Dr. Saifedean Ammous — The Bitcoin Standard: The Decentralized Alternative to Central Banking
Let that sink in.
In other words, printing money that isn’t backed by gold or other assets is worthless and will impoverish society. Unfortunately, financial institutions have not only let this happen, but they have also played an active role in it.
So, could bitcoin be legal tender? In fact, El Salvador has declared btc legal tender already.
Bitcoin as a store of value
It is durable and indestructible as it isn’t physical.
Destroying a full node would cause nothing but a nuisance for the owner of that node. The bitcoin network would continue to verify transactions without delay.
Thousands of copies of the public ledger are available across the globe so the loss of a full node wouldn’t create any problems at all. The public ledger would remain unaffected, and no bitcoins would disappear or get stolen.
Bitcoin mining will stop when 21 million are in circulation. This unchangeable fact establishes value density; Bitcoin can sponge up and hold any amount of value.
It is hard to say if Bitcoin will keep its’ purchasing power as it’s not been around for long. But, so far, the worth of bitcoin is still increasing and outperforming all other assets in terms of purchasing power.
Liquidity has increased; nevertheless, the currency remains a volatile asset. However, it is far less volatile now than in the early days, so the regular user can buy and sell at any time without affecting the market significantly.
Medium of exchange
Portability is easy as the internet is everywhere. Hardware wallets and private keys can go wherever their owner is, and an online broker is always open for business.
To buy bitcoins, a user needs access to the internet, an online cryptocurrency wallet, and an account at one of the many reliable crypto exchanges.
Due to its volatility, especially smaller businesses would be hesitant to accept bitcoin as a form of payment. Imagine getting paid, and a bitcoin crash ensues, which causes that payment to be worth 30% less in a couple of days.
Crypto debit cards are obtainable and can be a smooth workaround. But most bitcoiners do not even want to spend their coins because people tend to hold on to what is most valuable. This is the Gresham’s Law phenomenon.
Bitcoin as a unit of account
Bitcoins divide into one-hundred-million satoshis. This is reasonably granular, and the lightning network has made bitcoin micropayments possible.
A foot is a foot, a centimeter is a centimeter; this never changes. A unit of account must be static, and bitcoin easily ticks that box. One satoshi is one satoshi.
What else speaks in bitcoins favor?
Proof of Work
Throughout time, work is backing money. A task would always precede money creation which represented value. So is work happening to create the value of Bitcoin?
Yes, miners are doing it and get rewarded for it. They provide computational power to the bitcoin network to solve complex mathematical problems.
This process secures the blockchain, verifies transactions, and adds the correct block to the chain.
There is no way to get bitcoin for free in the shape of a stimulus created out of thin air. Work has to happen. Either by mining it or buying it.
Monetary Policy
Monetary policy determines at which rate money supply increases or decreases and how interest rates will behave.
Fallible humans create these rules within centralized institutions so financial carnage is inevitable. Ego, ignorance, self-interest, and other human flaws will make sure this happens.
But, there are no humans involved in Bitcoin decision-making. Hence no human will create financial suffering.
The monetary policy is hard-coded into the protocol and cannot change. So, every four years, the halving event occurs, and that’s it.
The next one will be in 2024, and once again, the amount of Bitcoin miners receive for securing the network reduces.
So, the supply is increasing, but at a declining rate; this makes bitcoin disinflationary.
Yet, when looking at purchasing power, BTC is deflationary over time.
Bitcoin mining will cease in the year 2140. Until then, miners will do a good and honest job to verify the blockchain; after all, that’s how they get paid.
Difficulty Adjustment
If the number of miners increases, blocks should mine faster, and the coins minted faster. That makes total sense, but Satoshi Nakamoto thought of that too.
Mining difficulty increases when miners increase in numbers. But, the reverse is also true; if miners decrease, mining becomes easier. This way the time between adding new blocks stays at about ten minutes.
Neutrality
Bitcoin is a tool, or a program if you will that works as intended; nobody owns the right to print, create or inflate Bitcoin in any way.
In a sense, it is the opposite of Gutenberg’s printing press. Instead of duplicating things, it limits and creates scarcity. Yet, it empowers people just like the printing press did.
Conclusion
- More and more people are investing in crypto to improve their financial situation.
- El Salvador is the first country to declare Bitcoin legal tender.
- No matter what Peter Schiff or Jamie Dimon says, Bitcoin has what it takes to be the world reserve currency. In fact, bitcoin is a currency, a store of value, and a medium of exchange, all at the same time. Not even gold can keep up with that.
- There has never been a more scarce asset in the known history of man.
- Money has changed throughout history and will change again as human culture evolves. Thus, money must be malleable and become what the circumstances require it to be.
- The inflationary monetary policies have spun out of control. They are eating themselves and the planet like a black hole of consequence.
- Blockchain brings transparency to the financial markets monopolized and corrupted by centralized banking. This fantastic technology is unstoppable because it is exactly what we need. We have been waiting in silent desperation for too long.
- Even if most people are not aware of it, the revolution is here, and bitcoin is most likely the hardest money we will see in our lifetime.
- More people and companies are now investing in bitcoin. They know, it is a reliable store of value and a medium of exchange that they can access at any time, anywhere.
- There is no longer a need to involve a third party that asks questions, keeps money hostage, and charges criminally high transaction fees.
- We need a sound electronic cash system to help us change the future of the planet. Bitcoin and blockchain as a whole will play a significant role in that.
How do you rate bitcoin now?
Also read: The evolution of money and its corruption
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