Truly Understanding a Cryptocurrency-Dominated Future (and why it wouldn’t work)
It has only been 4 weeks since bitcoin reached a record high and the cryptocurrency is showing no sign of stopping. Like other alternate currencies such as gold or rupees, bitcoin’s surge in price has been fueled by its increasing value against the dollar. But why would people care about how the dollar is doing when investing in a completely different currency? During recessions, the confidence in the dollar, and the American economy in general, inevitably goes down. For this reason, people like to hedge the rest of their investments by investing in alternate currencies that could take the dollar’s place. In fact, JPMorgan strategists have gone as far as to argue that “the adoption of bitcoin by institutional investors has only begun, while for gold its adoption by institutional investors is very advanced,” (Spence 2020). It sounds technically fine, but the importance of the dollar cannot be overstated; the entire world uses the dollar as a benchmark, and it has long been the premier currency for international transactions. Let’s take a step back and discuss how monumental a switch to crypto would be.
What Would it Really Take to Switch to Bitcoin
Firstly, it is important to consider that it would take something truly monumental for the United States to stop printing the dollar, let alone switch to a cryptocurrency. As stated by Warren Buffett, “If you print bonds in your own currency, what happens to the currency will be the question, but you don’t default. The US has been smart to issue bonds in its own currency.” (Wolff-Mann 2020). Other countries often have to default because their debt is issued in the dollar, a currency they do not control. Meanwhile, the United States has full control over their debt since they control the dollar.
The most plausible scenario for the dollar to fail would be one where both inflation and debt get out of hand. In this scenario, the United States may decide to make it harder for consumers to spend money by increasing interest rates. Then, the government would also have to increase treasury yields, the interest rate paid to investors in government-issued treasury bonds (these bonds are the government’s way of letting investors pay off America’s debt). However, the government then may not be able to pay back the investors in these bonds given the high interest rates they have set on them, and they would be forced to default on their debt. In other words, high debt & high inflation might be enough to cause the United States to collapse and abandon the dollar.
What a Future with Bitcoin would Look Like
Assuming that the United States does not switch to another country’s currency, let’s assume that the new currency would be bitcoin. The main pros and cons of bitcoin likely lie in it being a cryptocurrency instead of a fiat (physical) currency, like the Euro or Rupee. Firstly, there is no middle man controlling the value of the currency. It is simply determined by supply and demand, where Bitcoin is supplied by the freelancers who mediate Bitcoin transactions. Furthermore, all purchases made via Bitcoin are never associated with someone’s personal identity and all you need to obtain more of the currency or make a transaction with it is an internet connection.
However, bitcoin’s biggest flaw also may lie in how there is nobody controlling the value of the currency. What happens when the bitcoin’s value crashes because there is a surplus of miners (the freelancers mediating bitcoin transactions)? What happens when bitcoin’s value skyrockets because there aren’t enough miners? There needs to be some intermediary like a central bank controlling the supply of the new cryptocurrency, so that its value won’t be super volatile and jump every time there are less or more people mining the cryptocurrency. This is a huge stretch, given that Satoshi Nakamoto, the alias that Bitcoin’s founders live under, created bitcoin under the belief that “Central banking is the problem. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.” (Dian 2017). Perhaps, a more viable solution is to have an intermediary regulate the number of people mining the transactions instead of having an intermediary directly control the price.
Once we get past that hurdle, the other obstacles have to do with the user experience. When it comes to using bitcoin online, there are barely any issues. Why is this? Today, most bank accounts get hacked as a result of online transactions being easy to track back to the customer. However, bitcoin uses a technology called blockchain, which means that online transactions using bitcoin cannot be tracked back to the merchant or customer. Furthermore, the transactional fees are much lower than that of transferring cash online because there is no bank required to store the currency. However, what happens when you are getting a cup of coffee? Unfortunately, all cryptocurrencies are virtual and cannot be printed. Unless Bitcoin’s founders decide to create a printable version of the currency, there would need to be some sort of app or card made to mediate these transactions. Additionally, making physical transactions would undermine the initial goal of crypto.
Conclusion
It should be clear that there are still many loose ends when it comes to using cryptocurrency instead of a fiat currency. In fact, it may even take undermining the meaning of a cryptocurrency to employ it as a national currency. Perhaps, a more viable solution is to create a compromise between fiat currencies and cryptocurrency that brings the best of both worlds. This could be done by letting the entire world use a cryptocurrency as the world reserve currency while each country can have its own fiat currency. Similar to how all online global transactions use the dollar because it is the world’s reserve currency, cryptocurrencies would be the primary online currency if it were declared the world’s reserve currency in the future. At the same time, each country would keep reserves of crypto and let their citizens use their state fiat currencies to make their everyday, physical transactions.
Works Cited
https://www.ai-cio.com/news/bitcoin-going-replace-dollar/
https://freedomnode.com/blog/21-wise-and-funny-bitcoin-quotes-by-satoshi-nakamoto/
