What is the purpose of Bitcoin: Speculation or dollarization?

The dollar has made quite an impression throughout the world, with several nations adopting it as a parallel currency to their own. Simply put, what is the meaning of dollarization? When a country’s native currency loses value, the government may adopt the U.S. dollar as a reserve currency alongside the local fiat currency.

But now, because of technological developments, we must contend with Bitcoin and other cryptocurrencies, which are more futuristic currencies. Experts disagree on whether Bitcoin is best seen as a store of value or a speculative asset, making it a riskier investment option.

Bitcoin’s inventor, Satoshi Nakamoto, never intended it to be used as a speculation tool. Nakamoto conceived of Bitcoin as a replacement for gold and silver.

Bitcoin has been around for a good dozen years, but the world is still trying to figure out what it is and how it fits into the broader economy. If you sum up Bitcoin in a few words, what would it be? Is Bitcoin, the first cryptocurrency, a speculative asset owing to its high volatility, or is it just a new type of dollarization?

And why do some believe Bitcoin is useless for anything except gambling? Will virtual currencies coexist with fiat currency or eventually replace it?

In this piece, we’ll look at where Bitcoin is at the moment and discuss whether or not it’s a viable dollar alternative or better off as a more speculative investment.

The original purpose of Bitcoin

Bitcoin’s white paper, credited to a persona only known as “Satoshi Nakamoto,” was published in 2009. Simply put, what function does Bitcoin serve? The paper claims Nakamoto conceived Bitcoin as a “purely peer-to-peer” digital currency. According to the white paper, Bitcoin was designed to function as a decentralized and anonymous payment system. Whether or if Bitcoin fulfilled Nakamoto’s original, audacious goal is debatable, even a decade after its launch. Since the Bitcoin network has scalability problems and hefty transaction fees, many people see it as a store of wealth rather than a means of instant payment.

Bitcoin’s meteoric growth in price has enabled it to overtake and even surpass previously market-dominant monetary establishments, such as gold (a commodity). However, Satoshi’s original intent for Bitcoin may have yet to be realized in its current form as an alternative currency. When the Bitcoin network is congested, it has trouble processing more than seven transactions per second (TPS), and its fees remain high.

In March of 2021, Visa handled an average of 84.1 million daily transactions. Over the same period, Bitcoin has averaged a mere 350.000 transactions per day. When compared to the goal of developing a worldwide alternative to fiat currency, 350,000 daily transactions are a shallow bar to cross.

Despite being the first cryptocurrency, Bitcoin has been debated as more of a store of value than a currency due to its lack of daily transaction value despite its long lifespan (almost 12 years). While Bitcoin has specific characteristics indicative of currency status (such as its usage as a means of trade), scalability limitations, among other obstacles, hinder It from attaining its full potential as a worldwide alternative currency.

What useful purpose can Bitcoin serve in the long term? 

A haven is an investment that grows in value over time. Gold, for instance, is one of the most widely accepted forms of monetary storage. Bitcoin has been called “digital gold” by some. But why is Bitcoin utilized, and what exactly is its goal?

Given its long price trend, Bitcoin may be considered a safe investment. Bitcoin’s value had increased annually from its humble beginnings when it was worth less than $1. Bitcoin failed to reach even $1 in value in 2010. In 2013, the value of Bitcoin reached a high of over $220 before crashing to around $100. In 2017, Nakamoto’s wealth surpassed $20,000; by 2021, it had risen to almost $64,000.

Long-term Bitcoin holders, sometimes known as HODLers, have contributed to the cryptocurrency’s price appreciation. People who “HODL” their Bitcoins have no plans to sell or exchange their cryptocurrency. Millionaire Bitcoin holders, known as “whales,” can move the whole Bitcoin market with a single sale. But committed whales know they keep Bitcoin’s price high, and they don’t seem to have plans to sell anytime soon. In the same way that some people choose to put their money into gold or other assets expected to increase in value over time, HODLers hope that Bitcoin will continue to rise.

Early in 2020, when the COVID-19 epidemic first appeared, the value of practically every financial asset plummeted as investors fled in panic. However, investors have poured money into Bitcoin and gold at an unsettlingly comparable pace.

While one year of positive correlation between Bitcoin and gold could make investors think of Bitcoin as a haven investment, the following year witnessed an adverse connection between Bitcoin and gold.

When two variables change together and in the same way, we say that they are positively correlated. Investors often flock to “safe-haven” assets like government bonds and precious metals during economic uncertainty. These investments may rise in value during a market collapse because they are either uncorrelated or adversely connected to the broader economy.

Many large companies believe Bitcoin was designed to serve as a future international reserve currency. For instance, the financial institutions JPMorgan Chase and Blackrock agree that the pioneering cryptocurrency is eating away at the gold market’s share.

On the other hand, the senior economist and global strategist of Europac, Peter Schiff, says Bitcoin is nothing but a “massive pump and dump.” Midway through 2021, Schiff engaged in an open discussion with SkyBridge Investments’s founder, Anthony Scaramucci. Although the former claim that gold would still have value a thousand years from now owing to its physicality, the latter indicate that Bitcoin might be replaced by another asset soon. Scaramucci has come out in support of Bitcoin, stating that the digital currency’s scarcity is more than enough justification for it to maintain value over time. Among the crowd, 51% agreed with Schiff’s gold sentiment, while 32% supported Bitcoin.

The points Schiff makes in his case are valid. Investments in real estate, precious stones, or priceless works of art have all been tangible assets that have maintained their worth through time. Given Bitcoin’s digital nature, if the cryptocurrency industry moves on from the pioneering cryptocurrency, it may have vanished. However, physical assets’ value is partly derived from their adaptability.

However, as the world moves into a more digital future, Bitcoin believers argue that a digital store of value is a progression of what came before. After all, Bitcoin is a liquid asset worth over a trillion dollars that is available worldwide. As long as people continue to put money into Bitcoin, the asset’s scarcity might be suitable for price or investment speculation.

The case for Bitcoin as a currency

Although Bitcoin’s price constantly fluctuates, who may still argue that it is a currency in the sense that Nakamoto first described it?

After all, Bitcoin seems to be a simple item to get on paper. Bitcoin users may transact with one another without needing to open a bank account or engage with a centralized authority. Bitcoin’s monetary framework is established on a worldwide scale. If local officials allow cryptocurrencies, businesses may easily accept Bitcoin and welcome customers from all around the globe.

However, the value of a currency stems from more than simply its exchangeability. Bitcoin is not seen as a replacement for cash because it lacks all three characteristics of fiat money:

  • It is not a store of value.
  • It is not a medium of exchange.
  • It is not a unit of account.

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