Bitcoin vs Traditional Money
Many cryptocurrencies have different features and objectives. A subset of cryptocurrencies aims to solve some of the challenges of traditional currencies. These cryptocurrencies aspire to become the global medium of exchange and store of value. The growing popularity of these cryptocurrencies has led to the belief that they may supplant traditional currencies. But, how do cryptocurrencies compare to traditional currencies?
Let’s begin by defining Money
What is Money?
Money is a medium of exchange. Money has taken many forms throughout history. Initially, people bartered, which involves trading goods for other goods, for example, cows for goats. The use of physical mediums exchange followed the barter trade era. Salt, shells, and precious materials including silver and gold were some of the popular materials used to facilitate value transfer. The next phase in the development of money involved the use of gold-backed bank notes. Later, the government adopted a form of money called fiat. Fiat currencies are not backed by any physical good but by the trust in the government issuing the currency. And now, we have cryptocurrency, which is a form of money that does not rely on a central authority such as the government for trust.
Bitcoin was the first and still is one of the most popular cryptocurrencies globally. Here is how traditional currencies such as the US dollar compare to Bitcoin.
One of the fundamental differences between Bitcoin and traditional currency is based on who controls the money. Traditional currencies are centralized, meaning they depend on central authorities to issue them and regulate their use. On the other hand, Bitcoin is decentralized, operating on a distributed network maintained by users around the world.
Centralization of traditional currencies harbors a risk of misuse of the power bestowed on them by the users and a single point of failure. For example, there have been cases of governments printing more money leading to high inflation. Banks and other financial institutes can also be biased with their services.
Bitcoin solves all these problems by operating without a central authority controlling the currency and hence no single point of failure. The cryptocurrency is not subject to the whims of any central bank or government.
Banks and financial institutions keep records of traditional currencies privately. These transactions are not publicly accessible and hence less transparent. Bitcoin transactions, on the other hand, are publicly accessible. Anyone on the network can view the details of Bitcoin transactions. The details include the amount sent, the sending address, the receiving address, and the time and date of the transaction.
Bitcoin and traditional money are also secured differently. Bitcoin uses cryptography and blockchain (distributed network), making it more secure. The immutability of blockchain networks makes it virtually impossible for hackers to steal Bitcoin or create fake bitcoin. Contrarily, traditional currencies are stored in centralized locations such as banks and financial institutions. Therefore, this currency is vulnerable to theft and fraud. Additionally, people can easily print fake traditional money.
Another point of difference between Bitcoin and traditional currency is in terms of their accessibility. Bitcoin is accessible to anyone from anywhere across the world. Users can send and receive Bitcoin without the bank accounts of financial institutions. Therefore, Bitcoin becomes ideal for the unbanked and underbanked population. Bitcoin is seen as a better means to achieve financial inclusion. Traditional currencies, on the other hand, are subject to regulations and restrictions that limit their use in some jurisdictions.
Bitcoin and traditional currency also differ in their supply. Bitcoin has a fixed supply limit of 21 million coins, which is expected to be reached by the year 2140. No more bitcoins can be created once the limit is reached. On the contrary, traditional currencies have an unlimited supply. They can be printed and issued as needed by the bank. Therefore, the supply of traditional currency can be expanded or contracted to manage inflation and deflation.
Bitcoin and traditional currency also differ in terms of their volatility. Bitcoin is a speculative currency, with its price rapidly fluctuating. For example, One Bitcoin was worth $28,984 on January 1, 2021. Four months later the price of one Bitcoin had risen to $63, 569 on April 14. The price dropped again to $29,798 on July 21 before bouncing back to reach a record high of $68,990 on November 10, 2021. One of the explanations for this phenomenon is that Bitcoin is a relatively new currency, and its price is driven by the interplay of supply and demand in the market. Contrarily, traditional currencies tend to be more stable since they are backed by the central authorities issuing them.
Bitcoin and traditional money are two distinct forms of money. The fundamental feature that makes Bitcoin revolutionary is that it is decentralized, while traditional currencies are centralized. This feature makes the relationship between Bitcoin and traditional money a complex one, with Bitcoin trying to destroy the traditional way of dealing with money.
While some people believe that Bitcoin will finally replace traditional currency, it is still too early to determine the certainty of such claims. It is still normal to question the concept of Bitcoin and compare it with traditional money.