Bitcoin is an efficient way to transfer money over the Internet and is controlled by a decentralized network with a set of rules, so it can be considered a substitute for Fiat currencies under the control of the central bank. Following is an article from the Encyclopedia Encyclopedia to answer the question of what the value of bitcoin depends on.
Let’s start from the beginning. Bitcoin and other digital currencies have been introduced as an alternative to the national currency. But where does the currency itself come from?
Why are currencies worth it?
Currency can be used if it is a reserve of value. In other words, one has to make sure that its value is not zero in society. Many societies have historically used precious commodities or metals as payment instruments because they were of relatively stable value. Instead of carrying large quantities of cocoa beans, gold, or other primary currencies for trading, eventually, societies decided to use new currencies as an alternative. However, the usability of many of the early currencies, their reliability, their long-term durability and low risk of depreciation made them still in use.
In modern times, new currencies often take the form of banknotes that are not as real and intrinsically valuable as old coins made of precious metals. Of course, nowadays most people make their payments through the internet or the same electronic currencies that look like banknotes, but instead of being physical, they are created by governments on computer servers.
Banknotes once had gold backing. That is, the same amount of money the government printed was stored in the gold treasury. But after the United States withdrew from the gold standard in the year 1970, it has been almost 50 years now that almost all existing government currencies have no backing, so they are called Fiat (meaning backed). Fiat currencies are supplied by the government and are not backed by any commodities.
The value of a Fiat currency is simply because people trusting a country, government, or government to use it for their own exchange. In fact, under the contract, the parties and the governments of the parties to the transaction accept one thing as currency. If people around the world decide not to use a single currency, it will be totally worthless.
Scarcity, divisibility, applicability, and portability
A successful currency, apart from the question of whether the value is stored or not, must possess the characteristics of scarcity, divisibility, applicability, portability, sustainability, and falsification. But what do these mean?
Maintaining the value of a currency depends on its supply. Excessive money supply and printing can lead to a sharp rise in commodity prices, called inflation. Low money supply can also cause economic problems called ” negative inflation “. The school of monetarism is a concept of macroeconomics that aims to address the role of money supply in health and growth (or the lack thereof) in a society’s economy.
In Fiat currencies, most governments around the world are printing money to control scarcity. Governments deliberately inflate inflation to maintain economic growth and reduce the value of money by printing more money. In the United States, for example, this rate has historically been around 2%. Excessive inflation, of course, as in Venezuela, is causing economic collapse.
Currencies can be divided into smaller units. Thus, for a single currency system to function as a tool for trading between different types of goods and values in an economy, it must have the flexibility associated with this divisibility. The currency must be sufficiently divisible to accommodate the value of any goods and services offered throughout the economic system. For example, the dollar itself is divided into a smaller unit called the cents.
A currency must be used to influence society. Individuals should be able to use currency units to pay for goods or services with full confidence. This is the first reason for the expansion of currencies in the first place so that participants can avoid direct and sustained trading of commodities. The application also provides easy movement of currencies from place to place. Precious metals and commodities face difficulties in providing this feature.
Currencies must be easily transferred between members of an economic community to be applicable. For Fiat currencies, this means that currency units must be transferable in the economy of a country as well as in the international economy through exchange and related markets.
A currency must have at least some stability characteristics. Today’s coins or banknotes are made of materials that are not very suitable for this property because they are easily torn, damaged, destroyed, or destroyed over time and unusable.
As a currency must be stable, it must be difficult to counterfeit to remain effective. If this is not the case, criminals can easily disrupt the currency system with counterfeit banknotes, thereby negatively affecting the value of the currency.
Now let’s take a look at Bitcoin:
Bitcoin compared to Fiat currencies
When Bitcoin was introduced in the Year 2008, its developers determined that only 21 million of Bitcoin would be created in the currency protocol. Bitcoin’s current supply is around 18 million units, the bitcoin release rate is reduced by almost half every four years, which is called Halving, so bitcoin’s supply in the year 2022 should be over 19 million, of course at 100%. Assume, however, that the bitcoin protocol does not change. Keep in mind that changing protocols requires the consensus of more than half of the network processing power involved in bitcoin mining; therefore, on paper, such an event is likely, but it is far from reality. Most governments, as part of their fiscal policies, consider flexible controls to supply circulating currency and adjust them according to economic factors.
This is not the case with Bitcoin. Until now, the continued supply of bitcoin units has created a vast and powerful community of miners, though this trend can be reversed by approaching the 21 million coin mark. It is difficult to say exactly what will happen at the time; one assumes that the US government has suddenly stopped producing new banknotes. The latest bitcoin will not be extracted until around the year 2140. In general, scarcity can increase value. This is the same problem with precious metals like gold.
21 million bitcoins are far less than Fiat currencies around the world. Bitcoin is divided into 8 decimal places. The smallest unit is 0.00000001 Bitcoin, called ” Satoshi “, derived from the alias of Bitcoin creator Satoshi Nakamoto.
A bitcoin is more divisible than a US dollar or other Fiat currency. While the US dollar can be divided into cents or a hundred US dollars (USD), a Satoshi is one hundred millionth of a bitcoin (BTC). This tremendous divisibility enables bitcoin scarcity; if bitcoin continues to rise in price over time, users with a fraction of a bitcoin unit can still participate in daily transactions. Without divisibility, assuming each bitcoin is worth one million dollars, it would be impossible to use in most transactions.
One of the interesting things about bitcoin is the use of digital currency by blockchain technology. Blockchain is a distributed ledger system that eliminates the need for trust between the parties, meaning that neither party involved in bitcoin transactions needs to trust each other. With the sophisticated system of reviews and approvals in the distributed bitcoin office as well as the system for creating new bitcoins, there is already trust in the system. Most importantly, the flexibility of blockchain technology is that it is also useful outside of the digital currency space. Bitcoin can be used as a money and payment method. Of course, there are some challenges that we will explain below.
Thanks to currency exchanges, wallets, and other tools, bitcoin is transferable between parties in a matter of minutes, regardless of the volume of transactions at a very low cost. Although bitcoin may not be very rational in the current situation for small payments and credit card systems are better, but for large transfers, bitcoin has a lot to say. One can easily buy ten thousand dollars bitcoin and send it to someone in Japan without having to use the banking system without having to worry about blocking or reversing the transaction.
The process of transferring large amounts of money into current systems can be time-consuming and the costs of such transfers are sometimes very high. Transferability is a very important feature of a currency.
One of the important issues for physical Fiat currencies is sustainability. A banknote can be torn, burned or unused at the same time. Digital payment examples are not prone to these physical injuries. Because of this, bitcoin is extremely valuable. Bitcoin is not destroyed like a banknote. Bitcoin, on the other hand, is obviously never lost. If a user loses his encryption key, bitcoin is permanently unusable in the corresponding wallet. By the way, that bitcoin is not going away and it is still found in blockchain data.
Bitcoin counterfeiting is extremely difficult thanks to the decentralized and complex system of the blockchain Office. Doing so essentially requires deceiving all contributors to the Bitcoin network. The only way anyone can make fake bitcoin is through a method known as “spend again”. Re-spend refers to a situation where the user spends or transfers bitcoin in two or more separate conditions; that is, the user creates duplicate data and transmits it over the network. However, this is not a problem for common currencies, as it is impossible to use two coins simultaneously. But such a thing, on paper days, is possible for digital currencies.
What makes re-spending impossible is the size of the bitcoin network. To recap, a so-called 51% attack will be needed. In this attack, the attacker or attackers must have at least 51% network processing power. By controlling the majority of the network’s power, the group can dominate the rest of the network to forge records. However, such an attack on the bitcoin network requires a great deal of effort, capital and computing power. Resources that are very little available.
Overall, bitcoin is in relatively good shape compared to Fiat currencies. So what are the challenges to bitcoin as a currency?
One of the biggest issues ahead is the value of this digital currency. The use of bitcoin as a value store depends on its use as a payment tool. If bitcoin fails as a successful trading tool, it will have no use and therefore it will be of no value in the long run and will not be considered a reserve of value. If we continue to see Bitcoin’s acceptance increase, its price will be even more stable; one cannot say for sure what will happen in the future.
Bitcoin application and portability face challenges due to storage and storage issues and currency exchange issues. In recent years, digital currency exchanges have been plagued by hacking, theft or fraud. Theft also happens in the world of Fiat currencies. While, in these cases, many regulations are in place, this is very helpful in compensating for the damages caused by such cases. When it comes to legislation, lawmakers look at bitcoin and digital currencies as a field full of lawlessness. Different governments view bitcoin differently and believe that the consequences of choosing bitcoin as a global currency are very high.
Manipulating the bitcoin market is also one of the major challenges of this digital currency. The bitcoin market is still very small compared to traditional markets, and wealthy and influential people known as “whales” can direct the market to the desire they want by creating a news bomb or registering large orders. The only thing that can eliminate this challenge is the timing and expansion of the bitcoin market. As the bitcoin market grows larger and more regulation is applied, the less manipulation it will have.
Bitcoin’s value comes from where other currencies come from. Individuals have accepted the value of bitcoin among themselves, thus increasing its demand for bitcoin. Bitcoin also has unique features that contribute to its acceptance as a value store or value transfer tool. Solving current Bitcoin challenges can help grow its value, and if Bitcoin fails to adapt to future technologies, it will lose value.
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