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  • The Invisible Hand

Could Bitcoin be a Future Currency?

Bitcoin has reached the headlines in the past year for its ability to make or break fortunes. However, focus has drifted away from its potential as a currency in the wider economy. Bitcoin appears to be a currency; it can be traded, exchanged and used to buy consumer goods yet many question whether it qualifies. Perhaps its position in the future economy will be merely as a speculative asset as it appears is true today.

The three main characteristics of a currency are its ability to be a medium of exchange, unit of account and store of value. I will argue that Bitcoin fulfils none of these and therefore, would be an ineffective future currency.

Perhaps Bitcoin’s greatest flaw is its inability to be an effective store of value. Bitcoin’s value has changed dramatically in recent times and despite increasing over 2000% at one point in 2017, it has declined by 68.02% in 2018. A store of value must retain its value or by definition it is ineffective. A store of value function is also important for investment because investment requires certainty which Bitcoin certainly does not provide. Therefore, very little investment would occur in a future economy which used Bitcoin because the uncertainty and risks would be too great. If Bitcoin were to be used in an economy, few people would save their money depriving the economy of investment and the investment flows that did occur would be greatly unstable.

A rapidly fluctuating currency also makes Bitcoin a useless unit of account, because prices would have to constantly change so the true value of a good would be difficult to ascertain.

Perhaps in the future projects such as stablecoin could be more effective. They aim to minimise the effects of price volatility so they would be a much better store of value. They work by pegging the value of the currency to another currency or exchanges traded commodities such as precious metals. They have, however, been prone to failure recently and they have required significant upkeep.

The main use of a currency is as a medium of exchange, so we can avoid a cumbersome barter system. Yet Bitcoin fails in this regard as well. Processing of Bitcoin payments are extremely slow and can last in excess of 30 minutes. Clearly, waiting half an hour in a queue to buy a cup of coffee would not be suitable. In the future to combat this transactions could be speeded up by using an authorisation hold method (traditional credit card method) in which a certain amount of Bitcoin for transactions in stored on the card. However, the future of Bitcoin as a medium of exchange still looks bleak as the attraction of security and untraceability restrict this. Large steps would also have to be made to introduce this into shops because only a tiny minority accept Bitcoin today.

Bitcoin will not be the currency of the future and instead it will be regulated to position of so many complex and technical financial assets.

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