New Gold Or Bubble: Will Cryptocurrencies Replace Regular Money
Cryptocurrencies are called digital gold and new money. Despite all this talk, nobody buys bread at the supermarket with Bitcoin. Let us examine why cryptocurrencies have not yet become a universal means of payment and whether this will happen in the future.
What Are Cryptocurrencies, And How They Work
Cryptocurrency is a digital currency that does not have a single governing centre; all participants have equal rights. A mathematical code controls the system – no one can give an order to print “extra coins” or withdraw them from circulation.
Cryptocurrencies are a bit like non-cash money on a card or electronic wallet. The information that the user has a certain amount is recorded in a special register; a person can dispose of this money without holding it in his hands physically. When transferring money, money is debited from his account and credited to the beneficiary’s account.
The difference is that for regular transfers, there are intermediaries – banks, payment providers – who record this information in their centralized ledger and, under certain circumstances, can cancel the transaction or block the account.
In cryptocurrency networks, transactions are performed directly and are recorded in a decentralized ledger – blockchain. Information about all transactions in the blockchain is not stored in one place but all devices connected to this network. Any user can view information about any transaction since the network’s launch. Still, if the system has already accepted the payment, no one can cancel it and change the transaction chain.
In this system, each user is their bank. Here, neither the state nor corporations have the exclusive right to issue and access user accounts: it is impossible to withdraw funds without private keys. It will not be possible to block transactions of a specific user because the system does not provide for any blacklists. In theory, the principle of decentralization implies an increase in user confidence in digital assets.
When talking about cryptocurrencies in this article, we will use Bitcoin (BTC) as an example, launched in 2009. Although there are several thousand cryptocurrencies in the world today, the share of bitcoin in this market in November 2019 is 66%. The share of other cryptocurrencies is so tiny that their chances of bypassing Bitcoin as a universal means of payment are minimal.
The Present And Future Of Cryptocurrencies
- Cryptocurrencies are an alternative to classic money: electronic money that is not tied to states. The most popular cryptocurrency is Bitcoin. Each owner of a cryptocurrency is their bank in a decentralized system.
- The critical disadvantage of cryptocurrencies is the volatility of the exchange rate. This makes it challenging to use them as an actual means of payment.
- Cryptocurrencies are not recognized as legal tender in most countries but are recognized as an asset. Their legal status has not been finally determined.
- Besides Bitcoin, there are thousands of other cryptocurrencies. In some countries, government cryptocurrencies are emerging – centralized and backed by fiat money or real assets.
- So far, bitcoin is a speculative instrument mainly used for investment and preservation of capital. It is technically possible to make a payment for bitcoins, but cryptocurrency is rarely used for settlements.
- Despite the impressive growth in the exchange rate, Bitcoin cannot replace regular money today due to too low capitalization, high volatility, uncertainty with regulators, and insufficient acceptance.