Central bank’s nemesis? Not Exactly

This is a technological age where the world engages in commerce sans a central authority. This could be an argument against central banks in favor of Bitcoins. A few more pointers: Decentralized currency gives people complete control over their funds, eliminates middlemen involvement in transactions, and does not cause recession or scandals, unlike real money. Sounds appealing. But at the moment, Bitcoins function more like an asset than a currency, something people trade, such as stocks or bonds; it is not something people trade for goods and services.

On that note, also consider this: Central banks such as the Banks of Japan, Canada, and England, Sveriges Riksbank, and European Central Bank in collaboration with the Bank of International Settlements(BIS) are taking initiatives to release their own cryptocurrency, and if they succeed, the dollar’s status as the world’s dominant currency would be in jeopardy. Just have to wait and watch how the whole central bank cryptocurrencies pan out.

For example, take Facebook’s Libra cryptocurrency that spooked U.S. lawmakers who opined that the project, if improperly regulated, could be exploited by bad actors that would, in turn, pose significant systemic risks endangering the U.S. as well as global financial stability. The project is currently on hold following the House Financial Services Committee’s order.

Federal Reserve’s Perception

Given Bitcoin’s current use scale, it is not much of a threat to the Fed’s ability to carry out monetary policy. However, if the use scale grows, then it could pose some concern. If everybody starts exchanging via Bitcoins instead of dollars, then what would be left of the latter? As a countermeasure, the Fed would then tighten the monetary policy in order to achieve an impact on dollar value. However, the Fed conducts its monetary policy by either increasing or decreasing the banking system reserves via open market operations. Therefore, as long as liquid dollar-denominated assets are in good demand, the Federal Reserve would be able to impact interest rates and carry out the monetary policy without worrying much about cryptocurrencies for now. Also, the Fed is open to blockchain technology while at the same stresses the need for trusted intermediaries as well.

Bitcoins Are No Real Money Replacement: Why?

Though cryptocurrencies have aroused significant interest and have many positives, they are rife with inherent contradictions. Consider the following pointers:

  • Do not have a value store that enables people to save in order to make future purchases
  • Stability is an issue: are extremely volatile (erratic price movements)
  • Lower adoption rates and non-existent government support
  • Cannot meet supply when demand is more (only 21 million BTCs can be mined)
  • More demand for BTCs increases transaction costs (blockchain verification). Example: In December 2017, BTC transaction rate spiked at $US57, i.e., a $2 coffee bought with Bitcoin entails a $57 transaction fee
  • Waste considerable electricity and computing power required to validate transactions. Example, the total power used to mine Bitcoins equals that of medium-sized economies like Switzerland
  • Open to debasement and fraud (money laundering and terror financing)

Are these arguments adequate to say that Bitcoins still have a very long way to go to be able to dominate the global monetary system and that cash is still the king?

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