Should Bitcoin Replace Currency of Central Banks?

What is the difference between central bank authorized currency and Bitcoin? The bearer of central bank authorized currency can merely tender it for exchange of goods and services. The holder of Bitcoins cannot tender it because it is a virtual currency not authorized by a central bank. However, Bitcoin holders might be able to transfer Bitcoins to another account of a Bitcoin member in trade of goods and services and even central bank authorized currencies.

Inflation will bring down the true value of bank currency. Short term fluctuation in demand and offer of bank currency in money markets effects change in borrowing cost. However, Spice remains the same. In case of Bitcoin, its face value and real value both changes. We’ve recently witnessed the split of Bitcoin. That is something like split of share in the stock market. Companies sometimes split a stock into two or five or ten dependant on the market value. This can increase the level of transactions. Therefore, as the intrinsic value of a currency decreases over a period of time, the intrinsic value of Bitcoin increases as demand for the coins increases. Consequently, hoarding of Bitcoins automatically enables a person to produce a profit. Besides, the original holders of Bitcoins will have a huge advantage over other Bitcoin holders who entered the marketplace later. In that sense, Bitcoin behaves like an asset whose value increases and decreases as is evidenced by its price volatility.

When the original producers including the miners sell Bitcoin to the general public, money supply is reduced in the market. However, this money is not going to the central banks. Instead, it would go to a few individuals who can become a central bank. In fact, companies are permitted to raise capital from the marketplace. However, they are regulated transactions. This means because the total value of Bitcoins increases, the Bitcoin system could have the strength to hinder central banks’ monetary policy.

Bitcoin is highly speculative

How do you purchase a Bitcoin? Naturally, somebody must sell it, sell it for a value, a value decided by Bitcoin market and probably by the sellers themselves. If you can find more buyers than sellers, then your price goes up. This means Bitcoin acts such as a virtual commodity. You can hoard and sell them later for a profit. What if the price of Bitcoin comes down? Of course, you will lose your money similar to the way you lose cash in stock market. There is also another method of acquiring Bitcoin through mining. Bitcoin mining may be the process where transactions are verified and put into the public ledger, known as the black chain, and also the means by which new Bitcoins are released.

How liquid is the Bitcoin? It depends upon the quantity of transactions. In stock market, the liquidity of a stock is dependent upon factors such as value of the business, free float, demand and supply, etc. In the event of Bitcoin, it seems free float and demand are the factors that determine its price. The high volatility of Bitcoin price is due to less free float and more demand. The value of the virtual company is dependent upon their members’ experiences with Bitcoin transactions. We might get some useful feedback from its members.

What could possibly be one big problem with this particular system of transaction? No members can sell Bitcoin should they don’t have one. It means you need to first acquire it by tendering something valuable you possess or through Bitcoin mining. A large chunk of these valuable things ultimately goes to a person who may be the original seller of Bitcoin. Needless to say, some amount as profit will surely go to other members who are not the initial producer of Bitcoins. Some members may also lose their valuables. As demand for Bitcoin increases, the original seller can produce more Bitcoins as is being done by central banks. Because the price of Bitcoin increases in their market, the initial producers can slowly release their bitcoins into the system and create a huge profit.

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