Are you wondering whether Bitcoin can affect fiat currencies? If so, here’s how this virtual currency could affect conventional money.
The U.S dollar has remained the reserve currency for the world for decades. However, every country has its fiat currency. Fiat currency is the conventional money used by people in different countries to exchange commodities or pay for services. Generally, commodity money has value due to its worth. For instance, precious metals like silver and gold, shells, and salt, have value due to their worth. On the other hand, fiat money has value because governments have declared it a legal tender. Thus, it lacks an intrinsic value.
Bitcoin is a digital asset and an exchange medium. That means two or more parties can agree to exchange Bitcoin with other items or services. What’s more, this digital currency facilitates direct online transactions between individuals. With Bitcoin, users don’t require an intermediary like a bank or other service providers.
Fiat currency is subject to inflation because a government can instruct its central bank to print more. However, Bitcoin’s supply can’t exceed 21 million units. Thus, this cryptocurrency is scarcer than a precious metal like gold.
Bitcoin and Fiat Money Are the Same and Different
Both Bitcoin and fiat money are forms of money because they allow people to exchange and store value. Ideally, you can pay for a commodity or service using fiat money or Bitcoin. However, Bitcoin offers features that traditional money can’t provide.
For instance, people can receive and spend Bitcoin anytime, anywhere in the world. And you don’t require a government or bank to transact with Bitcoin. Perhaps, this is the revolutionary aspect that makes Bitcoin unique from fiat money.
Additionally, fiat money is like a debt. Whenever the central bank releases banknotes, it issues the consumer a portion of the government’s debt. Governments create more money when people take out loans. When people borrow from banks, they make money. If people don’t take out loans, fiat currency won’t circulate. Thus, if consumers don’t take loans from banks, fiat money won’t be available.
On the other hand, Bitcoin’s intrinsic value exceeds its community trust. This virtual currency doesn’t depend on a loan system. Instead, its value depends on its effectiveness as an exchange medium. Anybody can receive or transfer this virtual currency without relying on any centralized institution or authority. And this makes Bitcoin so revolutionary.
Bitcoin’s Impact on Fiat Money
While Bitcoin seems revolutionary, its impacts on fiat money are unknown. Beating the U.S dollar, for instance, won’t be easy for Bitcoin. That’s because this reserve currency has historically won against competitors because of its backing by a stable policy and large economy.
But Bitcoin’s usage and adoption are increasing globally. More people buy this virtual currency on platforms like dogecoin-millionaire.app and use it to transact. Thus, the continued acceptance of this digital currency could mean that people will have additional monetary units. This Bitcoin might eventually affect a single incumbent’s stability. And Bitcoin’s volatility could make this impact worse.
If institutions and individuals substitute a currency like the U.S dollar with Bitcoin on a systematic and long-term basis, the need for holding fiat money will decrease. And this will increase the conventional money supply. Thus, fiat currency’s demand will decrease impact its circulation rate.
In this case, the Fed will compensate for tight monetary policies to ensure a similar monetary accommodation. Thus, this digital currency’s substantial use can lead to uncertain velocity measurement. And judging the appropriate stance for the monetary policy won’t be easy.
The Bottom Line
Bitcoin is a new virtual form of money. Its impact on fiat money is uncertain because of its low usage and acceptance. However, the world could feel Bitcoin’s effects on conventional money if more institutions, merchants, and individuals accept and use it.