Will Cryptocurrency Substitute Real Money?
Bitcoin, the original cryptocurrency, entered its 13th year at the beginning of 2022. The question still remains since its very first inception: Will cryptocurrency be able to replace real money in the future?
There are a number of misconceptions about cryptocurrency that make many people skeptical about the future of this asset class and cause them to believe that it will never be able to substitute real money despite the undisputed success of current cryptocurrency prices.
Let’s discuss in the below sections whether any of these skepticisms have any grounds to understand whether cryptocurrency has the potential to replace real money.
Cryptocurrency Is Not Issued By Any Government
Although most people are not aware, there used to be no government-issued currency before 1971. Banknotes issued by governments were gold or silver certificates, and they were immediately convertible for either gold bullions or silver coins. This means the banknotes you exchanged were, in effect, a piece of some precious metal that was represented as paper bills.
Former US President Richard Nixon removed this gold and silver peg from the US Dollar in 1971, which changed the country’s currency from a precious metal certificate to a sole paper currency. Since that day, the US Dollar is not backed with any precious asset but solely the faith in the United States government.
Following that, all other governments around the world removed the metal standard from their currencies, which started the age of government-issued (fiat) currencies.
And as time passed, society’s view on money had eventually changed. Today, the majority of people assume that for a currency to be real money, there should be a government behind it.
In that sense, stating that cryptocurrency cannot be real money just because there is no government behind it does not make sense. 50 years earlier, real money was not issued by a government either. It is just the changing of times that what backs money is starting to shift from real assets to virtual assets, as we have been living more and more in a virtual world at this stage of the internet age.
Cryptocurrency Is Not Backed With Any Asset
Cryptocurrency is not backed with any asset, which has been a deal breaker from day one for millions of people to adopt this new asset class. However, as discussed, fiat currencies are not backed with anything either but most people do not care about this because they tend to trust their governments.
Precious metals have physical properties such as their conductivity, durability, etc, which give them real value. This is also why metal-backed currencies are deemed to have fundamental value.
Similarly, cryptocurrencies have a number of utilities, albeit in the digital world, instead of in the physical world. And as there is more and more value being accumulated on the internet networks every day, having digital utility can definitely serve as a fundamental value.
Therefore, although cryptocurrency may not be backed with any physical asset, it can still have a certain level of fundamental value depending on its technology and digital utility. Some of these technologies and digital utilities are:Â Network Effects
An increasing number of users in a network translates to a higher number of transactions, which in return accumulate a higher amount of network transaction fees. Transaction fees are what adds value to a cryptocurrency network. Bitcoin and Ethereum were able to bring together the highest number of participants throughout the 13 years of cryptocurrency’s lifespan, which is the reason that they constitute the two most valuable cryptocurrency networks today.
Self-Governance
Transaction fees that accumulate in a cryptocurrency as a consequence of the transactions held in its network are distributed to miners autonomously (or stakers, depending on the cryptocurrency). This fee distribution serves as a reward in return for their investments, and there is no single, centralized authority that is able to alter or halt this operating mechanism.
In that sense, a cryptocurrency network is self-governed. The community of the network decides on any actions related to the operation of the cryptocurrency.
In a mineable, Proof-of-Work (PoW) cryptocurrency like Bitcoin, the more computing power a miner consumes, the higher number of transactions they are able to validate in the network and a higher number of newly created coins they earn as a reward.
Whereas in a staking, Proof-of-Stake (PoS) cryptocurrency, the more funds a participant invests in the cryptocurrency’s native coins, the higher number of transactions they can validate and a higher number of newly minted coins they earn as reward.
Thus, either the computing power or the financial resources of participants maintains and secures a cryptocurrency, which eliminates the need for government executives and institutions of the fiat currency system.
Minimum Transaction Time and Costs
Cryptocurrency transactions are much faster and cheaper compared to cross-border payments in fiat currency transactions. This is because cryptocurrency payments are made directly peer-to-peer instead of traveling through all those jurisdictional intermediaries that cost a lot of money and time. Due to that, cryptocurrency transactions are almost instant and generally cost no more than a simple domestic bank wire fee.
Continuity
Cryptocurrencies can never be shut down because there is no central authority to do that. Unless some authority switches off the entire internet in the world, a cryptocurrency network is an active round the clock unlike the banking system, which needs to be turned down at the end of business hours and on weekends.
Limited Supply
The majority of cryptocurrencies have a fixed total supply by the nature of their irreversible source code. This setup protects cryptocurrencies against inflation, the most gruesome burden of fiat currencies today as fiat currencies are pretty much printed in infinite amounts nowadays due to the endless monetary expansion needs of economies triggered by the ongoing recession.
Some Closing Thoughts
The above-discussed technologies and utilities of cryptocurrency allow it to have fundamental value, which has been the crucial recipe to be counted as real money throughout the history of mankind. It is just that we are transitioning heavily to the virtual world which has the potential to make cryptocurrency the future of real money.
Bitcoin’s market value is currently at around $870 billion, while Ethereum’s is at $450 billion. And the entire value of the cryptocurrency market is around $2.4 trillion. As a comparison, the market capitalization for the world’s largest 15 fiat currencies is over $80 trillion! Therefore, cryptocurrency is a very new and small market that has not yet passed the test of time. Despite that, surpassing a value of over a trillion dollars in only a decade is still quite promising.
