Forex in this article
• Three characteristics make up a currency
• Bitcoin does not meet the requirements
• BTC initiates discussion about CBDC
Currencies issued by central banks have three primary characteristics: they are a means of payment, a unit of account and a store of value. While currencies such as the euro, US dollar or yen meet this definition, the question arises as to whether cryptocurrencies such as bitcoin can join the ranks of real currencies and compete with the established fiat currencies.
Bitcoin as a means of payment
If you take a close look at Bitcoin in terms of its ability to be used as a means of payment, it quickly becomes clear that the original cryptocurrency fails with the first currency feature. Apart from the crypto experiment in El Salvador, Bitcoin is only recognized as an official means of payment by the Central African Republic.
However, the acceptance of cryptocurrencies is on the rise in numerous countries: Some merchants around the world now accept payment in Bitcoin, but the cyber currency has not yet made a widespread breakthrough as a means of payment. The number of use cases is still manageable if you do not want to use a crypto credit card that is loaded with crypto currencies and thus enables the payment process with Bitcoin to be detoured.
Although some economies are preparing to pave the way for cryptocurrencies in the country and to facilitate payments with cryptocurrencies, such initiatives have so far not been forthcoming, especially in highly developed industrialized countries.
Bitcoin as a unit of account
Bitcoin is also at a disadvantage when it comes to the second currency characteristic that the euro, US dollar & Co. fulfil: The property as a stable unit of account. Fiat currencies make the value of goods comparable and cumulative. A prerequisite for this, however, is a certain form of currency stability – in times of inflation or even hyperinflation, fiat currencies also have problems as a reliable unit of account. However, this applies in particular to cryptocurrencies, because cyber currencies exhibit large fluctuations in value even in times of manageable inflation. This price volatility stands in the way of Bitcoin being used as a reliable unit of account.
Against this background, retailers who accept Bitcoin payments always use the current euro or US dollar rate as a unit of account for comparison – how much customers have to pay in Bitcoin for a product results from the current exchange rate and can be used for that same good vary greatly from day to day. In addition, there are problems with regard to assessability, especially for smaller amounts of money: goods in the cent range would only be worth a fraction of a unit in Bitcoin – this makes it difficult to use them in everyday goods traffic and makes it difficult for consumers to assess the value of a product.
Bitcoin as a store of value
With the third feature of fiat currencies, their ability to act as a store of value, Bitcoin can at least begin to score points. The high volatility stands in the way of the cryptocurrency here as well. The purchasing power of Bitcoin is not stable and can fluctuate greatly from day to day. So if you invest money in Bitcoins today, you can have a lower value in your depot tomorrow.
In the long term, however, bitcoin has, curiously enough, performed worlds better than its fiat counterparts, the euro and the US dollar. Despite strong fluctuations and repeated slumps in the crypto market, which were partly due to the increasing correlation with tech stocks, the uncertain market environment, but also to crypto’s own negative news, investors with long-term investments in Bitcoin did well. In view of the fact that the concept of cryptocurrencies is still relatively young, it is not clear whether this trend will continue in the coming years.
Bitcoin sparks discussions
So if you take currency characteristics as a basis to determine how strong Bitcoin is to be classified as a currency, it becomes clear: According to the classic definition, Bitcoin is not a threat to the euro, US dollar, etc.
The mere fact that the BTC is not managed and issued by central banks due to its unregulated, libertarian character makes it unsuitable as a world currency in the currently prevailing monetary system. Because without state regulation, acceptance as a means of payment alone will hardly be possible.
Nevertheless, the Bitcoin can be an asset for the global monetary system and is already today. The existence of cryptocurrencies alone sparked the discussion about digital versions of fiat currencies, and monetary authorities around the world have been dealing with the concept of digital central bank money ever since. It can be expected that digital currencies will gain a foothold in the future and will become more relevant on the basis of technological developments.
However, it is not to be expected that the central banks will relinquish their currency sovereignty. Digital central bank money (CBDC) will also have to continue to be measured against the criteria for a currency. It currently seems unlikely that bitcoin will fulfill all currency characteristics.
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