Here are five problems with bitcoin that will ultimately cause it to fail
I’m not saying cryptocurrencies will fail. In fact, it’s pretty obvious that the future of currencies is digital, and crypto is just a special way to make digital currency work.
I say bitcoin will fail. I have seen articles that use bitcoin and cryptocurrencies as synonyms, but this is a mistake. There are thousands of cryptocurrencies and bitcoin is just one of them. It’s the oldest, so it’s the best known, but I think there are some serious issues with bitcoin that will cause it to fail. Here are the main reasons.
There is no real value
Some people say that fiat money (which are the normal currencies we all use today) also has no real value since we got off the gold standard. This is a mistake. Fiduciary money has the value of the guarantee of the government which issues it. In fact, on the Indian rupee note, you will see a âpromise to pay to bearerâ issued by the governor of the RBI. In US dollars, you will see the words “legal tender” which means the same thing. Governments have the power to tax their citizens and businesses, the ability to sell public assets, issue bonds, and other means of securing their currencies. These are formidable powers that give confidence that the value of the currency will be there.
Stocks have real value because of the ability of companies to generate profits from the goods and services they sell. Raw materials have real value because industries buy them as raw materials for use in the production of goods and services.
The only value of bitcoin is that someone else is willing to pay the price for it. In that sense, it’s like a work of art. But even a work of art has the ability to beautify the space it occupies. Bitcoin doesn’t even have that.
There is no stabilizing force
The fiat currency is strongly defended by the government which issues it. Central banks go to international money markets to carry out “market operations”, that is, to buy or sell their national currencies in order to keep them stable. Without stability, a currency does not work.
Bitcoin’s volatility makes it a terrible currency. It doesn’t matter how many sellers say they accept it. Just think of it this way: if you have bitcoin, will you be using it to buy anything? You won’t. You would just use fiat money. This is because you did not buy bitcoin to use it as currency. You bought it as a speculative investment hoping it would increase in value. You would not pay in bitcoin because you fear that two weeks later the value of bitcoin will increase by 20%. For the same reason, when bitcoin starts going down, sellers will stop accepting it as a form of payment because they don’t want the value to drop 20% a week later.
It competes with national currencies
Bitcoin supporters say it will replace fiat currency. If this has any chance of becoming true, it means bitcoin competes with national currencies. Can we really imagine the central banks of China, the US and the EU saying ‘let’s cancel our currencies and just use bitcoin, which no one can control’? It would be fatal to their monetary systems! As we have seen in recent days, China has banned bitcoin trading and mining. Various other countries have also hinted that they will do the same. So, no, countries will not embrace bitcoin. They’ll release their own versions instead, and then ban bitcoin.
Investing in bitcoin is not investing in blockchain technology
There are cryptocurrencies, called stablecoins, that are backed by real assets (such as the US dollar) that use the latest blockchain technology. These coins are much more suitable for use as currencies because they only fluctuate as much, or as little, as their underlying assets. Again, no, no one is buying bitcoin because of their blockchain technology because there are better options available.
Bitcoin is a utopian dream
Why are important people buying bitcoin if it has so many problems? Some bitcoin proponents see a future where currencies are fully democratized and not controlled by governments. I am not convinced that this future will come based on the above reasons.
The massive amount of liquidity in the markets right now, coming from the monetary and fiscal policies of many governments to fight covid, is a big reason for the rise in the value of bitcoin. This is not sustainable in the long term.
Whatever other advantages bitcoin might have over fiat currency, such as speed of transactions, will be eroded when fiat currency becomes fully digital.
Moh Hon Meng is co-founder of the iFAST group.
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