Bitcoin to USD Has Unlimited Potential, Maybe

We’ve all heard of Bitcoin but there are actually over 700 cryptocurrencies currently be traded.  These are forms of money, meaning mediums of exchange, which are challenging fiat currencies maintained by central government banks.  Even as the exchange rate for Bitcoin to USD is setting new highs, in defiance of prediction after prediction of its impending demise, it is still unknown to the vast majority of people.

Commerce in Bitcoin is Growing

Many companies now accept Bitcoin as payment for goods bought online.  Some online casinos also accept Bitcoin through an eWallet.  A Bitcoin casino also still accepts many other currencies as well.  For the average person, the biggest problem with cryptocurrencies is that we are so used to government currencies that we have a hard time getting our heads around the notion of a currency independent of a government.

Although Bitcoin was created only in 2009, by an “inventor” called Satoshi Nakamoto, who most people think is the pseudonym of a group of creators, the idea of an alternative currency was known at least 100 years ago.   Thomas Edison spoke about a currency that would replace government currency because governments had already proven themselves unreliable with regard to the trustworthiness of their currencies.  Bitcoin value and the value of all cryptocurrencies is thus a function of the confidence people have or don’t have in fiat government currencies.

Trillions could be Lost

The great fear is that it is inevitable that fiat government currencies will all implode and a new medium of exchange will have to be established.  Cryptocurrencies take the formation of new currencies out of the hands of governments.  Government money is no longer backed by a physical entity, such as gold, as it was in the past.  It is in reality a measurement of debt and if enough people default on their debts all at once a crisis ensues.  This is what happened in 2008 as mortgage holders defaulted on their loans.  But the fiat currencies that had produced the overconsumption of mortgagees lived on.

Scary Terminology

The language of cryptocurrencies also scares away a lot of people.  They say that alternative currencies are “mined”.  They say that the amount of money represented by cryptocurrencies will be limited.  The average person doesn’t understand how it will be possible to limit mining of new money.

Gold Supply Grew

When money was backed by gold, the amount of gold was never limited.  The biggest reason that gold survived for so long as the backing for government issued money is that it is relatively rare, durable, and hard to find.  Prospectors looked for gold all the time but the supply rarely took monumental leaps forward.  The biggest complaint against gold was that it was an artificial backing for money.

The reality is that any medium of exchange that is not self-backing is backed by something else.  The world’s government currencies are backed by trust in government.  That’s what drives the alternative currency market: few people really trust their or any other government.

Strange Process

In order to use a cryptocurrency, you need a “wallet”.  This wallet is not like the wallet you carry in your purse or pocket.  The term is therefore a bit misleading.  The wallet stores your alternative currency and interacts with “blockchain” using “keys” to transfer the currency from your wallet to their wallet.

Blockchain is another of those frightening new terms that accompany cryptocurrencies.  Blockchain is software that records currency movements and can be used to record almost any kind of transaction.   It is called a “digital ledger”.  The point with blockchain is that you don’t need to know how it works.  We don’t know how many things work but we know that they do work.  The same applies to blockchain and cryptocurrencies generally.

Do National Currencies have to Crash for Cryptocurrencies to Take Over?

The USD is backed by the full faith and credit of the US government.  As a combination of nasty partisan politics and the ever-growing US national debt push people away from believing in the full faith and credit of the US government, it could happen one day that the USD is replaced as the world’s reserve currency.

No one really wants that to happen, not even bitcoin enthusiasts.  There would be so much havoc on all world markets, for foodstuffs as well as stocks and bonds, that it could disrupt the world in ways unforeseen.

For now, Bitcoin will simply be another currency and the other 700 or so cryptocurrencies will also be just currencies floating around, being used to buy goods and services, but not threatening the hegemony of fiat government currencies.  Many other things have been used historically as currency from beads to cigarettes.  They also didn’t overtake fiat currencies.

Billions of people would have to lose complete faith in government money for the cryptocurrencies to take over.

 

 

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