Why Should Bitcoin Never be Accepted as a Global Currency

The Lesser Known Drawbacks of the Cryptocurrency

“People get excited from big price movements, and Wall Street accommodates … You can’t value Bitcoin because it’s not a value-producing asset.” It’s a “real bubble.” — Warren Buffet

There has been a massive surge of support from people in the last few years advocating the need for a cryptocurrency to be a Global Currency. If this were to happen, there would be only one serious contender, the Bitcoin.

Bitcoin has been in existence since 2009 and has been garnering a great deal of attention ever since. The primary reason to create the Bitcoin is based on the Austrian School of Economics, which advocates the free production and distribution of money, thus, ending the power of the Central Banks of the world that control the currency flows currently.

The primary reason that most people are skewed towards this proposition of a Global Currency which is decentralised, digital and impossible to duplicate is that people have lost faith in the fiat currencies of the world. Why wouldn’t you lose hope?

In the 21st Century alone, we have seen countries completely ruin their currencies due to lack of judgement, selfish political agendas and the polarisation of the world.

• Greece after the Global Financial Crisis of 2009 was forced into the most prolonged ever recession amongst developed economies as the government, and the Central Banks had underreported the debt of the country by more than half of what it actually had at the time. When this came to light, the government was forced to take on austerity measures which resulted in 12 rounds of tax increases and spending cuts which led to riots and protests across the country.
• Venezuela since 2010, has been in a state of hyperinflation. A carton of eggs today in Venezuela costs 250,000 Bolivar as compared to 6,700 Bolivar in 2017.This is the effect of hyperinflation on the people of a country where prices increase by 50% every month.Due to this phenomenon which was led by political instability and the constant greed of power, the currency of Venezuela today is worthless.

We can go on with these examples and talk about the high amount of government debt in Argentina or how Zimbabwe today has a 100 Trillion Dollar note equivalent to just US 40 cents.

These kinds of events have left millions of people languishing for their livelihoods and paying for mistakes their governments have been making. People had lost their faith in the financial system of their countries and hence when they got to know of a cryptocurrency that would help them tackle some of these problems they were ready to choose this alternative.

Yet, most of the people who advocated for Bitcoin to take on the role of a legitimate currency tend to look at the issue of existing fiat currencies on a standalone basis. While I agree that the Governments and Central Banks have not been able to manage the economies successfully, I do not agree that Bitcoin will help us resolve our issues. Frankly, it might create new ones that we have not yet identified and most probably will be beyond our control.

Some of the lesser-discussed and known issues with Bitcoin becoming a legitimate currency are:

The Dark Side of User Anonymity

Everybody who supports the adoption of Bitcoin does so because the transactions maintain 100% user anonymity. If you were to conduct a transaction with bitcoins, none of your personal data would be made available in the transaction. Each individual gets their own unique identifier which enables them to maintain complete secrecy.

This very reason is the worst enemy for any country’s government to regulate payments either domestic or international, taxation and more importantly control crime. The fact that you and I can go trade in Bitcoins without the knowledge of anybody knowing also means the terrorist organisations and the mafia can do the same.

Crime rates can increase as terrorist organisations will be able to bypass the very structure that is keeping them on the fences today. While your information is secure, it doesn’t mean the system recognises between the legal and illegal aspects in which the cryptocurrency can be used.

For this very reason of user anonymity, people on the dark web have already made Bitcoin the most liquid and easily traded currency, and there is nothing you can do about it because you don’t have any information about their identity.

Extrapolate these transactions on a global scale and imagine the consequences once it starts being used for the wrong reasons.

The Supply of Bitcoins is Limited

The mining of Bitcoins will seize the day 21 million Bitcoins have been mined. That means the currency will be limited in circulation unless we have another cryptocurrency in as well.

Every country today faces its own domestic issues which are in most cases correlated with the rest of the world. For example, the Global Financial crisis, which originated in the US had a trickling effect in Europe and Asia as well. During such times, as businesses were bleeding, and people were losing jobs, the Central Banks were in a position to print money, allowing the government to take on the debt and thus supply that money to the citizens and businesses to weather the storm.

Another event, which you and I are currently are part of is the Pandemic. Nobody saw this coming, and we can’t blame the governments for this. Yet, countries like the US needed to print money up to USD 3 Trillion to keep the countries afloat and help unemployed people.

How will you do this when your current supply of Bitcoins is limited and more importantly, who will you turn to in the event of a crisis? Sure, there are plenty of loopholes, and countries have been failing with the current system in place. Yet, the critical point to note here is that when things go wrong in a centralised system, there is accountability for it. You can hope to correct the system as you know what exactly went wrong.

In a decentralised environment, when there is a crisis, the supply of money is limited, and there is nobody to regulate the cryptocurrency, how will you implement progress and change?

Data Hacks & Frauds

The Bitcoin software itself is still one of the most secure software out there. The issue, however, lies with the third-party wallets which are not even close to being as reliable. From Hackers to Ponzi schemes promising high returns, Bitcoin owners have been victims of investing in a product they do not fully understand and of an infrastructure that is not able to provide protection to their investments.

One of the most noteworthy hacks was that of Mt. Gox, the most actively used exchange for Bitcoins from 2010 until 2014. But, in 2014, they announced they had been hacked, and 850,000 Bitcoins had gone missing. The value of which today is close to USD 4.5 Billion.

Income Inequality will Peak

It is no secret that the developed markets today have the edge on Bitcoins solely because they were early adapters to the technology. Within these markets as well, the number of people that hold Bitcoins are far and few.

As I am writing this article, the price of a Bitcoin is worth over USD 9,200. While all of us know that Bitcoin cannot be produced after the 21 millionth one is produced. With such a high cost of investment, the people who can afford them today are those who fall in the rich and wealthy bracket.

Sure, you can buy a fractional value of a bitcoin as well, and that would imply that almost anybody can purchase the cryptocurrency. But, when I refer to affordability, it is from a risk-reward ratio. Bitcoins have been the most volatile asset in the last decade. It has been known to double or halve in value within a couple of months based on news and speculation relating to the cryptocurrency.

In November 2018, the price of the Bitcoin was around USD 6,200 and the following month in December it crashed to USD 3,000 eating away half of the value of the currency.

Therefore, from a risk-reward ratio, wealthy investors are in a better position to ride the volatility for two reasons:

• First, they can afford it. A wealthy woman/man who has invested in this asset class will not be as affected as an average investor, should the value decrease significantly.
• Second, if the world is moving towards this direction, the person with more money will be able to buy more Bitcoins. Simply put, the 1% of the world will run towards this safe haven because they can afford it. This is where income inequality will rise to exponential levels. The rich will get richer because they have more now, and the new system of scarcity allows them to have more in the future.

How will Businesses Raise Capital/Debt?

Whether you run a Startup or are part of a manufacturing or agriculture industry, raising capital or debt is an integral part of the growth of the business. When businesses are going through the most robust phase of the Business Cycle, they are going to require capital to keep the entity going.

Today, you can go to the Bank, Angel Investors or Venture Capitalists for raising money. The terms might not be fair, but at least you have the liberty of making the choice of taking it. Also, the reason we can go to any of these institutions to raise money is that money is readily available today. People have more so they can invest more, they can give more. All of this changes when we limit the supply of the currency and tell people that you can sit in a warehouse and mine your own money because Central Banks do not have the power to print any money now.

If we are looking for an alternative to the current system, it should not be one that helps solve some of the persisting issues but gives rise to plenty of new ones. The current world order doesn’t work for a lot of reasons, but the option we are looking at is no good either. At least not now.

Some of the smartest people in the world have got the currency play wrong on so many occasions, including governments. To think that Bitcoin is the ultimate solution to everything that we have done wrong in the past is merely premature, to say the least.

Hopefully, we can find a blend of the two systems that will eventually neutralise the issues we face today. Maybe something along the lines of using Blockchain as a technology for the existing currencies, which will give us the best of both worlds. Until then, we are better off the way we are at present.

Why? Because the devil we know is always better than the devil we don’t.

See you next time…