The cost of Bitcoin has skyrocketed over the past year, this cryptocurrency is becoming more and more popular among investors and companies. The future of cryptocurrencies looks promising, but digital coins still have many obstacles to overcome before they become an important part of the financial system.
Is Bitcoin a Threat to Traditional Currencies?
First of all, cryptocurrencies need market regulation. However, a cryptocurrency like Bitcoin is unlikely to threaten traditional currencies. Bitcoin, on the other hand, may continue to evolve as an alternative to traditional assets like gold.
In 2020, cryptocurrencies, especially bitcoins, brought the greatest profit as risk appetite increased and financial markets recovered. If in March 2020 the price of Bitcoin was below $5,000, then in April of this year it exceeded $63,000. In mid-May, the price fell just below $50,000.
Bitcoin has also benefited from growing fears that massive money printing will devalue traditional currencies, as well as from news that a number of reputable investors and companies have begun investing in cryptocurrencies.
Bitcoin currently has access to financial instruments such as a functioning futures market, funds, and other investment products. Thus, the growth of bitcoins can now also be explained by favorable market conditions and the growing acceptance of this cryptocurrency as a market asset.
Will the Bitcoin Bubble Burst?
As with many other assets, there is a high risk of BTC bubble formation. However, analyzing the value of Bitcoin is particularly difficult.
Traditional assets like stocks, bonds, or real estate have a rate of return that can be used to calculate their value relative to other assets. It’s even impossible to determine the true value of Bitcoin and raw materials, which are deprived of such an opportunity
Still, you can get an idea of the change in the cost of many raw materials by tracking changes in demand. For example, when forecasting the price of oil, it’s known how much oil will be consumed, taking into account economic growth and other aspects.
The price of Bitcoin is more difficult to determine since all price predictions must be based on the assumption of how widely and intensively this digital currency will be used in the future. And here a number of radically different points of view take place: from those who believe that Bitcoin will replace traditional currencies, to those who believe that Bitcoin will be banned and become useless. The truth, probably, lies somewhere in between.
Cryptocurrency Is a Headache for Central Banks
In recent years, Bitcoin and other cryptocurrencies have taken significant steps to become a recognized investment asset. Last year, Paul Tudor Jones, one of the most successful hedge fund managers in the world, announced that he had invested in Bitcoin:
The only thing that I know for certain is I want to have 5% in gold, 5% in bitcoin, 5% in cash, 5% in commodities.
The electric-automobile manufacturer Tesla also announced earlier this year that it had acquired bitcoins amounting to $1.5 billion. Coinbase, the world’s largest cryptocurrency exchange with a market value of over $60 billion, was listed on the Nasdaq exchange. There are other examples where companies and banks are announcing that they will start offering different types of services with cryptocurrencies.
While cryptocurrencies are on the rise, many skeptics are appearing. Among the biggest opponents are central banks, which see cryptocurrencies as a growing threat to their currency monopolies.
They may not be worried about Bitcoin and other ‘independent’ cryptocurrencies. Their biggest headache is the plans of large tech companies to create stablecoins or private cryptocurrencies with a fixed exchange rate against traditional currencies.
The most striking example of a stablecoin is Facebook Diem (formerly Libra), which could in fact become a threat to traditional currencies if used by billions of people around the world.
It was originally planned that Libra would start working in 2020, but the project had aroused strong suspicions in the United States and the European Union, which caused delays and changes in the concept.
Central Banks Avoid Competition
The problems with the Diem or Libra cryptocurrencies are a good example of how governments and central banks are unwilling to deal with competition. In particular, the United States has good reason to do everything in its power to maintain the dollar’s status as the world’s largest currency. Today, the US dollar is used in nearly 9 out of 10 global transactions.
The fact that the dollar is so dominant gives great strength to the USA because it controls the supply of the currency. Those who want to use dollars electronically are completely dependent on the US banking system, which increases the influence of the United States.
Neither the United States, nor the European Union, nor China, nor any other state with its own currency is interested in Bitcoin or any other cryptocurrency becoming a means of payment.
The main weapon of states is the systems of regulation and supervision at their disposal. By limiting in various ways the feasibility or legitimacy of cryptocurrencies, states can limit these threats. The European Union has already presented a draft of what the legal regulation for cryptocurrencies might look like.
But still, rules are rather necessary. Regulation and better supervision are essential to make it harder for cryptocurrencies to be used for all kinds of illegal activities, to strengthen consumer protection, and to improve security.
Will Local Digital Currencies Appear?
Central banks know that the success of cryptocurrencies is partly due to the shortcomings of traditional currencies. Simply put, traditional currencies are not suitable to meet future service and payment requirements.
Therefore, many central banks are planning to introduce their own digital currencies, which will have more functions than modern traditional currencies. The Bank of Sweden has ambitious plans to introduce the e-krona. In China, the authorities have already begun testing the e-yuan.
However, none of these currencies in the form of cash can be used anonymously and, most likely, outside the country.
Huge Electricity Bills for Crypto Mining
A significant part of BTC’s criticism concerns the fact that its mining consumes a large amount of energy. In 2020, the Bitcoin network consumed 77 TWh of electricity, which corresponds to the annual energy consumption of Sweden.
The higher the price of Bitcoin, the greater interest to obtain it. There is an opinion that such consumption is a waste of energy. However, the mining process ensures the security of the BTC chain, ensuring that no one can sell their bitcoins multiple times.
- Thus, high power consumption can be viewed as a cost of maintaining network security.
However, this doesn’t change the fact that electricity consumption is a big issue. Today, making a single transaction with Bitcoin requires as much energy as it takes to complete approximately 700K transactions with traditional payment cards.
Since Bitcoin and most other cryptocurrencies are relatively little used as a means of payment, these currencies have become something that is bought and sold mainly as financial investments.
As an investment asset, Bitcoin poses no greater risk to traditional currencies than physical gold. Rather, Bitcoin has become the equivalent and competitor of gold.
Bitcoin is worth over $1 trillion today. This sum is equal to 11% of the value of all physical gold available in the world. Today people use gold as an investment and store of value, not as a means of payment. Most likely, this will be the future of Bitcoin.
As long as Bitcoin doesn’t threaten traditional currencies as a means of payment, governments and central banks around the world will keep it alive. But the dream of Bitcoin enthusiasts that one day it will gain world dominance in the foreign exchange market is just a dream so far.
How do you see the future of cryptocurrencies? Feel free to share your thoughts in the comments!