Bitcoin claims it is “the first decentralized peer-to-peer payment network that is powered entirely by its users without any central authority or middlemen.” This lack of central authority is the main reason governments fear cryptocurrency. It is important to understand the differences between conventional currencies and governments to understand this fear.
Points to Remember:
- Bitcoin has been gaining attention over the past decade not only from individuals but also from governments all around the globe.
- Some countries fear that Bitcoin could be used to circumvent capital controls, money laundering, or illegal purchases. This could pose a risk for investors.
- Others have raised more serious concerns about the potential for decentralized cryptocurrency to undermine or destabilize central bank control.
In What Do We Trust?
Fiat refers to the traditional currencies issued by governments. Fiat currencies are worth their value because they are issued by governments. This promise is meaningless to an increasing number of people. Fiat currencies cannot be backed by tangible assets.
The government cannot return currency in exchange for a bar or can of gold, silver, cans of beans, or other items of value. Fiat currencies are backed only by the full faith, credit, and integrity of the government that issued them. You can exchange your fiat currency for gold, Silver, or beans with someone or an entity that has the item.
Why Control Matters?
Governments control fiat currencies. They control fiat currencies by using central banks to create or destroy money from thin air. They can also control how fiat currencies are transferred. This allows them to monitor currency movements, determine who benefits from them, collect taxes and track criminal activity. Nongovernmental bodies can create their currencies, removing all of this control.
The control over currency can have many downstream effects, including on a country’s fiscal policies, business environment, or efforts to combat crime. Although each topic is complex enough to fill volumes, this brief overview will give you an idea of the overall concept.
Fiscal Policy
While the threat of crime is a major concern, currency’s role in a country’s monetary policies could have a much greater impact. Control over currency is a serious concern because governments can increase or decrease the amount of money that circulates in an economy to stimulate spending and investment, create jobs or prevent out-of-control inflation or recession. This is an extremely complex topic.
The Business of Bitcoin
Bitcoin users don’t require the existing banking system. When so-called “miners,” use their computers to solve complicated algorithms that verify Bitcoin transactions, the currency is created in cyberspace.
They receive payment in the cyber currency as their reward.
The entire banking system may be rendered obsolete if Bitcoin or another cryptocurrency is widely accepted. This may sound great considering the current behavior of the banking sector, but there are two sides. Who will you call if your mortgage payment has been hacked without banks? How can you earn interest on savings? Who will help if a transfer fails?
Although the financial crisis has given bankers a worse reputation than before, there are still some benefits to institutions that ensure timely, efficient, and reliable asset transfers and record keeping. The fees banks charge for their services are another issue. These fees create a lot more revenue and many jobs in the global banking industry.
These jobs and the tax revenue that banks and employees generate are lost without banks. In a virtual world, money transfer businesses would disappear as well. If everyone uses Bitcoin, there is no need for a Western Union or any of its competitors.
Crime Concerns
Virtual currency and crime have been the subject of so much writing that it is easy to summarize the issue by saying that financial transactions that are not traceable facilitate crime. The ability to transfer money in an untraceable manner is a boon for drug trafficking, terrorism, money laundering, and other subversive activities. One example is the now-defunct Silk Road online drugs market. Its founder credits Bitcoin for its success.
The Other Side to Bitcoin
Virtual currencies are not only a headline-grabbing option for illicit activities but cash can also be used for many of the same transactions. There is also a theoretical argument that supports their use. This argument is based upon the fact that central banks manipulating the money supply have induced recessions and exacerbated unemployment and created a global banking system that is profiteering-based and corrupt.
For insight into the reasons disillusioned consumers would support the efforts of anonymous programmers to subvert a system that has not done them any favors, we need only look as far as 2008’s mortgage-market shenanigans. These ideas are not novel. These ideas are not new.
Before you Buy-in
You might want to know more facts before you convert your national currency into Bitcoin. You may want to consider some additional facts before you convert your national currency to Bitcoin.
Mt. Gox, the largest cryptocurrency exchange that converts dollars into bitcoins, was hacked by hackers who allegedly stole bitcoins worth hundreds of millions. A previous hacking incident netted $8.75million. Another alleged hacking incident netted $8.75 million.
Digital currency means that you cannot touch it or hold it. Its value fluctuates in an extremely volatile way. It is created anonymously by programmers using a method that is difficult for most people to comprehend.
Bitcoins can be stored on computers by users, so “users run the risk of losing their funds if they fail to implement adequate antivirus and back-up measures,” according to Virtual Currency Schemes, a paper published by the European Central Bank.
Hardware failure aside, throwing away an old computer without first removing your Bitcoin can also lead to a loss of your digital fortune.
In short, when you use Bitcoin, your money is being trusted to a complicated system that you don’t know, people you don’t know about, and an environment with limited legal recourse.
This would be a red flag enough to make it a bad idea in the world of traditional investing. The European Central Bank in 2018 reported that Bitcoin was only one of more than 1,600 digital currencies currently in circulation. As of July 2021, there were nearly 11,000 cryptocurrencies and 384 cryptocurrency exchanges.
Even if bitcoin fails, or is relegated to a minor role on the world stage, one of its successors could change the way the world views currency.
A Bitcoin for Your Thoughts
What does the future hold Bitcoin and other virtual currencies like it? They are here to stay, it is clear. The virtual currency can be used to purchase a variety of games as well as at retailers like Overstock.com.
You can also use Bitcoin for gift cards, such as those from Dunkin’ Donuts and Home Depot.
Based on the enforcement and regulatory actions taken by major governments such as the United States, China, and Russia, this status is unlikely to change any time soon.