The Promise of Bitcoin — Why has it gained such a strong following?
Is it digital gold or just worthless numbers? The basis for a new and better financial system or the world’s biggest Ponzi scheme? Since its inception in 2008, Bitcoin has continuously gained popularity, but opinions on the blockchain-based currency differ widely.
Join us as we take a closer look at the promises of Bitcoin and explore why it has gained such a strong following.
To understand Bitcoin’s rise, it’s best to start by taking a look at the current monetary system.
The financial crisis of 2008 led to a loss of trust in the traditional financial system. People began to question the value of the US dollar, which is fully based on trust in central banks. Since the dollar was de-pegged from the gold standard in 1971, the world has been burdened with debt and the money supply has increased dramatically, resulting in a significant loss of value over time — it’s estimated that 1 USD has lost more than 96% of its purchasing power in the last 50 years. Central bankers seem to have shifted their focus from maintaining the stability of the dollar to simply keeping it alive.
Fiat currency, or money controlled by a government, has a history of having a limited lifespan before those in power abuse their monetary power and devalue the savings of hard-working individuals.
When talking to ‘Bitcoiners’ the term “Sound Money” is used pretty often. So what does it actually mean?
Sound Money refers to a monetary system that maintains its value over time and is free from manipulation by central authorities such as governments or central banks. To be considered “sound,” a monetary system must have several properties including scarcity, durability, divisibility, recognizability, portability, acceptability, store of value, unit of account, fungibility, and security.
Historically, precious metals like gold and silver have been considered the best examples of sound money, but they lack portability. This is why gold-backed paper bills were introduced, which are much more easily transported than gold bars. The US dollar therefore actually was considered sound money before its removal from the gold peg.
Instead of hoping for the reintroduction of the gold standard, which is unlikely as it benefits those in power, sound money advocates have turned to Bitcoin.
So is Bitcoin Sound Money? Let’s put it to the test, shall we?
Scarcity:
One of the most important properties of sound money is that it is scarce, meaning that there is a limited supply. Bitcoin has a maximum supply of 21 million coins, which ensures scarcity and helps to prevent inflation.
Durability:
Another important property of sound money is that it is durable and can withstand wear and tear over time. Bitcoin is digital, so it is not subject to physical wear and tear, but the blockchain technology that it is based on is designed to be highly durable and resistant to tampering.
Divisibility:
Sound money should also be divisible, so that it can be easily exchanged for goods and services of varying value. Bitcoin is highly divisible, with each coin being able to be divided into 100 million smaller units called satoshis.
Recognizability:
People must be able to easily recognize the money as money. Bitcoin is a digital currency, and although it is not widely recognized as a form of payment in brick-and-mortar stores, it is widely recognized and accepted online.
Portability:
Sound money should be easily transportable, both physically and electronically. Bitcoin is highly portable, as it can be easily transferred over the internet, and it can also be stored on a variety of devices, including smartphones and hardware wallets.
Acceptability:
Sound money should be widely accepted as a means of exchange for goods and services. Bitcoin is becoming increasingly accepted as a form of payment, but it is still not as widely accepted as fiat currencies.
Store of Value:
Sound money should maintain its value over time, and Bitcoin has been known to be volatile in the short-term, but over the long-term it has been a store of value.
Unit of Account:
Sound money should serve as a standard unit of measure for the value of goods and services. Bitcoin can be used as a unit of account, as prices for goods and services can be denominated in bitcoin.
Fungibility:
Sound money should be interchangeable and have the same value, regardless of its history or origin. Bitcoin is fungible, as each coin has the same value and can be easily exchanged for another coin of the same value.
Security:
Sound money should be protected against counterfeiting and fraud. Bitcoin uses cryptographic techniques to ensure that transactions are secure and that coins cannot be counterfeited.
It seems like Bitcoin passes the test to be considered sound. But…
Will a new global financial system be built around the decentralised Cryptocurrency? It’s certainly too early to tell right now, but one thing is for sure, if Bitcoin continues its road to mainstream adoption it’s because the people chose it and not because Governments told people that they have to accept it.
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