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Main page  |  FAQ  |  The list of characteristics that make Bitcoin a means of payment

The list of characteristics that make Bitcoin a means of payment

2017-02-20 00:00:00

Bitcoin , born in 2009, is gaining increasing popularity. Despite the intrigues of opponents and the numerous barricades they have erected on the path of development, virtual coins are becoming more and more popular. Initially, it acquired a savings function, proving superiority over fiduciary counterparts, but recently they have been partially transformed into a financial asset suitable for online and offline cash settlements.

What arguments are not used by opponents of the phenomenon of cryptocurrencies, hoping to belittle the merits of alternative monetary units. Sometimes their reasoning reaches the point of absurdity. The most interesting thing is that this lie, at times, pours from the highest tribunes and often from the lips of prominent economic and financial experts, whose "delusions" cannot be attributed to a lack of awareness.

At a recent conference in Washington, DC, representatives of the Central Bank of Europe expressed their views on digital currencies, including Bitcoin. During the presentation, a striking statement was made that Bitcoin does not fulfill any of the functions of monetary units: it is not a medium of exchange or store of value, and also cannot be used for accounting.

It is possible that such an opinion is provoked by a significant level of cryptocurrency volatility. After all, the Bitcoin exchange rate can change dramatically within one day. In any case, this announcement raised a very interesting question about the differences between digital currency, fiduciary currency and gold. According to economic theory, the following properties are inherent in money:

  1. Divisibility.
  2. Replaceability.
  3. The difficulty of counterfeiting.
  4. Deficiency.
  5. Recognition.
  6. Portability.
  7. Long service life.
  8. Prevalence.
  9. Ease of storage.

After reviewing these characteristics, it becomes obvious that Bitcoin has a huge advantage over both traditional money and precious metals. But before moving on to a more detailed study of the characteristics of monetary units, you should decide on the terminology used.

So, fiat money means a currency that is officially used in a certain country. Moreover, the means of payment linked to gold do not apply to them. Money considered fiduciary cannot be directly converted into a commodity. Most currencies in use today are fiat currencies.

Gold is comparable to commodity money. In this capacity, it has been used for several millennia. Gold coins, products and bars are very popular with people who see them as a worthy alternative to fiduciary money. In general, the qualitative characteristics of gold are in many ways higher than those of traditional monetary units.

Bitcoin is a digital currency that is not controlled by government or commercial entities. The issuance of virtual coins is carried out in accordance with an algorithm that limits the total amount of Bitcoins to a certain number. Thus, the emission process is completely transparent and quite predictable. Verification of transactions carried out with the participation of the first cryptocurrency is provided by the largest computer network in the world.

Modern society cannot do without money, which performs the function of exchange, and is also a means of saving and calculating. Below we will analyze fiat currency, Bitcoin and gold based on nine characteristics inherent in monetary units.

Deficiency

This quality means the difficulty of obtaining or manufacturing a specific object. Money fits well with this characteristic. Indeed, despite their wide distribution, they are quite difficult to issue. During the development of civilization, mankind used a variety of objects as money, ranging from sea shells. But most of them did not correspond to the scarcity indicator. If we take the same sea shells for comparison, then they are found only in a few places on the globe. Given their rarity, they could not be considered as monetary units. Whereas sand, on the contrary, is too widespread, therefore it has no value in small quantities.

Fiat currency is, of course, very scarce. It is issued by the government in limited quantities. Moreover, production is quite cheap, so production on a large scale can be started. Nevertheless, the emission of currency is controlled by the authorities, which purposefully maintains its scarcity. The exception is hyperinflation, when fiduciary money loses value due to the significant rate of issue.

Gold, compared to other precious metals, is considered very scarce. After all, it is very difficult to obtain, plus the available reserves of Aurum are quite limited. In fact, gold is the best option in terms of mining difficulty and prevalence. Taking copper as an example, it is problematic to use it when making deals due to the large amount of metal. Whereas the supply of platinum is too limited.

Bitcoin mining is quite predictable and completely controllable. It is expected that the mining process will take a hundred years with certain errors. As a result, exactly twenty one million coins will be released into circulation. Compared to traditional money, this amount does not look very impressive. But it should be more than enough, since each coin is divided into one hundred million parts.

Long service life

One of the defining characteristics of money is its use as a store of value. To perform this function efficiently, an object must have a long shelf life and not lose properties over time. Most of the items that were used for exchange in the Middle Ages, for example, livestock or wheat, do not fall under these characteristics, therefore, they cannot be counted as money.

Fiat money is not considered ideal in terms of durability. After all, the paper on which banknotes are printed is subject to wear and tear. However, even damaged banknotes can be exchanged for new ones. Thus, their actual value does not suffer from mechanical damage.

Gold is much more profitable in this regard. The quality characteristics of the ingots will not be affected by long-term storage. Plus, they dont require any special care. Coins tarnish over time or change shape as a result of mechanical stress, but the metal itself will fully retain its value.

Bitcoin is a digital currency, therefore, it cannot deteriorate from external factors. Another advantage of this solution is the ease of duplicating virtual wallets. This approach allows you to protect files from damage or loss. But if the user did not take care of creating a backup copy of the wallet, then the failure of the PC will provoke an irrecoverable loss of coins. After all, they cannot be restored by the example of paper banknotes. Therefore, the owner of the cryptocurrency should take the measures necessary to ensure the security of digital savings.

Portability

Monetary units should be convenient so that owners can easily use them to carry out daily settlements. Thus, another property of money is portability. In other words, the medium of exchange should not create any inconvenience during storage. Most of the objects used in the old days do not have this quality. We are talking about livestock or large quantities of metal, such as copper or silver. It is quite obvious that today it is unacceptable to carry bulky things with you in order to use them when making an exchange operation.

Fiat money is ideal for everyday shopping. Whereas to conclude a major deal, additional measures must be taken. For example, provide an armored vehicle to move large quantities of banknotes. Of course, the option of using a plastic card cannot be denied. But with the same success, you can apply them to other objects, for example, gold or livestock. Therefore, fiduciary currency can only be called portable.

As for gold, it does not have this quality at all. Like any metal, its ingots weigh quite a lot, so carrying them with you is very problematic.

Bitcoin fully possesses the quality of portability. And this is not surprising, given its virtual nature. Any number of coins can easily fit on a regular flash drive. In addition, cryptocurrency can be transferred almost instantly to anywhere in the world, provided that you have access to the Internet.

Divisibility

Most of the transactions performed involve the issuance of change. Only relatively few transactions use integer values. Therefore, there is a need for money of different denominations. If a physical object is used as a means of payment, then it should be conveniently divided into several parts.

Fiat money comes in different denominations, so it is very convenient to use it for making payments. And since they are printed on paper, there are no difficulties with storing banknotes of various denominations.

If we talk about gold, then theoretically, bars can be divided into several parts without losing their value. But this is a very difficult process, since it is hard and must first be melted using special equipment. It should also be borne in mind that an appropriate room is required to store the ingots.

Bitcoin is the most suitable object in terms of divisibility. After all, each coin consists of one hundred million parts. If necessary, this value can be increased even more. To clearly see the degree of bitcoin divisibility, you can conditionally equate one coin to a thousand dollars. In this situation, Bitcoin is split up to 0.0001 cents.

Recognizability

This quality allows you to determine the authenticity of money and distinguish it from counterfeiting. Thanks to this property, the risks for merchants accepting cash are significantly reduced. To improve the recognizability of banknotes, the emission centers place watermarks on the banknotes, and the edges of the coins are made ribbed.

Most people have no problem identifying fiat currency, because they use it throughout their lives. If there are doubts about the authenticity of a banknote, then you can quickly check it using chemical means or appropriate equipment.

Gold also outwardly differs from other types of metals in color, ductility and weight. But these signs can only be determined by a person who has experience in dealing with Aurum. Ordinary users find it difficult to distinguish it from other externally similar metals. To be sure of the authenticity of gold bars, tests must be carried out using special chemicals. But these studies are of increased complexity and are performed only in laboratory conditions.

Bitcoins cannot be visually identifiable as they lack physical manifestation. To carry out verification, you need to use the appropriate software that will confirm the authenticity of the cryptocurrency using a whole chain of blocks. But only a technically savvy user can carry out such a procedure. If Bitcoins are stored on a paper version of a digital wallet, then their exact amount is almost impossible to determine. In other words, Bitcoins are difficult to identify for a layman.

Ease of storage

For monetary units to perform the function of accumulating savings, they must be easy to store. Objects of art do not correspond to this parameter, since most of them are large enough. For their storage, it is required to allocate a special room that must meet certain criteria regarding temperature, humidity, illumination. In the not too distant past, cattle were a good option. But with the beginning of industrialization, most people moved to cities in which it is impossible to keep livestock.

There are no particular problems with storing fiat money. Of course, a secure space is required, but since the notes are lightweight, there is no need to set aside large areas. In some cases, you can get by with a spacious safe.

Whereas gold bars are quite bulky, so they need to be placed in spacious and well-protected rooms.

Storing Bitcoins does not involve excessive effort or time. Some difficulties are observed with the blockchain due to the constant increase in its volume. But developers are actively looking for a solution using new developments in the field of software. In any case, the owner of the coins can take advantage of methods such as backing up or putting files in the cloud, which minimize the risks of information loss.

Replaceability

Monetary units are equivalent, that is, they can be easily replaced with each other. Therefore, precious stones and works of art cannot be counted as means of payment. After all, each object differs significantly in price, which is determined by a set of special characteristics. For example, two diamonds of the same weight may have different prices. It depends on the purity of the stone, its color and other qualities.

Fiat currency fits well with this characteristic. After all, banknotes of the same denomination have equal value. As far as gold is concerned, formally, the cost of bars of one weight should be commensurate. But in practice, their price can differ significantly, depending on the chemical composition of the precious metal, or rather, the presence of foreign impurities in it. The higher their level, the lower the purity of gold, which is confirmed by the breakdown.

Today, all Bitcoins are equal. But it is possible that in the near future this situation will change and the system will reject the coins obtained by criminal means, for example, as a result of a hacker attack.

The difficulty of counterfeiting

Money can only be a reliable store of value if it is difficult to counterfeit. Owners must be sure of their authenticity, otherwise there will be no point in using them.

Fiat currency is fairly easy to counterfeit. According to some reports, a third of US dollars in circulation are counterfeit. It is rumored that entire states, for example, North Korea, are engaged in counterfeiting US currency.

Outwardly, gold is very difficult to counterfeit. But there are many cases when lead ingots were covered with a layer of Aurum and passed off as precious ones. Of course, special vaults test precious metals. But from the received batch, they select several ingots and carry out testing. Based on this circumstance, it is not possible to determine the true size of the fakes.

In this regard, Bitcoin compares favorably with the precious metal and ordinary money. After all, it is impossible to counterfeit digital currency. The only risk is the so-called double spending, when the user is sure that the coins were sent to him, when the transaction did not take place. A similar situation happened in the spring of 2013 and the risk of its repetition, thanks to the latest developments, has been minimized.

Prevalence

An irreplaceable quality of money is the ability to exchange it for goods and services. The user must be confident that he will be able to freely use the funds at a convenient moment.

Fiat money is the most optimal means of payment in a certain country. The US dollar and euro can be used almost all over the world. All other currencies are easily convertible into other national means of payment.

Gold today is very rarely used as a means of payment. Bars of this precious metal are a kind of investment. The scope of Bitcoin is largely limited to the global web. In everyday life, only a few stores agree to accept cryptocurrency. But it should be noted that the number of such outlets is increasing every day.

What is the future of Bitcoin?

Fiat currency and gold have been used as a means of payment for hundreds of years. Traditional money is supported by a specific state. Whereas Bitcoin has only recently appeared on the market and is actually in its infancy. Opponents of the cryptocurrency blame him for significant price volatility. It is difficult to disagree with this, but as the volume of its use increases, the price jumps become much smaller.

If you compare Bitcoin with traditional money and gold, then the advantages of the former become obvious. Once the legal and cultural hurdles are removed, the digital currency will become firmly established in the market. Then the merits of Bitcoin without further ado will tell about its advantages, and all the false statements of the experts of the European Bank and other opponents will be refuted once and for all.