(Drivebycuriosity) - There is a lot ado around Bitcoin. This is "a decentralized digital currency, without a central bank or single administrator", says Wikipedia (wikipedia). Many other also call Bitcoin a currency, which would make it comparable to the US Dollar, the Euro and other currencies.,
This morning the price of Bitcoin dropped 8% and continued the sharp fall of the recent days ( cnbc). The price of Bitcoin had quadrupled from November 2020 through May and then had given up half of the gains.
(source )
The wild fluctuations show that Bitcoin is not a currency:
1. Paying with Bitcoin is a game of chance because of the wild
fluctuations. Tomorrow`s value of any payment could be much higher or
lower than expected. Neither seller or buyer could calculate the
transaction.
If a company would mark their prices in Bitcoin they would lose their
customers when a sharp Bitcoin rally makes their goods & services
too expensive or they would suffer high losses when a Bitcom crash makes
them too cheap.
If someone borrows Bitcom he could go bust because his debt could
explode when the Bitcoin price jumps, lenders fear the risk of a sudden
Bitcoin crash.
The extreme fluctuations would make accounting and business plans senseless.
2. Bitcoin is popular because its supply is limited like Picasso paintings. According to Wikipedia new Bitcoins are created at an
ever-decreasing rate (wikipedia). The total number of Bitcoins is capped at 21 million.
But this restriction also an obstacle on the way to the use as a
currency. In the 1940's, Milton Friedman recommended a fixed money
supply, the idea that the money volume should be kept at a certain
volume. Later he abandoned this proposal. He realized that a growing
economy, say with a rate of 2% annually, needs a growing money supply.
The money volume has to grow at least with the same rate as the economy
to finance the growth. Otherwise prices - including wages - would have
to fall, in this example around 2% annually. Friedman acknowledged that
generally falling prices could lead to a severe depression. Therefore
the limited supply of Bitcoins would not satisfy economic growth.
Because of these problems it is highly unlikely that many people use
Bitcoin as a currency, say for payments, calculating prices of goods
& services, and denominating loans. Today there is already a strong
competition between alternative currencies like US Dollar, Euro, Chinese
Yuan, British Pound (Pound Sterling), Swiss Franc and more. Each of
these currencies represents an economy and it is much more reliable for
economic calculations & transactions than Bitcoin.
Conclusion: Bitcoin is cool because it is a very geeky Internet gadget.
The wild price fluctuations invite gamblers to play with it. But it is
not a currency and will never be.
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