Bitcoin 101

Bitcoin Vs Fiat: Understanding why Bitcoin is better.

It is true that ever since the creation of Bitcoin in 2008, it has outperformed almost (if not all) assets currently known to you and I. However, knowing why Bitcoin is a good alternative to Fiat and Gold as a method of payment, and why it beats banks is more fun.

In this article, we will look at why Bitcoin is better than Fiat and gold and of course discuss the reasons why many traditional investors still fear putting their money in assets like cryptocurrencies.

Bitcoin Vs Fiat: How the two differ.

If you understand how fiat works, you will know that the value of your money decreases over time. Due to inflation, the amount of money needed 20 years ago to pay for coffee has more than doubled, thereby decreasing your purchasing power.

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Though many complain of the volatility in Bitcoin’s price (which of course is very extreme) fiat is also volatile. I would personally choose to have my money change in value on a daily basis but generally increase in value over time than a decrease in value.

Many naysayers of Bitcoin complain about the fact that Bitcoin has no intrinsic value. Well, that is true and also true of Fiat currency. Your dollar has no intrinsic value, hence the reason why governments and central banks can print fiat money at will.

If you still think your dollar is backed by gold, then you might still be living in the 1960s or 70s because since 1971, gold was scrapped as the backer of the dollar and the dollar in your pocket is now backed by “full faith” in the government.

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Well as you might already, the full faith in the government failed us all in 2008 after the financial crisis that didn’t just affect the United States but the entire world.

With Bitcoin, your money is not backed by any government as some have in the past failed their people, for example, that of Venezuela and Zimbabwe and who were just printing money at will leading to some of the most well-known inflations in recent times.

Putting your money in Bitcoin means you are not trusting any human with your hard earned cash (who are generally very greedy), you are simply trusting a machine which is currently very secured cryptographically and operates on the blockchain.

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Imagine that half the worlds population walks into the bank today and ask to collect the money which they saved in the bank. Do you think you will be able to get it? Well if they are lucky, they might get 10% of their money because that’s what banks are legally allowed to keep in liquid form.

You may be wondering where 90% of the money goes to. Let me tell you where it goes to, it goes to companies seeking loans from the bank. While the banks charge them relatively high for that, you get pennies as a reward for having them lend your money.

Let’s not forget criminals are also busy counterfeiting fiat, which also inflates the monetary system.

Enough said. Let’s see how Bitcoin plays out when compared to characteristics of what we consider today to be money.

Characteristics of Money. Why Bitcoin is better than fiat

Portability:

Bitcoin is portable because it is generally in digital form. Looking at this characteristic of money, Bitcoin is even more portable than Fiat or Gold.

Imagine Bill Gates walking into the bank and asking them to give him all his money so he can take it home. If at all the bank has that money available for him, he needs to remember bringing a Van along to carry everything.

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Durability:

Money should be durable and reusable. While fiat also meets this requirement, imagine your 5 years old tearing apart your 5 dollar bill. In principle, you can walk back to the bank for them to “sustainably print” you another 5 dollar bill, with Bitcoin, no need to even bother because the coin can be reusable over and over

Divisibility:

Bitcoin just like fiat can divisible to smaller amounts to 8 decimal places with 0.00000001 BTC being the tiniest fraction of a Bitcoin. With Fiat, that is 0.01 dollar.

Uniformity:

This means all denominations of a certain currency has the same and have the purchasing power. For example, my $2.50 should be able to get me the same coffee which your $2.50 can get you.

Limited in Supply:

Money needs to be limited in supply. In the case of Bitcoin, we all know there is only going to be 21 million Bitcoins ever. This same is not true for Fiat currencies as we have in the past seen governments who just create fiat notes out of thin air, which therefore leads to inflation and the decrease in your fiat’s value.

General acceptance:

Money needs to be generally acceptable. In today’s world, the dollar is generally acceptable in the US but move to neighbouring Canada, you will most often have to convert that money to Canadian Dollars. With Bitcoin, that is not the Case, if a restaurant in China accepts Bitcoins, it saves you the hassle of converting Bitcoin to Chinese Yuan before paying for your food. All you need to do is pay for the food with your Bitcoins on your phone.

You may now be wondering why many still believe in fiat currencies like the dollar even though we have just seen Bitcoin seems to be better than the dollar.

Why many still prefer fiat over Bitcoin

Even though the above points show Bitcoin is better than Fiat, many still prefer Fiat to Bitcoin. Here are some of the reasons why.

Governments:

While some governments have criminalized Bitcoin, most just see it as a grey area which means many people, even those who believe Bitcoin is better than the current dollar fear touching it.

This has made many to look at Bitcoin from afar, being scared of what the implications can be they touch it.

Responsibility:

With the dollar, if someone steals your money or steals from the bank, you can always count on the bank to take responsibility for that. This is currently not the case with Bitcoin.

If you get hacked or lose your coins, you bare the full responsibility and this reason scares many away from cryptocurrencies.

Price fluctuations:

Bitcoin’s price is very unstable and this also scares a lot of people. It could be fun to have your $100 increase to $300 within a couple of days. However, seeing that $100 decrease to $70 in a matter of days is generally not fun.

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Acceptance:

Comparing Bitcoin to Fiat at the moment, you can easily pay for your coffee in dollars in the US but that is not the case with Bitcoin at the moment. Not every street corner shop accepts or even know what Bitcoin is hence the acceptance rate of Bitcoin for payments is currently still low.

What does this mean going forward

Going forward, our societies need changes that are required for a more effective society. Fiat worked for several decades but the system doesn’t work effectively in this day and age.

In today’s world, sending money should be as easy as sending a message on Whatsapp or an email. This is what technologies like blockchain and Bitcoin can provide.

Not only is this going to be beneficial for individuals, but it will do much good for business, most of which now rely mostly on SWIFT, a system which takes about 1 to 5 days.

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This article is not an immediate call for you to invest in Bitcoin as many have lost their money invested in Bitcoin, nor does it deny the fact Bitcoin has its own shortcomings. It only emphasizes the fact that Bitcoin is more suited and efficient for today’s fast-moving world than fiat currencies like the dollar.

Many have argued that Bitcoin (just like Fiat) is dangerous given the fact that it can easily be used to facilitate criminal activities like terrorism financing and money laundering.

These concerns are very important but don’t go without saying the dollar is also not being used for such illicit activities.

A world where governments fully understand Bitcoin and place very good regulations that can help combat the use of Bitcoin for such activities would be a world with more trust, accountability and transparency.

I believe governments still need to have a role in how money changes hands in our society, but have limited capabilities as to how it is being issued.

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coinmag

Kinsley is an MSc student in Information Management and a blockchain consultant. He is a lover of big data with particular interests in disruptive technologies like blockchain technology and Artificial Intelligence.

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