Marc Serafino
Is Bitcoin legit? Is it real money? And perhaps most importantly — how does it compare to traditional money? We try to answer this (last) question here, and have 5 points to share.
Bitcoin is similar, but also very different from traditional fiat money. Here’s what we’ve got…
Also read: Bitcoin vs Central Banks
1. Surprisingly similar…
In many ways Bitcoin is similar to traditional currencies — it is recognized (though not as widely as major fiat currencies) and has a value; also it could be used to buy things, and its valuation changes according to market variables. Increased demand for Bitcoin over the last few years has seen an increase in its circulation and value.
Also like regular currencies it is backed purely by confidence — there is no gold behind it though that’s also the case with all modern currencies. However, there is also no well-established institution backing it up (like a national government). This, however, makes it a truly international currency.
2. Bitcoin is not a regulated currency…
Like any cryptocurrency out there — and unlike the “traditional money” — Bitcoin is decentralized and deregulated, while offering (pseudo) anonymity and increased transaction transparency. It is not based in any single country or jurisdiction, and its ledger is public, spread out all over the globe. Also, because there is no central bank for Bitcoin, the system is distributed and therefore not easily manipulated either by large institutions or by governments. On the other hand, it is this lack of oversight that makes bitcoin that much more volatile than fiat currencies.
3. Bitcoin is more volatile
As a non-regulated currency, Bitcoin is more volatile than any other money out there. According to the risk management expert and faculty member in the Finance Department at Boston University — Mark T. Williams — as of 2014, bitcoin has volatility seven times greater than gold, eight times greater than the S&P 500, and 18 times greater than the U.S. dollar.
While this may not sound too pleasing to many ears, some will find an investment or trading opportunity in Bitcoin’s volatility — the fact that its price can go up and down, leaves room for savvy individuals and companies looking to benefit from the emerging cryptocurrency market.
4. Bitcoin is the currency for the global world
Bitcoin springs from a simple idea — that people all over the world, from any class or country, can exchange products, services and credits freely and easily. It removes the middleman from the equation, including banks, merchant accounts and payment gateways. In a way, it is a throwback to a purer form of trade.
Bitcoin is based on same fundamental characteristics of currency, or anything of worth for that matter. As such — and given its successful track-record during the past few years — it is poised to emerge as a viable candidate as the global currency of choice, making worldwide trade of goods and services that much easier.
5. Bitcoin is more like gold
When you think about it, Bitcoin is more like gold than fiat money. First, it has a limited supply, with the algorithm set to stop rewarding miners after 21 million bitcoins have been issued. Second, bitcoins are not that easy to produce/make — again just like gold — with a ton of computing power being required to solve Bitcoin’s complex algorithms. Also, the more bitcoins are produced, the harder it is to create new ones.
Finally, these parallels with gold are used to define Bitcoin’s terminology — that is why the production of bitcoins is referred to as mining, while computers designed to produce bitcoins are known as Bitcoin miners.
Final word
Bitcoin shares some resemblance to the regular, fiat money; but it is also a very different beast, and in a way it is also similar to gold. Plus, with its global reach that promises to make financial services available to just about any human being on the planet, Bitcoin is set to revolutionize the way we think about the money. In some sense, it already did that with new Bitcoin fortunes being made as we speak. The question is — are you taking advantage of the new gold rush?
