Christine Smith, content strategist at the Federal Reserve Bank of St. Louis, suggests that bitcoin is less “exotic” and more boring than people might think. The two use cases of Bitcoin are a stock of value and a currency, which Smith uses to argue a trio of reasons why the dominant digital currency is no different from the “normal currency.”
Supported by Nothing
Bitcoin, like the US dollar, is not backed by any physical assets like gold. Its value is a consequence of the demand that people place on it, which has currently catapulted the price to around $ 9,300.
Smith quotes Fed economists who have already argued that “bitcoin units have no intrinsic value,” adding that neither the US dollar, nor the euro, nor the Swiss franc. For example, paper money is made of cotton and linen, which makes it inexpensive to manufacture.
The US government abandoned the gold standard during the Great Depression and withdrew its international ties to the system in the 1970s. Since then, the fiduciary money issued by the Federal Reserve is not backed by gold, but your money is still precious.
While bitcoin is debated for being characterized as a currency, asset, or investment, Smith says regardless of how you cut it, “bitcoin units have no intrinsic value.”
His next argument is related to the finite amount of bitcoin that will ever be created. As CCN recently recalls, there are only 21 million bitcoins in the total supply. The supply / demand dynamics of bitcoin and other cryptocurrencies and “shocks” of demand is what leads to the volatility this market is experiencing.
Meanwhile, contrary to popular belief, the Fed does not print money, notes Smith, but “increases or decreases the monetary base” (bank reserves + money in circulation). There is 1.63 billion US dollars in circulation as of the first quarter of 2018, most of which is Federal Reserve banknotes. Smith says that while this may be hard to believe, “scarcity” is at the heart of the Fed’s stability strategy in the monetary system, because “to maintain its value, money must be in limited supply.”
Finally, she mentioned the vision of Satoshi Nakamoto –
“A purely electronic version of e-money would allow online payments to be sent directly from one party to another without going through a financial institution.” – Satoshi Nakamoto White Paper
Although the decentralized nature of bitcoin is what differentiates it from fiduciary currencies, Smith observes a similarity in the way money is spent, “requiring no intermediary to process a transaction”. It concludes with the function of anonymity associated with money.
As for bitcoin, while its founder remains anonymous, its transactions are recorded on a traceable public register.