What is the main purpose of bitcoin: Speculation or dollarization?

Bitcoin's goal is to allow users to safely store and transfer money, such as when paying for goods and services. However, whether Bitcoin is a store of value or an asset that will lead to dollarization is a hotly discussed topic. Bitcoin's goal is to allow users to safely store and transfer money, such as when paying for goods and services. However, whether Bitcoin is a store of value or an asset that will lead to dollarization is a hotly discussed topic.

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The US dollar has made an impact over the world, with several countries adopting the US currency alongside their own. So, what exactly is the term "dollarization"? The term "dollarization" refers to the use of the US dollar alongside a local, fiat currency, which is common when the local currency has lost value.

But, because to advancements in technology, we now have a more futuristic kind of money in the shape of Bitcoin and other cryptocurrencies. Experts disagree about whether Bitcoin is a speculative asset, which means it is riskier than most other assets.

When Satoshi Nakamoto first announced the Bitcoin proposal, he didn't intend for it to be a speculative investment. Bitcoin was created by Satoshi Nakamoto as a substitute for traditional fiat currencies.

The world is still debating what Bitcoin is and how it should be classed twelve years after its debut. What is the purpose and function of Bitcoin? Is Bitcoin, the world's first cryptocurrency, a speculative asset due to its volatility, or is it a new kind of dollarization?

Furthermore, why do some people believe Bitcoin is solely for speculation? Will cryptocurrencies coexist with traditional fiat currencies or will they completely replace some of them?

This essay will look at the current condition of Bitcoin and whether it has what it takes to replace the dollar or if it should be kept in the shadows as a more speculative investment.

The original purpose of Bitcoin

The white paper for Bitcoin was produced in 2009 by the pseudonymous Satoshi Nakamoto, as all cryptocurrency fans are aware. What is Bitcoin and what does it do? According to the document, Nakamoto envisioned Bitcoin as a "pure peer-to-peer" electronic cash system. According to the paper, Bitcoin is intended to be an anonymous alternative payment method that does not require the intervention of a third party.

However, it is debatable if Bitcoin has accomplished Nakamoto's original, daring ambition more than a decade after its founding. After all, the Bitcoin network has scalability concerns and high transaction fees, leading many people to assume that Bitcoin is more of a store of value than a form of money.

Bitcoin has undeniably increased in value, surpassing competitors such as gold (a commodity) in terms of price. However, Satoshi's vision of Bitcoin as an alternative currency may not have been realized. During periods of network congestion, Bitcoin struggles to perform more than seven transactions per second (TPS) and still incurs hefty fees.

Visa processed an average of 84 million transactions per day as of March 2021. During the same time period, Bitcoin only processed 350,000 transactions on average. 350,000 daily transactions is a very modest criterion to meet in order to provide a global alternative to fiat.

Bitcoin's lack of significant daily transaction value over the past 12 years has led some to suggest that the world's first cryptocurrency is supposed to be a store of value rather than an alternative currency. While Bitcoin does have some characteristics that make it a currency — such as the potential to be used as a means of exchange — scalability limitations, among other issues, appear to be preventing Bitcoin from reaching new heights as a global alternative currency.

What useful purpose can Bitcoin serve in the long term?

A dependable store of value is an asset that steadily increases in value over time. Gold, for example, is the most widely used store of value. Many people regard Bitcoin to be "digital gold." But, what is the goal of Bitcoin, and how is Bitcoin used?

One may argue that Bitcoin, the world's first cryptocurrency, is a very reliable store of value based on its overall price history. Since its conception, Bitcoin has steadily increased in value, starting at less than a $1. Bitcoin couldn't even break through to one dollar in 2010. Bitcoin rose to $220 in 2013 before plummeting to below $100 in 2014. By 2017, Nakamoto's assets had surpassed $20,000, and by 2021, they had surpassed $64,000.

Long-term holders, or HODLers, are responsible for a portion of Bitcoin's price success. HODLers are Bitcoin investors who have no plans to sell their coins. Whales are HODLers who hold millions of dollars in Bitcoin and can single-handedly influence the asset's market with a single sell-off. Dedicated whales, on the other hand, are aware that they are keeping Bitcoin's price high and appear to have no plans to sell for a long time. HODLers see Bitcoin as an ever-appreciating form of money, similar to gold investors and others who put money into a store of value asset.

When the COVID-19 epidemic hit in early 2020, practically every financial asset experienced a price drop as investors withdrew their funds in fear. Nonetheless, investors have poured money into Bitcoin and gold at an unprecedented rate over the years.

While a good connection between Bitcoin and gold would lead you to believe that Bitcoin is a safe haven asset, the two assets had an unfavorable correlation the next year.

When two variables move in lockstep, or in the same direction, they have a positive correlation. During a financial crisis, a safe-haven asset is a financial instrument that is expected to maintain or even gain in value. These assets may appreciate in the event of a market crash because they are uncorrelated or negatively linked to the wider economy.

A significant number of corporations believe that Bitcoin's goal is to become the next global reserve asset. For example, both JPMorgan Chase and Blackrock feel that the first cryptocurrency is eating into gold's market share.

In contrast, Peter Schiff, the chief economist and global strategist of Europac, believes Bitcoin is nothing more than a "massive pump and dump." Schiff debated Anthony Scaramucci, the founder of the SkyBridge investment firm, in public in mid-2021. Due to its physicality, the former argued that gold will have a use case even 1,000 years from now, meaning that another asset might easily replace Bitcoin in the short run.

Scaramucci supported Bitcoin, claiming that the digital asset's scarcity is more than enough to ensure its long-term worth. Unfortunately for Bitcoin, Schiff's presentation pushed the audience's opinion toward gold, with only 32% backing Bitcoin.

Schiff makes an excellent point. Historically, all stores of value have been physical goods that have stood the test of time, such as real estate, diamonds, and art. Bitcoin's digital nature may mean that if everyone abandons the first cryptocurrency, it will serve little function and may as well cease to exist. Physical assets, on the other hand, have numerous uses that add to their worth.

However, as the world progresses toward a more digital future, Bitcoin supporters say that a digital store of value is merely a continuation of what has come before. After all, Bitcoin is a globally accessible asset with a market capitalization of over $1 trillion. Bitcoin's scarcity can't diminish over time, and as long as people invest in the cryptocurrency, the asset's scarcity could be beneficial for Bitcoin price speculation or Bitcoin investment speculation.

 The case for Bitcoin as a currency

Despite Bitcoin's ongoing volatility, there is a case can be made that it exists as a currency in the form that Nakamoto first proposed.

After all, Bitcoin appears to be a reasonably simple item to obtain on paper. To work with Bitcoin, potential Bitcoin holders don't require a bank account or to engage with a controlling third party. Bitcoin's financial infrastructure is already in place on a worldwide scale. Merchants can simply choose to take Bitcoin if their local regulators allow it, and anyone from anywhere in the globe can easily spend it.

However, a currency's case is founded on more than just its capacity to be spent. When compared to the three components of traditional currency — a store of value, a medium of trade, and a means of payment —

Bitcoin as a medium of exchange

Bitcoin falls into the category of medium of exchange in various ways. In a number of nations, the world's first cryptocurrency is already accepted for goods and services on numerous websites and even some small companies.

Unfortunately, Bitcoin's history as a perceived medium of exchange is largely defined by its use on the dark web. On a website called Silk Road, Bitcoin was the money of choice for individuals procuring illegal substances and engaging in risky conduct.

However, criminal actors' assumptions about the function of Bitcoin as an anonymous currency were incorrect. After employing multiple tracing methods inside Bitcoin's public ecosystem, governments were able to shut down Silk Road. Due to Bitcoin's lack of anonymity, one could claim that it was used as a medium of exchange on Silk Road since commodities and services on the site had a set of values, and Bitcoin was used to pay for those goods and services.

Even better, Bitcoin is fungible, which means that each Bitcoin may be exchanged for another, much like the US dollar and other fiat currencies. Some countries are even considering Bitcoin as a form of payment. El Salvador became the first country to recognize Bitcoin as legal money in September 2021. President Nayib Bukele believes that Bitcoin will help the 70% of El Salvadorans who do not have access to traditional banking.

Even if El Salvador's administration believes Bitcoin is a valuable addition to their use of US cash, 70% of the country's inhabitants oppose its legal tenderization. Many Salvadorans have no idea how to use Bitcoin, so the government of El Salvador must educate the public to see if Bitcoin can be used as legal cash.

The network's scalability concerns are preventing Bitcoin's adoption. Bitcoin's network can now process only seven transactions per second (TPS), compared to Visa's 24,000. Layer-two alternatives, like as the Lightning Network, are attempting to address Bitcoin's scaling problems.

While Lightning Network is gaining traction, it has to be seen whether the project can expand, as the Bitcoin network cannot be deemed a medium of exchange unless its average TPS increases.

Aside from that, because of its hard cap of 21 million coins, Bitcoin is a deflationary asset. Given that Bitcoin is expected to increase in value as the asset becomes more scarce, the cryptocurrency might be utilized as a means of exchange in the same way that the gold standard was.

However, if companies do not adopt Bitcoin as a daily means of payment, the deflationary nature of Bitcoin will make it more of a store of value than an alternative currency.

Bitcoin as a unit of account

Because of its volatility, Bitcoin is difficult to use as a unit of account. After all, an asset that might change by tens of thousands of dollars in a single day can hardly be regarded a dependable tool to transact value in a local economy.

Due to Bitcoin's continuous price swings, a product can be valued $0.00034 in Bitcoin one day and then radically change in the next hour.

It's also difficult to estimate Bitcoin's current worth at any particular time. At any given time, multiple cryptocurrency exchanges show different rates for Bitcoin, with price differences ranging from hundreds of dollars to thousands of dollars. Retailers can't be expected to keep up with Bitcoin's price fluctuations if the rest of the world can't even keep up with them.

Then there's the typical Bitcoin denomination. How can businesses price their items when the price of one Bitcoin is way above $10,000, let alone one dollar? Customers and businesses would struggle to determine the genuine value of a coffee if the price is $0.00034 worth of Bitcoin on Tuesday and $0.000012 worth of Bitcoin on Thursday.

Current financial systems around the world are presented in the simplest possible form for accounting and convenience purposes. In Bitcoin, asking merchants to embrace yet another sort of perplexing, variable bookkeeping is unlikely to go over well.

Bitcoin as a store of value

Even though there are certain issues with this nomenclature, Bitcoin may be best understood as a store of value, as previously stated. For one thing, Bitcoin speculation emphasizes the currency's volatility, making citizens wary of Bitcoin as a long-term storage option.

When consumers buy gold, they expect the price of the precious metal to gradually rise from the time they buy it. At the very least, gold investors anticipate being able to resell the metal at a comparable beginning price.

Bitcoin, on the other hand, can lose almost 100% of its value from the time it was purchased. While Bitcoin's volatility can be beneficial, such a high level of risk does not bode well for the cryptocurrency's future as a store of value.

The lack of a physical representation of Bitcoin must also be considered. Gold, art, and other valuables can be concealed or safely stored for the duration of their possession. Although Bitcoin can be safely held in some places, such as a hardware wallet, the majority of investors keep their funds in a cryptocurrency exchange or similar internet-connected wallet. Bitcoin is always at risk of theft because to the ongoing connectedness of online wallets, which is completely beyond of the holder's control.

Bitcoin insurance does exist to some extent, however the amount of coverage available is totally dependent on where the consumer keeps their cryptocurrency. Traders are still at the mercy of Bitcoin's extreme volatility, even if they locate the most safe means to store their Bitcoin. All of this is based on the assumption that Bitcoin will continue to be in high demand. While the cryptocurrency's limited supply is expected to keep demand high if a superior crypto project emerges, what will people do with their now worthless Bitcoin?

The case for Bitcoin as a speculative asset

Bitcoin can be deemed speculative for the first 12 years of its existence. While Bitcoin's classification may alter in the future, the cryptocurrency's unpredictability makes it difficult to categorize as anything other than speculative.

Most cryptocurrencies, including Bitcoin, are purely speculative, according to Rosa Rios, the former US treasurer, because the bulk of cryptocurrencies do not fulfill a main purpose. Rios described Ripple as less than speculative, given that the asset is designed to promote global cross-border payments.

Surprisingly, Gary Gensler, the chairman of the US Securities and Exchange Commission, has stated that Bitcoin is largely a speculative store of value. Bitcoin and other cryptocurrencies, according to Gensler, do not serve citizens in the same manner that the dollar does. Nonetheless, we should regard Bitcoin as a distinct asset class rather than a vehicle for widespread dollarization.

Bitcoin vs. the dollar

For many reasons, the promise of a digital alternative to traditional currency that is not controlled by a government or central party has polarized opinion. For one thing, it's understandable that a merchant might choose not to accept Bitcoin over their native currency. If a merchant takes Bitcoin in exchange for a good or service, the value of Bitcoin could plummet the next day. If a company is having difficulty, it is likely that they will choose the steady income provided by the established dollar.

However, proponents of Bitcoin may argue that refusing to accept it means that it will only increase in value as it gets scarcer, claiming that Nakamoto's money is a deflationary asset. The US dollar, on the other hand, is inflationary and will lose value over time. Bitcoin may very well be the long-term asset to hold in the long run, if demand for Bitcoin continues to grow.

Let's look at the contrasts between a dollar-based monetary system and a worldwide Bitcoin-based monetary system.

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Of course, if Bitcoin were to become the asset that replaced the US currency in other countries, there would have to be a regulatory change. After all, Bitcoin is a worldwide cryptocurrency, and monetary policy would have to adjust to accommodate it. Tax modifications, value adjustments based on multiple fiat currencies, and a unification of the current global financial system would all be required.

This isn't to add that unlike a dollar, a government can't issue more Bitcoin. Due to the restricted supply of Bitcoin, millions of people may be unable to own even a single BTC. Could Bitcoin's restrictions wreak havoc on the financial system in the same way that the gold standard did? We can anticipate the same issues that plagued gold.

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