It seems as if the borders between cryptocurrencies and fiat money become blurrier. Since the use of cryptocurrencies for payments is increasing while at the same time some countries are trying to restrict its use and develop own digital money, it’s unclear if Bitcoin could be considered a new form of money. In this paper, the author will explain the differences between both and try to find an answer to the question if cryptocurrencies can perform like traditional money.
Table of Contents
3. INTRODUCTION
4. WHAT IS MONEY
5. WHAT IS BITCOIN
6. CAN BITCOIN PERFORM LIKE MONEY?
7. CONCLUSION
Objectives & Topics
The paper examines whether Bitcoin and other cryptocurrencies can fulfill the traditional functions of money by comparing them against the established criteria for currency as defined by modern economic theory and central banking standards.
- Theoretical definition and functions of money
- Technical fundamentals of Bitcoin and blockchain technology
- Comparative analysis of Bitcoin versus fiat currency
- Impact of volatility and speculation on monetary utility
- Environmental and regulatory challenges for cryptocurrencies
Excerpt from the book
6. Can Bitcoin perform like Money?
To better compare Money with Bitcoin the author will compare the three characteristics of money with the characteristics of Bitcoin.
To serve as a “medium of exchange” Bitcoin needs to be accepted and used sufficiently. A lot of companies make use of Bitcoin as a medium of exchange, and further even governments are considering using cryptocurrency as an accepted medium of exchange. A recent example is El Salvador, whose president announced that the country will accept Bitcoin as a legal tender, arguing that this would allow most of the population access to the financial infrastructure. Furthermore, Chambers argues, that simply the fact that people make use of Bitcoin for payments underlines its role as a medium of exchange. Bitcoin also comes at much lower transaction cost than money and is much faster, especially for international transactions. Bitcoin is not bound to banks or other financial institutions which makes it possible to transfer Bitcoin at any time. This also includes transactions where the anonymity is very important. Before it got shut down in 2013, the so called “Silk-road” was an online marketplace for illegal goods like weapons or drugs, where Bitcoin was used as the sole medium of exchange.
Last, Chambers states that Bitcoin transactions are also more protected against fraud than other transactions, because only the owner of the private key has access to the wallet which makes theft or fraud more difficult. Bitcoin transaction can’t be reversed which increases its importance as a medium of exchange. Chambers argues that especially in the e-commerce, sales paid with credit cards are often claimed to be paid by someone else, and thereby forcing the credit-card company to charge back the money of the company. This wouldn’t be possible with Bitcoin, since only the owner of each wallet has access to the private key needed for the transfer.
Summary of Chapters
3. INTRODUCTION: Provides an overview of recent market developments, specifically the impact of regulatory announcements and environmental concerns on Bitcoin's price stability.
4. WHAT IS MONEY: Outlines the classical functions of money (medium of exchange, store of value, unit of account) and differentiates between commodity, representative, and fiat money.
5. WHAT IS BITCOIN: Explains the origins of Bitcoin, its decentralized nature based on blockchain technology, and the process of mining and network verification.
6. CAN BITCOIN PERFORM LIKE MONEY?: Evaluates Bitcoin's viability as a currency by contrasting its current market usage and technological features against the theoretical requirements of money.
7. CONCLUSION: Synthesizes the findings, determining that Bitcoin currently functions more as a volatile speculative asset rather than a stable, widely accepted form of money.
Keywords
Bitcoin, Blockchain, Cryptocurrency, Money, Medium of Exchange, Fiat Money, Central Bank, Volatility, Mining, Ledger Technology, Digital Asset, Monetary Policy, Decentralization, Speculation, Financial Infrastructure
Frequently Asked Questions
What is the core focus of this research paper?
The paper evaluates whether Bitcoin and cryptocurrencies can function effectively as money by comparing them to traditional financial systems and definitions.
What are the primary themes discussed?
Key themes include the definition of money, the mechanics of blockchain, market volatility, regulatory impacts, and the challenges of environmental sustainability.
What is the main objective of the study?
The objective is to determine if Bitcoin meets the criteria to perform like traditional money in a global economic context.
Which methodology is employed in the work?
The author uses a comparative analytical approach, measuring Bitcoin's characteristics against the three fundamental functions of money defined in economic literature.
What topics are covered in the main body?
The main body covers the theoretical framework of monetary systems, the technical infrastructure of Bitcoin, and a critical analysis of its utility as a medium of exchange, unit of account, and store of value.
Which keywords best characterize the work?
The work is characterized by terms such as Bitcoin, Blockchain, Volatility, Fiat Money, and Decentralized Finance.
How does Bitcoin's inability to reverse transactions impact its use as money?
The inability to reverse transactions prevents traditional "chargeback" fraud, but it also creates significant risks for users, as mistaken or fraudulent transfers are permanent.
What role does energy consumption play in the evaluation of Bitcoin?
Energy consumption is a major point of criticism, as the mining process requires significant power, leading to negative environmental impacts that hinder Bitcoin's acceptance as a mainstream method of payment.
Why does the author conclude that Bitcoin is not yet a stable currency?
The author concludes that extreme price volatility and a lack of intrinsic value make Bitcoin a speculative asset rather than a stable store of value or reliable unit of account.
- Quote paper
- Julian Dressler (Author), 2021, Bitcoins and Blockchain: Can Cryptocurrencies perform like Traditional Money?, Munich, GRIN Verlag, https://www.grin.com/document/1075960
