Is crypto ideal for commerce, speculation or dollarization? Since the launch of Bitcoin, and other different types of crypto coins that followed after it, there has been a lot of debate surrounding its utility, future, feasibility in today’s market, and most importantly its volatility in prices and possibilities to use for illegal practices.
All of these concerns of the market experts and financial analysts have made the already tough path of its mass adoption all the more complex.
People in general are more apprehensive than confident about its purpose – whether it is ideal for commerce, speculation or dollarization.
This is not an easy subject to understand, especially if you are a beginner and have very little knowledge about general and crypto economics, its technicalities and its utility.
This article will shed some light regarding that matter with different aspects of crypto discussed in detail.
Therefore, spend about ten minutes of your crucial time in reading this article which will surely make you more knowledgeable and confident when you plan your crypto moves next time.
To be very specific, prominent names such as Elon Musk and Michael Saylor gave a lot of weight to the general belief of people that Bitcoin in particular can be used as a means of exchange in commerce.
While Elon Musk indicated the probable return of Tesla to accepting Bitcoin as a mode of payment, Michael Saylor termed the coin as the rail system for fiat money, especially the dollar, on a global scale.
Their belief gave momentum to the idea of using Bitcoin as a currency for commerce.
Is Cryptocurrency Ideal for Commerce, Speculation or Dollarization?
Usually, people believe that crypto has got a huge potential to replace the current financial system but most of them do so without knowing the intricacies in it.
They also do not take into account the several known and unknown consequences that it may have on the future economy.
For example, if you consider the use of Bitcoin in commerce with respect to the beliefs of Elon Musk and Michael Saylor, Lightning Network is considered to be the frontrunner in terms of Bitcoin being used in commerce.
To put it into simple words, Lightning Network is actually a service that supports commerce and is designed on top of Bitcoin.
This network service makes transactions between two parties much faster and cheaper.
This is usually ensured by verifying the transactions made on the trust-minimized Bitcoin blockchain network from time to time in batches.
According to a few survey reports, the Lightning Network is gaining popularity every year and gradually more and more people are using this service on specific networks.
This indicates the potential use of Bitcoin in commerce.
However, at this point, it will be thoughtless not to consider Ethereum next to the use of Bitcoin as another important blockchain network that is typically more related typically with finance than with commerce.
For example, consider Wrapped Bitcoin, usually referred to as WBTC. This is typically an ERC 20 token which is Ethereum compliant.
Its value is tied to the value of Bitcoin. This pegged value of the WBTC is maintained by BitGo, its custodian.
It is seen that over the years the number of such Bitcoins wrapped on the Ethereum network has grown significantly and at quite a fast rate of about 67%.
In fact, if any specific period of time is considered and compared with the number of Bitcoin committed to the Lightning Network in general then it is seen that it is higher by a couple of magnitudes.
With this higher number, in theory, it is possible for WBTC to be used for different commercial applications, especially in those areas where and ERC 20 token is accepted.
However, in reality, it is used as DeFi or Decentralized Finance.
Therefore, the story is quite clear.
Bitcoin, at least for the time being, can be considered as an investment asset like gold rather than as a medium of exchange like the dollar.
Take a look at El Salvador, for example, and you will come to know about the distinction.
Ideally, in these dollarized and Bitcoin adopting countries, though there are only a few now, multiple crypto coins are held in the digital wallets by the citizens.
This creates an entirely different world where Bitcoin is held as an investment asset and a stable coin is used for dollarization being pegged to the dollar.
That is where the financial analysts and experts think that the world will be in motion on Bitcoin rails, referring to the dollar stable coin.
This will result in further dollarization all over the world and such likelihood of dollarization through stable coin has shown signs that it is quite a reality.
However, the market sentiments seem to differ from this notion of the financial experts.
The participants in the crypto market strongly believe that the market will not move on Bitcoin rails.
Rather, they believe that it will be Ethereum that will take over eventually.
For example, Tether, or USDT, one of the largest stable coins in terms of supply, is supported by several networks, whether it is the original network of Tether or any other application supporting network that runs on Bitcoin or on Ethereum.
Such stable coins have a lot of value and utility and certainly has the desired potential to support commerce in a way that is much, much better than cryptocurrencies.
Crypto coins, on the other hand, are considered to be extremely volatile by nature and therefore more suitable to be considered as an investment asset class.
However, what happens in reality is that these coins are used especially as a quote currency in the finance world on the crypto exchanges.
Therefore, it can be said in a few simple words that it is not commerce but finance that is leading adoption of cryptocurrencies at the moment.
In this category, Bitcoin typically has the unique status of a blue-chip investment class.
But, in this particular aspect, the market seems to indicate that it clearly prefers rails that are built on Ethereum.
However, with all that said, several economists also came up with their concerns, typically with respect to the new Bitcoin and crypto related policies followed by countries like El Salvador.
They fear that it will make these countries a new hub and a safe haven for criminals who want to launder Bitcoin into dollars.
In fact, there are several reports that point this out citing examples of Frankfurt and Amsterdam that have recently become the most convenient hubs for money laundering.
As it is, there is no dearth in the demand for stable coins that are pegged with dollars.
And, there are several crypto exchanges that offer liquid Bitcoin-Tether crosses.
The worst and most worrying part is that most of these crypto exchanges seldom have stringent KYC or Know Your Customer and AML or Anti-Money Laundering protocols in place.
In comparison, crypto-to-dollar pairs are less, and if ever crypto coins rule the world, the regulatory challenges between commerce and crypto at the ramps will be over and beyond the borders of any particular Central American state.
Now talking about dollarization, as you may know, the US dollar has a significant presence all over the globe.
In fact, there are several countries that have integrated this currency of the United States together with their own currencies.
This is dollarization which typically defines the incorporation of the US dollar along with the local fiat currency.
More often this happens especially when the currency in use loses its intrinsic value.
However, today technology has developed in leaps and bounds.
And with Bitcoin and other types of crypto coins being used quite freely and widely all over the world, there is no doubt that the world is experiencing and is moving towards a more futuristic, if not more useful, form of money.
It is on this specific aspect that the financial experts debate.
They wonder whether the actual purpose of Bitcoin is to be simply a speculative asset.
If that is so, it will be much to the contrary of its original purpose of facilitating peer to peer transactions without the need of any intermediaries like a bank or a financial institution.
This means that the project will fail its purpose for which it was ideally created by Satoshi Nakamoto – to be used as an alternative to the traditional fiat currency.
In other words, it also means that Bitcoin typically is much riskier a crypto as compared to most of the other investment types.
This leads to a lot of dilemmas and even after more than 12 years of the launch of the coin, the financial world is still unsure about the actual purpose of Bitcoin and what it really does.
The experts seem to be divided on the concept and are still wondering how Bitcoin should be classified based on its functions.
There are lots of questions that may come to the minds of general people, experts, and financial analysts. And, the answers to a few of these questions are still to be found. Some of these questions are:
- Can Bitcoin, the first crypto coin of the world known for its volatility be considered as a speculative asset?
- Will Bitcoin become the new type of dollarization?
- Will crypto coins be able to coexist with specific types of traditional fiat currencies or will it replace them entirely?
- Does Bitcoin have the ability to really replace dollars considering its current state or will it remain in the background as only a typical speculative investment?
In order to find the answers to these questions, you will need to explore the world of crypto a bit more.
The Original Intention
Considering the use of Bitcoin by people all over the world now, questions about its original purpose or intentions can be raised.
You may tend to think whether its purpose of creation was to use it for speculation or dollarization. Well, here it is for you.
The original purpose of creating Bitcoin, just as all crypto enthusiasts know, is mentioned in the white paper of it released by its pseudonymous creator Satoshi Nakamoto in 2009.
According to this document, the original purpose of Bitcoin as intended by Satoshi Nakamoto was to be used purely as a P2P edition of electronic cash.
The whitepaper further detailed that Bitcoin is to be an alternative and anonymous payment system which will eliminate the need for involvement of a third-party.
However, considering the current situation, whether the coin has been successful in achieving the initial and bold vision of Nakamoto is arguable, even after a decade of its launch.
There are few specific reasons for its failure, as the crypto and financial experts pointed out, such as:
- The scalability issues related to the Bitcoin network and
- Its high transaction fees.
These two specific factors made people believe that Bitcoin is typically not an alternative to traditional money but it is more of a store of value.
However, there is no doubt that the value of Bitcoin has risen over the years and it has even surpassed the value of gold, its competitor in several aspects.
Another significant reason that Bitcoin has failed to keep up to the vision of Satoshi to be used as alternative cash is that the Bitcoin network seems to be unable to process more than 7 transactions per second.
Just for your information, Visa could process more than 84 million transactions on an average per day, and that is the figure as of March 2021.
In comparison, Bitcoin, on the other hand, could only process about 350,000 transactions in a day on an average.
This ideally is a very low threshold of daily transactions in order to become a useful alternative to fiat money on a global scale.
This is why most people believe that Bitcoin, the first crypto of the world, is a store of value but not as alternative cash, even after a decade of its launch.
This is in spite of the fact that Bitcoin comes with features that resembles a currency status such as it can be used as a medium of exchange.
Long Term Prospects
Now, the question is: Is the long term prospect of Bitcoin and crypto bleak as well? Or will it serve any useful purpose, and if so, what?
Well, for that you will need to take a step back and understand what a reliable store of value really means as an asset.
Typically, an asset which is considered to be a reliable store of value should gradually appreciate as time passes by.
Gold, for example, is one of the best examples of an asset with a good store of value.
Bitcoin, in particular, is considered by many as a ‘digital gold, but does it serve its main purpose is the key question.
Well, if you take a look at the price history of the coin in general you will see that Bitcoin has really proved its worth as a reliable store of value, quite fairly, over time.
The value of a Bitcoin was less than a dollar initially and gradually it has increased in terms of value every year after its launch.
According to the records, the price of a Bitcoin increased as follows:
- In 2010, it was less than one dollar
- In 2013, it increased up to $220 and then fell back to less than $100
- In 2017, it rose to a staggering $20,000 and
- In 2021, it soared over $64,000.
Though the coin has also experienced some significant lows during these periods due to its volatility, the overall price of a Bitcoin was always pretty high.
A significant reason for the success of Bitcoin in terms of price is the long-time holders.
These HODLers are the investors who have no intention to trade the coin for a long time.
There are a few specific Bitcoin investors who hold coins worth millions of dollars and are called the crypto whales.
They can move the Bitcoin market significantly and single-handedly with only one sell-off but the dedicated whales seldom indulge in such activities.
Their intention is quite clear and is very much similar to those who invest in gold or any other similar types of store of value assets.
They consider Bitcoin to be a form of money whose value will be ever-appreciating.
For example, when the pandemic due to COVID 19 struck the world in early 2020, it shook the world economy and affected nearly every financial asset.
There was a significant crash in the price of several financial assets when the investors panicked and took out their money.
With that said, on the flipside, investors from all over the world put in a lot of money in Bitcoin and gold and the rate at which they did due to the pandemic was quite alarming.
This made people believe that there is a correlation between gold and Bitcoin and therefore it can be considered as a safe-haven asset with a lot of store of value.
Typically, both gold and Bitcoin experienced an inverse correlation in the very next year.
In comparison, when there is a positive correlation existing between two variables, they move in lockstep or in the same direction.
Ideally, a financial instrument is considered to be a safe-haven asset when it maintains, if not increases, its value during any economic crisis.
However, since gold and Bitcoin are negatively linked or uncorrelated with the overall economy, there is a high chance that the value of these assets will increase especially when the market crashes.
There are lots of corporations and financial institutions that believe that the main purpose of Bitcoin is to become the potential reserve asset of the world in the future.
They believe that it has already started to dig into the market share of gold.
On the other hand, there are also several financial experts and analysts who believe that Bitcoin is simply a big pump and dump scheme.
They substantiate their claims by saying that gold in particular will have a significant number of use cases even after one thousand years from now. It is simply due to its physical form.
This, in other words, implies that Bitcoin, which is compared with gold now, can be replaced easily by any other asset down the lane.
However, they also believe at the same time that Bitcoin will hold its value in the long term because it is scarce, just as gold.
As for the opinions of the general public, according to a report of a survey, more than 51% showed their trust in gold while only 32% favored Bitcoin.
Ideally, if you look into it deeply, all these arguments do have quite a fair point.
Historically speaking, if you consider the stores of value of assets such as real estate, art, gemstones, and others, all have physical forms and therefore could stand the test of time.
All these physical assets have different use cases which determine their value.
On the other hand, the digital nature of Bitcoin means that when and if everyone moves from it, it will no longer exist and therefore will virtually not serve any purpose in the long term as well.
However, the Bitcoin advocates believe that as and when the world moves on to a more digital economy and future, Bitcoin will evolve as a store of value just as it has done before.
This is because Bitcoin after all, among all other crypto coins, is an asset that is accessible by investors all over the world.
It offers more than a trillion dollars in liquidity and cannot erode over time.
Add to that, the scarcity of the coin, with a total supply of 21 million coins of which more than 80% is already minted, could act as a positive factor for price speculation of it or investment speculation in Bitcoin.
Crypto as a Currency
Now, consider crypto, or Bitcoin, as a currency. In spite of its characteristic volatility, Bitcoin can be considered as a currency just as Satoshi Nakamoto thought it would be.
There are several reasons to think so. Some of which are:
- It is a comparatively an easy asset to get hold of
- The Bitcoin holders do not need a bank account or a third party to trade it and
- There is a Bitcoin financial infrastructure already in place at a global level.
Therefore, the merchants now simply have to accept it as a mode of payment assuming that everybody can come in and spend easily and the local regulations are in favor of it.
However, the case for a currency is not only dependent on the ability to spend. It should typically have the three basic elements of a traditional currency which are:
- Medium of exchange
- Store of value and
- A unit of account.
Until Bitcoin has all these three elements in it, it will not be considered as a currency by any one and not even by its opponents.
As a medium of exchange, Bitcoin fits in quite well in its description.
This coin is accepted already as a unit of exchange for goods and services provided by several websites and even quite a lot of local businesses in lots of countries.
However, its history as a medium of exchange typically is in dark web usage.
This is ideally the most favored currency by the criminals to acquire illegal products and engage in hazardous activities on a website called Silk Road, all due to the anonymity.
However, governments have tracked down and put an end to the Silk Road within the public ecosystem of Bitcoin.
It is good that Bitcoin is fungible which allows it to be interchanged with other crypto coins, just like US dollars and other fiat currencies.
Therefore, it is not surprising that a few countries have already started adopting crypto as a medium of exchange, especially Bitcoin.
However, scalability is an issue with Bitcoin that hinders its mass adoption with just 7 transactions processed per second.
The Lightning Network has been able to resolve this scalability issue of Bitcoin to some extent with its two-layer solution.
It is yet to be seen whether Bitcoin can do away with the scalability issue completely or turn out to be a deflationary asset due to the finite supply of the number of coins.
If the value goes further up, it can surely be used as a medium of exchange.
But then again, businesses should not fail to accept it as a daily mode of payment.
Otherwise, the deflationary feature of Bitcoin will make it more of a store of value rather than an alternative currency.
If Bitcoin is considered as a store of value, then again there are a few issues with this moniker.
One, the speculation points toward its volatility does not make it a reliable coin to hold for long term.
The price of any crypto may fall by 100% from the time of its purchase.
Therefore, it is not a good store of value. Gold, on the other hand, increases in value over time.
At the very least, people investing in gold can expect to sell it back at a comparatively similar purchase price.
Lack of physical form also makes crypto quite risky.
These are usually stored in digital wallets which are at constant risk of being hacked, facing technical issues, and compromises resulting in theft of funds.
Losing the private keys to access these wallets also may result in losing the money, forever.
And, as a unit of account, the volatility aspect of crypto and Bitcoin makes it very difficult to be issued and used in the economy let alone transacting with them.
The price of a crypto coin can change by every minute, hour, or day due to constant and uncontrollable price swings because everything depends on the market sentiments.
This means a product bought for 1 coin worth $100 may be worth more or less the next hour or day resulting in a drastic loss or profit as the case may be.
Therefore, there is a lot of uncertainty in using crypto as a unit of account.
Moreover, it is quite impossible to determine the actual value of crypto at any given point in time.
Different prices of the same crypto coin may be listed in different exchanges making it difficult for the world and the merchants to agree on one price point.
And, there is no average denomination based on which the price of a product can be fixed.
For example, if the price of a bread loaf is $0.00034 worth of Bitcoin today and $0.000012 tomorrow, both the retailers and the customers will struggle to parse the true value of the bread loaf.
Therefore, the existing financial system around the world is far less complicated and convenient for accounting purposes.
At this point, asking the merchants to shift to a completely new and complicated financial system will call for troubles, confusions, and uncertainties which will not go well for accounting and tax calculations.
Crypto as a Speculative Asset
Take a look now at whether or not crypto or Bitcoin can be considered as a true speculative asset.
Considering the fact that Bitcoin and other crypto coins have been around for more than a decade now, it can truly be considered as a speculative asset.
Its unpredictable nature and ever-changing future makes it very difficult to think of it as anything but speculative.
The main reason behind this is that most of the crypto coins, including Bitcoin, fail to serve their primary purpose.
The United States Securities and Exchange Commission chairman Gary Gensler more interestingly considers crypto coins as a speculative store of value because these cannot serve as the US dollar does.
Therefore, crypto should be viewed as a unique asset class for investment and not as something that can perform pervasive dollarization.
The instability in the value of the crypto coins, as said earlier, does not allow the merchants to accept it as a mode of payment in place of a dollar.
Should its value tank the next day they stand a high chance of incurring irrecoverable losses.
Therefore, they want something that is more stable, like the dollar.
However, crypto enthusiasts and proponents argue that the value of the coins will only move up if they are not accepted by the merchants.
This is because the coins will continue to become rarer, making it a deflationary asset, much unlike the US dollars that are inflationary and will have reduced value over time.
Therefore, considering the long term when the demand for crypto grows, these may very well prove to be a good speculative asset worthy to invest and hold for a long term.
Crypto as the Future
Therefore, what about the future of crypto?
Since crypto encourages making peer-to-peer payments with no external support or interference but managed through open source software controlled by a group of people, it entirely relies on the confidence on the currency.
However, there is a lot of doubt regarding its safety and security, especially after incidents of huge amounts of money disappearing due to theft by hackers.
Then, to make a crypto transaction users need to have digital wallets that are also prone to hacks and other technical vulnerabilities.
Every transaction made on the blockchain needs to be verified by the miners who use their computational power and a lot, repeat lot, of energy for it.
This causes a serious impact on the environment and a huge carbon footprint.
Moreover, to ensure legitimacy of a transaction the miners need to solve very complex mathematical puzzles that take a significant amount of time, especially for the larger transactions.
This reduces the speed of transactions.
However, there are lots of advantages of using crypto such as the transaction cost is pretty low as compared to credit card transactions or bank transfer.
But that comes at the cost of safety and security.
Transactions on blockchain can be made anonymously since no personal details are shared.
This however, attracts the bad actors to make illegal transactions.
Also, different wallet addresses can be created if you want to isolate one transaction from another when you use crypto.
Finally, the limited supply of crypto coins anchors the long term value of them, encouraging their role as a store of value much unlike fiat currencies that can be printed at the free will of the central banks to maintain their value.
In spite of all its pros and cons, crypto still has a bright future.
In fact, several big tech firms and traditional financial institutions are now planning to launch their own digital currency systems.
The future of Bitcoin is quite bright but whether or not it will be successful to keep up to the vision of Satoshi Nakamoto is yet to be seen.
This is because, as pointed out in this article, people still have diverse opinions about its actual purpose.