Does Decentralization of Currency make it any superior over Government backed fiat Currency?

Bitcoin dipped to around $50K on Friday (14 May) from its record high value of $59K in the same week on Sunday just after a renowned tycoon announced to drop it from his company’s purchasing methods of the products. Yupp, that’s none other than the real world “Tony Stank”, Mr. Elon Musk. Just a single tweet brought about 16% change in the highest traded Cryptocurrency in the market in a matter of days. The real question is, are people really investing in a new Currency or is it merely another hyped Stock market bubble which would otherwise not have any value. Let’s figure it out!

Bitcoin Forecast

History is inevitable, in a matter of mere 5 years, Venezuela’s Bolivar lost its value by 10,000,000% (7 zeroes) by the end of 2019.

The first ever fiat currency was introduced in China as early as the 10th Century. The value of these currencies was usually backed by metals like Gold, Silver, Copper etc. Certain periods in history have witnessed commodities like flower bulbs be used as currency, one such is Tulip which was much hyped in Dutch during the 17th Century. The cost of the metal or other commodity kept rising and so governments started issuing bills that would promise to hold the same value as the metal of the same price.

Soon governments started printing more bills than they had metals in reserves and that caused Inflation of the currency. And when governments print money in excess, it causes Hyperinflation. Hungary, Zimbabwe and even China are some of the examples which have witnessed this Hyperinflation because of unsound government policies. It would take only a matter of 15 hours for prices to double in Hungary during its emergency period of 1946, meaning that a Bread costing $10 in morning would cost $20 by the end of the day. As history is inevitable, in a matter of mere 5 years from 2014, Venezuela’s Bolivar lost its value by 10,000,000% by the end of 2019. The verdict is, currencies are prone to devaluation if the issuer is not informant enough to keep it floating stable.

While world economists had been discussing a solution to creating a “Stable Currency”, some people came up with the idea of Decentralized form of currency whose value will be decided by the ones who trade it.

Bitcoin, the first ever decentralized digital currency to be ever created, was introduced in 2009. While it didn’t gain much traction in the first 8 years of its emergence, the value of Bitcoin started rising in 2014 when it reached $20K by the end of the year 2017. The icon of Bitcoin was mostly defamed initially because of its use in transactions occurring in the black market, such as the Silk Road. But who says it was decentralized?

Here are some events listed down in the order of their occurrence and their impact which impacted the sudden rise or fall in the value of Bitcoin —

1. A series of events in 2013 caused a very high fluctuation in the price of Bitcoin. After FBI seized about ₿26,000, shutting down Silk road in November, the price of Bitcoin fell by about 83% within 3 days, only to rise by 377% to $946 in December.
2. In January 2017, the People’s Bank of China (PBoC) spoke with bitcoin exchanges informing them that bitcoin is still not a currency under Chinese laws. The Bitcoin price fell to $800 by 28% in 4 days.
3. The price fell by 30% in March 2017 when Winklevoss brothers were denied an ETF bid, citing the risk of fraud and a lack of regulation among the world’s bitcoin markets.
4. Developers approved the Segregated Witness (SegWit) in July 2017 which would optimize the Bitcoin block size as well as improve its scalability. This caused the price to climb up by about 50% within a week to $2748.
5. The price climbed to around $20K by December 2017 carried by a number of ICOs (Initial Coin Offering) by thousands of startups, only to fall to $11,000 within a few couple of days. Few ICOs succeeded while most of them failed but they still managed to raise over $2.2 Billion from investors.
6. While Bitcoin was banned in most of the countries, China, Russia and South Korea had a very high number of transactions occurring that year. There was an excess of Bitcoin incoming to exchanges in December 2017 and at the same time Mt Gox sold around 6000 BTC directly to exchanges.
7. The bitcoin value fell to around $6,000 in June 2018 after a series of events including the theft of Cryptocurrencies from exchanges.
8. On 13 March 2020, bitcoin fell below $4000 during a broad COVID-19 pandemic related market selloff, after trading above $10,000 in February 2020. A large number of financial institutions such as MicroStrategy, Square Inc. announced their investment in BTC followed by PayPal allowing transactions in Bitcoin on its platform. These events again brought back Bitcoin to life at about $20K.
9. Tesla CEO Elon Musk announced his interest in Bitcoin earlier this year which took the price of Bitcoin to $37K, a sudden rise of about $5000 within an hour. Another announcement of Tesla of its purchase of $1.5 billion of Bitcoin and it accepting BTC as a payment for its payment again took Bitcoin to the moon at about $46K, a rise of about 20% in mere few hours.

So why is everyone saying Bitcoin is better than Dollar?

Well, it is people’s faith. Let me explain.

If you remember the case of Tulipmania, people thought it’s worth is way above other flowers or assets like metal and their faith led to Tulip becoming a currency of trade for over decades.

Why is the value of the Dollar so stable?

Because it’s backed by American reserves which are believed to never go empty. It is people’s trust in the American government and its economy that it would sustain in the long run. Even if the USA started printing more money, the inflation of the currency will still be far lower than any speculations from past examples.

Why is the value of China’s Yuan so low despite it being such a big economy?

It’s called Artificial Inflation. China artificially keeps the value of Yuan lower than US Dollar to encourage higher exports and thus more foreign income in treasury! The goal isn’t really inflation. Let’s do a thought experiment: suppose it costs you 100 yuan to make your widget. If a yuan is worth 50 cents you can sell your widget in America for anything more than $50 and profit. If the yuan is worth 75 cents you would have to sell your widget for at least $75 to profit. China manipulates its currency to give themselves a competitive advantage to sell goods in America.

Why is the value of currencies like Rupee not so stable?

We can follow the same reasoning as the case of China but with a little modification. One of the most likely causes is the dramatic push towards the Digital era and also its easing policy allowing foreign investment to increase inflow in the local economy.

Then why is Bitcoin so volatile?

Again the answer sums up to one word, Faith. People generally don’t trust a medium unless it has been sworn in by a higher authority. Since Bitcoin is a relatively new payment method in the market and not widely legalized in dozens of countries including various states of USA, China, Russia and even India, it’s natural not to trust the currency despite the promises it makes. While it’s noteworthy that Bitcoin has seen very sudden fluctuations in its value since its inception, it has continued its bullish rally despite it being regarded as illegal in many parts of the world. Because the issue of legality hasn’t been solved yet, it will likely remain volatile for years to come. Even after it being legalized, the demand and supply chain would only drive it higher.

So is Bitcoin better than Dollar/Yuan/Euro/Rupee?

It’s promising. BTC is being made as an acceptable currency for trading in various parts of the world. Whether it’s legalized by government institutions or not, it’s People’s Currency and as long as people have faith in it, the price of Bitcoin would never fall.

By the way, Bitcoin isn’t the only currency that’s hyped in the Cryptocurrency world, there are plenty to watch out for. Ethereum being the most promising while meme coins like Dogecoin having no real value in the world and utility tokens like BAT gaining attention are likely to increase in demand in coming times. The arrow of Digital currencies is only seeking to go up and to the moon.

Thank you for reading!