Is Bitcoin a Potential Global Currency?

Bitcoin, the pioneering cryptocurrency, has garnered significant attention and adoption since its creation in 2009. With its decentralized nature, cryptographic security, and limited supply, Bitcoin has often been touted as a potential global currency.

However, the question of whether Bitcoin can truly fulfill this role remains a subject of debate among economists, technologists, and financial experts. In this article, we will examine the key factors influencing Bitcoin's potential as a global currency.

Decentralization and Trust

One of Bitcoin's main strengths lies in its decentralized nature. It operates on a peer-to-peer network called the blockchain, which eliminates the need for intermediaries like banks or governments. Bitcoin transactions are transparent, secure, and can be verified by anyone, ensuring trust and reducing the potential for fraud. This decentralized aspect appeals to individuals seeking financial independence and protection from economic instability.

Limited Supply and Store of Value

Bitcoin's algorithmic design sets a cap on its total supply at 21 million coins. This scarcity has contributed to Bitcoin's perception as a store of value, similar to precious metals like gold. Advocates argue that its fixed supply makes it resistant to inflation, as central banks cannot arbitrarily increase the money supply. This characteristic makes Bitcoin appealing to individuals and businesses looking to hedge against traditional fiat currencies.

Adoption and Infrastructure

Bitcoin's adoption has grown steadily over the years, with an increasing number of businesses, institutions, and even governments accepting it as a form of payment. Major companies like PayPal and Tesla have started integrating Bitcoin into their services, lending credibility and further driving adoption. Additionally, the development of infrastructure, such as cryptocurrency exchanges and custodial services, has made it easier for individuals to buy, store, and transact with Bitcoin.

Volatility and Scalability Challenges

Bitcoin's volatility is often cited as a significant hurdle to its role as a global currency. The cryptocurrency market experiences significant price fluctuations, which can deter businesses and individuals from adopting it for day-to-day transactions. Furthermore, Bitcoin's current transaction processing capacity is limited, resulting in slower confirmation times and higher fees during peak demand periods. Addressing scalability issues is crucial for Bitcoin to handle a higher volume of transactions and compete with traditional payment systems.

Regulatory Environment and Government Acceptance

The regulatory environment surrounding cryptocurrencies varies across countries. While some nations have embraced Bitcoin and other digital assets, others have imposed restrictions or outright bans. Regulatory clarity and government acceptance are essential for Bitcoin's widespread adoption as a global currency. A consistent and favorable regulatory framework can provide stability, attract investment, and encourage mainstream acceptance.

Will Bitcoin become more stable in the future?

According to data published by Ark Invest, bitcoin's volatility is diminishing over time as its network value has increased. As more people adopt Bitcoin its network value (or total capitalization) increases. So as adoption increases, the marginal demand for bitcoin should become a smaller percentage of its total network value, diminishing the magnitude of price swings 

Based on the diagram above, it is clear that $1 billion in new demand on a $10 billion network value (10% marginal demand), should impact bitcoin's price more significantly than $1 billion in new demand on a $100 billion network value (1% marginal demand). Therefore as time passes, a lower marginal demand will lead to increased price stability.

If Bitcoin wants to create price stability today, it can easily do so by increasing the supply of bitcoin and thereby reducing the marginal demand – exactly the same way central banks operate. However, this is not desirable as, based on the impossible trinity, it will lead to restricted capital flows. So Bitcoin is opting to operate in Side C of the triangle and create a true alternative to national currencies. An alternative that can transform the global economy.

Also, the current volatility in price is not necessarily a criterion to claim that bitcoin is a poor store of value. Historically, that volatility has been accompanied by significant upward moves in its price. Over time bitcoin's purchasing power has increased significantly (the price of bitcoin has compounded at an annual rate of roughly 200% and, despite significant intra-year moves).

There are three key conclusions from the analysis I have done: (a) Bitcoin is a global phenomenon that is disrupting traditional banking paradigms and creating a currency that encourages free capital flow; (b) Bitcoin's price instability is a deliberate choice and over time the volatility will significantly reduce, and (c) on a long-term investment horizon, Bitcoin has been delivering an extremely high rate of return (200% annual compounded return on a 10-year horizon). Therefore, as per my analysis, Bitcoin is not only a great long-term asset to own but also has the potential to become a true alternative to global currencies. National Banks, beware.

Conclusion:

Bitcoin has undoubtedly disrupted the financial landscape and has the potential to become a global currency. Its decentralized nature, limited supply, and increasing adoption have made it an attractive alternative to traditional fiat currencies. However, challenges such as volatility, scalability, and regulatory uncertainties must be addressed for Bitcoin to achieve widespread acceptance. As the cryptocurrency ecosystem evolves and matures, it will be interesting to observe how Bitcoin's potential as a global currency unfolds.