Distinction between Bitcoin and Central Bank Currency
What is the difference between the central bank sanctioned currency and Bitcoin? The holder of the currency authorized by the central bank can simply offer it for the exchange of goods and services. The holder of Bitcoins cannot offer it because it is a virtual currency not authorized by a central bank. However, Bitcoin holders can transfer Bitcoins to another Bitcoin member account in exchange for goods and services and even central bank authorized currencies.
Inflation will lower the real value of bank currency. The short-term fluctuation in the demand for and supply of bank currency in money markets affects the change in the cost of borrowing. However, the face value remains the same. In the case of Bitcoin, its nominal value and its real value change. We have recently witnessed the split of Bitcoin. This is somewhat like a stock split in the stock market. Companies sometimes divide a stock into two, five, or 10 shares, depending on the market value. This will increase the volume of transactions. Therefore, while the intrinsic value of a coin decreases over a period of time, the intrinsic value of Bitcoin increases as demand for the coins increases. Consequently, hoarding Bitcoins automatically allows a person to make a profit. Also, early Bitcoin holders will have a huge advantage over other Bitcoin holders who entered the market later. In that sense, Bitcoin behaves like an asset whose value rises and falls as evidenced by the volatility of its price.
When the original producers, including the miners, sell Bitcoin to the public, the money supply is reduced in the market. However, this money does not go to the central banks. Instead, it goes to a few individuals who can act as a central bank. In fact, companies can raise capital from the market. However, they are regulated transactions. This means that as the total value of Bitcoins increases, the Bitcoin system will have the strength to interfere with the monetary policy of central banks.
Bitcoin is highly speculative
How do you buy Bitcoin? Naturally, someone has to sell it, sell it for a value, a value decided by the Bitcoin market and probably by the sellers themselves. If there are more buyers than sellers, then the price goes up. It means that Bitcoin acts as a virtual commodity. You can accumulate them and sell them later for a profit. What happens if the price of Bitcoin goes down? Of course, you will lose your money in the same way that you lose money in the stock market. There is also another way to acquire Bitcoin through mining. Bitcoin mining is the process by which transactions are verified and added to the public ledger, known as the black chain, and also the means through which new Bitcoins are released.
How liquid is Bitcoin? It depends on the volume of transactions. In the stock market, the liquidity of a share depends on factors such as the value of the company, the free float, supply and demand, etc. In the case of Bitcoin, it seems that the free float and the demand are the factors that determine its price. The high volatility of the Bitcoin price is due to lower free float and higher demand. The value of the virtual company depends on the experiences of its members with Bitcoin transactions. We might get some useful feedback from your members.
What could be a big problem with this transaction system? No member can sell Bitcoin if they don’t have one. It means that you must first acquire it by offering something valuable that you own or by mining Bitcoin. A large chunk of this valuable stuff eventually goes to a person who is the original seller of Bitcoin. Of course, a part of the profit will go to other members who are not the original producer of Bitcoins. Some members will also lose their valuables. As the demand for Bitcoin increases, the original seller can produce more Bitcoins as central banks are doing. As the price of Bitcoin on their marketplace rises, the original producers can slowly release their bitcoins into the system and make a huge profit.
Bitcoin is a virtual private financial instrument that is not regulated
Bitcoin is a virtual financial instrument, although it does not qualify to be a full-fledged currency, nor does it have legal sanctity. If Bitcoin holders establish a private court to resolve their issues arising from Bitcoin transactions, they may not care about legal sanctity. Therefore, it is a private virtual financial instrument for an exclusive set of people. People who have Bitcoins will be able to buy large amounts of goods and services in the public domain, which can destabilize the normal market. This will be a challenge for regulators. Regulatory inaction may create another financial crisis as happened during the 2007-08 financial crisis. As usual, we cannot judge the tip of the iceberg. We will not be able to predict the damage it may cause. It is only at the last stage that we see the whole thing, when we are unable to do anything except an emergency exit to survive the crisis. We have been experiencing this ever since we started experimenting with things that we wanted to have control over. We succeeded in some and failed in many, though not without sacrifice and loss. Should we wait until we see the whole thing?