Distinguish between bitcoin and central bank currency
What is the difference between a central bank authorized currency and bitcoin? The holder of currency authorized by the Central Bank can only offer it for the exchange of goods and services. The holder of bitcoins cannot offer it because it is a virtual currency that is not authorized by a central bank. However, Bitcoin holders may be able to transfer Bitcoins to another Bitcoin member’s account in the exchange of goods and services and even currencies authorized by the central bank.
Inflation will lower the real value of the bank’s currency. Short-term fluctuations in the demand and supply of bank currency in money markets affect the change in the cost of borrowing. However, the face value remains the same. In the case of Bitcoin, its face value and real value change. We have recently witnessed the Bitcoin split. This is something like splitting a stake in the stock market. Companies sometimes split the shares into two, five or ten depending on market capitalization. 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 the demand for the coins increases. Thus, hoarding bitcoins automatically enables a person to reap profits. Besides, the initial Bitcoin holders will have a huge advantage over other Bitcoin holders who entered the market later on. In this sense, Bitcoin behaves as an asset that increases in value and decreases as evidenced by its price volatility.
When the original producers, including the miners, sell bitcoin to the public, the money supply in the market decreases. However, this money will not go to central banks. Instead, it goes to a few individuals who can act as a central bank. In fact, companies are allowed to raise capital from the market. However, they are structured transactions. This means that as the overall value of bitcoin increases, the bitcoin system will have the power to intervene in the monetary policy of central banks.
Bitcoin is highly speculative
How do you buy bitcoin? Of course, someone has to sell it, and sell it at a value, a value that is decided by the bitcoin market and possibly the sellers themselves. If there are more buyers than sellers, the price goes up. This means that bitcoins act as a virtual commodity. You can store it and sell it later to make a profit. What if the price of bitcoin drops? Of course, you will lose your money just like the way you lose money in the stock market. There is also another way to get Bitcoin through mining. Bitcoin mining is the process by which transactions are verified and added to the public ledger, known as the black chain, as well as the means by which new bitcoins are issued.
How liquid is bitcoin? It depends on the volume of transactions. In the stock market, the liquidity of a stock depends on factors such as the value of the company, free-floating, demand and supply, etc. In the case of Bitcoin, free-floating and demand seem to be the two factors that determine its price. The high volatility of the bitcoin price is due to a decrease in free-floating and an increase in demand. The value of a virtual company depends on the experiences of its members with bitcoin transactions. We may get some helpful feedback from its members.
What could be a big problem with this transaction system? Members cannot sell Bitcoin if they do not have one. This means that you must first obtain it by bidding on something of value that you own or by mining Bitcoin. A large part of this valuable stuff eventually goes to the person who was the original seller of the bitcoin. Of course, some of the amount as profits will definitely go to other members who are not the original producers of bitcoin. Some members will also lose their valuables. As the demand for Bitcoin increases, the original seller can produce more Bitcoins as central banks do. With the price of bitcoin rising in their market, the original producers could release their bitcoins into the system and make a huge profit.
Bitcoin is an unregulated virtual private financial instrument
Bitcoin is a virtual financial instrument, although it does not qualify as a full-fledged currency, nor does it have legal sanctity. If Bitcoin holders set up a special court to settle their issues arising from Bitcoin transactions, they may not have to worry about legal sanctity. Thus, it is a virtual private financial instrument for an exclusive group of people. People with bitcoins will be able to purchase huge amounts of goods and services in the public domain, which could destabilize the normal market. This will be a challenge for the regulators. The inaction of regulators could trigger another financial crisis as happened during the financial crisis of 2007-2008. As usual, we cannot judge the tip of the iceberg. We won’t be able to predict the damage it could do. Only in the last stage do we see the whole thing, when we are unable to do anything except the emergency exit to survive the crisis. That’s what we’ve been going through since we started experimenting with the things we wanted to control. We succeeded in some and failed in many, although not without sacrifices and losses. Shall we wait to see everything?