FxWirePro: Will bitcoin succeed in replacing official currencies completely?

Bitcoin, as a cryptocurrency is poised to make further strong gains if consumers and investors continue to use it across the board. To some extent, this seems a bit unlikely, owing to the stern actions taken by various governments against the use of this, following its extremely volatile nature and several widespread news of massive scandals. In the developed economies, there will hardly be any stable demand for bitcoins, and it will no doubt continue on a rollercoaster ride.

The value of bitcoin has witnessed a rise from EUR700 to EUR10,000 within only a year and there are already alarms for a windfall loss. The value of the total number of bitcoins available, 21 million approx., would rise to EUR220,000 if used across all business transactions in the seven biggest industrial economies (G7). But the pertinent question is whether people want to switch to private money or not completely and if so, would the governments nod for this.

It is of course, true that private money with a limited volume would prevent the emergence of new, dangerous bubbles on the financial and property markets more than official paper money. The latter has witnessed a number of bubbles and crisis over the past 30 years.

Further, there have been doubts circulating in the western countries about the stabilization of the official currencies through the network effect. The inflation rate since the introduction of the euro, for example, has only amounted to just under 2% p.a.; this is despite the vast rise in the central bank money. Even if, in contrast to expectations, inflation rose to 5% or even 10%, people probably would defer from switching to private money. This is due to the network effect: if everyone pays in an official currency, the first to try out the new option would find very few willing to accept it in payment.

On the flipside, even if people want to shift to private money, the state would impose certain restrictions from doing so, since it holds a majority stake in maintaining its own monetary system. It benefits from the profits made by the respective central bank, can involve the central bank in the purchase of its bonds, and can more efficiently supervise financial movements, for example, to make tax evasion more difficult.

Further, the state could also ban public trading in private money such as bitcoins and ethereum. In a wrap, the barriers of private money are way too distinct and in the industrial economies, at least, no stable demand for bitcoins is expected to develop in recent times. Therefore, the cryptocurrency will no doubt continue its rollercoaster ride.

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