With cryptocurrencies such as Bitcoin and Litecoin surging in popularity, people are naturally going to get curious about this digital form of money. Investors may wonder could cryptocurrencies replace fiat money. They may even wonder how high prices for digital currencies could go or even replace actual paper money.
Unfortunately, there are no hard answers to the questions. Because the notion of digital currency replacing fiat, or paper money is still so new, let’s take a look at both sides of the issue.
Before we get to that, let’s take a look at a brief overview of each type of currency:
[one_half_first]Fiat currency:
- Is produced by central banks
- Can technically have unlimited supply
- Loses purchasing power over time
- Can be manipulated to increase exports
Cryptocurrency:
- Is a decentralized blockchain digital currency to be used as a medium of exchange
- Not controlled by any single party, government or bank
- Has a limited supply
- May not be manipulated to gain competitive advantage
There is a modern day currency war going on right now. Central banks have devalued their currency in order to provide a meaningful advantage when it comes to global trade. Governments and central banks have the ability to increase or decrease the money supply, depending on their objectives. This can make currency markets volatile and sometimes unpredictable.
The dollar has been losing value for decades, effectively lowering the purchasing power of everyone holding dollars.
Throughout history, fiat currencies have lost value over time. Naysayers of paper money have long advocated other means to protect wealth and buying power such as physical gold or other hard assets.
The question of whether or not digital money could replace fiat is a difficult one, and likely won’t be answered for some time to come. It is important to keep in mind that digital currencies like Bitcoin are only in their infancy. These currencies have not yet been fully accepted by the mainstream, although the number of merchants accepting them may be rising.
Digital currencies still have much to prove. Potential security issues, theft, criminal activities and general acceptance are just a few of the hurdles currently being faced by this new form of “money.” It could take years, even decades, for these electronic currencies to reach a level of reliability that earns the public’s trust.
The limited supply of digital currency as well as its decentralized nature may also present serious issues for governments and central banks. Such a monetary system could change the face of money and commerce as we know it today, and governments may be reluctant to use a system which is not completely under their control. It could inhibit their ability to affect the money supply and to maintain inflation targets. As well, it could also have an effect on debt, as a weaker currency makes debt repayment for manageable.
The rise of cryptocurrency has likely just only begun. As global economies become more technically advanced and as global commerce increases further, the possibility of more widespread use of this form of currency may exist. Don’t plan on using bitcoins to buy a new house just yet, however.
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