What is Bitcoin?
Bitcoin is a cryptocurrency that is designed to work as a payment system. It is a new form of money that uses cryptography to control its creation and transactions. In simple terms, it is like cash for the internet i.e. virtual money. Unlike Paytm or any other money wallet apps, it is not a double-entry book-keeping. It has a unique triple entry book-keeping system.
To readers who aren’t sure what Bitcoin is, let’s break it down in simpler words.
Bitcoin in simpler words is an electronic coin or virtual coin which is defined as a chain of digital signatures. Each owner transfers the coin to the next by digitally signing it to the payee. The ownership of the bitcoin can be verified based on these digital signatures.
Here, I will try to answer the question ‘Can Bitcoin be substituted for a Legal Tender?’ It can be declared as a legal currency if it supports the basic requirements and characteristics of money.
Money and its Characteristics:
Money is defined as any tangible item or verifiable record that is generally accepted in transaction courses as payment for goods and services. The basic six characteristics of money are:
- Divisibility: money can be divided into small increments, denominations or units of value.
- Durability: Money is a store of value. Objects used as money must withstand physical wear and tear; it should not lose it’s value over time.
- Portability: Carrying money should be easy and convenient.
- Uniformity: Any two units of money must be uniform or the same in the terms of what they will buy.
- Limited Supply: Money has limited supply. The circulation and pumping of additional money/ currency note in the economy is Federal/Central Bank’s decision.
- Acceptability: Money should be universally accepted.
Bitcoin and its Characteristics:
Now, we shall put Bitcoin through the test of qualifying as money.
- Divisibility: They are divisible up to 8 decimal places. Hence they are more divisible than any other legal currency. Since it is virtual money, all calculations are done using integer arithmetic programs. Thus explaining it’s high divisibility rate.
- Durability: They are digital wallets that cannot be affected by any physical issue. However, we must not ignore the fact that electronic breakdown, hard drive crashes or a virus can corrupt data. The corrupted e-wallet file cannot be recovered. These coins will be forever lost in the system. This can turn a wealthy Bitcoin investor into a bankrupt.
- Portability: Needless to mention, they are portable. In fact, one does not need to carry it anywhere since it is all virtual and digital. Practically any amount of money can be carried and stored online.
- Uniformity: when only one time period is considered, Bitcoins can be uniform. But when we look into the matter with a time lag, a serious matter arises. Let us consider the ancient barter system. Say, a unit of rice would cost two units of wheat. When future transactions had to happen, the exchange rate would remain the same. However, in this case, we experience a fluctuating exchange rate. Seller of a commodity may suffer a huge loss if the exchange rate depreciates. On the other hand, the buyer would experience a loss if the exchange rate appreciated. Hence, Bitcoins are not uniform.
- Limited Supply: The mining of this virtual currency is a difficult process and hence the supply is also limited. The mining requires spending computing power to process transactions (adding transaction records to Bitcoin’s public ledger of past transactions or blockchain), secure the network, and keep everyone in the system synchronized together. In simple words, miners use software to solve math problems, which in turn helps to earn a certain number of bitcoins. As transactions increase maintaining the record of the previous transactions becomes difficult and complicated hence, mining decreases furthermore.
- Acceptability: Bitcoin is not yet universally accepted. Small merchants and certain risk-averse traders still do not believe in virtual transactions. The bitter truth is Bitcoin acceptability rate is not even near to half the acceptability rate of fiat money.
Can Bitcoin be substituted for a Legal Tender?
Bitcoin has mostly all the characteristics of money. The foundation is coming up with a self-regulatory system that would be implemented across bitcoin exchanges to bring about uniformity in the utilization of the virtual money. In the near future people might actually consider using Bitcoin to be more safe, secure and convenient compared to any other legal tender. Hence, Bitcoins can be substituted for a legal tender. But should it be? Well… we should leave that to the institutions and higher authorities. Because… who are we kidding? We all know that our growing economy is accompanied by growing cyber crimes. Both seem to have a positive regression even if the regression is a spurious one.
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