Supply chain relationships in the finance and tech industry are genuinely global in reach and complexity. Bitcoin may provide a more stable long-term solution to our money woes by establishing much-needed trust and transparency in these industries.
While Bitcoin is still in its early stages, the technology, security and potential for disruption are certainly there. The traditional financial system has made it easy for some but impossible for others to participate in the global economy. Moreover, as payment systems become more virtual, we lose our physical interaction and accountability. In addition, you may consider knowing about the distinction between Bitcoin and Fiat Money.
The financial system is rife with counterparty risk; “insiders” continue to exploit regulatory loopholes that gain them an unfair advantage over competitors. A company can be fully regulated in one country but use different rules in different countries.
Technology has advanced to a level where blockchains are replacing large portions of the financial system. A cryptocurrency is not only a payment network, but it provides an accurate, digital and immutable record of ownership.
Bitcoin’s fixed supply serves as an actual digital currency for the entire community, and unlike gold, this is not limited by physical supply. It is easy to lose sight of the fact that Bitcoin is still an infant technology; it only has been around for less than 10 years, and its market dominance is relatively tiny. First, however, let’s discuss what makes bitcoin a potential monetary system.
The Foundation for a Secure Financial System
Bitcoin is the perfect system for a secure payment network. The current financial infrastructure has been built on trust and is not very secure. Bitcoin provides an alternative, reliable, transparent, and incorruptible system which eliminates the need to trust the financial system.
As we agree that it isn’t possible to achieve absolute security in an environment with trillions of dollars at stake, bitcoin removes this possibility through transparency and decentralization. The history of Bitcoin’s transactions is stored on each participant’s local blockchain so all parties can have confidence in the chain’s integrity and the other participants’ reputation. That makes trust management much more straightforward than traditional methods, where users across all parties must share data.
The authenticity algorithms built into Bitcoin and other cryptocurrencies are also helpful for monitoring suspicious transactions. We have all experienced the explosion of fraud in the banking industry where only a small subset of transactions are investigated; the enormous compliance burden caused by this makes it near-impossible to manage risk effectively. In Bitcoin, where each transaction is verified and broadcast to a global crowd, fraudsters are greatly reduced.
Monetary Policy in Theory and Practice
The primary purpose of monetary policy is to manage inflation, and as it turns out, bitcoin has some interesting properties when it comes to managing inflation. For example, there are two methods to limit inflationary risk: changes to the money supply or changes in interest rates.
If the increase in money supply is faster than the growth of goods and services, then prices will rise, causing the currency’s value to fall. The opposite happens if people opt for a lower spending rate, creating deflation.
While governments can manipulate interest rates and direct editing of a money supply, bitcoin provides the best mechanism for managing inflation. Bitcoin’s deflationary nature is due to its fixed supply and issuance algorithm, which makes it more limited than conventional fiat currencies (Fiat money refers to a currency issued by a central authority like the government).
Bitcoin is less prone to inflationary behaviour because its algorithm has a built-in limit on the amount governments can issue. In theory, bitcoin will never become inflated because it will have no fuel to increase its supply. Bitcoin’s deflationary nature also proves helpful in providing economic stimulus during times of recession. When the economy is depressed, a reduction in the money supply causes deflation and encourages spending. It allows people to hold onto the currency and are more likely to spend it when necessary.
A stable monetary system:
Unfortunately, no monetary system can be perfect, but we have a fantastic opportunity to create more economic stability with modern technology. Bitcoin provides an open network with decentralized data and algorithms that users can use to manage monetary policy. In addition, the ability of the bitcoin protocol to evolve will enable it to keep up with the challenges created by financial innovation.
Easing international exchange:
When the international finance industry sees the power of bitcoin, for example, in the ease of cross-border payments, we can expect a demand for more stable currencies. The community is developing payment methods that allow people to use bitcoin and other cryptocurrencies to transfer money across borders. Since central banks issue and exchange currencies, we have an asymmetric relationship with the federal reserve system.
Resolving financial crisis:
We must rely on governments to re-inflate the economy or bail out troubled institutions. Bitcoin’s transparent and incorruptible ledger allows the community to support each other during times of crisis rather than expecting governments to use taxpayer money. As more people realize that bitcoin can stabilize the economy, we will see increased demand for such a technology.
With bitcoin, it is possible to have a value stored and transferred without necessarily having a bank account. Since fiat money is a central bank issued, they can charge fees with no accountability or recourse. Bitcoin empowers people by providing a service similar to banks that allow customers to store their wealth in an account without requiring a central authority.