The PBA Idea Channel’s video compared bitcoin to hats from the Team Fortress 2 video game. The hats were intrinsically worthless because they did not affect the gameplay in any way. However, the players turned those digital pieces of headgear into a form of local currency (PBS Idea Channel, 2013). This logic may also be applied to any currency in our world, even the most stable and widespread since the currency has meager intrinsic value and only represents the worth of a product. Before the emergence of currency, people used to barter, directly trading their goods for a satisfying amount of other products. The invention of money streamlined the process, as people reached a consensus on how much certain goods cost. They did not have to exchange directly anymore; instead, they could use a convenient equivalent and make the trade much simpler. Nowadays, alternative currencies gain popularity, as they bypass the limitations and problems of fiat currencies in a way how first types of money streamlined trade.
Traditional flat currency serves that exchange function while retaining its inherently worthless nature. Some currencies are more stable, and they often serve as a global measurement of value. Their stability is guaranteed by a significant number of countries and financial institutions, which agree to hold a particular currency as an exchange equivalent. For example, the USD is guaranteed by dozens of governments and national banks worldwide. The Euro has been established and maintained by the Eurozone area members for more than 20 years. As long as all players adhere to their agreement, traditional currencies keep their positions. Certainly, there always will be a risk of a global economic crisis, which can cause the loss of people’s savings. In addition, fiat currencies are prone to inflation over time, which slowly erodes wages and savings. However, the global consensus between the national states and banks would probably keep the traditional currencies dominant on a scale of the international economy.
On the contrary, the most popular alternative digital currencies, such as Bitcoin, Ethereum, Litecoin, or Dogecoin, are anything but stable. In mid-April 2021, Bitcoin experienced rapid growth and reached nearly $65,000 value. Sometime later, Elon Musk revoked Tesla’s policy of accepting Bitcoin as payment for their products, and Bitcoin’s price fell below the $50,000 mark almost immediately (CBS News, 2021). Last Wednesday, May 19th, the Chinese Banking Association stated that financial institutions should “resolutely restrain” from using digital currencies due to their volatility, and Bitcoin’s price fell to about $30,000 (CBS News, 2021). Ironically, the very warning about the volatility of digital currencies caused a big slump in said currencies.
However, digital currencies have real-world worth due to agreement between their users, just like usual money. As long as the Internet users keep on mining the digital currency and storing it in their wallets, it will have worth. Unlike the traditional fiat currencies, the value of most digital ones is not guaranteed, so they are susceptible to wild fluctuations. One announcement from a powerful figure such as Elon Musk can cause a fall or significant growth, as there are no institutions to maintain stability. On the other hand, with sufficient analysis or sheer luck, digital currencies can turn into lucrative investment opportunities.
Overall, digital currencies have several advantages over traditional money, at least on a peer-to-peer level. They are more independent; they are not affected by the will of global financial institutions and can bring significant profits in case of lucky or well-thought investment. However, these pros are counterbalanced by corresponding cons: independence can result in rapid loss of savings due to unpredictable factors. Andrew Bailey, the governor of the Bank of England, said to buy digital currency “only if you’re prepared to lose all your money” (Smith, 2021). One must think carefully before entering digital currency trading or investing in the tools needed to mine it.
References
CBS News. (2021). Why is the price of Bitcoin and other cryptocurrencies falling? Web.
PBS Idea Channel. (2013). Are Bitcoins and unusual hats the future of currency. Web.
Smith, A. (2021). Cryptocurrency has ‘no intrinsic value’ and investors will ‘lose all your money’, says Bank of England chief. The Independent. Web.