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Cryptocurrency vs. Traditional Currency

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Currency 101: The value of any currency is determined by what someone
will give you in exchange for said currency.
Currencies, crypto or otherwise need to follow three basic rules:
4. They need to be difficult to produce (cash) or find (gold or other precious
metals)
5. They need have a limited supply
6. They need to be recognized by other humans as having value
Using only Bitcoin (BTC) as an example, it ticks the boxes of all three of these
characteristics:
4. Bitcoin uses complex computer algorithms in its production which take a lot
of computational power, so it cannot be replicated easily or at a discount
5. There are a finite supply of Bitcoins – 21 Million to be exact[2]. As of 2015,
roughly 2/3 of this number had been mined
6. There are hundreds of Bitcoin exchanges and Bitcoin is accepted everywhere
from Subway to OKCupid
Where cryptocurrencies differ from traditional currencies (also known as Fiat
currencies) is that they are not tied to any one country, nation or institution (in
most cases). There are no USA Bitcoins, no Japanese Litecoins or anything like
that. They are decentralized.
Bitcoin was designed as a “deflationary currency” – meaning over time its value
will, in theory, inherently increase. Unlike fiat currencies which are inflationary
and whose value will eventually decrease. After all, in 1917, $1 was worth the
equivalent of $20.17 today. So the US Dollar is worth 20 times LESS than 100
years ago. In other words, if you continue to hold $1 over the course of 100
years, you will be able to buy progressively fewer and fewer items in exchange
for it, whereas with Bitcoin, the opposite will happen.
As another real world example. On 22 May 2010, Laszlo Hanyecz made the first
real-world cryptocurrency transaction by buying two pizzas in Jacksonville,
Florida for 10,000 BTC. Today 10,000BTC is worth over $40 million.
Bitcoin was designed this way so that no single person (or government) could
increase the supply of money, lowering the value of the money already in the
market.
We also have to remember that fiat currencies that we know and love were not
always the main players in the currency world. For centuries, Gold and other
precious metals were seen as the most desirable currencies for day to day usage.
It was not until governments could standardize and verify the metallic content of
coins (and later paper bills) that they became the go to choice for citizens.[

Legendary Economist John Maynard Keynes had this to say about inflation and
inflationary currencies.
”By a continuing process of inflation, governments can confiscate, secretly and
unobserved, an important part of the wealth of their citizens. By this method they
not only confiscate, but they confiscate arbitrarily; and, while the process
impoverishes many, it actually enriches some. The sight of this arbitrary
rearrangement of riches strikes not only at security, but at confidence in the
equity of the existing distribution of wealth.“
While Bitcoin has an air of uncertainty about it based on the decentralization
principle – where the real potential lies is in seeing it from the opposite
perspective. With no single body being responsible for the supply of money, it
forces all players (government, businesses and consumers) to be transparent
about their processes, lowering the risk of fraud or tampering. The transparency
is ensured by rewarding miners for their efforts (in the form of coin). This single
dominating factor is why so many investors are confident about the long term
viability of the currency.
One common argument made by Bitcoin detractors is that as there is no
government backing the currency, it could totally collapse in theory. However,
we have seen these happen numerous times with fiat currency under scenarios of
hyperinflation where governments can no longer ensure the value of their money
and as such have to create an entirely new currency. Common examples include
the German Weimar Republic in the 1920s, where the currency lost so much of
its value, banknotes were used as wallpaper. Currently, the Venezuelan economy
is on track to experience over 1000% inflation for the year, leaving many
citizens unable to afford daily necessities like bread. Bitcoin enthusiasts see the
cryptocurrency as recession-proof.
The cost of international transactions is another area where cryptocurrencies
maintain a huge advantage over traditional ones. Anyone who has ever had to
send money overseas will know that the cost of processing these transaction can
reach ridiculous levels. There are times when these fees can top 10%. As

cryptocurrencies do not view international transactions (as there are no “nations”
involved) any differently from local ones, there are minimal fees for sending
money to any part of the world. The speed of transactions across borders is also
much faster than regular fiat currencies, a Bitcoin transaction takes around 10
minutes to register as opposed to days for international bank transfers, and other
coins process transactions even faster.

 

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