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  • Otto Vos

Bitcoin versus fiat money

Updated: May 15

Superior money characteristics, yet not replacing fiat money.


Introduction

In 2008 Satoshi Nakamoto published its whitepaper and described

Bitcoin as “a purely peer-to-peer version of electronic cash .. [for] online payments to be sent directly from one party to another without going through a financial institution.”



Bitcoin and its meaning

Since then Bitcoin has received much attention and received many new definitions beyond the original :



Bitcoin: 2 views on money

Bitcoin can be evaluated as money on 2 aspects:

  • Functions of money: medium of exchange, measure of value and store of value

  • Characteristics of money: durability, portability, divisibility, uniformity, limited supply, and acceptability


As will become apparent Bitcoin does not yet offer all the functions of money but does have superior characteristics.


Bitcoin money functions

Bitcoin as money still falls short in providing the full functions of money like fiat money can for medium of exchange, unit of account and store of value.


The comparison between the two (fiat money and Bitcoin) is not completely valid due to a few factors:

  • Fiat money is only global as concept not as currency. Bitcoin is a true global currency.

  • Fiat money is heavily supported by governments (i.e. national banks) as the single money solution ("money-monopoly"to pay taxes/goods/guaranteed etc). Bitcoin is not government supported.

  • Fiat money has a global network effect on consumer and merchant side with centuries of history. Bitcoin has to gain traction still.

Function

Criterium

Fiat money

Bitcoin

comments

Medium of exchange (for goods and services)

Merchant acceptance (global)

100%

​Large acquirers do not yet see Bitcoin as standard service offering

Consumer acceptance (global) for payments

100%

<1%

​Mostly indirect Bitcoin payments using Lighting or Visa crypto credit cards

Payment technology

Highly mature:


Innovation stage

Lighting Network is still in innovation phase but growth and adoption are rising

Used as Legal Tender

Yes

No

​except El Salvador, Central African Republic. Some argue only failed states.

Unit of account to measure values of goods and services

Degree of use

100%

<1%

Even in El Salvador prices do not have to be expressed in BTC (mostly dollar)

Store of value

Value stability

Low volatility

High volatility

Bitcoin is more in sync with stocks and dollar

Fit for purpose

relatively low fit

relatively high fit

​Fiat money is inflation sensitive. Although Bitcoin inflation hedging capabilities seem overrated

Use

High

​Low

Savings are still higher than Bitcoin


Bitcoin money characteristics

Bitcoin has superior money characteristics when compared to the fiat money. Many National Central Banks or regional institutions like the ECB are already involved in all kinds of initiatives to mimic some of the money characteristics of Bitcoin most notably the digital aspects (like durability/portability/and an aspect that should be added to money characteristics: programmability). For example, Central Bank Digital Currencies (CBDC) will be digital but will never have the de-central aspects of Bitcoin governance model.

Charachteristic

Fiat money

Bitcoin

Comments

Durability

Limited

Unlimited

Cash particularly is less durable than digital Bitcoins

Portability

Limited

Unlimited

Bitcoin is globally/digitally available while cash/coins remain local and expensive to transport

​Divisibility

Limited

Unlimited

Fiat money usually upt 1/100 (cent) while 1 Satoshi = 0.00000001 BTC (and smaller is possible)

Uniformity

High

High

Limited supply

Unlimited

Limited

Bitcoin has a hard cap of 21 million Bitcoin, while fiat money can be printed as much as national banks seem to need it.

Acceptability

High

Potentially extremely high

Bitcoin could be the one global money system

Programmability

Not possible

Possible

Bitcoin is used (direct/indirectly) for Lighting/smart contracts and is maintained by a community of developers.



Conclusions superior characteristic but not successful money

Bitcoin does not yet function in a way it can replace the current fiat monetary system. This does not mean that the current fiat system is perfect. There are plenty of opportunities for Bitcoin to provide specific use cases (like cross border remittances), or to support countries in their efforts to become less dependent on other currencies as the dollar.


Bitcoin does offer all the characteristics of money and in many ways is superior to current cash as issued by the National Banks and even to digital money (as provided by the commercial banks).



Remaining questions

If Bitcoin has many superior money characteristics it should naturally win the race from fiat money in the end. A few important question thus remains:

  • How is it possible that Bitcoin has not yet replaced current fiat money while it has superior characteristics for money?

  • In countries where Bitcoin is legally on the same foot as fiat money, will Bitcoin push out fiat money?

  • What or who can make Bitcoin succesfull and will it be only a matter of time?

Replace fiat money: unlikely scenario in developed countries

Governments are unlikely to replace their own “ fiatted” money by a self-governing money solution. As said most governments are trying to implement digital currencies themselves to offset the issues with the current fiat money. Or implement further regulation of Bitcoin and other crypto currencies to bring it inline with the stringent know your customer regulation, AML, anti terrorism financing).


Bitcoin as fiat money in "failed states": uncertain way ahead

Certainly not all Bitcoin adepts supported wholeheartedly the decision of El Salvador to"legalise" the Bitcoin in 2021. For them it was against the spirit and letter of Bitcoin to impose it as a new fiat money on the population via a "pseudo-despotic" leader. Also El Salvador did not have its own fiat money that could be replaced by the Bitcoin. The US dollar is used and remains legal tender together with the Bitcoin. Despite many incentives form the president, consumer uptake is low even for expensive remittances from workers in the US sending money to El Salvador, Bitcoin is barely used.


Way to succes: only alternative for the public by the public

Currently Bitcoin is in many ways the only viable alternative for fiat money. It is a global, fundamentally secure money system. Bitcoin is also a public alternative by design. The way to success can thus only be determined by the public for the public. No government will and can make Bitcoin succesfull, it is a "contradictio in terminis."

On the supply side: Developer communities, miners and wallet providers decide the speed of progress and what use cases to support and in the end what function of money Bitcoin will provide to the public. The so called network effect needs relevant use cases and time to develop.


If Bitcoin would ever "fail" it is because the public does not need it or the public was not allowed to use it, or governments succeed in providing alternatives with some of its characteristics (like CBDC).

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