Bitcoin versus Dollar

Bitcoin versus Dollar

Comparing Bitcoin and the Dollar is something that yields different results depending on what you are trying to learn. If the question is Bitcoin versus Dollar as a currency, then the Dollar wins, simply because it is accepted in many, many more places. If it’s Bitcoin versus Dollar for transparency, then Bitcoin – with its public ledger – has the advantage.

There are many ways to compare the two currencies. This article will consider some of the advantages and disadvantages of each and explain some of how they differ.

Basic Bitcoin
Let’s start with some basics. Bitcoin is a cryptocurrency based on blockchain technology. That means that it is a digital, or virtual, currency that uses cryptography and a publicly distributed ledger, called the ‘blockchain’, to verify transactions. Why does it do that? Because when it was created, by the person going by the pseudonym ‘Satoshi Nakamoto’ in 2009, that was considered a good way to make transactions both secure and transparent.

It works like this: transactions on the network are gathered into blocks and added to the chain of previous transactions – hence the name ‘blockchain’. The resulting ledger is shared with the entire network so that transactions are visible to everyone. However, a problem with digital currency is known as ‘double spending’ – spending the same coins more than once.

This isn’t a problem with a physical currency, because once you have spent the money it is given to someone else. However, with digital currency, it can be a problem without a central authority to verify whether the money has already been spent. Bitcoin does not have that central authority.

What it does have are ‘miners’ – computers that batch transactions together and then try to find a cryptographic hash – a 64-digit hexadecimal number – that is equal to or lower than the one specified by the network. When it finds one – and it is doing this in competition with many other miners – it is awarded some newly-mined Bitcoins and the transactions are added to the chain.

Should anyone try to alter a previous transaction or re-spend the same coins, the resulting hash will not meet the network’s criteria and it will be obvious that there is a problem and the transaction will be halted.

Durable Dollar
The Dollar, in contrast, is very much centralised. It is known as a ‘fiat’ currency because it is backed by the order of a central bank and not by a value against a physical asset, such as gold. Many currencies used to be backed by gold – the so-called ‘Gold Standard’ – but, like the Dollar, no longer are.

The central bank manages the currency. Unlike Bitcoin, where new coins are produced by mining, new Dollars can be issued by the bank. Transactions, rather than being on a public ledger, are verified and backed by a broad banking network.

The Dollar has a long history and with that comes a certain stability. In a comparison of the stability of the Dollar with the stability of Bitcoin, Cointelegraph found that the Dollar’s most volatile period over the last 30 years saw it lose 33 per cent of its value over three years. In comparison, Bitcoin’s most volatile period saw it lose 60 per cent of its value over three months.

ABCBullion compared the two currencies on a number of criteria that it said are crucial to a successful currency. On many of them the Dollar and Bitcoin are well matched. Both are durable, portable, divisible and immediately recognisable. However, there are differences. While the Dollar is consistent, Bitcoin’s consistency is questionable. And while the Dollar could be considered widely acceptable, Bitcoin cannot.

The analysis, which compared both to gold, found that neither the Dollar nor Bitcoin can be considered intrinsically valuable, whereas gold can.

Where the Dollar wins
Many of the benefits and drawbacks of either the Dollar or Bitcoin depend to an extent on your economic position. For some, the fact that the Dollar is a fiat currency is an advantage; it is centrally supported, widely available and has an entire banking network to keep it working. For those who consider centralisation to be a bad thing, however, this is very much a disadvantage. Keep that in mind when reading the following.

The Dollar is easy to store, transfer and claim. If you want to turn your money into physical notes, then you can go to a bank and withdraw the cash immediately. Now, if everyone in the world did this, there would be a problem because there are fewer notes in circulation than there are Dollars in existence – but in normal, daily circumstances, the process works.

It can ‘inflate’ or ‘deflate’ as needed to support the economy. This is something that is certainly debatable, but there are economists who consider that an advantage. Bitcoin’s independence means that it doesn’t work that way.

Since it isn’t tied to the value of gold, the Dollar – or any fiat currency – frees-up that gold to play a role in the economy or be used by industry, since it doesn’t have to be held in reserve.

Though it wouldn’t be true to say that most people understand the theory, or philosophy of money, it’s certainly the case that everyone in a particular society is brought up to understand the concept of currency, and to have some rough sense of its value. This knowledge may be imperfect, but it allows almost everyone to use money and know what they are doing.

The same cannot be said of Bitcoin, which is complicated and takes time and effort to learn. Further complexity is added by the fact that Bitcoin and other cryptocurrencies often seem to act more like assets than currencies, with people buying them speculatively in the hope of profiting from a rise.

That complexity continues with the concept of wallets, which are not easily understood by people new to the currency. The basic means of storing the Dollar – in a physical wallet or a bank account – are understood by most people. Again, it is true that most people don’t understand some of the advanced financial instruments employed in investment banking, say, but it’s also true that most people don’t need to know that.

Your Dollars can be lost or stolen if you lose your wallet, but the level of scams and frauds involving the Dollar is not as high as it is for Bitcoin, where coins are frequently stolen from exchanges and wallets.

Meanwhile, as mentioned above, Bitcoin is very volatile, far more so than the Dollar. Some of this is driven by another disadvantage that Bitcoin has; some buyers are treating it as an asset and buying speculatively in the hope of profiting from a price increase. In addition to potentially fueling price volatility, this undermines Bitcoin’s effectiveness as a currency.

Finally, the Dollar, with more than 200 years of history, is a currency with a reasonably stable future. It’s unlikely to disappear and be replaced by another currency overnight. With Bitcoin, the future is murkier. Even if cryptocurrency represents the future of money, it is possible that it will be another currency, and not Bitcoin, that makes that happen.

Why Bitcoin wins
It’s possible to make the opposite case, of course. Though Bitcoin is volatile, its volatility seems to be slowing down as trading volume increases. As it settles, it will have an advantage in economies where inflation is running out of control. In those countries, the money has effectively lost its role as a store of value. Bitcoin, which is subject to price changes but not to inflation, could represent a more stable option in those places.

Tied into Bitcoin’s lack of inflation is its built-in scarcity and the fact that the supply cannot be manipulated by governments or anyone else. There will only ever be 21 million Bitcoin, with the last one expected to be mined in more than 100 years’ time. The limited supply of Bitcoin should prevent its value from falling. Conversely, increasing supply of Dollars leads to inflation, which diminishes the value of an individual Dollar.

Critics of inflation argue that this is, in effect, an economy confiscating people’s wealth. For example, if $1,000 buys you a new suit but next year inflation means that the same suit will cost $1,200, then whoever runs the economy has effectively taken away 20 per cent of your wealth.

If there were a central body that decided to issue new Bitcoins, then this process would not be as sound. Mining of Bitcoins is determined by the maths underlying the system. The amount of new Bitcoin mined with each block of transactions will actually decrease as time goes on, keeping the system stable.

That’s a somewhat contentious criticism. Less contentious is the argument that money supply manipulations intended to keep the economy in balance, are more likely to end up fuelling economic booms and busts. There are various arguments as to why this is; from flaws in the system itself to the inability of individuals to manage something as complex and unpredictable as an economy. However, the key point is that one way to remove this problem would be to make it impossible for a central body to manipulate the currency at all.

Even if you don’t accept that, another argument against centralisation is that it concentrates power in the hands of a few. Ensuring that nobody has control is therefore fairer.

Then there are the transactions themselves. Bitcoin transactions are transparent because the ledger of transactions – the blockchain – is public. This is not the same as saying that every transaction can be traced to an individual – it is possible, with the right precautions, to be virtually anonymous when using Bitcoin. That means the public can see where and how money is being spent in the system. This is not the case with Dollars, clearly.

The processing of these transactions is automated and not prone to mistakes, as human-processed Dollar transactions are. In theory, Bitcoin transactions can be instantaneous, too – much faster than transferring Dollars to someone’s bank account. In practice, the speed of transactions is heavily dependent on how much you pay in fees.

The overall case
As you can tell, many of the advantages of Bitcoin are philosophical ones – and the extent to which you agree with the philosophical argument will determine how much weight you give those advantages. There are a few practical benefits, however.

At the moment, the Dollar has all the advantages that come from being a dominant currency for hundreds of years; people are taught to understand it as children, every vendor and financial institution in the US – and quite a few outside it – accepts it as payment, and so on. If the positions were reversed, and Bitcoin was somehow the 200-year-old currency and the Dollar the 10-year-old newcomer, then the latter would be suffering from poor public understanding and limited uptake.

If you are looking for an outright winner here, then of course the Dollar wins, particularly because of its power as the incumbent. If you are looking for a future winner, then it is harder to call. In pretty much every other situation in which you might wonder whether the Dollar or Bitcoin is best, the answer will be: it depends what you want to do.

Bitcoin wins if you want to protect yourself from inflation, while the Dollar wins if you want a trusted intermediary in charge of your currency. Right now, different needs would drive different choices.

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This post is provided for informational purposes only. None of the information presented here should be considered investment advice. Everyone should always do their own research and due diligence before sending funds to any third party.