As bitcoin use keeps growing and gaining public attention, the question naturally arises: will it replace fiat currency?
Bitcoin’s price gains in 2015 and the current emergence of two competing bitcoin versions – Bitcoin Core and Bitcoin Classic – have raised expectations in some quarters that bitcoin could replace fiat currency, according to Bloomberg . Bitcoin Debates Based On False Premise
Noah Smith, an assistant professor of finance at Stony Brook University and a freelance writer for finance and business publications, sees a fair amount of misunderstanding in these debates. Both topics – which bitcoin version will prevail and whether or not bitcoin will replace fiat – are debated under the assumption that long-term value is what makes a currency good. Smith argues that the opposite is true.
Many bitcoiners are not well grounded in monetary economics, Smith writes. Hence, they assume that for a currency to be valuable, it needs the backing of a valuable commodity, like gold. They assume that money is without value without such backing. Such a view likens money to a stock certificate, a placeholder marking ownership of something with intrinsic value. Money is equated with value.
Money’s main value rests not on intrinsic value but liquidity, Smith claims. This is different from stocks, gold, housing or other real assets. Why Liquidity Matters
Liquidity refers to the ability to quickly and easily trade something for something else. Houses are not liquid since selling one can take months. Stocks are more liquid. Money, however, should be the most liquid entity of all as it provides the ability to pay for anything at any time. If a form of money can’t serve this purpose, a more liquid form of money is needed.
Money with no real asset backing can be “perfectly good,” Smith argues. What is needed is a […]
