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G7 Report – Bitcoin Is Not Money Nor Asset

Late last year, the Big Seven (G7) released a report stating that bitcoin and other cryptocurrencies still do not constitute a “reliable and attractive” means of payment. In particular, G7 researchers are convinced that cryptocurrencies are incredibly volatile, difficult to use, and they have scalability problems and regulatory risks.

Bitcoin According to Money Theory

Until now, regulators of various countries have not come to a common denominator in matters of cryptocurrencies and therefore interpret their essence in their way. Some equate bitcoin to assets, others to means of payment, still others to goods, and still others completely prohibit the circulation of digital currencies, calling them extremely speculative tools and a tool in the hands of criminals. Before answering the question of what cryptocurrency is, let’s turn to the basics of monetary theory.

Bitcoin can quite effectively perform all five of the essential functions of money. So, despite the relatively high volatility of the first cryptocurrency, Bitcoin is in demand as a measure of value and a means of circulation in countries like Venezuela. The economy is suffering from hyperinflation, where the prices of goods can vary significantly even during the day.

The first cryptocurrency is able to serve as an excellent tool for diversifying an investment portfolio. Besides, over the years, the price of Bitcoin has been growing. Therefore, cryptocurrency can be a means of accumulation.

The value of money as a medium of circulation lies in its purchasing power. The actual value does not necessarily determine the latter (for example, gold from which money is made or for which it can be exchanged under the gold standard) – it can be determined by the trust of money holders.

The Benefits and Disadvantages of Bitcoin in comparison to Fiat Money

If we talk about the benefits, then the list of those must be the following:

  • Limited emission. Bitcoin supply is limited to 21 million coins, of which more than 85% have already been mined. Thus, BTC is almost the rarest asset on Earth. In the long run, its price will increase subject to constant or growing demand. Therefore, bitcoin can perfectly serve the function of preserving value, especially if the investment horizon is measured over the years.
  • Lack of a central regulator. From this property follows the stability of Bitcoin to censorship and the voluntaristic manipulation of its various parameters; anyone can make transactions and store value in BTC without any permission to do so.
  • Low transaction costs and reasonable payment rates. These properties are especially relevant for those who carry out cross-border transfers. Lightning Network technology is designed to increase speed and reduce the cost of payments, as well as solve the problem of scalability of the BTC network.
  • Security and irreversibility of transactions that do not require parties to disclose sensitive information. The irreversibility property, in particular, protects sellers from losses due to fraudulent chargebacks.
  • Extremely low and predictable inflation. This property is closely related to the previous one. The current inflation rate of BTC is 3.79%, and after the May halving, it will fall below 2% (in the currencies of most countries this indicator is slightly higher).

Of course, Bitcoin is not an ideal – and it has many disadvantages. However, it seems so because a lot of people are using it for various (mainly bad or illegal) purposes.

  • Low degree of acceptance of cryptocurrencies. Many people still consider bitcoin as something frivolous and highly speculative, not appreciating the advantages of decentralization, the strength of cryptography, and the potential network effect.
  • High volatility. The range of bitcoin price fluctuations is still quite high, but a long-term downward trend characterizes the indicator. So far, significant volatility may repel conservative investors who prefer low-income and least risky assets.
  • The deflationary nature of bitcoin can be both an advantage and a disadvantage. The concentration of BTC in the wallets of large investors increases over time.
  • The irreversibility of transactions can also be a significant problem, especially if there are risks of failure to fulfill an agreement. For example, when paying through VISA or MasterCard, the customer can use the chargeback procedure.
  • Only the owner of the coins can sign transactions and spend money from his wallet.

Even though G7 leaders are not ready to comprehend the reality, the massive and worldwide Bitcoin adoption is still on the race. According to many experts, it is just a matter of time, when governments and banks will realize the whole potential of Bitcoin, not only as a currency, but as an additional tool to support financial global system.