Earlier this year, Jack Dorsey, cofounder of Twitter and CEO of Square, declared that Bitcoin would become the world’s “single currency” within a decade. What was striking about Dorsey’s comment wasn’t just the audacious prediction but also the notion that Bitcoin might be useful for something other than speculative investing. After all, even as the financial world has been gripped by cryptocurrency mania over the last year, the “currency” part of cryptocurrencies has receded in importance in the public eye. As a Goldman Sachs executive put it last year, Bitcoin is, at the moment, more of an asset than a currency—it’s something people trade, like a stock or bond, rather than something they exchange for goods and services.
That perception reflects reality. The number of Bitcoin transactions (as opposed to trades) has not risen much in the last few years, and one recent academic study suggested that half of those transactions are associated with illicit activity. As a medium of exchange, Bitcoin remains today pretty much what it was in 2010: an interesting complement to the existing monetary system, primarily useful for people interested in avoiding legal authorities or living in societies racked by inflation (like, say, in Venezuela or Zimbabwe).
Still, the dream that cryptocurrency could replace our existing system of fiat money, in which the money supply is controlled by government-run central banks, remains a key part of Bitcoin’s appeal. The promise is of a system where the government can’t manipulate the money supply, and market competition determines which currencies people use. But what would happen if that dream came true? If the dollar and the euro were replaced by Bitcoin, how would the system adapt, and how would the economy and the financial system function?
The simple answer is: not well. Our economies and financial systems are built around fiat money, and they rely on the central bank’s control of the currency (and the government’s ability to issue debt in that currency) to help manage the business cycle, fight unemployment, and deal with financial crises. An economy in which Bitcoin was the dominant currency would be a more volatile and harsher economy, in which the government would have limited tools to fight recessions and where financial panics, once started, would be hard to stop.To read more, click here