Bitcoin and the blockchain technology that made it possible is a groundbreaking innovation that made waves in financial markets worldwide. The unchecked excitement and no-holds-barred speculation that fueled the crypto market bubble in 2017 largely deflated this year, and Bitcoin is starting to track low-volatility investments like gold. We’ve seen a lot of progress in the virtual currency marketplace in 2018, but will we ever see virtual currency replace cash outright?
Currency is Both an Investment and Medium of Exchange
We use fiat money as a means of exchange. Rather than having to trade a fresh loaf of bread to your neighbor for a dozen fresh eggs from her hens, the two of you can just go to the grocery store and purchase your breakfast foods whenever you want. But in addition to being useful as a medium of exchange, fiat currencies around the world have proven to be valuable investments as our economic activities have become more and more global.
Investing in currency is not a new or controversial idea. The first foreign exchange market was established in Amsterdam almost 500 years ago, and virtual currencies are giving a new generation of small cap investors the same opportunities that larger financial institutions have had access to for decades. But rather than having to figure out the complicated ForEx markets where currencies are exchanged, anyone can trade virtual currencies using their computer or mobile phone.
Just like governments and big banks, small investors are now buying currencies and holding them with the expectation that they will profit from a positive exchange rate. Decentralization has translated to democratization in currency exchange markets. This is particularly exciting for small-cap investors, who often struggle to make returns in financial markets that are dominated by the ultra-rich. A new generation of investors are flocking to virtual currency exchanges, but in order to be a valuable replacement for cash cryptocurrency must be both a useful investment tool and a convenient means of exchange.
Cryptocurrencies May Become Better Than Cash – But Not Yet
Cryptocurrencies have democratized currency investments, but most of us don’t use cash this way. If they’re ever going to replace cash, cryptocurrencies will have to become an effective medium of exchange. And while the ubiquity of smart phones and mobile technology are making this a growingly realistic possibility, virtual currencies just aren’t quite there yet.
Bitcoin and the thousands of coins that followed it were meant to be a fast, inexpensive way for people to move money around. Just like cash, it was designed to be a means of mutually-accepted exchange between people in transactions. But unlike cash, it was untethered to any national government. This means that virtual currency exchanges can be carried out free from challenging and burdensome centralized banking systems. Hash algorithms and miners ensure that exchanges are legitimate, and the blockchain keeps all transactions on a permanent ledger that is checked and re-checked several times per second. And while all of this spells out the perfect recipe for a cash substitute, two main problems prevent virtual currency from replacing cash: time and money.
In theory, Bitcoin or any of the other reliable virtual currencies out there should be able to replace cash. But they have not done so because most cryptocurrencies have not lived up to their promises of free and instantaneous cross-border transactions. Rather, cryptocurrency exchanges have proven to be rather pricey and time consuming, particularly when using Bitcoin, the market’s dominant coin and gold standard. Until Bitcoin improves or the market finds a new king, we shouldn’t expect a cashless society to emerge any time soon.