The Real Bubble: Bitcoin or the US Dollar
There has been much talk and analysis on Bitcoin and whether or not it is a bubble that will explode on those holding the cyber currency. While Bitcoin prices have come down from the heights experienced in late 2017, there is still a lot of concern over this cyber currency and the potential for fallout from the currency. While many people are concerned about Bitcoin, the United States dollar has similar risk built into it. Comparing and contrasting these currencies can help an individual to understand what they want to hold over the short and long-term.
Advent and Problems Associated with Bitcoin and other Cybercurrency
Bitcoin was created by an anonymous founder who understood the demand for a cyber currency that is universally issued and is not created by a single nation or bloc of the nation. Bitcoin is not supported or backed by a sovereign nation and its lingering stability is backstopped by the demand for the currency. As more individuals, businesses, and speculators are willing to accept Bitcoin as a form of currency, the value of it appreciates.
Bitcoin was created to have no more than 23 million units issued ever. As Bitcoins are mined using various factors of mathematical and computer capacity, the number of Bitcoins that are in circulation have increased with a cap of 23 million. However, that is the upper limit on the amount of Bitcoin in the market. As demand has increased for the currency, Bitcoin has appreciated in value.
There are concerns with security issues surrounding Bitcoin. Bitcoin has been used as a means of exchange on the dark web and for illegal activities and may be banned in places around the world. Further, several online wallets were robbed of their Bitcoins and concern of this may lead to individuals staying away from the currency. If more situations like this, Bitcoin may prove to be a bubble that ultimately pops.
Contrasting to the U.S. dollar
For almost a century, the U.S. dollar has been the reserve currency of the world after taking over this mantle from the Great British Pound. While the United States is owned as the reserve currency and the United States is still the largest economy in the world, economic power has been shifting to several up and coming nations around the world including China and Brazil, and the European Union. If another currency is adopted as a reserve currency, as a replacement or alternative to the U.S. dollar, there is a risk that the U.S. dollar could depreciate in value drastically.
The U.S. dollar is, of course, always decreasing in value due to inflation on the dollar which is leading to depreciation of the currency. Depreciation of the dollar is being accelerated due to the loose monetary policy that is increasing the number of dollars in circulation as a prop to the economy. The United States dollar has not depreciated significantly due to loose policies being in place in Europe and parts of Asia (notably Japan). As such, the U.S. dollar has been keeping up with these currencies but has been declining in accordance with many hard assets and even cyber currencies like Bitcoin.
Ultimately, the U.S. dollar and Bitcoin do have a number of risks built-in to them and have many bubbles like characteristics associated with them. The finite number of Bitcoins in circulation help to support its pricing when compared to the infinite number of dollars that can be printed by the U.S. government. However, other factors, including worldwide acceptance of Bitcoin, the emergence of other cyber currencies, and the U.S. currency standing as the reserve currency of the world will help to determine if these currencies are bubbles that will ultimately burst.