Can bitcoin undermine the central banking ecosystem?

Bitcoin’s price volatility has become a sticking point for retailers and investors alike. In 2017 alone, blockchain tech was used by companies to develop solutions in insurance and healthcare. Still, the potential for disruption is clear with central banks — especially with cryptocurrencies offering unprecedented transparency and transaction speeds. Visit how bitcoin payments make everything easy going.

However, central banks have begun to take notice and see it as a competitive threat or even an existential one in its own right — leading some to believe that blockchain tech will be able to undermine the role of central banks entirely over time.

 What is a decentralized currency?

Any central entity does not back decentralized currencies, nor can they be printed—they are entirely “untrusted” by the government. Therefore, any impact on inflation is up to the individual user and, ultimately, the market. Bitcoin derives its value from how easy it is to acquire but has developed a market cap of USD 800 billion to hedge against that difficulty.

Bitcoin’s market cap is roughly more than Ireland’s GDP, a small European country. As such, while Bitcoin represents less than 1% of the global currency supply, it represents 10% of the global cryptocurrency supply. First, let’s discuss whether the speculation of bitcoin undermining central banks is true.

Problems with central banks:

  1. They are slow and uncertain, threatened by financial crises and by the actions of powerful private actors.
  2. They cannot offer micro-targeted policy instruments.
  3. Asymmetric information is free to operate in market transactions because it does not require significant monitoring or enforcement costs, making it attractive for non-transparent actors to conduct illicit activities such as money laundering.
  4. Central governments are subject to politics and cultural differences that can make it difficult for regulators to consistently implement rules equally across countries (this was a problem during the last financial crisis).

How can bitcoin resolve these challenges?

Digital currency is the exact opposite of cash, and although any government does not back it, it is pretty easy to exchange using a digital wallet. The transactions are recorded in the blockchain and can be used to create new currencies. Let’s discuss how bitcoins can help with each of the issues:

  1. It can be sent peer-to-peer, so there is no need for third-party involvement; this increases speed significantly.
  2. It prevents double-spending by having a permanent record of each transaction on the blockchain, which isn’t owned by anyone or any group but exists for everyone as an online public ledger that uses technology to work without needing a central authority or trusted third party involved.
  3. There is no way to counterfeit bitcoins, which makes it a safe investment.
  4. Due to the nature of blockchain and its inability to be hacked, it allows for regulatory oversight in all transactions, even across national boundaries and by individuals.

The network essentially acts as a regulator and keeps participants accountable for their actions — especially important when it comes to ensuring that the same rules are applied universally. Additionally, as cryptocurrencies become more widespread, there is a chance of attracting more and more people into trading, which could also attract new investors into stock markets and help drive further innovation in technology (much like we saw during the last dot com boom).

Is there any possibility of bitcoin mining undermining the central banks?

As a platform for trusted transactions and record keeping, it could be used to efficiently settle inter-bank payments, securities trades, and other financial transactions with a reduced risk of fraud. Moreover, the costs of this service would be lower than what is currently charged by the existing centralized infrastructure.

Bitcoin is also focused on providing an open and decentralized platform on which companies can safely execute smart contracts. It can allow for self-enforcing agreements between parties without needing intermediaries or arbiters.

The advantage of these so-called vending machines is that they are genuinely peer-to-peer, i.e., there is no intermediary to take fees or slow down the process, plus they are user-friendly and have predictable outcomes. Bitcoin might not undermine central banks, but if embedded with the centralized infrastructure, it can bring many changes in the financial segment.

Is bitcoin still undervalued?

The bitcoin price is still low compared to its potential and can touch $100k per unit. The price of bitcoin is controlled by the market and not by the government or central banks. Bitcoin is an asset that can be used for trading, investing, and many other financial tasks. Blockchain technology allows bitcoins to be transferred without any middleman — eliminating unnecessary bureaucracy and ensuring transparency and trust in transactions.

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