Bitcoin Made Simple - Part 6 - Bitcoin vs Fiat
In the previous article we looked at three reasons why Bitcoin is superior to fiat currency. Regardless, a lot has happened in the world since my last article. These developments further emphasize the points made in that article.
I pointed out 3 reasons why Bitcoin is superior to Fiat money. These are
Control: You are in control of your money with Bitcoin
Banks cannot lock you out
Govt cannot outlaw cash that you hold
Inflation: Creation of more money is not in control of humans with Bitcoin.
The central bank cannot “print” more fiat money causing inflation
The monetary policy cannot be changed
Cross Border transactions: It's very easy to do cross border transactions with Bitcoin.
No need to get permission
No need to pay high transfer fees
In this article I will look at some of the current developments to emphasize the advantages that Bitcoin has over fiat money. Let’s look at that next.
Control
Our neighbor to the north, Canada, illustrated the fact that you are not in control of the fiat currency. The Canadian government seized the bank accounts of several people associated with a protest. They also worked on seizing any Bitcoin (and other crypto tokens) held at an exchange like Coinbase or Robinhood by some of the protestors. They did not though seize any Bitcoin owned by you and not held at an exchange like Robinhood since that is much more involved. In a later article I will explain why the two modes of holding Bitcoin result in different levels of control.
You might be tempted to think that the problem here is not with the fiat currency but with the use of bank accounts. Hence, you might conclude that a better option is to store fiat currency safely under your control such as in a safe in your house (better than storing under your mattress).
But there is a risk with that also. It’s called demonetization. The government can declare that some or all notes that make up fiat money are no longer valid currency. This happened in India in 2016. The government of India outlawed some of the currency notes being used at that time. If you had such currency notes in your safe, you had a limited time to deposit these currency notes in a bank in order to get the credit. But then, you could only deposit a limited amount of such “illegal” money.
Thus, you can see that you are not really in control of money when it comes to fiat money as I mentioned in my previous article.
This need not be the case with Bitcoin unless held in exchanges like Robinhood and Coinbase. Bitcoin held in exchanges like Robinhood is as much in your control as fiat money is. The government can compel the exchange to turn over your Bitcoin to the government.
On the other hand, if you control your Bitcoin by using your Bitcoin wallet then the government will have to arrest you and compel you to share the private key before they can seize the Bitcoin. And this will not scale since they need to do this for all the millions of people who hold Bitcoin as opposed to compelling a few exchanges to transfer all the Bitcoin over to the government.
Inflation
Inflation is related to the monetary policy. Monetary policy governs how many new units of the currency are created every year and by whom. A lot of new units of the currency being created will result in debasement of the value of the currency. This means that fewer resources can be purchased with the same amount of currency.
Fiat currency is completely controlled by the government. The government decides how many new units of the currency to create or “print” every year. You can see this from the chart of monetary supply for US shown here and also reproduced below. There were approximately 4 trillion dollar in circulation at the beginning of 2020. And late last year this number had climbed to $20T. So lot of new dollars that have been “printed” in the last two years.
We can see the effects of this in our regular life. Price of everyday items like groceries, gas etc is going through the roof. While the following image is fake since gas prices in California are around $5 per gallon, still this indicates what might be in our future.
Bitcoin on the other hand has a monetary policy that has not changed since the day Bitcoin was created. There are going to only be 21 million bitcoins in existence unless everyone agrees to change the rules. But the probability of changing the rules seems close to zero.
Cross border transactions
It is very easy to transfer Bitcoin to people in other countries. This is unlike transferring fiat that might not always be easy. Apps such as Strike make it very easy and seamless to do these transactions. I had tweeted about this a while back in the thread shown below.
Thus, current developments have provided more proof of why Bitcoin is superior to fiat.
Thanks for being part of the Bitcoin journey with me. I plan to continue this series much more regularly going forward.