Bitcoin, Cryptocurrencies and The Money in the New Era - 3 -

 4. Trust, Belief and Regulation

As almost for all commodities or financial instruments, trust, belief and legal regulation have a very important effect in also the currency. If a currency has not legal infrastructure, public trust and belief, probably it will not live and be acceptable in the long term.

The reason why most of the people trust and believe the fiat money system is clear. We know that fiat monies are issued by the central banks and mostly they are backed by the states. Actually, issuing by a central bank and backed by a state make fiat monies “the real currency” for the humankind. Unfortunately, it is clear that cryptocurrencies don't have the public trust and belief enough yet. Due to fact that they are not backed by a state and not issued by a central bank people generally consider cryptocurrencies as an unreliable, even a speculative investment tool.

On the other hand, Bitcoin is very young now but it has possibility to become very popular sooner, then it will be able to be a rival for traditional fiat money system or other currencies which means that it could be better to create necessary legislation for cryptocurrencies now. Because later could be too late for this action to take. Even though Bitcoin is not yet widespread and isn’t as wide as other international currencies, taking consideration Bitcoin continues to increase its popularity, regulatory measures will be needed.

There are countries in the European Union that haven’t taken an official stance towards Bitcoins and other virtual currencies, but as Bitcoins continue to be more popular, it is very clear that we are going to see more countries begin to create their own policies in order to regulate virtual currencies. “Further action from other authorities can reasonably be expected in the near future” (European Central Bank, 2012).

 

5.Conclusion

As we have discussed before, it is well-known that Cryptocurrencies have a lot of disadvantages about being widely accepted for now at least. Generally, in financial subjects, making people trust you could take a long time. Due to fact that Cryptocurrencies-Bitcoin have high volatility of value, there is no state or bank guarantee in the back of it and it has not been widely accepted by the community yet, we could say easily that cryptocurrency cannot acquire the role of money for now.

On the other hand, it is an undeniable reality that cryptocurrencies have been attracting a lot of public attention in recent years. Especially western governments, universities and Non-governmental Organizations have been making researches about cryptocurrencies increasing day by day. Moreover, the number of people who invest on Bitcoin are mounting and everyone asks for information about Cryptocurrencies in almost every day to financial consulting firms or the banks. Bitcoins could be regarded as a bad alternative to traditional money with the scope of criminal activities, because virtual currencies would make easier to conduct criminal activity such as: money laundering, drugs trafficking, computer hacking and terrorism.

It is clear that, none of these activities is widespread or extensive to the use of Bitcoins. There are other bad or negative sides to using a virtual currency that do not have to do with criminality such as speculation, risky investment and issue of unpredictability. It is obvious that without necessary legal regulation and central bank or government guarantee, Bitcoin or all other Cryptocurrency users bear all the risks.

It should be accepted that keeping Bitcoins in a digital Bitcoin wallet will leave your virtual currency vulnerable. If we consider the issue in the scope of computer hacking for example. We would say that a digital wallet is weak to computer hackers. In order to attract people attention to this issue, The European Banking Authority has issued this warning to its citizens, “Exercise the same caution with your digital wallet as you would do with your conventional wallet” further urging users of Bitcoins, “not to store large amounts of Bitcoins in their digital wallets for an extended period of time” 

In conclusion, we could say that if cryptocurrency will gain the role of money one day in the future, it must serve also as functions of money also. Even it has some of functions of money like being a store of value, a unit of account and a medium of exchange, Cryptocurrencies cannot execute all these functions properly yet.

Despite the fact that the most known cryptocurrency-Bitcoin has a lot of popularity and a good number of investors, it is clearly known that it is not highly accepted yet all around the world.

After considering all these facts, especially in the short term, it seems that cryptocurrency could be an investment instrument for the investors who like taking risk instead of acquiring the role of money.

How to buy Bitcoin? Will Bitcoin fall more or rise increase? THE MONEY IN THE NEW ERA - 2 -

 3.Definition and Functions of Money

After defining and understanding what a cryptocurrency is and how it works, we should analyse it with conventional money. Money has a lot of definition and it has been defined diversely from different points of view. However, it could be said briefly that money is a tool which is based on public trust and provide us to buy our needs and making our transactions. Moreover, money is “a stock of assets that can be readily used to make transactions “.

 

Due to fact that money has three main functions, if we want to predict or understand future of the money and cryptocurrency, we must consider and analyse firstly these three functions in terms of usage of cryptocurrency also. It should not be forgotten that our real main target in analysing functions of money is to understand if cryptocurrency can obtain the role of money in the future in terms of functions of money.

 

It has been widely accepted that main and primary function of money is the medium of exchange function. If you can't transfer or exchange goods and services via money easily clearly the usage of money will not mean anything to you anymore. In this aspect if we consider "Bitcoin" as the most accepted and used cryptocurrency, it is not impossible to buy or exchange some goods or services via bitcoin but it is very clear that bitcoin has a limited ability in the sense of the medium of exchange function. Bitcoin has a very limited space for buying or transferring goods or services all around the world in comparison with fiat or modern money.

There are some limited number of online shopping websites and retailers operate all around the world and they accept cryptocurrencies especially bitcoin as an exchange or buying tool if you have a crypto-bitcoin wallet. However, it could be readily said that these kind of limited and selected numbers of retailers or websites are not enough to be widely accepted as money.

 

One another important aspect and function of money is to serve as store of value for its owner. In this aspect having stability and predictability are very crucial for any commodity or any currency. Because via money people want to have some value which will not change in the short term. In this scope volatility emerge as a very significant term for the currency.  When we look at the volatility issue in terms of most known cryptocurrency-bitcoin it is very obvious that value of bitcoin has been so volatile during the recent years.

According to Kuikka (2019: 16) Shortly after the invention, the value of the new digital currency “bitcoin” when compared to the US dollar was measured in only about a cent. However, during the following year, bitcoin saw a rapid rise in value reaching a total of 27 US dollars by end of 2009. In the early 2010s, bitcoin began to gain more mainstream adaptation, and in 2014 Microsoft was one of the first major corporations which declared it will begin accepting payment transactions by bitcoin (Smith, 2014) and by the end of 2017, bitcoin had reached its highest value of 19,783.21 US dollars. The rapid development of bitcoin created a lot of speculation and interest in the area of cryptocurrency. It seems that solving volatility issue seems one of the most important and difficult problems for cryptocurrency.

 

As the third important function of money: "a unit of account" represents a useful function. When we think that sometimes how important even buying a little slice of cake, this function of money emerges as a very important issue. If you have a sole and inseparable currency and while you cannot buy even a little slice cake from a retail store with it, it is very obvious that you start to think again if it is a real currency or not.

to be continued..