Bitcoin was initially created as an alternative payment system. However, Blockchain - its underlying technology, gives it multi-dimensional features.
There is a debate between people that compare Bitcoin to fiat money, as well as the traditionally most valuable asset to date, gold. While manipulating is not our intention, below we have concentrated the most important features of each asset.
When we refer to fiat currencies, we mean all the available money in circulation, issued by a government and accepted as a legal tender. The Fed untied currency from gold in the early 70s, to create an instrument that will be able to inflate or deflate, depending on the need to accelerate or slow down the economy. Fiat currency is a governmental paper with no intrinsic value. Its value depends solely on trust, and it is only used as a means of payment. Without being backed by gold, fiat currencies are an instrument that generates debt. New money is created by a group of people with unknown intentions, so fiat currencies are prone to manipulation.
It is the most valuable metal on the planet. Its value is dependent on its scarcity and its usability, that ranges from using for jewelry to manufacturing electronic products. As gold can only be mined, it is extremely hard to be manipulated. It is very expensive to store gold securely, and it would always be prone to theft. Additionally, gold can be confiscated by governments, same as in Federal Reserve’s Act in 1933, as a measure to deal with the Great Depression. Gold is widely accepted, and its value can be easily verified; however, it is not easily transferable or divisible which makes it a non-convenient payment method.
Bitcoin’s value, similar to gold, is an asset in scarcity, as only 21 million will ever be created. What is even more valuable on Bitcoin, is the Blockchain, the underlying technology. Through a network of validators, payments can be executed instantly (regardless of their size), without the need for a centralized authority. Moreover, Bitcoin has no physical existence and only exists in a digital format. Bitcoin transactions are pseudonymous; hence payments are not vulnerable to theft. At the same time, Bitcoin is transparent so that everyone can track the history of transactions or the Bitcoins in circulation. The Blockchain has been developed in such way, that participants maintain the network’s security. It follows specific rules that are enforced by the majority; therefore it cannot be manipulated. Bitcoin is also an efficient method of storage, that is protected by inflation or currency dilution.
On the other hand, as there is no human interference, Bitcoin transactions are irreversible. Also, as people do not yet fully understand Bitcoin, by keeping their digital assets in a digital wallet in their PC, they are vulnerable to malware and hackers’ attacks. Unfortunately, Bitcoin has been subject of speculating, and its price is extremely volatile. While this has given many the opportunity to profit from long-term investments, it has made Bitcoin a risky payment method for merchants.
The safe haven
In times of economic turbulence, people have always looked to safe stores of value. However, none of them has been a no-brainer solution. Holding fiat currencies are prone to dilution and gold is hard-to-store and can be seized by governments. Bitcoin is still nascent and has not yet proved its abilities as a store of value. Nevertheless, it could be possible that it has all the necessary features to serve as a “safe haven” in the future. Bitcoin can virtually store large amounts of money, protected by theft or capital controls and inflation.