Pros and Cons of Accepting Bitcoin as a ‘Currency’

6 mins read
by Angel One

Cryptocurrencies have been a fad recently but the age of Bitcoin has crossed a dozen years. Bitcoin was introduced as a game-changing phenomenon, which would revamp the global finance economy and spectrum. Ever since its inception, governments across the globe have been skeptical in accepting the Bitcoin economy or making it a legal tender, replacing the often chaotic fiat currencies. However, for many, the digital token was widely an alternative to the fiat currencies, which accepted the new world order in the early old days.

The original plan for Bitcoin was to instate it as an everyday payment mode. However, although the digital asset has become a global phenomenon, mainstream success stems from its appeal as an investment instrument. However, 12 years down the line, a tiny South American nation El Salvador has adopted Bitcoin as a legal tender. So, for the first time, effectively, Bitcoin is a ‘currency’ legally.

Bitcoin enthusiasts are fully charged up with the development, economists and other financial experts have highlighted the downside consequences of the adoption, which may outweigh the positives. In this light, it is very much important to understand the pros and cons of recognizing and accepting Bitcoin as a  legal tender currency.

  1. Bitcoin is free of censorship

Decentralization is arguably the most compelling feature of the Bitcoin network as a currency. The crypto network utilizes a peer-to-peer (P2P) model designed to permit intermediate-free payments. Unlike conventional banking and payment methods, the validation of Bitcoin payments does not require the inputs of central authorities or third parties as the ledgers are verified by PoS. Both sides of a transaction can execute payments directly from their wallet and watch it get validated by other network participants and at least 51% validation is necessary. The validation process of Bitcoin transactions is not governed by a single entity. As such, it is technically impossible to censor or reverse transactions. This also makes bitcoin hack-proof. Bitcoin payment is the complete opposite of the conventional payment solutions backed by banks and other transaction service providers. In such cases, the service provider or the bank controls the entire process.

Thus, they have an option to include or exclude any individual, area or entity from the entire process. Also, they have the prerogative to reverse the payment, which is a core factor in chargeback frauds.

In most cases, these solutions cannot operate in nations sanctioned by countries where their headquarters are situated.

Bitcoin is ideal for remittances and other cross-border payments, thanks to its decentralized nature, which allows the holder to evade restrictions. Putting it simpler, the Bitcoin network and Bitcoin are available globally.

The restrictive features of conventional payment or currency solutions,  taking note of the flexibility that Bitcoin offers, it is safe to say that accepting Bitcoin as a legal tender provides an avenue to participate in the global financial landscape without worrying about payment restrictions.

  1. Bitcoin is fast and cheap

For cross-border payments, Bitcoin is a cheaper alternative. Bitcoin is a decent proposal for international transactions because the Bitcoin network does not require a bureaucratic system or political diligence to be handled and executed.

It can easily, or we shall say digitally, reach the destinations. The P2P network makes it instantaneous, adding to the low cost and affordability of the network.

  1. Bitcoin is an anti-inflationary system

The supply of Bitcoin is fixed at 21 million and currently, there are 18 million Bitcoins already in supply. This means only 3 million Bitcoins can be mined further and released in the market.

Another anti-inflationary mechanism adopted by the Bitcoin network is the block reward halving system, which ensures that the number of Bitcoins minted when new blocks are added to the Bitcoin blockchain is halved roughly every four years.

Bragging these two systems, the value of Bitcoin has been able to maintain the upward trajectory, since its launch in 2009. On the contrary, the government can decide to print more fiat currency, triggering inflation.

  1. Regulatory Uncertainties

It is next to impossible to enable a fluid and strong economy anchored by Bitcoin without reviewing existing regulations and incorporating new ones. This approach lets all affected industries or parties understand, establish and admit standards necessary for processing, exchanging and accepting Bitcoin.

For instance, a Bitcoin-anchored economy requires a universal rule for setting Bitcoin denominated prices for goods and services, which are likely to remain some throughout the world. Also, there is a need for a more robust crypto tax system and regulation for tracking and paying tax associated with Bitcoin payments.

While it is relatively easy to tax fiat transactions, it is a tad difficult to track the activities of Bitcoin users, especially when they are using non-custodial wallets, and tax them accordingly. Also, end-to-end- encryption makes this process more complex.

  1. Price Volatility

The cryptocurrency market is highly volatile and no country would prefer such a volatile currency to be used as the medium of exchange as the value may fall or rise sharply, merely in a few hours. The inherited volatile nature of Bitcoin makes it highly unstable. However, the major reason for this volatility can be attributed to the highly speculative nature of the asset. Price volatility is one of the major arguments used to counter the validity of Bitcoin as a legal tender. Opting for a stable legal tender makes it easier to avoid losses, which are caused by uncertainty or volatility of the prices. For instance, a business that received 1 Bitcoin as payment for rendering service may incur losses if the price of Bitcoin falls before the 1 Bitcoin is exchanged to fiat or a stable digital asset. It is like giving gold for a transaction, which may be bearer or dearer compared to the fiat currency. This risk has been a major talking point in El Salvador and the world saw a sharp fall in the digital currency market as soon as it was adopted as a legal tender. However, the markets recovered soon but the skepticism prevailed. In July, concerned citizens of the state went out on the streets to protest the country’s decision to adopt Bitcoin as a legal tender. One of the issues raised during this demonstration is the volatility of Bitcoin and how it could impact the earnings of Salvadorans.

The volatile nature of Bitcoin is a two-edged sword. The rise in the price of Bitcoin could effectively boost the value of the earnings of merchants, companies and individuals accepting the digital asset as legal tender. But they will have to buy more Bitcoins.

Conclusion

The use of Bitcoin for everyday payments comes with its fair share of benefits and drawbacks. The adoption of Bitcoin in El Salvador will provide more insight into other possible effects of accepting Bitcoin as a legal tender. One should wait for what the future holds for us.

 

Disclaimer: Angel One Limited does not endorse investment and trade in cryptocurrencies. This article is only for education and information purposes. Discuss with your investment advisor before making such risky calls.