Regarding cryptocurrency, my simple question is, what can Bitcoin do that normal currencies can't?
Then, my layman's understanding is that currencies are backed by some form of valuta - gold, for example. What backing does Bitcoin have? What makes it worth anything?
Money has three main functions:
- A medium of exchange (a convenient means of payment)
- A store of value (it must hold its value over time)
- A unit of account (a common measure of the value of goods, services, assets and liabilities)
performs none of these functions. Its volatility prevents it from doing so - its price is all over the place. Even making payment in ₿
is expensive. The market in ₿
meets the classic definition of a bubble. That is, people now buy ₿ not to use it but in the hope that its price will rise above what they paid for it and they can sell it for a profit. All bubbles burst. Think Dutch tulips in the 1630s. There are many more examples.
There is nothing that Bitcoin can do that normal currencies can’t.
There was a time when the issue of currency by governments (a liability in their balance sheets) had to be matched by a tangible asset, usually gold. None of today’s currencies are wholly backed by gold. Remember that banknotes represent only a small proportion of a country’s money supply (about 4% in Australia). Most of the money supply consists of currency plus deposits in banks and other financial institutions. Central banks (agents of governments) now control money supply by influencing interest rates – the price of money. The quantity of gold they hold to ‘back’ the currency on issue has become irrelevant.
Like gold itself, Bitcoin is backed by no asset. Like gold it is ‘mined’, or produced, with great difficulty, by those who choose to do so, through the use of computer programs to solve elaborate puzzles. There is a limit on the total amount that will be issued, though that limit may be changed once it is reached. Like any asset the value of ₿
is what people are prepared to pay for it.