Bitcoin as a currency Although it is a new decentralized virtual currency, like any other known regular currency, it can be paid for a variety of goods and services.
It has become accepted by many stores and financial institutions, and its popularity and spread have increased, and this is what gives it value as a currency or monetary instrument, and it has become available for trade and investment as a store of value like us. Dealing with gold or silver During this article, we will shed light on how to trade and invest in it and understand the mechanism of dealing with it as a financial asset.
Characteristics of bitcoin and money in circulation
No one will deny that Bitcoin as a currency is useful as a form of money - regardless of its existence - and plays its role as a financial or monetary medium in transactions and payments in the usual way. Not as popular as traditional currencies but on the way. And to achieve this financially because of its characteristics of money in circulation, which contributes greatly to the popularity, fame, and acceptance of any currency, traditional or virtual.
The circulated currency has certain characteristics and without them, it loses its value and its function as a mediator in achieving financial transactions, activities, and commercial exchanges, and possessing these characteristics makes the currency acceptable as an important commercial tool. The exchange of goods and services and also dealing with them as a basic measure of value, and in the following lines, we will learn about these characteristics and how Bitcoin can achieve them.
1. Acceptance and reconciliation
Money in general circulation is the main feature and essence of any monetary system, not only money but also any physical assets that the general public agrees to make a medium of commercial exchange. With this feature, the idea of bartering developed before the invention of the money known today, and the idea of bartering for some stones or coins developed.
The general rule is: A person does not accept the money that he accepts in return for his goods or services unless he knows that it will be taken from him without objection from others.
Bitcoin BTC was able to gain this advantage in terms of its acceptance as a payment tool in e-commerce, and the measures and measures taken against the COVID-19 crisis helped to increase the volume of e-commerce transactions in general with the pandemic. And the development of electronic payment methods and the spread of the idea of contactless payment, and this is what developed digital currencies, including bitcoin, on the map of developing regulations for financial and commercial activities.
Also, the Bitcoin network handles transactions individually and it takes up to 10 minutes to verify and confirm them.
Thus, it is quite similar to the real-time gross clearing system or RTGS implemented in central banks, except that it uses a decentralized global currency that is not issued by the government, and that is what drives legally operating economic institutions. Accept Payments in Any Currency Bitcoin BTC made use of this payment method which automatically increased trust and demand
Note: A survey conducted by HSBC in late 2020 showed that 36% of small and medium businesses in the US accept Bitcoin; The most popular ones are but are not limited to Wikipedia, Microsoft, Burger King, and Subway.
2. Ease of ownership, transportation, and storage
It is the ability to easily own, transfer and spend the currency or physical assets that are considered a currency while preserving its economic value. At first, dealing with the idea of money or a barter system, many traded commodities lacked this feature.
Perhaps this was the reason why gold and silver coins were created and recognized as money, and perhaps this was the reason why the idea of electronic transactions was accepted in its infancy.
In addition to being a digital currency, it was originally designed to be stored, spent, and transmitted electronically. Bitcoin BTC had no problem carrying this feature either, as it is easy to transfer and easy to own the currency, and it can be believed that there is no difference between dealing with Bitcoin and dealing with electronic transactions with traditional money.
Instead, compared to other banks or any other method of transaction, Bitcoin is easier and faster. If sent in Bitcoin format, it only takes a few minutes to send money from one end of the world to the other.
3. Partition possibility
Money in circulation - as a monetary instrument - must have the ability to divide its value into smaller units so that financial and commercial transactions can be carried out more easily. cent, each unit - 1 cent - equals 0.01 of the integer value in US dollars.
To increase the likelihood of adoption and incentivize transactions with Bitcoin as a payment currency, Bitcoin BTC can be divided into small units such as 0.00000001 BTC, named Satoshi after the name of the developer, that is, one Bitcoin is equal to 100 million Satoshis.
Bitcoin developers promise that the divisibility of Bitcoin can be increased into 100 billion sub-parts or more if needed, as the Bitcoin protocol and associated software can be modified to handle smaller units.
In short, what gave Bitcoin value is that we as individuals decided that it has value, and we accepted it to demand obtaining it with purchasing power that raised its price, just like gold.
Gold is the closest to comparison in front of Bitcoin - as a currency - so they called Bitcoin the name of digital gold, as both have a benefit, have a general global acceptance, limited supply, and are not issued or produced/minted by a central government, Finally, both are mined, one by digging through rocks, the other by the power of collective computing and decoding of mathematical algorithms.
4. Relative persistence
It is one of the important economic criteria and means that the currency can maintain its value and existence over time, and the key to preserving the value of the currency is the size of its supply.
Excessive money supply can lead to higher commodity prices and economic collapse as the currency depreciates. Also, a very small money supply - scarcity - can cause economic problems. In the case of regular fiat currencies, most governments around the world continue to print money as a means of controlling shortages.
When Bitcoin was first launched in 2009, its developers stipulated in the protocol that the supply of coins mined from it would be a maximum of 21 million, meaning no more than 21 million bitcoins would ever be minted/minted/issued and the current bitcoin supply was roughly 18 million.
And the bitcoin issuance rate is about every four years. It has decreased by half, indicating that the last bitcoin will be mined in 2140, assuming that the protocol will not change, which means that the bitcoin money supply will not swell. When there are 21 million coins, it should become The currency that is deflationary as no new coins are minted.
This makes Bitcoin an asset with a strong point as it gives its holders the ability to increase the value of their investment. But the only problem with Bitcoin is its high price volatility, which can cast doubt on its ability to maintain its value, although this is not a big deal since Bitcoin is a financial asset and its derivatives are listed on crypto-asset exchanges. It is easy to take advantage of these fluctuations in price speculation.
What gave bitcoin its value?
In short, Bitcoin is valuable because it is useful and used as a form of money. It has the money-in-circulation feature that we mentioned earlier in this article. It is true that monetary or fiscal authorities, like traditional currencies, lack trust based on central governance.
However, it is backed by mathematics, cryptographic rules, consensus mechanism, and POW proof of work that has proven quality and superiority in creating a secure asset. And you have to remember that trust and public acceptance are all it takes to acquire and maintain value for any kind of transparent, real, physical, tangible, or virtual digital currency, and at this point, Bitcoin has largely succeeded.
Recent periods and this point, in particular, can be measured. In addition to being an investment tool and a store of value, it is accepted as a payment tool by users, merchants, and many commercial organizations, otherwise, its price would not go down. They achieved what they achieved.
From the economic point of view, which determines the value of a commodity/money to be traded based on two major factors, utility and scarcity, utility increases demand due to the intrinsic value of the asset, and scarcity increases the desire to acquire the scarce asset. value as its store and Bitcoin BTC manages to achieve both. Significantly:
utility
The remarkable development in electronic commerce and electronic work, in general, contributed greatly to creating the need for electronic payment methods, which led to a reduction in the use of traditional currency and the emergence of the idea of a direct exchange of value between two people.
But this transformation requires security, transparency, reliability, and accuracy, and the emergence of Cryptocurrency led by BTC offers solutions to these problems through its decentralized infrastructure, making direct money transfers fast, traceable, and transparent. And it does not change. To secure this currency and its assets and preserve its value.
rarity
Bitcoin and many cryptocurrencies are coins of limited supply. This means that there is a limited number of coins that can be mined or mined. For example, Bitcoin has set a currency supply cap of 21 million bitcoins, because once that number is reached, mining activities will not generate new BTC.
Bitcoin supply reached 18,587 million in December 2020, which means that 88.5% of the total supply of bitcoins will eventually be redeemed, and once 21 million bitcoins are in circulation, the prices will depend on the order and volume. Transactions in which Bitcoin must participate. So, back to the utility part - just as we imagine what might happen when total gold reserves start circulating in the back of the world instead of in it.
Factors affecting the price of bitcoin
In principle, it depends on the decentralization of Bitcoin as a currency, as it is not issued by a central bank, so government monetary policies or government plans to attract or pump liquidity, inflation rates, and economic growth measures, which often affect the value of Bitcoin. The currency is not valid for Bitcoin.
Because BTC has no financial relationship to the Bitcoin network and is not, in financial terms, a part of it, its ownership is not considered a stake in the company that guarantees ownership of an equivalent piece.
- Bitcoin prices are mainly affected by the following factors:
- Bitcoin supply and market demand
- The cost of generating bitcoin in the mining process
- The amount of reward given to bitcoin miners
- The number of competing cryptocurrencies and the state of market demand for them
- The number of crypto-asset exchanges where BTC is available
- The number of supporters as financial and commercial institutions or stores and accepted as a method of payment
- Regulations governing its circulation and related issues
- Internal management, protocol updates, and network health and security
Remember that Bitcoin is a decentralized free software project. Therefore, no one can announce the return on investment in it or determine the size of its purchasing power in general, and its prices have complete freedom of movement, so price fluctuations can cause bitcoin owners or traders to win or lose. money unexpectedly
The relationship between supply and demand plays an important and influential role in determining Bitcoin prices, as is the case with other financial assets in general, and the variance in the size of supply and demand is what causes prices to drop.
In the case of BTC, the protocol allows new bitcoins to be created through mining at a fixed rate, but with slower growth over time. For example, the growth rate in the number of bitcoins mined was 6.9% in 2016, followed by 4.4% in 2017 and then 4.0%. in 2018
This can be seen as an artificial inflation of the currency trading system, which creates scenarios where the demand for bitcoin increases faster than the supply, driving up the price.
This situation is expected to continue until the number of bitcoins reaches saturation, where the supply ceiling reaches $21 million, at which point the demand situation will have the main impact on the prices. , assuming the width is fixed.
The bitcoin mining process also plays a role in influencing prices, and electricity consumption is by far the most important factor. The idea is for miners to compete to solve a complex mathematical puzzle just to create a block, and the first to do so will be rewarded with a pool of newly minted bitcoins. and any transaction fees accrued since the last block was found.
This means that more miners/miners entering the competition to solve the puzzle have the effect of making it harder to solve just to keep 10 - and therefore more expensive as the machines run in parallel to prove the same block. Minute duration and less reward size. From 25 bitcoins per linked block as rewards to 12.5 bitcoins, the return on investment in mining equipment and electricity drops, which may reduce the number of new joiners.
At the same time, the increase in the price of bitcoin fills the gap caused by the decrease in the number of equivalent bitcoins, which means that the increase in the price of bitcoin itself is higher than the mining cost satisfactorily for miners. The catalyst for attracting more, considering that this circuit will only stay in place until a certain number of bitcoins reaches the specified supply limit.
Conclusion While the demand for Bitcoin is increasing with its general recognition and acceptance as an intermediate for payments and remittances, the availability of new supply shrinks with each block size and Bitcoin shrinks every four years. The protocol does not allow the rate of supply of new bitcoins to increase in response to high demand. An imbalance in supply in response to an increase in demand causes the price to rise further.
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Cryptocurrency trading