It is important to have a recap of the world’s monetary system because we need a basis to justify global acceptance of Bitcoin as payment money, there should be a yardstick to know if a decentralized currency is worth spending in urban and rural market; can citizens of the world (first and third) use it for day-to-day payment of goods and services? This article is going to empower you with relevant information about money and Bitcoin potential in the world.
In the last 5,000 years, money has evolved slowly, it started from barter trading which was the only means value can be exchanged between our ancestors. For example, a tuber of yam could be exchanged for a bowl of oil. This means is somewhat not accurate considering how much the world’s financial industry has grown. But ‘medium of exchange’ is just one of the other important features of money.
The world quickly moved to other kinds of money like cowry shells, animal bones, and rare stones. They agreed that it is money, they placed value on it and it quickly became a medium of exchange in addition to the fact that these commodities are divisible. Yes, there is a new need, an addition that humans craved for, they want the money that will be portable, and they deserve to have money that can be moved easily between cities, kingdoms, and empires. Aside from divisibility, there was a need for portability.
Gold, silver, copper, and nickel quickly gained universal recognition as precious stones, they replaced cowries and other commodities that were used as money. Through Ottoman Empire and Roman Empire, these rare metals were spent. Gold and silver witnessed the rise and fall of Pharaohs, it was around when Babylonia rose and fell, and they remain as the world currency.
Important features of money are durability, portability, general acceptability, divisibility, hard to counterfeit, and store of value.
Did Gold Meet All These Criteria?
No, it is acceptable by people, it is durable, it is a store of value, and hard to counterfeit. But gold is neither portable nor easily divisible. There is a gap that must be filled, the new solution should be in tune with the new demand of the global economy and financial reality.
One of the fathers of recent economics, Adam Smith, encouraged the use of receipt as legal tender between traders, instead of making a payment with physical gold, they used receipts which is the evidence that they own gold and it is safely kept in a vault. The fiat money would not have existed without Adam Smith’s initiative- from this period till the early 1970s, all paper money in circulation was backed by real gold. Whatever amount of fiat that you have, there is gold in the central bank reserve that is backing it. Unfortunately, the value of paper money has been on a downward spiral. The American dollar continues to lose its purchasing power and it is not showing any sign of recovery. According to experts, it will keep getting worse as long as the government is responsible for the minting of new notes that are backed by nothing. Inflation continues to attack the world’s global currency and it is down on everyone that minting new fiat is no longer a responsible solution.
Fast-forward to 2007, the world experienced a turbulent financial crisis. Popularly known as the global economic meltdown. This opened up a new idea, and it was conceived by Satoshi Nakamoto in 2009, because of the economic downfall, he was convinced that a deflationary currency that is out of control of the government and central banks would be the future of money. Hence, he worked with some anonymous computer programmers and they leveraged cryptography to develop Bitcoin and its network is called Bitcoin blockchain, it is the first cryptocurrency that got mainstreamed. It is arguably the most decentralized form of digital currency in the world, not backed by gold, but human believe in its value. The value of a Bitcoin is what people think it is, and how much they are willing to pay for it in fiat value. It uses military-grade technology for its encryption, it is safe, valuable, and secured, and it has every other feature of money that economists can think of. The power and potential of this currency lie in its scarcity, nobody can create it at will, and only a specific amount of the coin can ever exist. It uses a reward system that ensures that only those who make contributions (miners) to its blockchain are rewarded via the PoW (Proof of Work) consensus algorithm.
Is Bitcoin Going to Dominate?
Every new form of money has a peculiar challenge, in this case, blockchain is the medium through which Bitcoin can be sent and received by users. Its blockchain has a block size of 1MB, which is equivalent to 1,048,576 bytes. Let us get a little bit technical, every transaction is about 380.4 bytes on this chain. A block is mined every 10 minutes, = 2,759.12, there can be less than 2,800 transactions on the blockchain in every 10 minutes. The need for higher transaction speed lead to the development of SegWit, this increased block size to 4MB, it is an improvement.
Scalability
The unit of BTC is Satoshi, it was named after its founder, while Bitcoin is highly divisible, and it is evident that 100,000,000 satoshi makes 1BTC. In world history, no money is as divisible as Bitcoin. Despite this, no users can send 1 satoshi of Bitcoin through the blockchain ever since it witnessed massive adoption. Currently, a dollar is equivalent to 2900 Satoshi, but nobody can send out this meager amount of Bitcoin without incurring huge losses.
Imagine a financial payment system where 200,000 people are trying to make and receive payment per minute and you realize that less than 1,200 transactions are possible per minute despite the improvement that was made possible by SegWit.
A slow payment system is not ready for global adoption, if over 200,000 users should attempt to use the network in a minute, the blockchain will get clogged, and transaction fees will increase sharply. According to data provided by Ychart, daily transactions on the blockchain have dropped by 24.125% since an all-time high of 400,000 daily transactions.
There seems to be an inverse proportionality between BTC value and the daily amount of transactions. This is as a result of high transaction cost, the higher the value of the coin, the more money (Fiat value) is paid to process a transaction. The fee is less of a concern to institutional users, businesses can afford to transact with the coin regardless of the fee, but it is a great turn off to retailers. No petty traders would accept Bitcoin payment as long that there exists a scalability problem. Between late 2020 and January 2021, a related indicator on Ychart shows that it cost an average of 110.91 USD to send out Bitcoin.
Now, does it make any sense to incur $100 fee because you want to buy a loaf of bread that cost $3?
What Blockchain Congestion Does to Bitcoin
A couple of users on Reddit experienced slow transactions on Bitcoin network, some of them have experienced delay that is as high as 15 hours before they could get one confirmation on the blockchain. A hungry man would not wait for 15 hours in a restaurant before he gets served with food, in a situation when people have to pay before services are rendered, 15 hours feels like a lifetime.
There is a need for speed comparison between existing solutions in the banking industry, Visa is one of the biggest payment processors in the world. According to Towards Data Science, Visa can process 1,700 transactions in a second, a whopping 146 million transactions can be made through Visa in 24 hours. A currency that would be acceptable on the global stage must have a similar transaction speed.
In Conclusion
The world financial system is taking a huge turn, and Bitcoin will play a significant role because it has the potential to bank more people in developing countries where many citizens are largely unbanked. As long as they can memorize their wallet seed phrase or keep it safely, they could have a digital bank securely stored in their brains or anywhere else. This technology possess a huge threat to brick and mortar banks. While experts believe in the revolutionary financial technology that Satoshi created, it is clear that Bitcoin is going to serve as a major store of value in the future, but it is far from becoming a currency through which billions of humans will depend on for day-to-day financial transactions. It is good for B2B (Business to Business), but not P2B (People to Business) and P2P (Peer to Peer). It may end up like gold, it could be a digital form of a reserve currency.
However, if a layer two solution can be created and the network speed is improved by 100 times, the status quo may change. For now, it is safe to conclude that Bitcoin is not the next payment money.