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Bitcoin has disrupted the financial industry since its inception over a decade ago. It is the first modern cryptocurrency, decentralised virtual currencies that are now an integral part of the financial markets.
Bitcoin and many other cryptos are available for trading via industry-leading brokers. For example, multi-asset broker Exness has an expanding range of crypto trading products, including Bitcoin, Solana, Cardano, Litecoin and Ether. Crypto trading at Exness is swap-free for all clients, explaining the broker’s popularity among crypto traders.
Aside from being an attractive speculative asset, Bitcoin is an increasingly popular form of payment. Bitcoin options are now available on mainstream payment platforms such as PayPal (NASDAQ:PYPL) and VISA. In September 2021, the cryptocurrency became a legal tender in El Salvador.
The growing prospect of Bitcoin has made many of us wonder if it can replace fiat currencies. Twitter co-founder and crypto supporter Jack Dorsey once claimed Bitcoin would eventually replace the US dollar and ‘unite a deeply divided country.’ Will Bitcoin ever take over as the dominant form of currency?
To act as an alternative to fiat currencies, Bitcoin has to be capable of performing the essential functions of money. In other words, the cryptocurrency has to be an excellent store of value, unit of account and medium of exchange.
Unfortunately, Bitcoin is far from an ideal store of value due to its volatile nature. Although Bitcoin enthusiasts would argue that the digital currency would keep rising in value, the potential continuous appreciation can make Bitcoin a desirable speculative asset at most. The price of Bitcoin is too unpredictable for the crypto to function as a store of value.
The volatility of Bitcoin also makes it extremely challenging to use it as a unit of account. The price of Bitcoin moves an daily average of more than 2%. Such fluctuation means it is not viable to measure the value of an asset with Bitcoin.
Can Bitcoin be an effective medium of exchange then? Again, its volatility poses a barrier to using Bitcoin to pay for goods and services. As the price of Bitcoin fluctuates on a daily basis, sellers and business owners who accept Bitcoin as a payment method will have to frequently change the amount of Bitcoin they charge for their products or services. This can bring unnecessary inconvenience to their business operations.
Since Bitcoin hasn’t been able to perform the main functions of money, it is not ready to replace fiat currencies yet.
Nevertheless, Bitcoin does benefit from the network effect. As the number of regular Bitcoin users increases, the value of Bitcoin will grow exponentially, stabilising the cryptocurrency. This will equip Bitcoin to become an alternative to fiat currencies. But until then, Bitcoin will remain a speculative asset thanks to its volatility.
