Bitcoin claims to be the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen. The anonymity it provides makes it more secure while the lack of a central authority makes the system immune to failures. This is what scares the regulators; the open-to-all nature of the flagship cryptocurrency also makes it prone to being used as a tool to facilitate illicit activities, adding to the concerns of the authorities.
Banks and financial institutions share the same concerns about bitcoin. Central banks issue or destroy money out of thin air, using what is known as monetary policy to exert economic influence. They also devise how fiat currencies can be transferred, enabling them to track currency movement, dictate who profits from that movement, collect taxes on it, and trace criminal activity. All of these control would be lost if decentralized currencies like bitcoin come into circulation.
Bitcoin users don’t have to depend on a centralized banking system and thus the existing system can easily be rendered useless. The cryptocurrency possesses several advantages over the traditional system. Probably one of the most important advantages of bitcoin over banks is its deflationary nature.
Bitcoin is less inflammatory than Banks
Unlike fiat currency, Bitcoin is capped at 21 million and doesn’t lose value due to inflation. According to basic supply and demand economics, it stands to reason that over time as the demand for bitcoin rises, the price can only go up because the total supply is capped. The finite nature of bitcoin gives it value just like gold, the only difference being the programmable nature of bitcoin.
Until 21 million bitcoin has been mined, there is an inflation rate based on how much BTC is created through mining annually. Currently, bitcoin’s inflation rate is close to 3.6%, with around 18 million bitcoin in circulation. This 85% of the total bitcoin market capitalization. However, there is a protocol coded in the underlying blockchain that performs the so-called Bitcoin “halving” or “halvening,” and producing new coins becomes more difficult. The process happens every 210,000 blocks.
The protocol cuts the block reward in half. Each time a Bitcoin halving occurs, miners begin receiving 50% lesser BTC for verifying transactions. The upcoming bitcoin halving is set to execute on 18 May 2020. Bitcoin’s inflation rate would drop to 1.8%. The number is lower than the inflation target of 2% set by most central banks.
The upcoming event would allow bitcoin to make a clear case for itself as less inflationary than most fiat-based systems. Many nations have succumbed to the damages of high inflation rates and cryptocurrencies like bitcoin have been used as a shield against it.
Can Bitcoin replace banks?
Central banks are currently the dominating structure nations use to manage their economies. They have monopoly power and won’t be willing to part with their control so easily. While Bitcoin and other digital currencies have sparked a lot of interest, its adoption rate is tiny and government support for it is virtually nonexistent. Until and unless governments recognize Bitcoin as a legitimate currency, it has little hope of killing off central banks any time soon.
Banks, on the other hand, are trying to fight bitcoin with their very own centralized cryptocurrencies that are called Central Bank Digital Currencies (CBDCs). Even though bitcoin is decentralized, regulators can make it really hard for people to access cryptocurrencies and can render the technology useless using their own centralized crypto.