What Does Bitcoin Lack: Key Shortcomings Underpinning its Limitations

Bitcoin, a decentralized digital currency not issued by any government or business, has garnered attention from enthusiasts and critics alike. However, despite its growing acceptance, the digital coin falls short in several crucial areas that are essential for a viable currency. This article delves into the shortcomings that make Bitcoin a marginally useful currency and highlights why it may not be a long-term stable solution.

Shortcomings of Bitcoin

Money serves three primary functions: as a medium of exchange, a unit of account, and a store of value. Bitcoin, while used as a medium of exchange by a growing number of merchants, struggles to fulfill the expectations for a unit of account and a store of value due to its extreme fluctuations. These fluctuations render it unstable and unreliable, hindering its potential as a widely accepted and trusted currency.

During 2013, Bitcoin's volatility was significantly higher compared to typical stocks, and its exchange rate with the US dollar was about 10 times more volatile than those of major currencies like the euro and yen. The lack of correlation between Bitcoin's value and other currencies or gold further demonstrates its instability.

This volatility undermines the ability to use Bitcoin as a reliable unit of account and a store of value. Businesses and investors alike struggle to price goods and services or plan financial strategies using a currency whose value fluctuates wildly. The inability to hedge against financial risk makes investing in or accepting Bitcoin a high-risk proposition.

Absence of Essential Currency Characteristics

Bitcoin lacks many features that are typically associated with traditional currencies. For instance, it cannot be deposited in a bank but must be held in digital wallets that have been vulnerable to theft and hacking. This poses a significant security risk for users and limits the trust that consumers might place in the cryptocurrency.

There is no deposit insurance or comparable protection for consumers, unlike traditional banking systems. Additionally, lenders do not use Bitcoin as a unit of account for consumer credit, auto loans, or mortgages. Credit and debit cards are also not denominated in Bitcoin, limiting its daily use for transactions.

Long-Term Economic Flaws

Even if Bitcoin's volatility subsides and it finds a place in the global payments system, it faces another significant economic challenge. The total supply of Bitcoin is capped at 21 million units, making a fixed money supply incompatible with the needs of a growing economy. Such a limitation could lead to deflationary pressures and the need for continuous pay cuts for workers, which might result in public unrest.

The fixed supply of Bitcoin means that as the economy grows, the purchasing power of each unit would increase, leading to a gradual decrease in the value of goods and services. This deflationary trend could create economic instability and social unrest, reminiscent of past economic movements like the late 19th century's free-silver and populist movements.

Conclusion

While Bitcoin has made strides in gaining acceptance as a medium of exchange, its shortcomings in being a reliable unit of account and store of value, coupled with its lack of essential currency characteristics and long-term economic flaws, limit its potential as a stable and widely accepted form of currency. Despite the innovative nature of cryptocurrencies, Bitcoin and similar technologies need to address these fundamental issues to gain broader acceptance and stability.

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