Bitcoin Replacing Physical Currencies

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The use of physical money will be replaced by digital currencies. You might ask: “What are we going to do with all of the old paper currencies?” Well, we could certainly start building financial museums and someday bring our grandchildren there telling them: “this is what we used to use when we were young”. Will it be just Bitcoin in the future? Absolutely not! The USD is almost a digital money already. Most transactions are done with credit cards or bank wires, but Bitcoin will have its role to play in the world. The USD is mostly just digits on a screen, anyhow – they are very similar, but Bitcoin has a lot of useful features that the USD does not have. It is possible that the USD will convert to a model that is more similar to Bitcoin, but that would be difficult to accomplish considering the foundations of our financial infrastructure was built on the current properties of the USD. If the USD acquires all the features that Bitcoins has, which it won’t, will Bitcoin still have a role to play? Yes, I would say – Bitcoin is an extremely powerful financial instrument that is easily programmable!

The current owners of the physical money are not going to need to trade in their old bills. It would be wise for people to diversify their assets in case if the price of a bitcoin rises significantly compared to the USD.

Will Bitcoin be one of the worlds’ currencies? It absolutely will be – it already has! The real question is: “how large of a fraction of the pie of currencies will Bitcoin become?”  Currently, most transactions with the USD and other fiat currencies are already digital. There is not actual physical cash that exists for all of the money that is out there. When someone gets a loan from the bank, they are lending out money that is in their accounts that belong to other people. So, do the people that have the money in their bank accounts also have that money, too? Does the account holder have $100,000 in the bank even though the bank lent that $100,000 to a home owner? That is $200,000 worth of money but only $100,000 in cash actually exists. Banks are required to hold 15% of the “money” as physical “cash”. The rest is insured by the FDIC (up to a certain amount) if account holders need their cash but the bank does not have it. There is no FDIC insurance for a Bitcoin wallet, but there are exchanges that offer private insurance on their accounts such as Circle and Xapo.

Bank account holders are in fact lending their money to people that are holding debt to the bank. The account holders sometimes get some small amount of interest for the money in their bank accounts – it is not significant; it won’t keep up with inflation. On top of the potential interest, the banks provide services in exchange for the bank holders’ cash. What would happen if a large number of people went to their banks and took out all of their money? The banks would not have enough. The FDIC insures the accounts so they have to send the money to the banks so they can give them to the account holders. If this happened rapidly, the FDIC would have to get the treasury to print a lot of money to payback the account holders. The people with debt to the bank would owe the bank and the FDIC the money on their loan. The home owner might or might not have a lot of wealth if they have a mortgage on their home. Homes would go way up in USD value since there is more money in circulation – most of them will have fixed rate interest.  The homeowners would benefit because there home would be worth more than what they owe on it but people holding actual money would be hurt because of the inflation.

How much would a large influx of investors buying bitcoins affect the financial system? The people that previously had the bitcoins and sold them to the people that took the money out of their banks to buy bitcoins will have a large portion of USD and possibly they will keep a significant portion of these bitcoins. This will potentially displace some of the funds from the banks and their other investments. Most of the USD will end up back in the banks which will, in turn, lend them out and the cycle will continue. Even if Bitcoin went mainstream, it will not cause a financial crisis; it will only open up more opportunity and cause the existing financial infrastructure to be more efficient and competitive. It may cause some obsolete services to go away.

What happens when transactions are replaced by bitcoins? The USD would be used less. This will cause the Bitcoin to rise against the USD and it will transfer wealth to Bitcoin holders. I think wealthy people will be able to purchase enough bitcoins and have enough control to mostly maintain the current distribution of wealth. Bitcoin has a long way to go to become relevant, but it is growing rapidly. There will be quite a few new millionaires and billionaires if Bitcoin goes mainstream. Bitcoin technology just might be the world’s next largest international financial system that is widely recognized. Gold is an example of an international transaction system, but it is for the museums & collectors now; it is impractical to use it for transactions.

“Receipts of gold” was the next international transaction system – these receipts were called dollars, but then the dollars got detached from Gold. They then started making receipts for the dollar and transacted the receipts instead of transacting physical dollars – those were checks. They then created the Internet and could send digital receipts of the physical dollars – those were wire transfers and credit/debit cards. The current system is a mixture of  dollars, receipts of dollars and digital receipts of dollars. It is easy to exchange the digital receipts of dollars. Bitcoin is superior to digital receipts of dollars since it is self-contained. There has to be a lot of trust built between the parties when utilizing the current financial model since digital receipts of dollars are worthless unless if they are honored. With Bitcoin, this trust is not needed; once the transaction is complete, the wealth transfer has been honored and it can’t be reversed. The Bitcoin system enforces integrity: money can only be sent from a wallet if a private key is provided. There is no need for an inefficient central authority to guarantee the integrity of transactions; Bitcoin transactions can be made almost instantly with absolute certainty.