But the fundamental question is how this system works? Is Bitcoin like electronic cash or technology? Is Bitcoin like gold a store of value? The world is coming to terms with bitcoin, it is best to know about the fundamentals of this digital asset.
William Foxley, a technology reporter, has published an article on the Coindesk website that explores the economic roots of bitcoin and seeks to find a fundamental reason for the digital currency’s recent rise in price.
What are the primary goals in creating bitcoins?
In White Paper, Nakamoto outlines his main goals in creating this new monetary protocol:
- Bitcoin is the first successful technology to achieve a peer-to-peer version of electronic cash.
- The Bitcoin network is a decentralized payment system, meaning that you do not need financial intermediaries (such as banks and credit institutions) to transfer bitcoins.
- Bitcoin is designed in a way that it will not allow any organization or government official to interfere in its monetary reserves.
- The characteristics of bitcoin, that is, limited supply and the gradual reduction of inflation, follow the free market theory that complements the old economic ideologies.
What has been the major idea of creating bitcoin?
Mark Thornton said in an interview with Coindesk that “Bitcoin is designed to counter the current dominance of Fiat paper money and the central banking regime that has ruled the global economy for more than a century.”
Bitcoin is inspired by two prominent economic ideologies in Europe and the United States. The aim of them to free money from government printing presses. According to this theory, no product or service has intrinsic value and that the value of each product depends on how one views the product. Traditional beliefs about the origin of money say that the government is the creator of money, but the new theory holds that the market is the source of money.
What is the idea of the economists for the monetary system?
The economist Hayek defended the idea of creating an independent monetary system, said in an interview in 1984:
“We can’t have good and strong money unless we take control of money out of the hands of governments. Of course, we can’t take away control over money from the government by force. So, the only thing that we can do is to indirectly introduce an alternative to the people that governments cannot stop.”
Comparing the bitcoin financial system with central banks, Thornton said:
“The planned release of bitcoin mimics the natural behavior of gold. It is an obvious confrontation between the Bitcoin network and central banks, which allows them to make money under any pretext. Accordingly, Bitcoin has performed very well over the past few years.”
Central banks appear determined to devalue their fiat currencies. This issue will affect most over the US Federal Reserve, the European Central Bank, and the Bank of Japan. Together with many other central banks, they have reduced their large interest rates to zero or even negative rates.”
Why is Bitcoin compared to gold?
One of the most attractive features of Bitcoin is that it does not conform to any of the standard valuation methods. So Bitcoin has no cash flow to worry about reducing, and no physical assets support Bitcoin.
Like gold, amount of demand determine the value of bitcoin. Depending on how much people are willing to pay for it. On the other hand, unlike gold, the price of bitcoin never affect the supply of that. It is one of the reasons for the rapid changes of the price of bitcoin. Because the new supply will never increase to meet more demand.