Influence of Bitcoin on Fiat Currencies

Bitcoin, the first ever created decentralized cryptocurrency, came up in 2008 and since then has changed the way we see the banking system. This digital coin is characterised by being free of control of central banks, but is this good? How then someone can be sure that a transaction will be enforced? Well, here the so spoken block chain technology shows up to solve this problem, assuring transparency and safety to trade.

Another question arises, if there is a system capable of enforce transactions can Bitcoin even be considered a currency? Some might argue that such a volatile asset could not be designated and used as a currency, but the fact is that some economic agents already accept Bitcoin as a mean of payment.

In this article the offer that no one can refuse is that we analyse the impact of Bitcoin on fiat currencies like euro, pound and mainly dollar.

Whenever central banks issue money they need to predict how many new goods and business will arise next year so that they can issue the right amount of money to keep currency

value stable. Now, with cryptocurrencies like Bitcoin, companies create their own currencies that do not are in control of central banks therefore they cannot be foreseen, although they have the same function of traditional money.

This event can lead to two possible outcomes. First as central bank does not see the money turnover it may well conclude that there is no economic growth and will not issue money. If money supply fall short, the most likely outcome since on average economies grow, currency prices will skyrocket. Second, even if it is evident that there is economic growth, central banks will have difficulty to predict money demand accurately. In both scenarios we can expect some unusual volatility.

Now let ́s move one to an all different level of affairs, since WWII most international trades are done in dollars, but is this standard threatened? As cryptocurrencies are decentralized currencies and can be easily traded at low transaction costs, such an appetence mixed with the desire of countries like China and Russia to not depend on dollar standard can enhance a de-dollarization of the economy and potentially put an end on the US tremendous economic power. If such a process gain momentum the world as we know will change drastically, it is not all about the depreciation of dollar, without a mechanism capable of having piles of debt that amount to $20 trillion, US would lose its economic power and perhaps the power would shift from the west to east, maybe China.

However, this idea is very remote even with such powerful sponsors, to eliminate the dollar standard this cryptocurrency would have to substitute the dollar as reserve currency, to that happen most countries in the world would have to accept it as a currency and central banks would have to retain it as reserve. We need also to consider that all previous attempts to put an end to dollar standard went wrong: Saddam Hussein and Muammar Al-Gaddafi are not here to argue but I think they are two pretty good examples of how far US can go to keep its hegemony.

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