Is Bitcoin really the future of cryptocurrency

CryptocurrenciesWhat future the Bitcoin is blooming

If the euro had lost almost half of its value within six months, investors would have long since panicked. No matter how often the European Central Bank (ECB) stressed that it had the situation under control - the majority of savers would have put their money in safe havens a long time ago. With cryptocurrencies, on the other hand, investors react surprisingly calmly to the wildest turbulence. No matter which capers the Bitcoin price strikes: Investors are staunchly loyal to the digital currency. For many of them, Bitcoin is nothing less than the money of the future.

The question of whether cryptocurrencies are better money is as old as Bitcoin. Now crypto-disciples have received fresh food. In a report entitled "Imagine 2030", Deutsche Bank provides around 80 pages of arguments why crypto currencies could replace fiat money within the next decade. Central bankers use the term fiat money to denote currencies in the traditional sense: money that serves as a medium of exchange but has no intrinsic value. “The forces that hold the fiat money system together are fragile,” writes study author John Reid.

For a fiat money system to work, it needs trust in the guardians of money. People have to believe that the currency will be worth as much tomorrow as it is today. If this is not the case, the system collapses. Such a scenario could loom by 2030, believes Reid. His argumentation: The expansive monetary policy of the central banks is eroding people's trust in national currencies.

For a long time now, the monetary authorities have no longer pursued price stability as their primary goal, but rather, as an extended arm of politics, keep interest rates artificially low in order to make it easier for states to refinance their debts. "Before governments allow interest rates to rise, they are more likely to change the mandates of the central banks," writes Reid. This in turn is likely to drive inflation higher - and further fuel doubts about paper money. The demand for alternative currencies like Bitcoin could then skyrocket.

But are cryptos really the better means of payment? Critics argue primarily with volatility. For a currency to be accepted, its value must be stable. If the rate rises by three percent on Monday and falls by five percent on Wednesday, gamblers will be happy, but the majority of people will never accept such a currency as a stable means of payment. "In view of the price fluctuations, crypto tokens are neither suitable for reliable storage of value nor as a unit of account," says Bundesbank boss Jens Weidmann.

Even Deutsche Bank analyst Reid sees some hurdles for a crypto-based financial system. First of all, states and supervisory authorities would have to officially recognize digital currencies as a means of payment in order to stabilize the exchange rate. Then it would need the support of payment service providers, credit card companies and merchants to create global reach. And finally, the providers still have to find solutions for potential threats such as cyber attacks or power outages so that hackers don't bring the system to collapse.

Critics see another problem, especially with the market leader Bitcoin. If the economy grows, the money supply actually has to grow with it - after all, more money is needed to buy the additionally produced goods. Central bankers are therefore constantly adjusting the money supply. The amount of Bitcoin is limited to 21 million. Bitcoin is thus protected against inflation, but the system tends to deflation. A Bitcoin-based financial system would therefore suffer from the same trust problems that Deutschbanker Reid currently attests to fiat money.