Tuesday, 14 May, 2024

Can Bitcoin replace the US dollar?

Jack Dorsey believes it will, but it’s a conclusion that is out of step with reality.

Jack Dorsey is an enigma. Part sorcerous shaman, part Big Tech bro, very little is known about the ex-Twitter CEO, a man who keeps his cards close to his chest. However, when it comes to Bitcoin (BTC), his cards are very much on the table. In a nutshell, Dorsey is very much a "Bitcoin Bro." So much so that he thinks it’s the future of digital currencies and will replace the USD, the most dominant currency in the world.

Is Dorsey's belief realistic, or is it a thing of pure fantasy?

The American actor Will Rogers famously argued that “too many people spend money they haven't earned, to buy things they don't want, to impress people that they don't like.” It’s an interesting quote and raises an interesting question: What exactly is money? In simple terms, it’s any object that’s accepted as a form of payment. Not only is it a medium of exchange, money is a store of value. This brings us on to Bitcoin (BTC), the most famous cryptocurrency in existence. Is it actually money? The Chinese Communist Party (CCP) thinks not. In the US, however, an increasing number of people, including a number of prominent politicians, think it is. Who is correct? More importantly, who is wrong? Because if Bitcoin fails, millions of people stand to lose a lot of money.

With cryptocurrencies, especially Bitcoin, we seem to be at a crossroads of sorts with countries like China, Turkey, and Egypt banning them, and other nations, like the United States, for example, embracing them.

Last month, Foundry USA, a New York-based financing company, became the world’s second-largest Bitcoin mining pool. “The rise in the participation of American entities,” according to Cointelegraph, “can be attributed to China’s recent blanket ban on crypto trading and mining activities.” Where did all those Chinese miners flock to? To foreign lands, including the United States.

The Greenidge Generation bitcoin mining facility is in a former coal plant by Seneca Lake in Dresden, New York.
The Greenidge Generation bitcoin mining facility is in a former coal plant by Seneca Lake in Dresden, New York. (AP)

It's easy to see why: at least 1 in 10 Americans have dabbled in crypto in the past year. Bitcoin enthusiasts come in many forms, from teens in basements to powerful politicians. Take Francis Suarez, Miami’s mayor, for example, a man who intends to take paychecks “100 percent in Bitcoin.” On December 10, the 44-year old announced plans to take a part of his 401k in Bitcoin. Meanwhile, Eric Adams, the next mayor of New York City, believes schools should add cryptocurrency to future curriculums. Bitcoin, in his opinion, is “the new way of paying for goods and services throughout the entire globe.”

But, you see, it’s not. Bitcoin, like every other cryptocurrency, is not actually money. It lacks practicality. Its inherent volatility, contrary to popular belief, makes it a poor store of value. At the same time, trying to make necessary purchases with Bitcoin is, for lack of a better word, torturous.

Oh yes, where does Bitcoin’s value come from? Absolutely nowhere. It’s not tied to economic reality. It’s all make-believe. It's a speculative asset, at best; a dangerous gamble, at worst.

The truth about Bitcoin

Proponents of Bitcoin often cite its decentralized nature. Unlike traditional fiat currencies, like the USD and EUR, it’s not controlled by central banks. It is, we're told, a “currency” of the people, by the people, for the people."

In the United States, 10 percent of the richest people now own 70 percent of the country's total wealth. Across the country, financial inequality reigns supreme. Thank goodness, then, for Bitcoin, the great equalizer. Not so fast. A recent study by the National Bureau of Economic Research (NBER) pours cold water on the suggestion that Bitcoin exists to empower the masses. On the contrary, it exists to further empower the already empowered. According to the researchers, Bitcoin suffers from its own one-percenter problem. More worryingly, that problem is likely to grow in the coming years.

The authors found that the top 10,000 Bitcoin investors now own at least 5 million Bitcoins, or roughly $230 billion's worth. In other words, 0.01 percent of all Bitcoin holders now control 27 percent of the world’s number one digital currency. The US-based company Microstrategy, spearheaded by the charismatic Michael Saylor, has invested more than $2 in Bitcoin; Tesla, meanwhile, owns $1.5 billion worth of BTC. So much for Bitcoin’s ability to bridge the financial divide.

The Great Con

Advertised in a very specific manner, Bitcoin's branding is brilliant. It’s the “new gold,” or so we are led to believe. The term “miners” conjures up images of traditional gold diggers, armed with pickaxes and hardhats, toiling in the heat, sweat dripping from their brows. In reality, there’s no actual mining. Bitcoin is created through complex algorithms that are performed by supercomputers that consume more energy than many small countries.

Moreover, Bitcoin is not gold. It’s nonphysical. It exists on the blockchain, which means it doesn’t really exist. Moreover, Bitcoin, like the blockchain itself, is hackable. Even without hackers, Bitcoin is, at best, an inadequate form of “money.” If in doubt, let me point you in the direction of El Salvador, a country that recently made Bitcoin legal tender. The rollout has been an unmitigated disaster, largely because the average person does not want Bitcoin. They want a stable currency that does not fluctuate in value day-to-day. That is what occurred in Weimar Germany, and we all know how that played out. Spoiler alert: Not well.

However, as I have noted elsewhere, Bitcoin does serve a purpose in countries decimated by war and systemic governmental failures. In places like Palestine and Lebanon, where traditional currencies have plummeted in value, people have turned to Bitcoin as a means of survival. In these countries, Bitcoin has become the equivalent of a “break glass in case of emergency” means of exchange. The lack of economic sovereignty has left them with no other option. For desperate people in desperate situations, bitcoin can be very useful.

But, in the United States, Bitcoin is little more than a plaything for the super-wealthy, and a dangerous gamble for the mere mortals, many of whom have little in the way of savings. The US dollar has its critics, and for good reason. The greenback has lost its allure, especially as the current president of the United States continues to print it into oblivion. Two wrongs, however, don't make a right. A person with gluten intolerance doesn't replace bread with pasta, after all. They look for a healthy, superior alternative to the current problem. Bitcoin, in its current form, is not a solution to the dollar problem. Until millions of people in relatively stable environments – like the US, for example – can use it to purchase everyday essentials, my skepticism shall remain.

Which brings us back to Jack Dorsey's dream of Bitcoin replacing the USD as the global reserve currency. Perhaps Dorsey really does believe that the most dominant crypto is capable of becoming the most dominant currency. However, there is absolutely no reason to believe that it will. As the author Philip K. Dick famously noted, “Reality is that which, when you stop believing in it, doesn't go away.”

The reality surrounding Bitcoin is a brutal one. It lacks any sort of inherent value; it’s wholly unregulated and tightly controlled by elite institutions and uber-influential billionaires. Bitcoin is backed by nothing but faith – blind faith as some experts have argued. At least the dollar, for all its obvious flaws, is backed by the U.S. government. Investors, by and large, still trust the dollar. There is little reason to believe that this will change any time soon, if ever. Expect a digital dollar to replace the traditional dollar, not a wholly unpredictable cryptocurrency.

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