Will This New Currency Replace Your Dollars?

by Brian Kehm, Financial Research Associate, The Oxford Club

new-currency

In Uncle Sam we (have to) trust.

But as the war on cash picks up speed, savers are losing faith.

This is happening all across the globe. Folks are flooding into government-free currencies.

The chart above gives a recent example. It shows the increasing activity in bitcoin-rupee trading. The volume spiked after India banned high-denomination bills. This cash ban is pushing citizens toward bitcoins... but is this new currency safe?

The World’s New Currency?

Bitcoin is a digital currency that’s run on a decentralized computer network.

Governments can’t tamper with the bitcoin supply and system. This is one of two main selling points for its users.

The other major benefit is that it’s easy to use and spend. This sets it apart from more traditional government-free currencies.

Gold has long appealed to those who don’t trust the financial system... but it’s hard to use. When was the last time you went shopping with gold coins?

With bitcoins, you can buy just about anything today. Big businesses like Microsoft (Nasdaq: MSFT) keep adding new bitcoin payment options. This adoption is helping to stabilize its price.

Wide adoption is crucial for a new currency to succeed. You need buyers and sellers to trust that the money they trade will continue to have value.

Bitcoin should stabilize as more folks use it. Citizens around the world are eager for a new currency that’s beyond their governments’ reach. People are tired of getting the tail end of monetary policy.

Venezuela is a prime example today. Inflation is out of control, and it’s expected to top 1,600% this year. One Venezuelan dollar (bolívar) at the start of the year will be worth less than $0.07 at year-end. Holding bitcoins instead will better maintain buying power.

The death of physical cash is also giving governments more control.

The U.S. is funneling folks into its digital money system. Harvard professor and former Treasury Secretary Larry Summers recently published a piece in The Washington Post titled “It’s time to kill the $100 bill.”

People around the world are waking up to excessive government money control. They’re turning to new currency options.

The benefits of bitcoin are clear... but this new currency comes with downsides too. I worked with a second-generation digital currency in Beijing and have some unique insight to share...

Bitcoin’s Big Issue

Governments can’t control the bitcoin money supply... but they can try to regulate how it’s used. Some countries, like Thailand, have tried to ban it outright.

Bitcoin regulation is a concern, but that isn’t what worries me most about its long-term sustainability.

A steady inflation rate is mathematically impossible for the currency. Bitcoin production, or “mining,” is regulated by a computer algorithm. And that algorithm puts a finite limit on the number of bitcoins that can be produced. What’s more, users can lose their bitcoins if they forget their encryption key.

Deflationary currencies are dangerous. Why would you spend money if it’s going to be worth significantly more tomorrow? Ultimately, this trait will stop bitcoin from overtaking major currencies.

Bitcoin might not be viable in the long term, but some other government-free currency must eventually take its place. That’s because we’re rapidly moving toward a historic change in our money system.

The death of cash is just part of a $662 trillion event that will reshape our bank accounts, our economy and, perhaps, our entire civilization. If you’re concerned about the long-term preservation of your wealth, do yourself a favor and watch this video.

Thoughts on this article? Leave a comment below.

Chart of the Week