The Economic Impact Of Using Bitcoin For Transactions

Bitcoin is a form of digital currency. However, it came into existence; other forms of currencies were being used to pay for goods and services. So before we go into the economic impact of adopting bitcoin as an alternative for goods and services, let’s take a look at the history of money.

The history of money

Money is any item or verifiable record that is widely accepted as payment for goods and services in a particular geographical area or socio-economic context. Money facilitates the process of trading wealth. It has intrinsic value (commodity money) or nominal value (fiat money).

The invention of money took place before the beginning of any recorded history. In ancient markets, exchanges were made through trade by barter.

Afterward, Gold and silver became the most common form of money throughout history. Although, they were times when other metals were used to make other types of coins. For instance, ancient Sparta minted coins from iron. This type of currency is becoming extinct, but in many languages, the word silver is still used to refer to the term “money”.

Later, Paper money was introduced in China during the 11th century as merchants and wholesalers desired to avoid the heavy bulk of copper coinage in larger commercial transactions. However, paper money did not replace coins in this era; it was used along with coins.

Bills of exchange became relevant with the expansion of European trade toward the end of the middle ages. Commodities were heavily dependent on credit for their widespread expansion. Goods were supplied to a buyer against a bill of exchange which constituted the buyer's promise to make payment at some specified future date, provided the buyer was reputable.

In the late 20th century, payment cards came into play. Cards such as debit cards and credit cards have become the dominant mode of consumer payment globally. The Bankamericard, launched in 1958, became the first third-party credit card to acquire widespread use and was accepted in shops and stores all over the United States.

In the second part of the 20th century, the development of computer technology saw the emergence of digital currency, which simply means that money can be represented digitally. By 2000, most money existed as digital currencies in bank databases. By 2012, in most countries, 20 to 58% of transactions became electronic.

Cryptocurrencies were introduced through blockchain in 2008; Satoshi Nakamoto proposed the bitcoin. It was implemented in the same year. It uses cryptography, which allows it to have a distributed ledger called the blockchain. It became the first widely used decentralized, peer-to-peer cryptocurrency.

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What are the differences between traditional currencies and cryptocurrencies?

Traditional currencies, also known as fiat currencies, are any form of money accepted and recognized by a particular government and centralized; it is also controlled and managed by the government, e.g., dollars and pounds. While cryptocurrencies are digital forms of currency built on a blockchain that uses cryptography to function properly, e.g., bitcoin and Ethereum.

Fiat currencies are centralized and require third-party involvement. At the same time, cryptocurrencies are decentralized and function with peer-to-peer transactions that require no intermediary or any third party to be involved.

Fiat money is generally stable when managed effectively, but cryptocurrencies are highly volatile, and the value is easily altered because of this factor.

Many countries have laws that provide protection against scams or theft of fiat money, whether digital or physical forms, which makes it easier to retrieve stolen funds, but any government does not currently back crypto, so there is no form of regulation attached to it.

The value of cryptocurrency is generally derived from the continued willingness of its market participants to exchange traditional money for crypto, which may result in a loss of total value for a particular cryptocurrency if its market diminishes or disappears. However, the value of fiat currencies is fixed and is not dependent on other currencies

Cryptocurrencies offer lower associated fees and more cost-effective transactions, while with fiat currencies, the existence of third parties often results in significant fees charged to the users

In the traditional banking system, making transactions may take up to 3 working days with high transaction fees, but in crypto, there are no transaction fees for making national transactions and also minimal transaction fees for international transactions; transactions also take place within minutes or hours.

So what is bitcoin?

Bitcoin is a digital currency that does not have any form of central control (decentralized). Instead, it centers on peer-to-peer transactions and cryptography. It makes use of a digital ledger that stores all its transactions, and the copies are held on servers all around the world. Those servers are known as nodes.

Consensus on who owns which coin is reached by cryptography across these nodes rather than relying on a central source of trust like a bank. Each transaction is broadcasted publicly to the network and shared from node to node.

Transactions are collected together by miners every ten minutes into a block and added permanently to a blockchain. A private key is used to prove ownership of funds to the network when making a transaction. A person should simply memorize their private key in order to retrieve or spend their virtual currency.

When a transaction is verified, a new block is opened, and a Bitcoin is created and given as a reward to the miner(s) who verified the data within the block—they are then free to use it, hold it, or sell it.

Bitcoin uses the SHA-256 hashing algorithm to encrypt the data stored in the blocks on the blockchain. Simply put, transaction data stored in a block is encrypted into a 256-bit hexadecimal number. That number contains all of the transaction data and information linked to the blocks before that block.

Why should bitcoin be accepted as a mode of payment?

There is user autonomy: bitcoin promises users autonomy because the price is not attached to any form of government policies or regulations.

Bitcoin transactions are pseudonymous, meaning that the transactions can be identified only by using a blockchain address. Internet protocol addresses are not a requirement for making transactions.

Transactions are done peer-to-peer; this means no transaction charges, account maintenance fees, or overdraft charges.

There are very low transaction fees for international payments or transactions. Typically, with fiat currencies, foreign payments attract huge transaction fees and exchange costs, but bitcoin transaction is fast, eliminating the inconvenience of typical authorization requirements and long waiting periods.

The transactions are irreversible and immutable; this means that a third party cannot alter them. Also, transactions conducted between two addresses are safe and secure.

The economic impact of adopting bitcoin as a mode of payment.

Increased job opportunities: the emergence of bitcoin has brought with it an industry dedicated to supervising crypto exchanges that happen throughout the world. Some early adopters have become rich quickly, while other persons have developed agencies or companies that depend on trading bitcoin as a source of income. Software engineers have likely become the most sought-after professionals in the industry.

Alternative for unstable domestic currencies: in countries where the local currency is constantly fluctuating, cryptocurrency can be used to circumvent the condition. People who do not have bank accounts are mostly disadvantaged financially. However, a large number of people in this category possess cell phones that are internet-enabled and can easily make bitcoin transactions with them.

Low transaction cost: transaction fees for most crypto payments are really low or non-existent at all because crypto is decentralized and does not require extra fees for its maintenance. Little to no transaction cost also brings about trust in the cryptocurrency system, causing its users to make use of more financial tools.

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Transparency

Crypto transactions are automated and tracked on an immutable digital ledger in blockchain technology. This does not only bring power and freedom to people. It also reduces the potential risks of fraud and scams.

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