The St. Federal Reserve has published a blog post highlighting some similarities between bitcoin and regular currency. It is based on an earlier research paper carried out by the Fed indicated three key attributes common to both Bitcoin and regular currency. This comes at a time when there is a lot of debate concerning cryptocurrencies in general and how they are to be regulated. According to the blog post Bitcoin whether in principle or in practice sure does behave a lot like physical cash.
The post asserts that Bitcoin has no intrinsic value. This means that it has no value of its own. Just like physical cash which is numbers printed on a blend of cotton and linen which isn’t inherently valuable. Bitcoin, being a digital currency, exists as data. The U.S. dollar is no longer based on the gold standard which means that a currency note isn’t worth its weight in gold. The only value attributed to a currency note is that which has been predetermined by the Fed.
This characterization of Bitcoin having no intrinsic value because it is a collection of data strings is sure to raise some eyebrows. Data isn’t exactly of no value as the entire internet value-chain is expressed in terms of data. A lot of effort and resources has been put into data protection in recent times. It appears counterintuitive that something of no value would require that much protection.
For a currency to maintain its value, its supply must be limited, i.e., scarcity. The Fed maintains the money in circulation by increasing or decreasing the monetary base. The monetary base refers to the currency in circulation plus the reserve balances held by the Fed in lieu of depository institutions.
In the case of Bitcoin, scarcity is created by means of a limited supply. The total Bitcoin supply is capped at 21 million after which no more bitcoins will ever be mined. This finite supply of Bitcoin ensures that the cryptocurrency cannot be devalued simply by diluting the amount in circulation. According to the blog, the total money in circulation in the U.S. was $1.63 trillion as of March 21.
The third similarity between bitcoin and physical cash identified by the St. Louis Fed is the absence of third-party intermediaries when carrying out transactions using both of them. Cash transactions require no middleman, just like Bitcoin. However, it is important to note that these days, due to strict financial laws only micro-cash transactions can occur without any middlemen. It is not possible to imagine a $100 million cash transaction without some alarm bells going off. For Bitcoin, on the other hand, virtually any amount of cash can be moved without any intermediary.