Why in news?
- Bitcoin value hit yet another lifetime high of $6000 recently and is expected to touch $10,000 very soon.
- While bitcoins have grown in popularity, its immediate and long-term prospects may not be too bright.
What are the challenges?
- Volatility – Volatility in trading price of Bitcoins indicate that it is not reflective of its fundamental value.
- This is a sign that many bitcoin buyers purchase the currency solely for the purpose of gambling.
- Accumulation by investors who are betting on its future potential as a standard medium of exchange is also a possible explanation.
- But one will have to wait to know if this is true.
- Political Risks – Rise of bitcoins is a serious challenge to national fiat currencies issued by central banks.
- National currencies allow governments to easily tax their citizens by printing a fresh supply of money whenever they need it.
- Bitcoin strikes at the root of this centuries-long government monopoly power over money held by governments.
- As political risks are too huge, market-based currencies will either be discourage by governments or completely banned.
What lies ahead?
- When bitcoin will meet its end, is very hard to predict.
- Its volatility in future might taper down if it survives for long.
- Although, replacing national currencies is a far cry, it definitely has potential to survive as a medium of exchange on the fringes of the monetary system.
What should be the policy towards Market Based currencies?
- A free market for private money can bring in serious competition that can improve the quality of our monetary system.
- This will either reign in inflation or make it more predictable.
- Speculative frenzies can indeed occasionally occur in such markets, as they do in fiat currencies issued by central banks already.
- But it is simply bad public policy to fully dismiss the market’s tremendous ability to regulate our money.
Source: The Hindu