The rapid growth of the value of a Bitcoin, raises an important thought experiment – can a digital currency turn into a reserve currency?
The Bitcoin’s characteristics make it a prime candidate to act as a reserve currency, given its relatively fast and low-cost transactions with no centralized price manipulation or import/export controls. This could eliminate the usury of middlemen such as banks seeking to siphon money off of the top of international trade deal.
After all, many people are not aware of the large costs charged by banks when sending money overseas. A large sending fee, a receiving fee, forex fee, paperwork fees and a handling fee are some of the charges the banks bill the customer for. On top of it, there’s always an unfair exchange rate charged to the customer by the bank.
Reducing these excessive bank fees and charges is one way in which the customer can save up to 90% on currency exchange. The other way is using Bitcoins for exchange of goods and services, since it is a peer-to-peer system which cuts out the middle man. Imagine travelling to another country with Bitcoins and exchanging them directly for local currency without middlemen. It would save us a lot of money by avoiding transaction costs, handling costs and manipulated exchange rates. Better yet the foreign vendor could accept payment in Bitcoins directly.
The ultimate reserve currency cannot be printed (and thus devalued) by any government. Gold and silver have served as the ultimate reserve currencies, as precious metals can be traded for commodities and services, provide collateral for debt and serve as reliable stores of value. Gold has its setbacks as it’s difficult to subdivide, carry and transport. Scientists have speculated on the total amount of gold on earth based on the amount that has already been mined, these calculations could be as off the mark as they are accurate.
Ever since the year 2010, the prices of gold and Bitcoin moved in the upward direction - though Bitcoins followed a rather erratic pattern. But in the year 2013, the two investment vehicles exchanged paths. Gold moved south, with SPDR Gold Shares (NYSE:GLD) losing close to 25 percent of its value. Contrarily, Bitcoins moved north, especially in the last three weeks, during which time they tripled in value.
But, contrary to the Bitcoins, gold has an intrinsic value. Moreover, the price of Bitcoins is not altered by the Gross Domestic Product (GDP), the inflation or by any other macroeconomic indicator. While many observers believe gold is still the only reliable reserve currency and the only reliable backing for government-issued paper money, it is worthwhile to think if a digital currency could also act as a reserve currency. But, only the future change in the Bitcoin value and volume would paint a better picture.