Will Central Banks get Killed by Bitcoin ?

Central Banks played a prominent role in the 2008 Financial Crisis via their policymaking. However, it led to the birth of Bitcoin (BTCUSD), the first Cryptocurrency to be created. Its determinants, such as decentralisation and peer-to-peer review, possess the potential to pull apart the role of central banks in the modern financial infrastructure. However, despite its advantages, it is not 100 percent adaptable due to many drawbacks.

What is Bitcoin ?

Founded by Satoshi Nakamoto in 2008, it was the first decentralized digital currency. In 2009, it was released. Unlike fiat money (government-issued currency regulated by issuing government), it has no administrator.
Without an intermediary, it sends money from one user to another via a peer-to-peer network. In this, network nodes verify transactions through cryptography. Then, the transactions are recorded in Blockchain.
It can be kept in a digital wallet and used to purchase goods and services and exchange currencies, including fiat and cryptocurrencies.

What is the working mechanism of Bitcoin ?

A blockchain is a database having a record of transactions. Its unit is named block, and it contains and represents all relevant data about a particular transaction. These blocks are linked to all previous transactions and thus create a chain of transactions.
A bitcoin is created as a reward to individuals for completing a process called blockchain mining. This process authenticates and records the undergoing transaction through cryptography.

What is the process to do transactions ?

The first process involves installing the Bitcoin wallet on devices like mobile or PCs. After this, the Bitcoin wallet will generate a Bitcoin address that can be used once. Then to initiate a payment, the address is to be shared with the persons with whom a person wants to have transactions.

Functions of Central Banks

The primary functions of the central banks include maintaining employment, stabilizing prices and regulating inflation, etc., to keep the financial system in motion during crisis times. It is done through their infrastructure, which has a vast network of numerous banks and financial institutions.
They use a variety of tactics to achieve their mandates, which primarily involve manipulating the money supply and interest rates. Changing the money circulating in the economy directly determines the spending by the consumers and thus the economic growth. In addition, they considerably affect the country's imports, exports and overseas investment, with their most significant merit being the ability to build trust in the system.

Advantages of Bitcoin over Central Banks

Economics and technology can explain why Bitcoin is thought of as a substitute for Central Banks. It solves some problems that central banks have arising from their working structure.

  • Decentralisation
    As discussed above, central banks have substantial control over the money’s value. It can change its value through specific monetary policies, and this substantial power can be misused. Here, the role of Bitcoin comes into the picture, and its decentralising property eliminates all chances of power misuse.
  • Ease to Implement and Utilise
    This feature is crucial for starters and gathers their attention. It functions on a censorship-resistant system that is open and allows to view all transaction records.
  • Security and Privacy
    The uniqueness and cryptographic security of Bitcoin eliminate all chances of hacking and counterfeiting. Unlike banks and other forms of payments like credit cards, it does not require personal details and works on complete anonymity. It truly works like a global payment medium. It gives the users power over their personal information and secures corresponding financial data.
  • Trust
    The decentralising property of Bitcoin is not a barrier to trust. The algorithms which form Bitcoin themselves take care of it. Its network needs to be approved by nodes worldwide to be included in its ledger. One node disapproval might make a transaction ineligible to be included in Bitcoin’s ledger.
  • No need for an Intermediary
    The Bitcoin infrastructure streamlines the production and distribution of currency. No intermediary is needed for the peer-to-peer transfer between the addresses of Bitcoin’s Blockchain. Thus, no network of banks as a middleman is required to distribute Cryptocurrency.

Disadvantages of Bitcoin over Central Banks

Despite the economic independence promised by Bitcoin, it has several catches. No feature accounting for value Unlike gold and silver, which has value for their rarity and tangibility, Bitcoin does not have any such feature standing for its value.

  • Use in Illegal transactions
    The first is the lower number of legitimate records used. Moreover, it is infamous and grabbed the attention of financial regulators, legislative bodies, and the media for being used as a tool for illegal transactions and speculation instruments, and its position as an instrument for legal transfers is unknown.
  • Volatile supply and limited Availability
    It is restricted in its supply and volatile. Its use is severely constrained because only 21 million bitcoin will be mined.
  • Price Swings
    Bitcoin’s price oscillates between extremes, making it difficult to use in everyday transactions.
  • Irreversible transactions
    A transaction cannot be cancelled, once money is transferred. In addition, there is no third-party institution that can support during problems with transactions.
  • Slow speed
    The Bitcoin payment speed is slow compared to other coins. It is a significant drawback because many substitutes with faster payment speed, such as altcoins.
  • Difficult to understand
    Bitcoin and other cryptocurrencies can be difficult to understand for many due to the complexity of the underlying technology. As a result, it might prove an obstruction to their adoption.
  • High Energy Consumption
    It is often criticized for the significantly high amount of electricity exhausted in mining. Bitcoin uses Application-specific-integrated-circuits in its hardware that has no use other than data mining and thus produces a high amount of electronic waste.

The Bottom Line

To sum up, Central banks act as the foundation of global financial infrastructure. Most countries use central banks to manage the economic system, which poses several benefits. However, it leads to excessive power on a single authority and many recessions, like in the past.
Currently, both Bitcoin and central banks co-exist, and this condition is more likely to remain in the future. Rather than rejecting Bitcoin, banks should embrace this technology. There is a considerable probability that many central banks will introduce their own central bank digital currencies (CBDCs). As a fact, many countries have taken a step in this direction.

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