Question is in the title. Anyone who's toyed sufficiently long enough on the foreign exchange understands that currencies are largely driven by sentiment or manipulated on the odd occasion. Plus, there's the fact that money has no intrinsic value. Has bitcoin overcome any shortfalls and risks of conventional currencies ?
There are huge differences between FIAT and Bitcoin.
Fiat is created out of thin air "with fractional reserve banking" and other mechanisms, there is no stop on how many will be created.
Another problem is that every country is FORCED to create more of it. Since otherwise the value of their money would increase to much, ending all export industry and tourism in that country.
So when the US prints an extreme amounts of FIAT they know that China must follow, which means that Japan must follow and the US must print more, and so it goes on.
Bitcoin can not be created out of thin air, and it takes an ever increasing energy cost to create one.
And since no country base their economy on it, its free from having to be endlessly printed. (It can´t even if it would be.)
Another very important difference is that Bitcoin is the only digital money you can own yourself with no one else having any access, and thus keep on your own computer or in your own cellphone or store on a USB the key to your money.
All other digital money, is money that is stuck in a bank and thus they might play around with it and go bankrupt.
But a Bitcoin is a Bitcoin and not simply a promise in their system. This also means that you can send them any time of the day instantly to anyone you like now even on Facebook or in emails.
The limited amount also gives it a longterm backing in that if it picks up in any market, it cant stay this low and will have to go much much higher, a value of something like $50-$5000 would not be strange in 10-20 years IMO.
There are some important shortfalls of traditional currency that Bitcoin addresses:
- There can never be more than 21m bitcoins in existence. Bitcoin will never be vulnerable to the quantitative easing or printing of additional currency which devalues the existing funds of holders of traditional currency.
- There is no central authority. A collapse of any particular corporation or govt will not cause Bitcoin to fail. There's no need to participate in a run on a bank.
- Bitcoins are very difficult to steal without coercion when protected in the right way. Security features for Bitcoin are still maturing, but it is possible to encrypt a Bitcoin wallet on an offline computer and do transactions from there. This heavily reduces the change of bitcoins being stolen through malware or physical theft of hardware.
- Bitcoins can be spent over the internet with very low transaction fees (a fraction of a percent compared with 3-4% with a credit card). When you know an internet retailer is trustworthy, Bitcoin is a great way to make payment.
- Transactions are essentially irreversible.
- Bitcoins cannot be counterfeited.
Though Bitcoin is obviously subject to manipulation through trading on exchanges, this has little effect on its usefulness as an online payment method as they can readily be converted to another currency before fluctuations have much effect.
Bitcoin as a currency is being inflated, currently, at a rate of 28% per year. That alone would disqualify it as being one of the "hard" currencies (i.e., United States dollar, Euro, Swiss franc, British pound sterling, Japanese yen) for a long time to come.
Bitcoin most definitely is driven by sentiment and with the aggregate of all order books being slim, it can likely be manipulated up or down with simply a six figure budget.
Where bitcoin's primary advantage comes into play is that the currency inflation rate a year out, two years out and ten years out is already known, today.
Additionally, when trading currency there is no T+2 settlement. Most Bitcoin exchanges settle trades instantly, and deliver bitcoin withdrawals in seconds. Thus the funds can then be used for spending or further transfer just minutes after the trade executes.
Unfortunately, the bitcoin exchanges are not as great with the flow of fiat used for trading. Arbitrage would keep the exchange rates about even (less trading costs) however because fiat funds don't flow cheaply or quickly in and out of the Bitcoin exchanges, exchange rates between exchanges will not be consistent.
This presents an opportunity to some, but serves as a hurdle to others. Because bitcoins are not traded yet alongside other currencies for forex or are yet considered by established financial trading firms, there are first-mover advantages being enjoyed by entrepreneurial endeavors writing custom trading bots.
One other benefit is that Bitcoin is just a protocol and data, which means it is universal. Central banks don't need foreign exchange reserves with bitcoin nor swap agreements to trade against bitcoin. There is simply self-interested individuals and companies doing the buying and selling (for both commerce and speculation).
Here are some other benefits:
The value of money is that it makes exchanging and storing value more efficient. Your assumption that it should somehow have other value besides that is wrong.
Bitcoin improves over traditional currencies in several ways, for example:
- Easy to send payments internationally without fees.
- No chargebacks.
- International, no need to make currency conversion.
- Easy to get started with receiving bitcoins.
- Possibility of microtransactions.
- No inflation.
- No single point of failure.
- Payment is done via digital signatures rather than giving away your password.
- Objective public record of payments made in case of disputes.
- An option for small countries without a viable currency of their own.
- No need to rely on financial institutes with poor service.
- A powerful scripting language that allows more advanced transactions than "A is paying X to B", and derivatives of the technology such as Namecoin.
- No restrictions on whom you can pay.
The idea that Bitcoin is superior to government-issued fiat is based on a few myths.
Myth #1: Bitcoin cannot be created "out of thin air"
This is not true. More coins can be created if a significant number of users (either the economic majority or the majority of the mining hash power) decide that it's good for the system. Given the history of all money, it is almost guaranteed that this will happen. It is the same as government-issued paper. Remember, the US dollar was once linked to gold, and apparently could not be created out of thin air. When rules are made by humans, the rules can be changed.
A separate but related point: nothing prevents Bitcoin from being levered like fractional reserve banking. See how gold ETFs work. Gold cannot be created out of thin air (even if everyone agrees!), but you can create paper on top of it.
Myth #2: Bitcoin is decentralized and not controlled by any single authority
Again, this is not true. Bitcoin does have an informal system of governance. A few people do make decisions on behalf of everyone else. This is just like a democratically elected government, except that it isn't democratically elected (so it's a "benevolent dictatorship"). It's very much like a central bank that decides which banks are bailed out and which banks are allowed to fail (see: 2008 financial crisis), who gets to keep their money and who loses theirs.
It's easier for the miners to tax your bitcoins than it is for the government to tax your dollars (see: Cyprus depositor tax).
Myth #3: Bitcoin cannot be counterfeited
It is trivial for anyone to create an implementation of the Bitcoin design (PDF) and call it "Bitcoin." For example, you could create an alternative version of the design with a upper limit of 42 million coins instead of the current 21 million, with faster transaction processing. Incidentally, this is exactly what Litecoin does. Litecoin could just call itself "Bitcoin" and it would be legitimate, because it does follow exactly the design laid out in the Bitcoin white paper. Therefore any number of Bitcoin clones can legitimately call themselves "Bitcoin" as long as they follow the white paper (this is how it's supposed to work), and therefore in a sense there can be any amount of "counterfeit" Bitcoin currency in circulation.
If you had an agreement with someone to pay you in bitcoins for a service you provided them, and they paid you in "counterfeit" bitcoins (which are as real as yours), there would be a dispute that would have to be settled in court. This is why Bitcoin is a caveat emptor system.
On the other hand, if you paid someone in bitcoins and they claimed them as fake, you couldn't prove it, because they could legitimately claim to have expected to receive a different kind of bitcoins. In this case you would lose your money and get nothing for it in return.