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Wednesday, December 2, 2020

Digital dollar or Bitcoin – Which Is Better?

With cryptocurrencies and Bitcoin back under the spotlight, central banks are once again looking at the possibility to release their own digital currencies. Just recently, the US Federal Reserve stated that they are actively working on a digital dollar.  

And while people buy Bitcoin as a great way of making profits, could the digital dollar be a better investment? Will Bitcoin and a government-backed digital currency be able to coexist? 

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In this article, we will answer these questions by comparing both assets and exposing their pros and cons. In the end, we will be able to determine which is better.  

First, let’s have a quick overview of what Bitcoin is.  

What is Bitcoin? 

Bitcoin is a peer-to-peer digital currency network that facilitates the borderless exchange of value. It is a completely decentralized system, which isn’t regulated or controlled by any central governing body.  

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Furthermore, Bitcoin has a limited total supply of 21 million coins. New bitcoins are issued through a mathematical process called “mining”, which involves solving increasingly complicated mathematical problems with powerful computers.  

And finally, Bitcoin’s transactions are totally transparent and accessible to anyone. Each transfer of bitcoins is recorded on a public ledger and cannot be modified. This makes bitcoins virtually impossible to duplicate or falsify.  

Bitcoin vs Digital Dollar – what’s the difference? 

Before we start discussing whether Bitcoin or the digital dollar is better, let’s run through their main differences.  

  • Volatility – this refers to the price stability of the asset. Bitcoin is known to be quite volatile, with considerable price variations over time. Paired with the traditional dollar, its digital counterpart should be much more stable in comparison.  
  • Decentralization – as we previously mentioned, Bitcoin isn’t controlled by governments or banks. The digital dollar, on the other hand, would be issued on command by the US federal reserve, similar to today’s fiat currency.  
  • Programmability Bitcoin can be used in any way the owner pleases. There’s no permission needed, only two agreeing parties are needed for a transaction, a sender and a receiver. Conversely, the digital dollar might begin a trend of “programmable money”, which could limit its useability and distribution.  
  • Scaleability – Bitcoin is known to poorly scale to mass usage, due to its proof of work design. While still at a conceptual stage, the digital dollar is expected to achieve hundreds of thousands of transactions per second in order to accommodate demand.  

These make Bitcoin and the digital dollar are very different from one another. Let’s pick apart these differences to determine if there could be a winner among the two.   

Bitcoin and the digital dollar compared 

Volatility can be both a disadvantage and a benefit for Bitcoin. The considerable price variations can be very discouraging for businesses that already work with low margins.  

However, this volatility also turns Bitcoin into a highly speculative asset, suitable for investing.  

Also, where Bitcoin is decentralized, the digital dollar would be a Central Bank Digital Currency (CBDC). This means it would be controlled and issued by the federal government. This raises questions about the privacy of transactions and could open doors to abuse of power.  

To add to this, governments have hinted towards a programmable CBDC, meaning that they could restrict their usage. For example, a person who is receiving a welfare payment will only be able to use their digital dollars to buy food, medicine or to cover their rent. 

The goal of Bitcoin is quite the opposite, giving people complete freedom on how they spend their money.  

And finally, the greatest advantage Bitcoin has over the digital dollar is its limited supply. By creating scarcity, Bitcoin’s value increases over time.  

In contrast, the federal bank can create more digital dollars whenever it sees fit, flooding the market with more fiat money. This waters down the value of digital dollars in circulation, through simple law of supply and demand.  

Conclusion 

So which one is better, Bitcoin, or the digital dollar? There’s no clear answer to this question, as their utility is completely different.  

Bitcoin can be seen as some sort of “digital gold” that acts as a great investment and impeccable store of value. Its decentralized nature gives people the freedom to use their money as they see fit. However, recurring issues with scaleability have shown that it could be very difficult to use it massively as a payment method.  

On the other hand, the digital dollar has some convenient use cases, like sending out welfare instantly and streamlining the taxation of businesses. Then again, this comes with the caveats of reduced privacy and controlled spending. It could give central banks too much control, the very thing cryptocurrencies are trying to avoid.  

This is why we’re more likely to see both digital currencies coexist and serve their own market niches.  

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