Could cryptocurrency replace the U.S. dollar? There are too many evolving variables to make a finite conclusion, but too many interesting additional questions arise from that possibility to ignore. For instance, cryptocurrency is a broad term. When you ask someone how many different types there are, they will likely be way off. They may talk about Bitcoin, Ethereum, and maybe even Tether. However, there are close to 2000 different types.
Even if someone believes that cryptocurrency could be the new form of currency, an obvious follow-up would be which one it will be? Can we go forward with multiple types of currencies, and what impact will that have on our current economic market?
What is Fiat Money?
A dollar is a piece of fancy paper. It is so powerful because of how strongly people believe in its value. That was accomplished because the U.S. dollar used to be backed by gold. The dollar represented how much gold it could be traded for. The gold standard has been abandoned, and our government now backs the dollar. A currency backed by the government that issues it is known as fiat money.
Although a government does not back cryptocurrency, it does have exchange value. Ironically, people measure the value of a piece of cryptocurrency by how many U.S. dollars it can be exchanged for. Much of cryptocurrency’s potential rests heavily on people’s faith and belief in its value.
Unstable currencies fluctuate in value. Investors who funnel money into unstable regions are more likely to choose a stable form of currency to deal with. They don’t want to generate profits in a currency subject to massive bouts of deflation. What is so interesting is that many of these people who trusted the U.S. dollar are now using cryptocurrencies.
This has the potential to disrupt—or alter—our economy. The Federal Reserve generates money for the U.S. Treasury. The more people choose to use cryptocurrencies for transactions rather than the dollar, the harder it is for the Federal Reserve. The speed at which money circulates (its velocity) directly impacts us. There is also a potential that the supply of fiat money significantly outweighs its demand. That decreases the value of the dollar and our country’s firm position as an economic leader.
We intentionally refrained from assigning a dollar value to a piece of cryptocurrency during this article or even acknowledging which ones are better than others. That is because the market is fluctuating, evolving, and growing. We follow and study it because it may become something your business has to face and manage in the future. To speak with a business law attorney, contact us today.
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