Why money is going virtual

15 April, 2015

Virtual currency is set to rapidly change global commerce as we know it. Already, an increasing number of merchants are accepting virtual currencies, primarily bitcoin.

While critics are often all too eager to sound the death knoll for virtual currencies, the fact remains that digital currencies such as bitcoin offer a number of compelling reasons for replacing old-school cash.

Wear and Tear of Bills

Perhaps the most compelling reason for replacing paper money with virtual currencies is the fact that paper money simply wears out over time. Almost everyone has received cash back at some point and noticed a bill that was extremely worn, perhaps even torn or taped back together. Paper money experiences a tremendous amount of wear and tear even after being in circulation for just a short period of time. During a single fiscal year, the Bureau of Engraving and Printing produces approximately 38 million notes daily. The vast majority of the notes printed on an annual basis are used to replace bills that have been taken out of circulation. While some denominations of paper money have a fairly long lifespan, that is not the case with all bills. For instance, a $100 bill has an average lifespan of about 89 months, but a $5 bill has a far shorter lifespan of just 16 months, due to frequency of use. Dollar bill notes, $10 notes and $20 notes typically last less than two years.

While paper notes obviously go through an extensive amount of wear and tear, this is not a problem with bitcoin and other virtual currencies since there is nothing tangible that needs to be exchanged. Consumers who use virtual currencies like bitcoin can therefore play a tremendous role in helping to reduce the amount of wear and tear of paper currencies.

Expensive to Mint Coins and Print Bills

It is also extremely expensive to mint coins and print paper bills. The cost to print paper bills alone is astronomical. ABC News reports that if coins were to replace paper bills, it would save the US government more than $5 billion. 1 Each year, the Federal Reserve Board anticipates the potential demand for new currency and then sends an order to the Bureau of Engraving and Printing, the agency responsible for producing U.S. currency. Of course, that printing is not done free of charge. Instead, the Bureau charges the Federal Reserve Board for the cost of producing that currency. The budget for producing new currency in 2015 is $717.9 million. According to the Federal Reserve, it now costs almost five cents to produce dollar bill notes and costs more than ten cents per note to produce five dollar and ten dollar notes. 2 The cost to produce $100 notes is now more than twelve cents per note. Given the amount of money currently spent on minting and engraving coins and bills, replacing old-school money with virtual currency could equate to tremendous savings for the government and tax payers.

Transaction Savings

Another compelling reason that explains why many consumers and businesses are already flocking toward virtual currencies is the fact that it is simply less expensive to use bitcoin than regular currency. The cost to make purchases or even transfer traditional currency electronically can be significant. This is one reason why an increasing number of merchants are now making the move to accept bitcoin as a form of payment. Each purchase made with bitcoin instead of a credit card helps merchants to save the costs associated with credit card processing.

Given the potential cost savings as well as convenience offered by the use of virtual currencies such as bitcoin, it is easy to see why money is now going virtual.

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1) ABC News. Coins Could Replace Dollar Bills, Save US $5.6 Billion.
http://abcnews.go.com/blogs/business/2011/10/coins-could-replace-dollar-bills-save-us-5-6-billion/

2) Federal Reserve. How much does it cost to produce currency and coin?
http://www.federalreserve.gov/faqs/currency_12771.htm