Bitcoin has taken the world by storm. Learn more about the evolution of the first cryptocurrency since its inception in 2009.
Can bitcoin become a mainstream currency, and what would that mean for today’s traditional financial services? It’s possible that bitcoin could reform traditional banking as we know it, but a number of conditions would need to be met first. Regardless of whether those conditions are met or not, it’s a certainty that bitcoin’s innovation will continue to inform the trajectory of both digital financial services and traditional banks going forward.
What is Bitcoin:
Bitcoin is a cryptocurrency or a decentralized digital currency, that’s supported by an open-source code, running on a peer-to-peer network, with no governing authority like what traditional currencies have. In its first days, bitcoin was worth very little. The only people mining were people who had a personal interest in seeing this new kind of currency succeed, and who had specialized computer expertise that allowed them to participate, transact and mine the currency.
Today, an entire ecosystem of miners, businesses, trading platforms, and financial services have emerged, facilitating the use of bitcoin for anyone who’s interested. Additionally, the ever-changing value of a bitcoin has fluctuated over the years. In 2013, one bitcoin was worth around $1,000 USD; today, that same bitcoin is worth nearly $9,000 USD. It’s no wonder that the casual consumer now has an interest in the cryptocurrency world.
Solving the Problems of Verification, Double Payment, and Supply:
Why did it take until 2009 for digital currency to begin evolving? There were two theoretical problems that stumped the world prior to bitcoin. The first was the problem of verification and double payment: with a decentralized system that has no authority, how can transactions be verified, and to that end, what stops a user from spending the same bitcoin multiple times?
The second was the problem of controlled supply. Every international currency is released into the economy in a limited amount, which prevents the currency from becoming valueless due to an infinite supply. For a decentralized cryptocurrency to succeed, it would need a controlled supply system in place.
How Bitcoin Addresses Verification and Double Payments:
Currently, at any given time, a block reward is up for grabs. Miners can get bitcoin through a process called mining, which involves solving a mathematical problem on their computer. There’s a purpose behind these problems beyond deciding who gets the next bitcoin: each problem confirms the details of a transaction that’s taken place.
The first miner to solve a given problem gets to add that transaction to the blockchain which is, in essence, a public distributed ledger that holds all of the world’s bitcoin transactions. Then, a new mathematical problem is released and the process begins anew.
Users have an incentive to participate in the transaction verification process via the peer-to-peer network because there’s a chance that they will receive bitcoin for their efforts. In turn, every transaction is verified in a timely manner, preventing bitcoins from being spent without being accounted for, which could lead to a higher than stipulated supply and a drop in prices.
How Bitcoin Addresses Supply:
There are a limited number of bitcoin available to be mined. There will only ever be around 21 million bitcoin as stipulated by the network created in 2009, and as of 2018, over 80% of those bitcoin has been mined.
Only a fixed amount of bitcoin is mined at a given time (when a block is verified by miners), and bitcoins are never released in response to macroeconomic changes (as traditional currency sometimes is). Mining becomes more challenging and time-intensive as time passes and more miners join the network. This prevents the price of bitcoin from plummeting in response to more bitcoin being available in the economy.
Bitcoin and the Mainstream:
Bitcoin serves multiple purposes today: it’s a store of value, a means of asset diversification and an inflation hedge (although it’s subject to its own price volatility as well). However, first and foremost, today’s Bitcoin has clear utility as a means of person-to-person exchange.
For bitcoin to become a mainstream currency, it needs to meet the same set of basic conditions that all traditional currencies meet: stability, trust, and acceptance.
Today, bitcoin is a volatile cryptocurrency with unpredictable cycles of inflation and deflation. The value of a bitcoin can double over the course of six months, and then fall by 50 percent in the next 30 days (it happened in 2012 and 2013). Years later, bitcoin’s value increased by 10x in 2017 and then over the span of a few months corrected by nearly 70%.
Consumers need a daily-use currency to be stable, or it loses its inherent value as a method of spending. In the grand scheme of things, even though bitcoin is the oldest cryptocurrency, it’s still very new: it’s only been in operation for eight years. We can only wait to see what the future brings for bitcoin’s stability.
Consumers won’t use bitcoin if they don’t trust that their money is safe. While traditional banks offer safeguards such as fraud protection, deposit insurance, and dispute moderation; bitcoin offers none of this. How can it, when there is no governing authority? Gaining the trust of consumers, businesses and governments is a vital part of bringing bitcoin to the mainstream, but it’s likely to pose a challenge.
Widespread acceptance is needed before bitcoin can become mainstream. This is one area in which bitcoin has made major strides in recent years. With a growing number of cryptocurrency holding services powering digital transactions, it’s easier than ever to spend your bitcoins. Major retailers and traditional financial institutions are somewhat behind but, if current trends continue, cryptocurrencies could potentially be part of the mainstream within the next couple of decades.
What Does Bitcoin Mean for Financial Services:
If bitcoin were to become mainstream, it would change today’s financial services as we know them. Simple and instant financial transactions between individuals would emerge as the standard. Retail and investment banks could participate in bitcoin trading for their clients, and they could accept bitcoins as collateral or deposits. It could prove risky for banks to avoid cryptocurrency altogether as the industry continues to grow.
The biggest impact that bitcoin has on today’s financial services could be its role in setting an example. Thanks to bitcoin’s innovations, we know that decentralized, digital financial systems can work. The bitcoin protocol, the public ledger in the form of the blockchain, and the full transparency of transactions are all components of a digital financial system that have the potential to endure and inform traditional banks’ future innovation. In particular, the blockchain could be used to allow digital transfer of land deeds to security holdings and investments, in addition to currency.
A Brave New World:
Where else can bitcoin go? The possibilities are nearly endless. Christine LaGarde, managing director of the International Money Fund, suggests that bitcoin and other cryptocurrencies could eventually be a solution for countries with weak financial institutions and unstable national currency values, such as Israel, where the Shekel is worth a mere $0.29 in USD and could continue to drop.
That’s not all: bitcoin’s protocol and the technology behind it could find its way into traditional finance. Billionaire venture capitalist Mark Cuban speculates that blockchain technology could be used for other financial applications in the future, suggesting that a public ledger and fully transparent transactions could be the norm someday. The dichotomy between traditional bank ledgers and the blockchain ledger is stark and it has the potential to change the way banks operate in the future.
There’s no doubt that bitcoin has momentum and that it has accomplished a great deal on its own in establishing the digital financial sector. It can’t be predicted where bitcoin’s trajectory will go, but it’s a certainty that its influence will grow, both in other cryptocurrencies and in traditional financial services.
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This article should not be used as or considered investment advice. If you have questions regarding cryptocurrencies, tokens or any financial investments please consult your financial advisor.