Understanding Bitcoin
Bitcoin is a pure digital currency. There are no coins or cash bills. You start using Bitcoins by downloading a Bitcoin app, eg. BreadWallet, and then follow the instructions.
There are some shops, bars etc. that takes Bitcoins. These shops are using an app as well. No Bank is needed for the transaction. The money is held by the app. That is why it is called a wallet.
Bitcoin is a decentralized digital currency that allows instant payments to anyone, anywhere in the world. Bitcoin uses peer-to-peer technology to operate with no central authority. (See Bitcoin)
The apps communicate with a common Bitcoin network. The Bitcoin network is driven by companies on a free basis, see an article about one of the big ones, BTCC. Every installation in the network, called network node, have a full copy of all transactions. Every Bitcoin transaction is public, distributed to all nodes in the network.
There exists ATMs that exchange Bitcoins into cash bills in the local currency or cash bills to Bitcoins. You can also use a Bitcoin exchanging website accepting normal debit/credit cards or bank transfers.
When you have exchanged your local currency into Bitcoins, you are free to transfer Bitcoins to anyone. This is where the challenge for the bank industry occurs, since the banks earn a lot on money transfers, in particular foreign transfers.
Since the beginning of 2015 the Bitcoin was up about 37 percent against the USD and is now equal to 425 USD, see Bitcoin is one of 2015’s biggest winners.
Bitcoin has the currency code XBT, and can be exchanged to other currencies such as USD, EUR, DKK etc. You find the exchange rate at many websites, one is preev.com.
The 2 largest Bitcoin-accepting retailers in 2015 was Microsoft and Dell.
Bitcoin is the seventh largest on the following “Daily transaction values” per Dec. 22, 2015, for digital payments via web, smartphones or cards (from businessinsider.com):
A traditional currency consists of two parts, one part of it involves digital money that exists on accounts in banks, and another part involves cash, existing anywhere, including banks. In some countries the cash part of the economy is very low. Sweden has, at the moment, the lowest part in cash, only 2 percent, according to New York Times. Bitcoin fits into this development of moving towards using cash less and less. The young generation will have no problems with Bitcoin.
People love digital services such as Netflix, Amazon, and Uber because they’re easy to use and deliver great customer experiences. These services are 10 times more convenient and deliver better customer experiences than the status quo, and are thus winning the market. It’s only a matter of time before the 10-times-better bank is founded, a thought that’s on the radar of every banker. (See Backbase & Efma)
The bank industry is worried. Digital services, like the Bitcoin, is taken slides of the market — just like AirBnB are doing against the established hotels, or Uber are doing against the established taxi companies.
Bitcoin sounds ideal, but it has it’s disadvantages as well. These disadvantages become clear, when you look at Bitcoin from a society’s point of view.
Bitcoin is anarchy
From a societal point of view, there are following disadvantages of Bitcoins:
- No individual can be identified or reported. Bitcoins owners are always anonymous, only using a generated id of the ‘wallets’ in the app, giving great opportunities for tax fraud, money laundering, terrorist financing etc.
- Bitcoin fits very well into the “dark internet“. For example, you can buy a false identity, including name, address, date of birth, phone number, password to some websites, Visa/Dankort-id and IP-address of computers, belonging to a existing Dane for less than 15 USD on AlphaBay. You pay by using Bitcoin, see politiken.dk and guide for accessing AlphaBay.
- Neither the currency, nor the technology behind it, is regulated by any authority. If something illegal happens, who should the courtsprosecute?
- There is no central bank to maintain the currency and the size of it. The financial market is basically by itself, and that can be a dangerous situation. Who will take leadership, when financial crises develop.
These are the reasons why the success of the Bitcoin is worrying — not only for the banks, who meet serious challenges, but for the society as a whole. With Bitcoin’s growing economy, the impact of these risks will grow as well.
The legal status of Bitcoin varies substantially from country to country and is still undefined or changing in many of them. While some countries have explicitly allowed its use and trade, others have banned or restricted it. (See Legality of bitcoin by country)
Currently, most countries have no statements or legislations about Bitcoin. And the bank industry is trying to create its own response to the development.
All variations within the spectrum
Talking about digital services in a broader sense, you find all variations in the spectrum:
- from traditional banking, exposing digital services on websites/smartphones/cards
- to whole, new economies like Bitcoin currency, having anonymous wallet on websites/smartphones and its own global network.
Software companies are working on all variations within the spectrum. See #fintech on Twitter.
Here are three examples:
- Apple holds the most consumer credit cards, globally, and is rapidly expanding its product ecosystem and Apple Pay payment network.
- Google continues to experiment with its own mobile wallet and is making it easier to send money via Gmail.
- PayPal is handling more international transfers than the top five banks combined.
Common to all three examples is that they are a challenge for the bank industry because they takes shares of the market, even though they are build upon core banking systems of the bank industries.
Another example is:
- Lending Club. It was initially launched on Facebook as one of Facebook’s first applications. It is now expanding into car loans and mortgages. In May 2013 Google purchased a stake in Lending Club. After that year the value of the company was tripled.
Lending Club is developed into a full-scale peer-to-peer lending company. This concept is using some of the same technologies as Bitcoin is using, as described below.
Alle four examples, Apple, Google, PayPal and Lending Club, are described in the report of Backbase & Efma.
Investors say about the new startup companies in Silicon Valley:
They’re going to disrupt the industry. The bank industry may act offensive and try to find ways to deliver the same benefits for the customers without having the disadvantages. Or they may choose to cooperate with Silicon Valley, just like Opel and Google, who went into a partnership about developing self-driven cars.
Bitcoin — conclusion
Bitcoin has been the most visible FinTech phenomena of the last decade. And for good reason — the growth in Bitcoin value and its acceptance into the mainstream of payments has been astronomical. But the technology underlying it, the blockchain, might be what drives the most profound, system-wide change of any nascent financial technology. The distributed and completely transparent nature of the blockchain has the potential to transform how exchanges — from stock markets to the awarding, buying and selling of patents — work. And that’s not years from now, but right now; the NASDAQ has already chosen the blockchain to underpin its new private share-trading market, a huge endorsement of its reliability and maturity. (See crowdfunder.com)
Bank of America is trying to load up on patents for the technology behind bitcoin. [..] It’s hard to speculate what Bank of America will do with these patents, if anything. But Coindesk notes these patents could be hinting at BofA working on a complete network based on blockchain. (See qz.com)
The new opportunities in the technology behind Bitcoin should definitely be considered. There is something brilliant about Bitcoin and the technology behind.
The strategy must be to
- exploit the technology, and
- avoid the disadvantages.
To understand the technology behind Bitcoin, you must understand Blockchain.
