Bitcoin: A Bursting Bubble or the Future of Finance?

Innovative alternative currencies (and the technologies behind them) have amazing possibilities, but also carry with them great risks.

At the start of the new year, Poland’s central bank and top financial regulator are backing an online campaign designed to deter citizens from investing in cryptocurrencies. And they’re not acting alone — as the popularity of the cryptocurrency market grows, Poland’s central bank is one among many issuing warnings.

The Monetary Authority of Singapore (MAS) has urged citizens to “act with extreme caution” and “understand the significant risks” of investing in cryptocurrencies, as they are not legal tender, not regulated, and driven by speculation. South Korea’s Financial Supervisory Service (FSS) has also emphasized that cryptocurrencies are not legitimate and therefore not subject to regulation at present. Recent reports also suggest that Australian banks are freezing customer accounts and blocking transfers to crypto exchanges.

Is all this negative press really cause for alarm, or are central banks simply afraid of an alternative transaction system that governments can’t tax or game by supplying loads of new currency out of thin air to inflate away public spending deficits? Let’s cut through the hype and take a closer look at the pros and cons of Bitcoin and other cryptocurrencies.

The idea of an international currency that’s not tied to a country or central bank and that’s designed for a globalized economy has fascinated economists, business executives, tech experts, and anti-government advocates for years. The ideal currency would be anonymous, provide protection from inflation, and be secure from theft and fraud. These ideals led to the creation of Bitcoins, which first appeared in 2009 with an initial issue of 2,625,000. Bitcoin needs some time to be considered a serious alternative to existing electronic payment systems, but it does provide real advantages to users. Let’s look at a few:

· Protection from fraud and identity theft. Being totally digital, Bitcoins can’t be counterfeited. And since they use a “push” mechanism that allows the holder to send exactly what they want to the seller or recipient with no further information. Bitcoins also don’t need names — digital wallet IDs are enough.

· Lower fees. There aren’t usually transaction fees for Bitcoin exchanges because the Bitcoin miner is compensated by the network with — you guessed it — new Bitcoins!

· Direct and immediate transfers. Purchasing real property typically involves a variety of third parties and multiple delays. Bitcoin contracts can be designed and enforced to eliminate or add third party approvals, reference external facts, or be completed at a future date or time.

· Access to brand new markets. There are approximately 2.2 billion individuals with access to the Internet or mobile phones who don’t currently have access to traditional exchange systems. These individuals are primed for the bitcoin market.

We’d be failing in our duty as good shepherds of technology if we didn’t provide you with an opposing point of view, so here are a few of the reasons that so many national banks around the globe are wary of cryptocurrencies:

· Bitcoin makes it easy to finance illegal and immoral activities. Because it’s anonymous, Bitcoin can be easily used to pay for illegal or antisocial acts. Digital currencies have been used to assist criminal activities like illegal drug sales, identity theft, child pornography, prostitution, human trafficking, and illegal arms sales. They are also favored cybercriminals to pay for developing and distributing malicious software. (Bitcoin supporters point out, correctly, that any financial institution, payment system, or medium of exchange can be used for illegal activities.)

· Bitcoin is extremely risky. There is no safety net or perfect way to protect Bitcoins from human error, technical glitches, or fraud. Some experts have also predicted that Bitcoin mining software will become a magnet for computer viruses, since there is no regulation of participants.

· Bitcoin is extremely volatile. According to an analysis published in The Wall Street Journal by Duke University finance professor Campbell Harvey, Bitcoins have been 7.5 times as volatile as gold and more than eight times as volatile as the S&P 500 over the last three years. Such violent price movements within short time periods don’t create ideal exchange mediums, meaning that most businesses will stay away from cryptocurrencies.

Whether Bitcoin and the blockchain technology behind it can change the future of the financial world is open to discussion, and there is still time to learn the technology, to experiment, and to see how it can best fit your organization. ITMAGINATION has extensive experience of implementing innovative projects in a variety of industries, and we’re confident that our Digital Banking strategy will put us at the forefront of whatever form the cryptocurrency revolution ultimately takes.