10 Jun Will bitcoin do for banks what email did for the post office?
Wikipedia defines email as “ a method of exchanging messages between people using electronic devices”. The email started its journey from time-sharing computers of nineteen sixty’s. Now email is used by almost everyone. So, when you are sending an email to someone from your office you press the send button. Do you know what happens in the background?
Here is a simple explanation of how email works:
- The sender composes a message.
- The email text written by the sender and the attachments are placed on the SMTP server as outgoing mail.
- The SMTP delivers the message to the recipient’s email server.
- The recipient’s download the new message by the sender.
Back in the 1980’s, email technology can be enjoyed by only those who can afford an expensive computer. By the end of the 20th century, email became available for everyone by internet cafes set up all around the town. This was the time when people started understanding the importance and benefits of an email. Email disrupted the post office as it started to get the attention by mainstream users. Entailing with new technologies email evolved into a modern-day tool used by all business savvy people.
Fast forward to 2018, bitcoin and blockchain technology is going through the same phase as email went. It’s not available for mainstream users and used by only those who can afford. The mainstream users still have problems understanding about blockchain. The level of trust in this new technology is less.
Let’s come from the basics. What are blockchain and bitcoin?
Bitcoin is a cryptocurrency that makes electronic payments without any trusted intermediaries. It is proposed by Satoshi Nakamoto. Blockchain technology is used as a backend for bitcoin for sustaining the distributed transaction ledger. Here money can be exchanged without being linked to real identity. The whole security of blockchain is dependent on cryptography.
As bitcoin is not controlled by any banks instead the transactions done are verified by a big community of miners who verify the transaction of the fund. The main disadvantage of blockchain is that it requires a huge number of people with computational power for the transaction to happen. People are still scared of this technology because they think it is only for criminals, nerds and drug dealers. This technology has been adopted by less than 1 percent of the global population. So, it takes a lot of time to be adopted in global scale just like email took time to be welcomed by the mass.
The Rise of Bitcoin
The price of bitcoin went from 1 cent in 2010 to more than fifteen thousand dollars in December 2017. The price surge that took place during December of 2017 may be due to the hype as it was recognized by a larger number of financial people later on. The surge is due to the involvement of new investors. They invested their money in this new technology that cannot match any stock exchanges in the world. According to statista, blockchain is predicted to grow to 2.3 billion U.S dollars by 2021.
Not only bitcoin even the price of bitcoin hash rate ( the computing power used by bitcoin’s network of computers to create new bitcoins) rates have gone through the roof.
Many new cryptocurrencies came into the market every day after bitcoin. The cryptocurrencies other than bitcoin are termed as altcoins (alternate coins). Some of the popular ones are Ethereum, Litecoin, Ripple, Dash, IOTA, Monero, Zcash and many more.
Ethereum is an open source platform that uses blockchain technology. Proposed by a cryptocurrency researcher and programmer, Vitalik Buterin in 2013. The concept went live in 2017 with 72 million ether coins. It uses an operating system called smart contracts: computer codes that help for money transactions. Ether is a cryptocurrency that can be transferred between accounts its blockchain is generated by the ethereum platform.
Ripple is based on a shared public database and uses a common ledger that is looked over by a network of validating servers that constantly compare transaction records. This cryptocurrency garnered the attention of banks. The reason is ripple gives you instant and direct transfer of money between two parties. Ripple is mainly made for enterprises to move a huge amount of money around the world as fast as possible.
IOTA is mainly based on Internet of Things where machines interact with each other and make transactions. It has a cryptocurrency called mIOTA which does not use the blockchain technology like others. mIOTA cannot be mined and 2.77 billion coins are already in circulation. The IOTA team aims to make connected devices transact through its platform.
Litecoin was one of the first cryptocurrencies that came after bitcoin. It was first released in on October 7th, 2011 by a Google employee, Charlie Lee. It is so much similar to bitcoin yet there are few differences that make it stand out. The processing time in litecoin network is faster than bitcoin’s. So, this allows litecoin to have faster transaction time than bitcoin.
Dash is an open source cryptocurrency that performs functions like validating transactions on the network, relaying messages through “master nodes”. As Dash is one of the easy to use cryptocurrency it is accepted by many web stores and web hosting services. The master node incorporates two kinds of transactions: InstaSend and PrivateSend. Instasend requires consent from master nodes to validate a speedy transaction and PrivateSend has a purpose to make transactions untraceable.
Monero was launched in 2014 promising secure and private transactions.They have a public ledger where anybody can send transactions but it is untraceable to the source. Whenever a transaction is sent, a stealth address is formed. This stealth address makes it impossible to know the destination address except for the sender and receiver. Due to its untraceable privacy advantage, it has been used by drug dealers, gun dealers, ransomware attackers. Monero was used in 44 percent of cryptocurrency ransomware attacks in 2018.
Pros and Cons of Bitcoin
Widely accepted as the modern payment method
Many merchants around the world accept bitcoin payments. The main reason is people want to avoid fiat currencies and the possibility of buying any virtual or physical product without any hassle. Companies like Overstock.com, Subway, Wikipedia, Microsoft, Zynga accepts bitcoin as a mode of payment.
Easy international transactions and lower transaction fees
The value of bitcoin is the same in any country. So, if you transfer a certain amount of payment through bitcoin, the value of the bitcoin remains the same at both source and destination. The best part is the transaction fees for bitcoin payment is less. Whereas, in traditional payment, you need to pay a transactional fee for international payment. Usually, the digital payments will include 3 percent of transactional fees whereas bitcoin it will be less 1 percent.
The value of bitcoin is volatile
The bitcoin’s value varies drastically overnight. This makes it difficult to give a volatile value for a commodity to be purchased bitcoin. Whereas, traditional currencies like the dollar has more stability.
Can be replaced by a better cryptocurrencies
As we all know that right after bitcoin got its popularity there came many cryptocurrencies in the market every week. Each offering a unique way of transaction methods that are better than bitcoin. So, the stability of one cryptocurrency to stay on the top is not possible as there will be other one waiting to do better.
Will Bitcoin replace banks
Bitcoin is still far away from becoming a legitimate currency when compared to US dollars, euro, and pounds. These thousands of cryptocurrencies were mainly made to solve the problems the banks created. But all of these cryptocurrencies don’t have the same goals. Some want to eradicate the use of banks and others want to enhance the performance of banks. So, banks should find a way to work with these cryptocurrencies to perform better.
Disadvantages of banks that can be solved by cryptocurrencies
We have a painstakingly complicated banking system
Our banks take a lot of time to transfer money from one person to another. Moreover, many people are illiterate about the way bank works because it’s too complicated to understand. If you have to transfer money to your friend from one bank to another bank, the whole process undergoes many steps before it reaches your friend. All of this can be simplified by using the power of blockchain. Transactions will be smooth, quick and cheaper.
Banks are centralized whereas blockchain is decentralized
Centralized systems are vulnerable and are susceptible to hacking. If the hacker gets into the centralized system, he gets access to all the information in it. Whereas, in a decentralized system the information is distributed among everyone. So, for a hacker to take control of all the information from everyone is difficult.
Banks adopting this technology into their system
Seeing the advantages bitcoin and blockchain can bring to their system, banks are trying to adopt this technology. Some of the well-known banks like JPMorgan Chase, Goldman Sachs, Barclays, UBS, and Citi bank have already started to implement this technology into their financial activities.