With the U.S. federal government announcing its first-ever Bitcoin securities case last month—a Texas man is accused of running a Bitcoin Ponzi scheme—cryptocurrency has entered the financial mainstream.
Recent security issues aside, though, the question is just how big Bitcoin and its fellow cryptocurrencies can get. Could the open-source Bitcoin even replace banking? There are some compelling elements in favor of it.
It just may be, though, that one needs to think about it more as a currency than a means of creating wealth.
For those who are unfamiliar with Bitcoin, or haven’t yet got their head around it, I’ll explain.
Bitcoin is a kind of Internet-driven version of barter. Two parties agree to a value for a transaction and the Bitcoin represents that value. Where it differs from traditional money is that the token or representation—in money’s case it’s a banknote—is electronic. There’s no physical mechanism.
It’s a “mechanism for enforcing property rights,” Peter Šurda, a writer who specializes in cryptocurrency economics, told me for a feature article I was writing a few weeks ago.
The elegance of that lack of coin, or banknote, is that you don’t have to pay anyone to physically move the stuff. Banks become redundant, and can’t claim their couple-of-percent every time they touch your currency.
Further, costs are reduced because you don’t need buildings, printing facilities, or wages to pay employees for counting the stuff. You don’t even need beach houses for the senior employees to rest in after a hard week’s counting.
Bitcoin’s cost of doing business is simply the cost of moving one agreed value electron from one person to another. All you need is some computer power, a stream of electricity to encrypt the agreed value so it can’t get stolen, and a network like the Internet.
Pretty much all you’ve got to pay for is the (not unsubstantial) electricity and computers. The more secure encryption is, the more calculations it takes, and performing high amounts of calculations requires lots of power.
Bitcoin gets around this cost by paying its transaction network operators—called miners—in bitcoins.
Consumers not getting it?
But there must be a catch, right?
Well, one area that consumers can have difficulty getting to grips with is Bitcoin price movements.
Bitcoin price is expressed as an exchange rate in relation to other currencies, like the U.S. dollar—and it changes, going up and down.
However, the way to think about it, I think, is not in the media-hype-oriented scream of wealth creation, but as a currency. The store of wealth, you could argue, is a red herring.
As a consumer, if all you use Bitcoin for is to transfer funds in order to avoid paying the banks’ exorbitant fees, the price changes don't matter that much.
Say the transaction takes about half an hour. If your sender converts from U.S. dollars to bitcoins just before the transaction, and then you convert the bitcoins back into dollars when you’ve received them, you’re only interested in that thirty minutes of price movements. It’s likely not much and probably still less than a bank wire fee.
So, if you’re using bitcoins to make a transfer of value, not store wealth, who cares about price fluctuations?
And it is in this time, Bitcoin’s early days, that fund transfers may be where Bitcoin can play best.
An open source developer named Venzen Khaosan has written an article about the differing functions of Bitcoin in Cryptocoinsnews.com, if you’d like to learn more about this idea.
“Unlike with traditional monies and financial systems, cryptocurrencies are just numbers,” Šurda says on his blog.
It is still too early to tell how exactly it will all play out, Šurda says of the future. But “unorthodox thinking can help,” he says.
If consumers can be encouraged to stop thinking of Bitcoin in wealth creation terms, 2015 could be the year cryptocurrencies take hold—but as a transfer tool. The user just has to ignore the price movements.
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