Bitcoin The Disruptor
Bitcoin the disruptor.
You must have heard of the digital phenomenon bitcoin. Most of you are probably not familiar with the underlying technology and how this very technology can disrupt almost everything that has to do with how we use money.
What is bitcoin?
Bitcoin is digital money, more accurate it is a crypto currency. It is the first and most known crypto currency, but there are a lot of other crypto currencies called “altcoins”. Bitcoin is a protocol (like HTTP for web browsing or SMPT for emailing) with the function of sending and receiving payment information. The bitcoin protocol works as follows: a computer connects with and sends binary codes to another computer, providing you with the control of X bitcoins on the first address and the command to increase them with X bitcoins on the other address.
Must sound familiar right, like internet banking you say? Well, you are almost right, except that you are completely wrong.
Bitcoin is a completely decentralized payment protocol, which means no bank is in control of your money. It is a gigantic public ledger containing all of the transactions made from the start, while being saved on millions of computers. Anyone can obtain an identical copy of the ledger and view the transactions in it. Bitcoin transactions are (almost) instant, almost free of transaction fees (about a penny) and most important no one has the control over your money.
How are bitcoins made?
To understand the disruptive nature of bitcoin you will have to understand the underlying technology. It is actually not bitcoin that is disruptive, but the technology driving bitcoin, the so called “blockchain”. Bitcoins are being created by running software on a computer, which in crypto currency terms is called “mining”. The software is adding and verifying records of recent transactions on the public ledger and compiling them to a “block”. Each of these blocks are added in a chain after each other and form the “blockchain”. These blocks will never be altered. Besides containing al this transaction data each block also contains a mathematical puzzle. The computer that solves this puzzle receives bitcoins in return. The processing of all these transactions and verifications while solving this mathematical puzzle are incentivized by bitcoins. Therefore, this makes maintaining the network profitable. Bitcoin has a controlled supply, as the total of bitcoins that will ever be made is finite. A total of 21 million bitcoins will ever be mined, which is hard-wired in the bitcoin protocol.
What is the potential of bitcoin?
Little to none transfer costs. Remember that extra euro on top of your bill while ordering food via thuisbezorgd.nl and paying with iDeal? These are typical transaction costs that bitcoin can get rid of. If you look at transaction costs at a larger scale you could see the huge impact bitcoin could have. Credit card fees are typically between 0.75% and 5% and for a transaction oversees these costs could quadruple. By cutting all of these transaction costs consumers and merchants will have more money to spend.
Transactions are being processed within 10 minutes. If you transfer money between (different) banks the delay is 1 – 14 days, depending on the banks.
Bitcoins are accessible to everyone with an internet connection. This could have a great impact on the people living in third world countries. Even in the poorest of countries most people have access to mobile phones. It gives everyone an alternative to their own inflation-subjected currency. As there is only a certain amount of bitcoin that will ever exists, bitcoin is not subjected to the economical phenomenon of inflation.
In medieval times when you deposited money in the bank and got a value paper in return, the banker actually had the same amount of all the value papers in his safe. When the first banker decided to lend money to other people and ask interest in return, money was created out of nowhere for the first time. This is how banks created money, which has not existed before. This is how inflation started. With bitcoin banks would no longer be necessary (or at least not in their current form), as people can borrow or lend their money straight from other people. As there is a limit to the amount of bitcoin there will be no inflation due to extra bitcoins being mined.
What is the potential of the blockchain?
The blockchain offers decentralized storage. Decentralized storage means no censorship, fraud or third party interference. Imagine decentralized email servers (peek-a-boo NSA), uncensored internet (google for China), smart contracts (fully automated contracts) and databases that are near to impossible to hack (Ashley Madison).
As with most disruptive technologies there is resistance, as disruptive technologies will take away the power of the ones dominating the current technology. Bitcoin and the blockchain will face many challenges and will be put under a lot of pressure, especially by the huge financial institutions. But as more and more people and corporations see the potential we could definitely say that bitcoin and the blockchain are here to stay.
Bitcointalk.org, (2015). Bitcoin Forum – Index. [online] Available at: http://www.bitcointalk.org
Frisby, D. (2014). Bitcoin.
Nakamoto, S. (2008). Bitcoin: A Peer-To-Peer Electronic Cash System. [online] Available at: http://www.cryptovest.co.uk/resources/Bitcoin%20paper%20Original.pdf