What is bitcoin? Pros & cons
I first began working in the banking industry in 1995, using the Cirrus ATM network. I’ve seen breakthroughs like mobile payments and withdrawals completely change the way we do business. It’s clear to me that Bitcoin, just like the breakthroughs before it, is paving the way for a new era of monetary transactions, an era in which everyone around the globe is economically connected.
What is Bitcoin?
Most currencies are backed by a government and declared as legal tender. The Bitcoin cryptocurrency, however, was created in 2009 as a decentralized currency, not tied to any country. Using a peer-to-peer system, individuals can buy and sell Bitcoin online, or through ATMs. Payments can be made using debit cards, connected bank accounts, or credit cards. Unlike centralized banking or electronic money, Bitcoin’s transactions take place without an intermediary, making it the first decentralized cryptocurrency.
The transactions are verified and approved by Bitcoin miners who use special computer systems that solve complex mathematical problems. For every problem solved, new bitcoins are generated and given to the miners responsible. The miners get fees twice, once when generating bitcoin and again when verifying and approving a transaction. The owner of Bitcoins needs to have private key to spend them, and the buyer needs to provide a different Bitcoin address with every new Bitcoins purchase. These keys are stored in a Bitcoin wallet, which can take the form of a software program, a web app, or could even be a physical paper wallet. Since losing a private key means permanently losing all the Bitcoins attached to it, it’s crucial that the wallet be stored in a secure location.
Why did Bitcoin Gain Traction? What are its Cons?
Although other cryptocurrencies have been created, Bitcoin was the first of its kind. No one had heard of cryptocurrency before Bitcoin was introduced. Being the first on the market has given Bitcoin a huge advantage over its competitors. This also means that Bitcoin has proven itself to be a reliable currency over time that is worthy of consumers’ trust.
It was also proven to be a universal currency, available to everyone regardless of location, nationality, or ethnicity. Bitcoin is also popular for having low fees, being completely decentralized, and having finalized transactions publicly viewable to all. As a result, over time Bitcoin has become accepted by many merchants around the world as an official payment method.
Bitcoin does have a few cons, however. Among them are its volatile value fluctuation, the risk of losing your wallet, and the possibility of hacking. The value of Bitcoin can also be affected by different factors such as miner’s production cost, speculation, and usability.
Chart link (Bitcoin price history)
The Legality of Bitcoin
Governments have been hesitant to accept Bitcoin due to the anonymous nature of its transactions. The decentralized peer-to-peer system of Bitcoin can be used for money laundering or other illegal activities. Law enforcement can’t go after just a transaction, they need a way to trace the funds to a person. Regulators prefer payment systems that allow them to trace transactions, verify who executed the transactions, and know the source of funds. In the USA for example, an online link was created to register complaints from the public about Bitcoin transactions. However, no complaints were received, so we can conclude that the people who undertook the transactions were savvy enough keep their transactions from being exposed to financial loss.
The legality of Bitcoin varies from country to country. It is legal in most countries, although some countries, such as Ecuador or Bolivia, have completely banned the use of Bitcoin. In most countries where Bitcoin is legal, it remains unregulated, like in the US for example. However, on September 20, 2016, a federal judge ruled that Bitcoins constitute real money. This was during a money laundering case, so some direction from the US government is present, and plans for future regulations are being discussed.
Before appraising Bitcoin prospects, it’s worth mentioning Blockchain, the underlying distributed ledger technology behind Bitcoin. Financial institutions and other industries are examining the possible uses of Blockchain to streamline their processes and reduce costs. Once Bitcoin gains mass adoption, gets regulated, and becomes more secure from hacking, it may get more attention towards its possible uses for banking and finance. As more countries become friendly to Bitcoin and digital currency in general, the more adoption it gains, and the less volatile it gets.
Accepting Bitcoin deposits in Digital banks and enabling brokerage house users to fund their investments and trading account with Bitcoin are indications of gradual Bitcoin adoption. Bitcoin could also play a role in financial inclusion by allowing people who do not have bank accounts to receive and send money, whether it’s through money transfer or in exchange for goods.
The digital currency ecosystem is quickly gaining momentum. More countries and institutions are seeing the potential in Bitcoin every day. The rise of Bitcoin and the acceptance of digital currencies are creating possibilities for us to move toward a more financially, economically, and culturally connected world.
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