Originally, we were going to title this post “Bitcoin: What It Is and Why You Shouldn’t Care.” We thought that as the decentralized crypto-currency has reached all-time highs recently, it would be a good topic to explain. You may wonder if Bitcoin really is gaining popularity as a currency (yes), and what, if anything, you need to do about it (nothing). And after some further research, we maintain our stance. As we’ll explain, Bitcoin is not worth the trouble as a currency or an investment for the average law-abiding citizen. But the technology behind Bitcoin has huge potential to modernize the financial marketplace—and that is certainly worth understanding.
What Is Bitcoin?
Financial services are slow to innovate. It’s 2017, yet you still have to wait three days for a stock or equity ETF trade to settle, two days for a check to clear, and sometimes over 10 days to get the money back for a reversed transaction on a debit card. This might surprise you because when you scan a check on your mobile phone the money is “pending” in your account immediately, and when you buy an ETF, it shows up in your brokerage account with the basis price on the day you bought it. But on the back end, these transactions are not as instantaneous as they appear because they go through many different steps of verification.
Bitcoin is different. It is a completely digital currency that allows users to conduct encrypted transactions instantly, without the use of any third party (i.e. bank). Instead, the transaction is an instant trade, like using cash. Like cash, the transaction is one-to-one. But unlike cash, each Bitcoin transaction (“block”) is recorded on the blockchain. To give a simplified analogy, it is as if every dollar bill in your pocket had a list written on it of all the transactions it was involved in prior to reaching your hands. Each transaction on the blockchain is confirmed by several parties on the network to make sure the correct amount transfers between the correct accounts. This can take anywhere from a few seconds to 90 minutes, but the more confirmations a transaction receives, the more secure it is. Each Bitcoin user holds their funds in a Bitcoin digital wallet, and can transfer them into their home currency from the wallet if desired.
The Future of Bitcoin
It remains to be seen how widespread Bitcoin use will become. The number of Bitcoin wallet users has increased every year since the currency was created in 2009, reaching over 12.2 million this year (but this does not necessarily correlate to the total number of users, since it is possible for one person to have multiple Bitcoin wallets).
But for the average person, the benefit of encrypted, fully anonymous financial transactions does not yet outweigh the risk to use it. As a new currency, Bitcoin’s value is extremely volatile. As of this writing, one Bitcoin is worth $1,196.79, up 175% from this time last year. Even the Bitcoin website advises that, “Bitcoin should be seen like a high risk asset, and you should never store money that you cannot afford to lose with Bitcoin.” (For related reading, see: Why is Bitcoin's Value So Volatile?)
Buying and accessing Bitcoins has become more user-friendly since the early days, but it is still “buyer beware” since it is not an official currency. It doesn’t help that Bitcoin has gained notoriety as the currency of choice on the black market—an audience who sees huge value in being anonymous.
Why Blockchain Matters
So why should you care about blockchain if Bitcoin is too risky for most people to use? While the Bitcoin currency has earned a somewhat shady reputation, the blockchain ledger infrastructure behind it has huge potential to simplify transactions in a variety of industries. Because each transaction is verified by a network, it takes out the middleman, putting the power back in consumers’ hands. This could not only save you money, but make your personal data more secure. (For related reading, see: Why Are so Many Banks Adopting Blockchain Technology?)
There is a clear application for financial industries. Fewer hands involved in a stock trade, or a money transfer, could mean a faster transaction and lower fees. Mainstream companies like IBM and Goldman Sachs are investing in blockchain research. Nasdaq is already experimenting with a private blockchain-powered stock exchange. And it’s not just limited to finance.
What if you could send your vote on various issues directly to your elected representative in a secure, verifiable way? Or if your team of doctors had a better way to securely share your medical data with each other? What if you had immutable digital property rights for everything from photos of your cat to the deed to your home? (For related reading, see: Blockchain Boom Next Big Thing for Tech Startups.)
Blockchain is a tool that could be used to improve many different industries, but right now it is in its infancy. None of these potential applications in finance or any other industry may actually occur, but some of them likely will. Whatever happens, it’s worth paying attention to new technologies that could have such a major impact on the world of money!
(For more from this author, see: 5 Ways to Make Good Automatic Financial Decisions.)
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