The impact of Bitcoin has been seismic, creating shockwaves throughout the banking and financing world. While new technologies are being continually being invented throughout the crypto landscape, for most people when they think cryptocurrency, they think Bitcoin.
What is Bitcoin?
Bitcoin is a form of digital cash that allows users to send money peer-to-peer with no third-party middleman. Bitcoin is stored on a blockchain network, tens of thousands of computers called “nodes” that can be run by anyone in the world.
By storing Bitcoin’s transaction data on a decentralized system of computers worldwide, the network is made secure from censorship or attack by governments or bad actors. Bitcoin can be thought of as a simple spreadsheet listing transactions one after another.
However, the network nodes compete to validate transactions in exchange for rewards. This is called Proof of Work consensus, meaning that nodes must prove that they are spending electricity and computing power in order to validate transactions.
To hack or disrupt the network, someone would need to control over 50% of the thousands of nodes running Bitcoin, and to attempt this would cost billions of dollars per minute.
Bitcoin was invented by an unknown developer or group of developers under the pseudonym Satoshi Nakomoto in 2009, and it was the first cryptocurrency ever made. Launched in 2009, it’s unique approach to decentralizing finance and offering secure peer-to-peer transactions has gone on to have a major impact on the world of finance.
Bitcoin Use Case: Banking the Unbanked
Bitcoin and other crypto technologies have come to occupy a space that many wouldn’t associate with digital currency, which is the representation of the economically marginal and financially vulnerable.
The phrase ‘unbanked’ refers to the staggering 1.7 Billion adults throughout the world that cannot or do not access regular banking services. The most prevalent reason for this is economic marginalization, poverty, or an unaffordable central bank. This lack of financial representation seriously impedes personal economic growth and regional economic development. For example, without a bank account people struggle to access credit, leading to a largely cash-based society and a financial ‘services gap’ that is supplied by volatile or bad faith actors. Fascinatingly Bitcoin and other blockchain solutions have found themselves to be very popular within this underrepresented sector, offering a secure means of banking with comparatively little cost. Interestingly for such a sophisticated piece of technology, many of the barriers for blockchain technology are increasingly being lowered, offering much better a chance for economic growth and stability.
Bitcoin use Case: Cross-Border Transfers
Many of these unbanked communities engage in cross-border migrational work, which offers distinct challenges due to this lack of banking representation. This often results in costly cross-border payments and long delays. Bitcoin has empowered many migrational workers throughout parts of Asia and Africa, who in the past may have been preyed upon by predatory financial services or impeded by outdated banking models.
Bitcoin achieves this by enabling workers to send BTC back to their families and communities at a low cost and with a high degree of security. By having basically no intermediation, Bitcoin links the sender and recipient of the coin directly at a cost ratio that is much cheaper, faster, and more secure than many other financial services.
In addition, the ‘serves gap’ of 24/7 banking often found in standard banking models is also being addressed by Bitcoin. Many modern banks are strictly limited to the framework of their opening hours, generating large costs and long wait times. Bitcoin is digitally global and decentralized in nature, therefore allowing users to circumnavigate this problem.
With these facts in mind, it is clear why Bitcoin is growing in popularity within these unbanked communities and is an emerging competitor within the financial services world.
Bitcoin use Case: Disrupting Financial Services Monopoly
Traditional banking and its associated financial services have effectively enjoyed a structural monopoly for decades. Bitcoin and its associated technological innovations have begun to disrupt much of these structures, largely by offering timely and secure services that traditional banking appears unable to compete with. One such use case for Bitcoin in this regard is its shattering of the costly need of banking intermediation, or as some have referred to it as, Bitcoins ‘disintermediation.’
Many traditional banks have essentially specialized in the financial service of intermediation, operating as the ‘go-between’ between different parties. This specialization is in many cases a key revenue stream for banks but is in many regards outdated. For users, these services are often associated with large costs in both time and money.
Bitcoin fulfills the demand for an alternative by utilizing its decentralized nature to disrupt financial services through disintermediation. What this means is that Bitcoin effectively ‘cuts out’ the financial services middlemen, linking the different parties in a far more direct and mutually beneficial sense. Bitcoin often achieves this by enacting smart contracts via its protocol layer. These smart contracts are self-executing and do not require the costly structures that are found in traditional financial services.
For many investors, it is clear that Bitcoin is an attractive alternative to the traditional structures of the financial and banking sectors and as such offers investors a lucrative investment opportunity.
Bitcoin Use Case: Speculative Gains as an Asset
Even to Bitcoins detractors, it is plain to see that as an asset Bitcoin has been incredibly lucrative. Throughout its short life Bitcoin has rocketed to staggering heights and is still yet forecasted for more. Therefore it can be said that a key use case for Bitcoin is its potential for gains for speculative investment. To utilize Bitcoins volatility and bullish reputation it is best to understand that Bitcoin is respondent to a host of factors that wise investors should seek to capitalize on.
Push and Pull
Bitcoin as a digital asset is beholden to many of the simple push and pull factors of supply and demand. Altogether there is a limited supply of 21 million Bitcoins that can be mined, and at the time of writing an estimated 19 million have already ready been mined. This creates a tantalizing financial opportunity as price volatility is likely to follow as supply dwindles and demand rises. Yet, there exists a complex web of market interplay that creates the trends and forces of Bitcoin’s value.
For example, mining operations may increase in cost as cryptographic mining becomes more complex or even shuts down due to changes in the hardware supply or political support. Often speculated financial regulation may spook the market in a host of different directions. Large coin stakeholders or ‘Whales’ may begin to liquidate their assets.
There is a host of reasons as to why Bitcoin may change in value and as such is considered to be an extremely volatile asset, yet it is this volatility that allows for spectacular gains for the very lucky or the very wise. Even with Bitcoins volatility as an asset in mind, a simple cursory glance at Bitcoins price history reveals that as an asset Bitcoin represents a huge opportunity and therefore is increasingly seen as a wise addition to one’s portfolio.
Bitcoin Use Case: Limiting Volatility of a Traditional Financial Asset Portfolio
It has been stated by noted economist Aleh Tsyvinki that somewhere between 1% and 6% of one’s portfolio should be composed of Bitcoin. The reasons for this are varied, but in simple terms 1% to 6% of Bitcoin in a portfolio represents great potential when you consider Bitcoins history and forecasted future, with a risk for loss that can be managed.
Effectively, investors can use a proportionately low Bitcoin investment to ‘hedge their bets’, as 1-6% is a relatively small investment, with a potentially massive payout. With all this in mind, it is little wonder that many investors have taken to Bitcoin, correctly identifying the strengths of the asset and its key strategic values in one’s portfolio.
Bitcoin’s Place in the Market
Today there exists a staggering amount of different cryptocurrencies and many of these have developed, improved, or simply outperformed some of the technologies and structures of Bitcoin. Some of which have even boasted of their potential to disrupt Bitcoin dominance. However, they are not Bitcoin and as of the time of writing haven’t approached its value or popularity. Bitcoin, its value, its many different use cases, and its reputation is in many regards hardcoded into the DNA of the crypto ecosystem.
Therefore it is very likely that Bitcoin will occupy a position of great importance in the future of cryptocurrency and financing in general, even as the technology grows and develops. To many, it is clear that Bitcoin is moving into a future in which people around the world will see cryptocurrency, its technologies, and its many opportunities more and more in their daily lives.