To say that Bitcoin has had a volatile start would be an understatement. Its value surged in late 2013 to more than US$1,000 per Bitcoin, triggering a media frenzy and warnings about it being nothing more than a bubble fuelled by speculators looking to make a quick buck.
In the following months, Bitcoin’s sharp decline in value, coupled with problems with leading exchanges such as Mt. Gox, only added to the growing concerns about its future and sustainability. The currency was written off as a fad and faded back into relative obscurity from its 15 minutes of fame.
However, I believe that this is no more a Bitcoin bust than the dot-com bust of the early 2000s.
Here are my reasons why
First, there is the irrational fixation on the price of Bitcoin, and its fall from the US$1,000 mark in December 2013. However, transactions continue to grow exponentially (more than 20 per cent growth in the last 12 months), despite the diminished price.
But the bigger mistake that almost everyone has made is to focus on Bitcoin as an alternative currency. As a currency which is not controlled by any central bank or regulator and is built to have a limited supply of just 21 million units, it will require nothing short of a miracle in order to replace today’s currencies on a global scale.
There is more to Bitcoin than a long shot for currency replacement. It is also a payment platform and a much more open and transparent one than the ones existing today. While many people associate it with anonymous black market trading, it is actually far more transparent than you may realise.
How it works
With Bitcoin, transfers are made through the ‘blockchain’. The blockchain is used to store financial transactions. Simply put, the blockchain is equivalent to a ledger used by traditional banks. Each ‘block’ is like a page of the ledger – keeping track of the debit and credit of each financial transaction.
While the concept of the blockchain is very similar to a bank’s ledger, there are also some major differences that will make Bitcoin a game-changing payment platform.
To begin with, unlike a bank’s ledger, the blockchain is not centrally controlled by any one entity or person. Instead, it is distributed and copied over thousands of computers spread all across the globe. This has various advantages. Firstly, there is no single point of failure. To hack the blockchain, hackers would have to target thousands of computers across multiple geographic locations, all at the same time. It may not be impossible, but it is made much more difficult.
You may have realised by now that this means every transaction can be viewed by the public. (Not to fret though, as these transactions are not actually linked to your real identity. You access your funds with an encrypted key that you keep to yourself!). A closer look at the blockchain shows that 150,000+ transactions take place every day. Last year, a transaction worth US$81 million was processed on the network, costing only four cents and taking approximately 10 minutes. That is far cheaper and faster than most banks!
Pros and cons
This apparent cost advantage is one of the more frequently touted benefits of Bitcoin. But critics would be correct to point out that there are no fraud or anti-money laundering protections built into it and these two factors turn out to be some of the main payment cost drivers for banks and financial institutions.
But a narrow focus on cost is a short-sighted view of Bitcoin’s true potential. The much more important phenomenon at play is the decoupling of pure payment processing (computers processing a ledger) from the other services and layers of a traditional payment model, such as anti-money laundering, consumer protection, branches, online and mobile channels, or other value-added payment services. This opens up the playing field for third-party providers to challenge the fundamental norms of payments as we know it today.
Are there better ways to protect consumers instead of the antiquated chargeback? Can we redesign the user experience and access channels for making a payment? Are there smarter ways we can use payment data to enrich people’s lives?
Some may argue that these are questions that the fintech industry has already begun to tackle within the existing banking system – so how does Bitcoin help? Well, the closed nature of traditional banking systems creates a much larger barrier to entry and inhibits innovation.
Let me illustrate with an analogy:
In the 1990s, we saw the same story play out with telephony and the Internet. The telephone network saw relatively few innovations because it was a closed network with the telephone company setting the rules of communication. Then, the Internet came online as an open, peer-to-peer network, enabling thousands of new apps and innovations we would have never dreamed of even a decade ago – the rest is history!
Likewise, today’s banking system imposes its own rules and constraints, like the chargeback and its outdated user access channels: think about how hard it has been to create a one-stop mobile wallet for all of your cards!
On the other hand, Bitcoin is an open and peer-to-peer network that enables anyone to build their own app or service on top of the base payment processing. This, like with the Internet, will create a marketplace of ideas for new payment services and innovations over the next five to 10 years that we can’t even begin to imagine today.
Bitcoin is to banking what the Internet was to telephony. The most exciting thing about it is not anything that we have seen yet, but what it can become in the future.
The views expressed here are of the author, and e27 may not necessarily subscribe to them. e27 invites members from Asia’s tech industry and startup community to share their honest opinions and expert knowledge with our readers. If you are interested in sharing your point of view, please send us an email to writers[at]e27[dot]co